Russia-China: Economic Ties Progress from Cold to Warm

After the collapse of the Soviet Union, Russian-Chinese trade and economic relations were lagging behind the rapid development of their diplomatic contacts and growing strategic and military-political cooperation. The situation for a numbers of reasons was described as “hot politics, cold economics”.

This situation in trade was due to the Russian business community’s focus on the priority development of ties with European and post-Soviet partners, limited interest for and inadequate experience of working on the Chinese market, as well as tariff and non-tariff obstacles to mutual trade (Russia joined the WTO in 2012, when China had been a member for over 10 years with a ramified network of free trade zone agreements with many countries, which facilitated the dynamic advancement of China’s trade with these states). One more possible reason is the Russian political leadership’s fear of becoming a “raw materials appendage” of China.

Chinese investments in Russia were meager not because Chinese investors had no interests in Russia, but because Russian businesses were working on trying to attract Western investors who could provide not only money but also modern technology, managerial expertise and best practices. Seeking to protect national security, Russia for a long time opposed the involvement of Chinese investors in projects in the Russian Far East, above all in the field of mining, construction and infrastructure.

Bilateral trade and economic relations surged ahead in 2010-2011 and 2012-2014, when bilateral trade soared from $39.5 billion in 2009 to $83.6 billion in 2012 and unofficial restrictions on the involvement of Chinese investors were lifted in Russia.

Geopolitical changes, such as a crisis in Russia’s relations with the United States and the EU plus their sanctions on Russia’s economy, as well as the US-Chinese trade war, have given a fresh impetus to Russian-Chinese trade and economic ties.

China has been the largest trade partner for Russia since 2010, and bilateral trade reached a record high of $108 billion in 2018. There has been obvious progress in investments: according to official Chinese statistics, the country’s total investments in Russia have grown from $4.89 billion in 2012 to $8.69 billion in 2014 and $13.87 billion in 2017.

There are several major features regarding current and potential Russian-Chinese trade and economic cooperation.

First, bilateral cooperation is focused on energy, as can be seen from the share of Russian energy exports (mineral fuel, oil and petrochemicals accounted for 71.6 percent of Russian deliveries to China in 2018) and China’s predominant investments in energy projects (in 2017, 47.5 percent of Chinese investments in Russia accumulated in the mining industry). The Russian energy megaprojects that are being implemented, or are to be launched with Chinese investments include Yamal LNG and Arctic LNG 2. In light of these projects plus the Power of Siberia, the first ever Russian-Chinese gas pipeline which is to become operational in late 2019, the volume of Russian energy exports to China will most likely continue to grow rapidly.

Second, there is huge cooperation potential in the joint development of the Arctic, including oil and gas exploration and production projects and the further development of the Northern Sea Route. Russia willingly accepts Chinese investments in these projects (China is expected to get a 20 percent share in Arctic LNG 2, while French and Japanese investors will only receive 10 percent each) but is wary of allowing the Chinese to invest in the construction of icebreaking LNG tankers and in LNG deliveries via the Northern Sea Route.

Third, Russia has high hopes for breaking into China’s vast agricultural market. The demand for agricultural imports is so great in China (in 2018, it imported $127 billion worth of agricultural products) that this has led to the development of new economic sectors in some countries. For example, Argentina has created a new soybean sector to meet China’s requirements. Russia is also focused on the production of soybeans for export to China.

So far, Russia accounts for a small share of the Chinese agricultural imports (2.5 percent in 2018) because Russian agricultural exports to China had been hindered by tariff and non-tariff barriers. China was unwilling to lift non-tariff barriers such as phytosanitary restrictions and import quotas. But the trade war with the United States has forced Beijing to diversify its sources of agricultural imports and to take a closer look at Russia’s agricultural exports. But bilateral agricultural trade can only grow if China lifts the barriers that hinder Russia’s agricultural exports to China. Some promising steps have been taken towards this end: six documents on phytosanitary requirements to some Russian agricultural exports were signed during the state visit of President Xi Jinping to Russia in early June 2019.

Fourth, cross-border e-commerce, which is a new feature of bilateral trade and economic cooperation, has great potential.

Fifth, financial cooperation, including the increased use of national currencies for bilateral settlements, the development of the interbank payment and settlement system, as well as the creation of financial data exchange channels, is playing, and will continue to play a major role in bilateral relations. It is notable that the share of the Chinese national currency in Russia’s gold and currency reserves has increased from 0.1 percent in June 2017 to 14.2 percent in early 2019.

During their 24th regular meeting in St. Petersburg, the prime ministers of Russia and China spoke a great deal about their countries’ plans to boost bilateral cooperation in the field of space exploration (including the exploration of the moon and deep space), research, technology and innovation, as well as in the automobile industry, pharmaceuticals and aircraft manufacturing.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.