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Will China and Russia Become Equal Partners - EastRussia | Opinions

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Will China and Russia Become Equal Partners?

In the context of a trade conflict with the United States, China today needs Russia both as a political and an economic partner. Will Russia be able to take advantage of this on favorable terms, or will China dictate its own rules, says Oleg Remyga, head of China at the Moscow School of Management Skolkovo.

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Oleg Remyga

Head of the China Department of the Institute of High-Growth Market Research at the Moscow School of Management Skolkovo
TRADE WARS

In the summer of 2018, the United States unleashed an economic standoff with China. Specific economic sanctions followed - with 24 September, customs duties in the amount of 10% for goods imported from the People's Republic of China came into force in the United States, the total value of which is estimated at $ 200 billion. 5 billion 10 December 60, PRC Chairman Xi Jinping and US President Donald Trump have agreed on a "truce" for a period of 2 days.
At the moment, participants in the trade war are at the negotiation stage. If the parties fail to agree, Trump promised to raise the tariff for Chinese goods from 10 to 25%. China, having received such a blow from the largest trading partner, was forced to look for new markets for its goods, spare trade routes and reserve sources of raw materials.

In addition to economic sanctions, the United States has focused its pressure on the Chinese Belt and Path initiative. The strategy brings together more than 60 countries and includes about a thousand individual projects in the field of industry, energy, transport and telecommunications infrastructure totaling up to a trillion dollars.

Potentially, the Belt and Path initiative seeks to create an alternative economic reality by connecting Asia and Europe with free flows of goods and services. The interim results of the implementation of the Initiative inspire optimism - trade with the participating countries in 2017 increased by 18% to $ 1,2 trillion, and M & A transactions by 15% to $ 40 billion 69 countries and international organizations concluded cooperation agreements with China as part of the implementation of the Belt and Path initiative.

At the same time, in a number of countries of the Belt and Path (especially those with long-standing economic ties with the United States), China’s working methods were perceived ambiguously - these are debt traps and transactions involving the use of not only Chinese technology, but also Chinese labor, and charges of interfering with in the internal political processes of countries such as Malaysia and Sri Lanka.

In the US, the need to contain China’s actions on the world market turned out to be an issue on which the Republican and Democratic positions converge as a whole: the Senate took the initiative to create a secure system of crediting global infrastructure projects as opposed to China’s economic activity. However, the actions of the West not only do not stop China, but also vice versa, urging it on to even more active actions. Since the Belt and Path Initiative, like the PRC's foreign trade policy, is not a geopolitical game at all, it is a desire to ensure stable economic growth within the country, which gradually slows down every year.

STATISTICS AND REALITY

According to the Russian Federal Customs Service, trade between Russia and China grew by 2018% in 24,5 compared to 2017 in the year and amounted to $ 108 billion. According to Rosstat, in November 2018 of the year China occupied the leading position in the list of Russia's foreign trade partners, behind it followed by Germany and the Netherlands.

Meanwhile, in the 2014 year, when Russia had just begun the so-called “turn to the East”, it was far from the most interesting market for China. The Russian economy, which is experiencing a recession amid sanctions, has attracted China much less than the Western one. But since then the situation has changed. The Russian economy has shown resistance to sanctions and is gradually returning to positive growth rates. Given that the value of assets during the recession has significantly decreased, this made them investment-attractive. And against the background of the trade war with the United States, the relative attractiveness of the Russian economy for China has increased even more significantly.



The real presence of the PRC on the Russian market is not easy to trace. Official statistics of the Central Bank of the Russian Federation for the period from 2011 to 2017 registered only $ 16,3 billion in direct investment from China. But at the same time, according to an assessment by the Institute of Emerging Market Studies of the Skolkovo Business School, the total amount of Chinese investment in Russia for the same period amounted to $ 36 billion. This estimate is based on data on specific projects implemented by Chinese companies in Russia. At the end of 2017, such projects were 56.

These figures differ from official statistics due to the fact that the structure of each individual project involves a combination of equity and debt financing and involves companies from different jurisdictions. Simply put, Chinese investors also use Cyprus, the Virgin Islands and other offshore jurisdictions when structuring investment projects.

Over 62% of Chinese investment accounted for projects in the field of energy and mining (more than half in the oil and gas sector). One example is the Ulyanovsk Wind Park, built by the Chinese state-owned company Dongfang Electric in cooperation with Fortum and Rosnano. This is Russia's first industrial park of alternative energy, the power of the generated energy is 35 MW. Fortum investments were $ 65 million.

The share of China's investment in Russian agriculture is 17% of the total investment in 2011-2017 and exceeds $ 6,2 billion. These figures indicate China’s attempt to reduce dependence on imports of agricultural products from the United States. COFCO Group, China's largest food producer and agricultural trader, plans to reorient some US grain supplies to the Chinese market in favor of Russia. COFCO plans to invest $ 400 million in the purchase of a Russian terminal for the transportation of grain. The first results can already be fixed - in 2018, Russia reached the first place in the volume of wheat supplies to the Chinese market. The next step is the supply of Russian livestock products to China.

As a result of the Eastern Economic Forum in Vladivostok, which took place in September 2018, several multi-million Russian-Chinese projects appeared, mainly in the energy sector, to develop fields in Siberia, but the most significant was the creation of a joint venture in electronic commerce between the Chinese giant Alibaba Group and Russian Mail.ru Group. Alas, while the technological sector of Russia is deprived of the attention of Chinese investors (it accounts for no more than 2% of all foreign direct investment from China to the Russian Federation for 2011-2017 years).

MUTUALLY BENEFICIAL PARTNERSHIP

China’s participation in the Russian economy is rapidly increasing. It is now, when Russia is becoming much more necessary to China than it was a year ago, that the prerequisites for building up Chinese investment and trade could be achieved on more favorable conditions for Russia.

As a result of the aggravated situation in the international arena, there was a rapprochement between Russia and China, looking for a stable partner in each other. For Russia, China is an alternative oil and gas market, the key to the development of the Far East and the Arctic. For China, Russia, which used to be only a source of resources, has now also become a conductor in the Central Asian region and a promising market.

The forced reorientation of economic ties played the role of a kind of airbag, which helps both Russia and China to balance risks and provide access to new markets. The disagreements of Russia and China with the West are likely to work in the near future to strengthen the economic and political ties between the two countries.