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“There is a chance, and it is considerable...” Will Russia fit into Chinese projects?

A well-known regional economist, the head of the Far Eastern Center for Economic Development and Integration of Russia into the Asia-Pacific Region, Far Eastern Federal University (FEFU) Professor, Alexander Abramov, thinks that Russia has an opportunity to successfully fit into the projects of China, a superior country, in terms of economic size

“There is a chance, and it is considerable...” Will Russia fit into Chinese projects?

Russia is open to various associations

The geographical location and the history of Russia predetermine the involvement of this country in the creation of qualitatively new alliances in the Asia-Pacific Region (APR) – political, economic, cultural, etc. In the context of the planned large-scale geopolitical and geo-economic turn, and the growing need for multi-polarity to solve the world’s problems, the pole of development and search for new partnerships is shifting towards Eurasia.

Perhaps one should not abuse the term “turn” – since Russia is not “turning away” from anyone. And even now, when our long-term relations with our traditional Western partners are being put to the test, the economic outcomes remain positive: despite the crisis and sanctions, foreign trade with these countries remains significant, and in some cases it is growing, including with such a significant opponent of Russia as the United States. Thus, trade between Russia and the United States grew by 5.6% in 2014, amounting to $29.2 billion.

Another point is that the level of development of Asian countries and the countries of the Asia-Pacific Region, the extent of their integration into the global economic processes, have reached levels that simply cannot be ignored. An indicative fact is that in 2013, China’s foreign trade volume was almost equal to that of the United States ($4.16 trillion compared to $4.03 trillion, respectively), and despite the general slowdown in global trade, China continues to hold this position.


China: an “economic driver” and more...

From the idea of reintegration of former Soviet Republics into the Eurasian Economic Union (EAEU) and creation on its basis of the Eurasian Union, involving a more extensive interaction of the member states, we have arrived at the idea of relations that exist on the continent in general. The economic strength and stability of China, largely shaping the overall Asian momentum, is certainly one of the most powerful economic drivers, first of all, of Eurasian economic integration.

China is definitely an “economic driver”. However, it should be clarified that there is no “common railway track” in Asia, and even the width of railway tracks varies in different countries. The Western tradition of dividing the world into “senior and junior”, “developed and developing” countries does not work in this part of the world.

For example, at the end of 2015, expectations were that final legal arrangements for “ASEAN Common Market” would be created. Ten countries of Southeast Asia – with a total population of 625 million people (excluding China), or 9% of total world population with GDP (at purchasing power parity) of $6.48 trillion (at the beginning of 2015), or about 6% of GDP of all the countries of the world – were uniting their markets and removing trade barriers on their borders.

Something similar to the European Union (which went through this process 20 years ago) was springing up. However, without the European bureaucracy and with the rate of economic growth 5-6 times higher than in Europe. What will China be for these countries – a “driver” or a passenger that bought a ticket in time for a comfortable seat – only time will tell.

 

The New Silk Road is also the project for Russia

Announced by the President of the People’s Republic of China Xi Jinping, the concept of Silk Road Economic Belt and the principle of “one belt, one road” stemming from it are the foundations of Eurasian integration – Chinese-style, representing the involvement of a number of countries in the process of interconnected development.

It is more appropriate to speak of “Eurasian integration” as an additional option of the megaproject of the Silk Road Economic Belt, but not as its goal.

In fact, China is acting as any prudent business manager who has accumulated some saving would: it is seeking to profitably invest these savings.

Today, China’s gold reserves amount to nearly $4.0 trillion, i.e. twice as much as aggregate reserves of the European Union and the United States ($1.805 trillion). That kind of money requires suitable investment projects. These projects, in turn, need a supporting investment environment – security, uniform legal procedures, and transparent financial monitoring.

In this situation, the partner countries of the Silk Road Economic Belt, which could include Russia, would also benefit from the same opportunities. However, whether they will be able to use these opportunities properly – this is not a question for China to answer, but the participating countries, and particularly Russia.

 

Complementary role of the Trans-Siberian Railway

The Russian transportation system is becoming the backbone of integration, its energy resources ensure stable development of the Chinese economy and Chinese money is flowing into modernization and development projects in Russia. Other countries also receive specific benefits, in the form of military, financial and other assistance.

We do recognize the importance of the Russian transportation system and the Trans-Siberian Railway. However, in the Silk Road Economic Belt megaproject, or in the transportation system of China, which ensures the export-import of Chinese trade, the transportation system of Russia plays merely a supporting role.

Maritime transport accounts for the major part of China’s trade, and this will remain so in the foreseeable future: out of the approximately 50 million containers, in which goods are transported around the world, 30 million pass through the south-east coast of China. The sea route is cheaper, safer and easier to operate.

In addition, there is the “problem of cargo imbalances”: As the “world’s workshop” China annually exports approximately 20 million containers with finished goods, and imports only 9 million containers with semi-finished products and a small number of products that it is not yet producing internally (this data does not include the “American destination”, where there is no ground alternative to sea transport).


Risks and opportunities for Russia on the way towards integration

Our task is to identify not only the positive aspects of such a process, but also to test it for the existence of difficulties, to identify a real set of benefits and potential losses for the Russian Federation from entry into full-fledged relations with a sovereign China, powerful and focused on its own development. The interaction between the Silk Road and EAEU is also an important issue.

The participation of Russia and EAEU in the Silk Road Economic Belt project presents both risks and opportunities.

The risks include the following concerns:

1) Russia is not in the position of a strong partner, and China will not fail to take advantage of this to promote its model of creation of a single economic space.

2) The logistic component of the project bears the risks of bypassing Russia via other transport routes. For example, taking into account China’s plans to build the China ‑ Central Asia ‑ Western Asia Railway, there is a threat of further outflow of cargoes transiting via the Trans-Siberian Railway to China.

To prevent the development of the situation along this scenario, it should be ensured that the feasibility of implementation of these plans be recognized as insufficient by the Chinese leadership itself. On the one hand, this is based on the fact of an extremely unstable situation in Western Asia (ISIS, Taliban, and their penetration into the countries of Central Asia). The creation of a transportation infrastructure is fairly risky under such conditions.

On the other hand, Russia should undertake more effective measures to increase transit capacity, simplification of procedures for documentation and reduction of the delivery time of cargo to the West.

Participation in the Silk Road Economic Belt project is also opening new opportunities for Russia, in general, and for the Russian Far East, in particular, for example:

1) Russia is among the countries with high sovereign yield of the national economy. Thus, public investment in this country, even from the monetary point of view, can bring significant benefits. At the same time, the return on investment is ensured by the material growth of the Russian economy, and the factor of its inevitable revaluation “upwards”, the growth of price of investments, made in advance, is predefined.

2) The Silk Road Economic Belt project has not yet developed a definite shape. A new economic order may arise within its zone, which is being formulated by the BRICS countries, and it may be supported by the EAEU. In case of a general agreement, this order can also be extended to the “belt” zone, but this requires considerable efforts to identify and “link” the interests of stakeholders.

In general, any large-scale project carries some risks (and the proposal for exports by China of production capacities in 12 priority sectors of the economy is certainly a proposal within the Silk Road Economic Belt megaproject). Economic mechanisms are an effective countermeasure to economic risks.

Political institutions or “people’s diplomacy” should not be overloaded with economic efforts.

With regard to the agenda of the Silk Road Economic Belt megaproject, Russia, and especially the monetary authorities of this country, have a lot of work to do: they must mobilize the corresponding tools in the stock market, the insurance services market, mobilize the monitoring functions of the Ministry for Development of Russian Far East, and the regional authorities.

The principle of “the rich get richer” is reasonable here as never before – only that part of the Chinese money, which we can diligently and prudently manage, will work effectively in Russian investment projects. Anything in excess can turn into a debt burden for the country.