The Russian vector However, these achievements are based on China’s work force and other resources, rather than due to a leadership role in technology, innovation or productivity. This affects China’s trade and economic cooperation with the world, including Russia. Since economic development in China largely depends on exports, it will have to change this model if the global financial crisis goes on for long. It will need to redirect its attention to working on domestic consumption to sustain the current momentum of development.
As for Russia, its economy is not exportoriented — with the exceptions of natural gas, oil and other mineral resources, as well as arms. This creates the ideal conditions for a closer and more lasting synthesis of the two neighbouring states’ economic systems. The only questions are how that will develop, and what direction that development will take in the foreseeable future.
In February, Russia’s Trade Representative in China Sergei Tsyplakov, stated, “the four pre-crisis years saw an annual trade growth of 69% between Russia and China, but in 2009, bilateral trade fell by almost a third to $38.8 billion”.
Trade between the two countries has fallen 31.8% since 2008, putting Russia at 14th place among China’s trade partners and accounting for only 1.7% of its trade with foreign countries. Russia's exports to China fell 10.7% to $21.3bn and imports from China plunged 47.1% to $17.5bn, cutting Russian trade surplus to $3.8bn.
“At the same time, oil exports to China increased 31% in 2009, to more than 15 million metric tons (110.25 million bbl), and Russia began supplying China with large amounts of coal”, Sergei Tsyplakov went on to say. Many analysts think that whilst emerging from recession, cooperation between the two countries can be restored to the pre-crisis level of $50bn$60bn, but not before 2011-2012.
Until now there have been few real prerequisites for a change in the structure of bilateral trade. In 2008, 98.6% of Russia's exports to China consisted of raw materials while 91% of Chinese imports were manufactured goods. In other words, commodities comprise the bulk of trade and economic cooperation between China and Russia.
“Russia should increase deliveries of high added value goods to China”, claims Yuri Chudodeyev, an expert on Russian-Chinese relations at the Institute of Oriental Studies of Russia’s Academy of Sciences. “Meanwhile, Russia’s principal exports to China are oil, chemical fertilisers and round timber – a trade pattern that isn’t compatible with Russia’s strategic interests”.
China is showing greater pragmatism and flexibility in this context, although authorities in both countries have made a number of statements on the need to change the structure of cooperation. Beijing is aware that Russia's economy will need time to fully attain its technological abilities.
“The gap in economic power and changing aspects of Russian-Chinese trade in new and high technology products are a definite challenge to Russia, at least to its manufacturers”, Mr. Chudodeyev adds. “Russia's instinctive response to this serious challenge should be real economic and technological development”.
So, Moscow and Beijing put different meanings on the concept of constructive cooperation. China will strive to consolidate the current cooperation model, while Russia will do its best to achieve a new and more sustainable form of cooperation in the foreseeable future.
Russia has abundant natural resources, but they are underused. Most of them are located in Siberia and Far Eastern regions close to China, which has abundant manpower and the ability to develop these resources, explains Mr. Chudodeyev: “Russia is in urgent need of Chinese labour, but many people here fear that Chinese workers will permanently settle in Russian territories, creating ethnic enclaves… This makes it necessary to control the flow of Chinese labour on a contract basis”.
But as opposed its attitude towards ASEAN countries, China has not been trying to create a common economic area with Russia based on a free trade zone, opting instead for specific, longterm trade and economic agreements. In fact, Beijing is apprehensive about more active Russian contribution to its economy, be it in the form of Russian capital or potential technological innovations. A relevant example is Russia's attitude towards major market players on the Chinese market such as turbine manufacturer Silovye Mashiny, nuclear power equipment and services export monopoly Atomstroyexport, Technopromexport, market leader in the construction of power projects and exporting electricity, and OMZ Gornoe oborudovaie (mining equipment and technologies).
It is far from easy for these companies to obtain substantial loans for supplying equipment to thermal, nuclear and hydroelectric power plants as well as the mining industry, whereas many Russian producers of raw materials are granted Chinese loans without any great difficulty.
Therefore, Russian exports of ferrous and nonferrous metals as well as crude and iron ore to China has been steadily increasing since September 2009, according to the Russian trade mission in China.
At the same time, sophisticated machinery and technology continue to propel the growth of Chinese exports to Russia, just as they did before the crisis.
However, the Sino-Russian joint action plan for 2009–2012 proposes serious changes in the structure of bi-lateral economic relations.
The joint action plan’s economic particulars seal both sides’ intentions to further cooperation on trade, investment, energy, science and technology, transport, civil aviation, space exploration, information and communication technologies, finance, water resources, agriculture, forestry and fisheries, customs, as well as inter-regional and cross-border cooperation.
Focusing on particular regions Another important feature of Sino-Russian trade and economic cooperation is its focus on the regions of East Siberia and the Russian Far East. According to China’s Ministry of Commerce, China’s total direct investment in Russia exceeded $1.8bn in 2009. The bulk of this sum went to engineering, mining and power supply. Over 55% of the total amount of direct Chinese investment was channelled into Western and Eastern Siberia as well as the Russian Far East.
China plans to invest up to $12bn in Russia’s border regions by 2020, according to Russia’s Ministry of Industry and Trade and the Federal Customs Service.
For example, Chinese investors have already invested heavily in the construction of two pulp plants near Khabarovsk and Chita, which will work with locally produced raw materials.
In mid-October 2009, Petropavlovsk PLC (formerly Peter Hambro Mining), a London-listed mining and exploration company with primary assets in Russia – along with Xuan Yuan Industrial Development Co. Ltd. – signed a cooperation agreement in Birobidzhan, the administrative centre of the Jewish Autonomous Region. It provides for joint and integrated development of large iron ore deposits in the region. In the first phase, XY Group will finance the construction of a mining and processing plant with an aggregate capacity of 3.2mn metric tons at the Kimkanskoye and neighbouring Sutarskoye iron ore deposits.
The second phase allows for the construction of a mining and processing plant at another adjacent Garinskoye iron ore deposit. The third phase plans construction of a steel plant in the area, with an annual capacity of 2.5mn metric tons.
China is also seeking to secure its long-term economic interests at the multi-lateral level. For example, an agreement on furthering cooperation in the Altanbulag free trade zone on the border of Mongolia and China was recently signed between regional leaders.
This policy is easily applied to the Russia's wellknown East Siberia – Pacific Ocean (ESPO) oil pipeline project. The project is designed to supply oil not only to China, but also to Japan, North and South Korea, and even to Taiwan, the latter understandably provoking irritation in officially Communist China.
It seems that China is just waiting for the chance to “privatise” the ESPO project for its own domestic use, even though the pipeline could be only halffilled with oil when it first becomes operational.
Infrastructure interest It is logical that this process has been accompanied by the development of transport links — for example, the transit corridor from China to Japan via Russia and South Korea, which was inaugurated in Autumn, 2009.
Combining rail and auto links with sea ferry service, the route begins on the Chinese border in the Jilin province, goes through the Russian port of Zarubino in the Primorye Territory and the South Korean port of Sokcho, and ends at the port of Niigata in Western Japan.
Using the route will shorten the time frame for transportation of goods between China, Russia, South Korea and Japan from 12 days to 20 hours, according to the Zarubino port authorities. On the other hand, this means that China will receive the shortest possible access to the Sea of Japan through the cross-border areas of Russia and North Korea.
Meanwhile, Russia has increased its attention on developing the Northern provinces of China. An agreement on a number of joint investment projects, including the construction of a refinery in China and gas and electricity supply from Russia to Northern Chinese provinces was reached in October, 2009 during a Russian delegation’s visit to Beijing, headed by Prime Minister Vladimir Putin.
A Sino-Russian technology park is being established in China to implement information technologies, and three special economic zones are under construction; two in China’s Heilongjiang Province and one in Russia’s Primorye Territory. Border crossings and international transport corridors leading to AsiaPacific countries are being established with a due regard for the Primorye Territory’s logistical infrastructure.
All this is gradually creating conditions for the two neighbouring countries to develop more promising joint economic projects, which will diversify and improve bi-lateral cooperation between China and Russia.
At the same time, leading Chinese and Russian companies have signed contracts or agreements exceeding $3bn. These include a five-year, $500mn loan agreement between Vnesheconombank and China State Development Bank to finance the project for building a multi-functional shopping and office centre in Moscow and a $133mn loan agreement between Vnesheconombank and the ExportImport Bank of China to finance supply of equipment, construction and installation work at a cement plant in the Nikolsk District’s Penza Region. A $500mn credit agreement between VTB Bank, one of Russia’s largest state lenders, and the Agricultural Bank of China for long-term financing of Russia's imports from China, a tri-party, $200mn agreement between the Russian services conglomerate Sistema, the Bank of China and ZTE Corporation to finance joint projects, and a $380mn investment project between Petropavlovsk PLC and the Xuan Yuan Industrial Development Co. Ltd. on the development of the Kimkanskoye iron ore deposit in Russia’s Autonomous Jewish Region have also been negociated and concluded.
These major projects and investments indicate that Russia and China are engaging in a long-term partnership dynamic, despite myriad sensitive areas that could easily become hot issues again, according to Yuri Chudodeev. He claims that, “In the short term, one cannot exclude the emergence of certain confrontational elements in Sino-Russian relations. It should be noted that part of the Chinese elite is traditionally wary of Russia, while certain groups in Russia's political and financial elites are not enthusiastic about Chinese economic activity in Central Asia’s former Soviet republics.
Certain circles in Russia have a divided attitude towards China’s economic and political rise due to psychological issues provoked by proportional differences in population figures and the disparity of the economy’s scale in the two countries. These concerns also include the fear that Russia could turn into a Chinese raw materials appurtenance, which could provoke a return to its territorial dispute with Russia.
Hypothetically, Russia could go down on the list of China’s strategic priorities, and vice versa. But the most likely prospect, and the best option, would be an expansion of the current level of RussianChinese partnership, its further development, and possibly even the transition to a model of real codevelopment in both countries.
