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"Politics are hot, business is cold"

The realities and development of Russian-Chinese economic relations are discussed by Alexander Gabuev, Head of the program "Russia in the Asia-Pacific Region" of the Carnegie Moscow Center

What does the past year show? According to Vladimir Putin, the sanctions bring Russia and China closer together. “I do not agree that the illegitimate restrictions on Russia introduced by certain Western countries have a negative impact on Russian-Chinese economic interaction. Quite the opposite, it stimulates our domestic business to develop sustainable business ties with China, ”he told TASS and Xinhua in an interview published on September 1. However, reality suggests otherwise. However, it is not only the sanctions that are to blame for this.

"Politics are hot, business is cold"

Alexander Gabuev

Head of the program "Russia in the Asia-Pacific Region" of the Carnegie Moscow Center
Vladimir Putin's visit to Beijing to participate in the celebration 70 Anniversary the end of World War II takes place 13 months after the US and the EU imposed the first sectoral sanctions against Russia (the first package came into force on August 1, 2014). And if the package of documents signed in Shanghai during the previous presidential visit, in May 2014, had rather symbolic significance (except for several contracts like the deal on the construction of the Power of Siberia), then already last autumn many began to think seriously about partnership with China. There was a period of high hopes: it was expected that Beijing would certainly take advantage of the opening opportunity and rush to buy up deposits, flood Russia with cheap loans, and also share critical technologies. The bureaucracy even overcame a number of important psychological barriers on this occasion: it was decided that the Chinese could sell minority stakes in strategic fields and let them into infrastructure projects. It was believed that the sanctions would finally make the old formula of Russian-Chinese relations "hot in politics, cold in business" irrelevant.

Trade goes off at its peak

Trade statistics describe very accurately what has happened in the economic relations between Russia and China over the past year. The Ministry of Economic Development of the Russian Federation, based on more reliable data from Chinese customs statistics, prepared a certificate that demonstrates the extremely unpleasant anatomy of mutual trade. During the decade 2003–2012 the volume of trade grew by an average of 26,4% per year, and this despite the fact that during these years there was a crisis. In 2010, China became Russia's first trading partner after the EU and has retained that location ever since. However, in the first half of 2015, the volume of trade between Russia and China fell by 31,4% - to $ 31 billion (in the crisis year of 2009, trade fell by 31,8%). It is obvious that it will no longer be possible to fulfill the task set for 2015 and reach a trade turnover of $ 100 billion.

One of the obvious reasons is the fall in prices for raw materials, primarily for oil. Mineral fuels, oil and oil products account for 61,4% of Russian exports to China. The value of the delivered goods of this group decreased by 33%, in physical terms, the volumes fell by 7% (only the volumes of crude oil supply grew - by 26,6%, to 19,4 million tons). However, the collapse of commodity prices is not the only factor, otherwise Russia would not have dropped by 15-e a place among the trade partners of the PRC, for the first time in many years it fell out of the top ten and gave way to other raw material countries, such as Brazil.

The decline is also taking place in imports from China, which decreased by 36,2% in the first half of the year. These data reflect another reason for the drop in trade - the developing economic crisis in Russia (the Ministry of Economic Development predicts a 3,3% drop in GDP by the end of the year). Data on trade with the PRC show that both enterprises and consumers are reducing the demand for Chinese goods: imports of machinery and equipment fell by 40,8%, imports of knitwear - by 50,8%. The only Chinese goods whose supplies are growing are meat (+ 297,1%) and vegetables (+ 14,1%), a direct consequence of food counter-sanctions.

Price found for sanctions

When in 2011 the then heads of state Dmitry Medvedev and Hu Jintao first formulated a goal of $ 100 billion in trade by 2015 and $ 200 billion by 2020, the main hopes were pinned on the supply of Russian hydrocarbons to the PRC. The Chinese economy grew at double-digit rates, oil prices were high, and the Skovorodino-Mohe pipeline was completed, so the outlook seemed quite realistic. Last year's agreements between Gazprom and CNPC on the construction of the Power of Siberia with a capacity of 38 billion cubic meters per year, which at the time of signing were estimated at $ 400 billion, looked like another step in this direction. On the way were the Altai projects with a volume of 30 billion cubic meters per year, gas from Sakhalin, which could be delivered by a new onshore pipe from Khabarovsk or Vladivostok, as well as the Novatek Yamal LNG project, in which CNPC was going to increase its share from the current 20% and attract bank loans in China.

At current hydrocarbon prices, the future of many of these projects is dim. Negotiations on the Altai project are still frozen. Gazprom intends to offer China to build a branch from the existing Sakhalin-Vladivostok gas pipeline by installing additional compressor stations, but the Yuzhno-Kirinskoye field, which is directly subject to US sanctions, should become a resource base, so the project's prospects are vague. During its current visit, Novatek is to sign an agreement to sell 9,9% of the Yamal LNG project to the Chinese Silk Road Fund, although even this deal will not remove all questions regarding the project at current prices. In addition, the Chinese oil and gas corporation CNPC in February lowered its forecast for gas demand in China in 2020 to 310 billion cubic meters per year compared to the spring forecast of 2014 (400 billion cubic meters).

Falling commodity prices and poor growth prospects for the Russian economy make many investment projects in Russia much less attractive than they seemed last fall. Thus, the volume of direct investment from China to the Russian Federation in the first seven months of 2015 has already decreased by 20%, said Lin Ji, director of the Department of Eastern Europe and Central Asia of the Ministry of Commerce of the PRC in August. According to Chinese officials, one of the reasons is the volatility of the ruble and the inability to calculate financial models for projects in the Russian Federation.

Finally, sanctions have a direct impact on both trade and investment. If during the May 2014 visit an agreement was signed between VTB and Bank of China, then after the introduction of sectoral sanctions, agreements with sanctioned banks and companies from the Russian Federation during major visits were signed by only two "political" banks of the PRC: Export-Import Bank and State Development Bank of China. This is due to the fact that commercial state banks of the PRC are much more closely connected with the global financial system, while ICBC and Bank of China have subsidiary banks in the United States. The reluctance of the commercial state banks of the PRC to work with the systemically important banks of the Russian Federation that have come under sanctions is also confirmed by Russian bankers. For example, in June, the first deputy chairman of VTB, Yuri Soloviev, complained in an article in Finance Asia about the "dual position" taken by Chinese financial institutions regarding the sanctions.

The best, of course, ahead

In the current environment, the recovery and growth of Russian-Chinese trade will depend primarily on oil prices. The dynamics of the Russian economy and the ruble exchange rate are closely related to this factor. The second factor is the willingness of the Russian authorities to really improve the investment climate and create reliable conditions for Chinese investments (a possible example is the advanced development territories in the Far East, provided that they work). Finally, the third factor is the lifting or easing of sanctions. But there is no need to wait for breakouts yet.

Under these conditions, Moscow and Beijing will most likely engage in strategic projects. One of the promising industries is military-technical cooperation, where, according to Russian experts (for example, Vasily Kashin from the Center for Analysis of Strategies and Technologies), Russia has a "time window" for selling some systems to China - in a few years, the PRC will probably learn produce them yourself.

Another area is infrastructure solutions in Russia, which fit into the framework of a megaproject to link the Eurasian Economic Union and the Silk Road Economic Belt (SREB), which Putin and Xi agreed on in May. The main question is how to fill this speculative concept with specific projects. So far, Moscow and Beijing are announcing specific infrastructure deals as part of the conjugation, such as the Moscow-Kazan high-speed rail project or a deal to be signed with the participation of Avtodor on the construction of a highway from Kazakhstan to Europe (continuation of the Western China-Western Kazakhstan highway). But here, too, the effect will not be quick, and negotiations on the terms will be difficult.
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