Russian-Chinese economic relations on the “Laws of war”

Russian-Chinese economic relations on the “Laws of war”

Moscow. January 21. Dysfunctional state of Affairs on the “economic track” of the Russian-Chinese cooperation in 2015 is clearly contrasted with the rapidly ongoing process of political rapprochement between the two countries.

Turnover for the year decreased by 28.6%. Instead of the previously planned $100 billion it didn’t even reach $70 billion, to offer $68,06 billion In the list of the countries – main trade partners of China Russia fell from 9th to unusual for 16th place. Its share in the foreign trade of China decreased from 2.21% to 1.67%.

Russian exports to China fell by 20%. The fall in the prices of raw materials and industrial goods have left the Russian exporters with no choice but to follow the path of increasing physical volumes of deliveries on those items where it was possible to make (oil, iron ore, copper, Nickel), or to try to discover new niches (agricultural products, high-tech goods). The latter has proven to be very difficult, since in many cases had to start from scratch. Nevertheless, physical volumes of main goods managed to maintain, thanks to which the share of Russia in total imports of China “sank” not so much, a decrease compared to the 2014 year with a 2.12% to 1,98%.

Chinese companies are facing an unprecedented sharp drop in demand on the Russian market (exports from China fell by 35.2% yoy), sustained losses, but were trying to survive, seeking to preserve entrenched positions. This is for the most part they succeeded. China remains the largest trading partner of Russia, and its share in Russian foreign trade from October 2014 to October 2015 increased from 11.2% to 12%.

In General, the crisis was, if not deeper, then at least longer than the previous recession of 2009. Then it was, say, a “shake-up”: the rapid decline and then a rapid recovery growth. By the end of 2010, the turnover actually returned to pre-crisis level. Now source for fast restoration of growth is not visible, so expect a repeat of this scenario in 2016.

Most likely, from the acute phase of the crisis will go into stagnation. Frightening figures the decline in turnover, as was the case last year, we will not see. It is possible that the values will even out in positive territory. In such a scenario expect the Ministry of Commerce of PRC, from the perspective of leaders whose main task on the Russian direction in 2016 will become the “stop of the recession and the transition to growth”. However, this increase, if it will remain slow and uncertain, and it will be calculated from a low base of last year.

The hope that investment cooperation would be a driving force for accelerated development of bilateral economic cooperation seems also not justified. A strong flow of Chinese investment abroad for the most part bypasses Russia party. We get streams on an annual volume of less than a billion dollars. According to mincommerce China, Russia still among the ten major recipients of Chinese investment, behind even Kazakhstan. In 11 months of 2015 Chinese direct investment in non-financial assets in Russia decreased by 15.2%.

Currently these investments are mainly in energy and raw material industries, and are almost exclusively the largest state-owned companies and “policy” financial institutions, which often insure their risks through the signing of corresponding intergovernmental agreements.

In December the Russian government Commission on foreign investment approved the acquisition by Chinese oil company Sinopec Corp. 10% of the company “SIBUR”. The Fund and the Chinese silk road during the regular meetings of the two Prime Ministers signed an agreement with OJSC “NOVATEK”, the contract of sale and purchase of 9.9% of shares of open joint stock company “Yamal LNG” (in this case, the Chinese wised up yet and the intergovernmental agreement). So, if these trades are quickly closed, the figures can change for the better, although not much change the overall picture.

In General, the results of the year showed that only political factors, is not supported by a sound economic strategy, is not able to provide a qualitative leap in the development of trade and economic relations. Even more urgent than before, was the need to develop a long-term strategy of development of economic ties with China. It aims to reflect current trends in the global economy and trade, vectors of regional integration, changes in the sectoral structure of the two countries, to identify approaches to economic exchanges with China, to identify priorities and the limits of rapprochement with him, to analyze the balance of potential benefits and risks, and identify optimal forms of interaction.

To develop strategy of development of economic cooperation with China should first of all address the question of the extent to which it can be viewed as an important and stable partner of Russia. Consensus in the expert community on this issue, as expressed by estimates and projections sometimes diverge, especially because their tone is often influenced by political preferences of the authors.

In order to understand all this, it is useful to consult the classic treatise sun Tzu’s “the Laws of war”, which is included in the number of required courses not only in Chinese military schools and academies but also at universities of economic profile. One of the basic tenets of the treatise – “know yourself, Know your enemy and in a hundred battles you will win a hundred victories”. While sun Tzu says: “If you know yourself but not know the enemy, then victory will be interspersed with defeats. If you know neither the enemy nor yourself, you’re doomed to failure”.

If using this rule of sun Tzu, to try to evaluate China as an economic partner, it is clear that the conditions for its economic development has become much more complex. The country entered a difficult and complicated phase “settlement”. To resolve such pressing domestic problems as the presence of enormous excess capacity, a bubble in the property market, prevention of systemic financial crisis, the improvement of ecological situation, raising the social sphere, will take not one year. During this period increases the likelihood of serious risks and challenges. In fact, we can see their manifestations in the slowdown of the Chinese economy, turmoil in the stock market, instability of national currency rate. Besides, the situation in the world economy is less favourable than in the period after China’s entry into WTO and to the global financial crisis (2002-2007). However, it is only one side of the coin.

A must see and the other side. The economic slowdown in large parts of the “compensated” by the increased volumes of the Chinese economy. Even assuming that the official statistics are highly inflated, and the real growth rates are not 6.9%, but below, say, 6 per cent, they still remain in two or almost two times higher than the rate of growth of the world economy as a whole.

The results of 2015 suggest that Chinese economy still stands as the largest market of consumption of hydrocarbons, metals and other industrial products. Despite a reduction of 7.6 per cent of the value of imports, import volumes of a number of major commodity positions has increased. Procurement of oil had increased by 8.8%, or $27.1 m and $ 335,5 million tons, LNG by 17.8%, copper and copper concentrate – by 12.6%, cellulose – by 10.4%. But almost all of these products are important exports of Russia to China.

In the Chinese market and new niches appear. One of them is agricultural products. Imports of grain and flour for the past year has increased from 19.5 to 32.7 million tons. Isn’t that the window of opportunity for Russia? In December of last year were finally signed bilateral interagency protocols, revealing the door to the Chinese market wheat, corn, soybean, rice and canola from Russia. It is regrettable that this was done very late. If we were a little quick, you could sign them back in 2012 or 2013. But… better late than never.

Dynamics of growth of Chinese investment abroad is not reduced. According to the Minister of Commerce of China Gao Chucena, their total volume in 2015 was $128 billion this year it is planned to increase by another 10%. But how many of them will thence to us, is another question. We must not forget that the Chinese, at least, not worse than us, are able to apply the laws of sun Tzu and to rate their partners according to their words and actions.

Overall, to cross China from the list of prospective economic partners clearly too early. Instead, it is better to make adjustments in some of our established views and approaches to collaborate with him on a number of key areas.

First, you need to pay close attention to the question of the terms of trade in goods and services. To help improve the conditions of access of Russian products to the Chinese market could free trade area (FTA). Currently China in some form or another has mode FTA with 22 countries and territories, which account for almost 40% of its foreign trade. Russia is not among them. FTA means primarily mutual preferential customs tariffs when supply of goods. Competition for the Chinese market, given the factor of the slowdown of the Chinese economy will have a very hard nature, the calculation will be taken every cent from customs duties. Actually, this is already happening. For deliveries to China the Russian coal export duties, and coal from Australia and Indonesia – no.

Last year, an agreement was reached between the EEU and China about the beginning of negotiations on a cooperation agreement, one of the points which should assume a FTA EEU – China, but as the ultimate goal. Certainly, it is a palliative measure, in which the solution of the problem may be delayed indefinitely, but, nevertheless, it’s a start. It would be useful, as it is seen, bypassing the preliminary stage, immediately begin to explore and discuss the main parameters of the future FTA. This would give real meaning to the cooperation within the framework of the project “belt” silk road, to strengthen the integration potential of the Eurasian economic Union, as well as raising the importance of this organization in the eyes of the Chinese partners.

Secondly, to remove barriers to trade and investment cooperation in the far East. Population of just over 6 million people. Chinese concepts is the city of the “second line”. At the same time the region is fabulously rich in minerals and natural resources. Given the small domestic market, remoteness from the European part of the country, rely on major investments in the manufacturing sector, apparently, is not particularly necessary. For Chinese companies may be of interest extraction and processing of raw materials, biological resources of the sea, the development of transport corridors, and agriculture. However, without a well-developed cross-border infrastructure, all these projects are very difficult to implement. Meanwhile, on the Russian-Chinese border, passing through the rivers Amur and Ussuri, there is no bridge. There are two projects – the construction of bridges of Tongjiang – bottom-Leninist (EAO), Heihe – Blagoveshchensk (Amur region). On both projects, intergovernmental agreements, respectively, in 2007 and 1994. No the bridge is still not built. If the project Tongjiang – bottom – Leninist there is still some movement, then on the second it didn’t start. Instead of the bridge proposed to build a cableway. On these projects, whether we like it or not, partners are judged on the seriousness of our intentions and make appropriate conclusions.

Thirdly, take part in energy cooperation as a given that regardless of the fluctuations in the prices of oil and gas is a seller’s market has become a buyer’s market. In this regard, of principle importance is the question of whether executed in time the obligations on Russian gas contract in 2014, will supply gas to China on schedule in 2018 or not. Some Chinese experts on this subject have doubts.

The next two to three years will be crucial from the point of view of long-term prospects of Russian-Chinese economic cooperation. Of course, there is no doubt that it will overcome the current bandwidth constraints. The question is how it will be? By and large, sees three main options.

First – Russia and China on the basis of the principle of mutual benefit will be able to build a model of economic interaction, which would effectively ensure social development of their economies. Second – economic relations will continue to develop by inertia, as a kind of addition to political relations. Third – economic paths the two countries diverge. The first and second options most likely. I want to come true the first option.

Sergey Tsyplakov