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Russia's cozy economic ties with China are not all they seem

Moscow chafes at junior partner status in trade fully dependent on oil and gas

Russian President Vladimir Putin, left and Chinese President Xi Jinping: Political and economic leaders in Russia are concerned about their country's trade status with its more economically powerful neighbor.   © Reuters

MOSCOW -- This year's St. Petersburg International Economic Forum -- Russia's version of Davos -- was notable for its massive Chinese delegation led by President Xi Jinping.

The high-profile Chinese presence spoke volumes about the rapidly expanding economic ties between Moscow and Beijing. By contrast, Americans at the June 6-8 event were barely noticeable, reflecting lingering Western animosity toward Russia amid economic sanctions that remain firmly in place.

Xi was clearly the guest of honor, with organizers including Chinese in some event signage, which is typically limited to Russian and English.

During the plenary session, both Xi and Russian President Vladimir Putin rhapsodized about their growing strategic alliance.

"Russia is not only our largest neighbor and a comprehensive strategic partner, but also one of the most important and most prioritized partners in all areas of cooperation," Xi said.

Putin was equally effusive. "Today, we maintain very deep and wide-ranging relations with China. We don't have such relations with any other country," the president said. "Indeed, we can say without exaggeration, that we are strategic partners in the fullest sense."

Nice words, but a close look at actual trade between the two neighbors paints a less rosy picture; one that reveals Russia as decidedly the junior partner.

During a panel discussion on economic cooperation between the two countries, Russian billionaire Viktor Vekselberg, the Ukrainian-born aluminum tycoon who chaired the session, began by asking what should be done to broaden bilateral economic relations, which are currently driven by the oil trade.

In 2018, the total value of trade between Russia and China surpassed $100 billion for the first time. While government officials on both sides rave about what they describe as "exemplary" economic relations, the trade environment is not that great, at least not for Russia.

Oil and other minerals accounted for 76% of Russian exports to China, with wood and paper products responsible for another 8%. After a new oil pipeline from East Siberia to the Asia-Pacific region went online in 2009, Russia's resource exports to China soared. In 2018, higher oil prices boosted the value of these exports.

China is now the largest overseas market for Russian oil, gobbling up a quarter of all her northern neighbor's oil exports. The share of mineral resources in Russian exports will rise further when a new natural gas pipeline for supplies to China is completed at the end of the year.

On the other hand, more than half of Russia's imports from China comprise machinery and automobiles. Consumer goods like clothes and shoes also constitute a large portion of these imports.

In a nutshell, Russia supplies resources to China, which in turns sells value-added products to Russia.

This has Russian political and business leaders worried over the prospect of their country becoming an "ancillary supplier" of resources for China. Specifically, they fret that the bilateral trade structure will give China huge pricing power over Russia and lead to increasingly wider economic inequity between underdeveloped East Siberia and the growing northeastern parts of China -- a situation that could create tension along the border in the Russian Far East.

Vekselberg's opening remarks exposed these grim prospects.

While the St. Petersburg forum was in full swing, Russian business daily Kommersant published an intriguing opinion piece on June 7. Written by Alexander Gabuev, head of the "Russia in the Asia-Pacific Region" program at the Carnegie Moscow Center, the article noted that Russia is not attracting much Chinese investment.

According to Gabuev, despite the thousands of Chinese political and business representatives with Xi at St. Petersburg, Russia still accounts for a mere 2% of China's overseas direct investment.

While being an avid buyer of Russian resources, China has never been keen to invest in its trade partner. In fact, China's share in total outstanding foreign direct investment in Russia is under 1% -- far less than the over 4% for Germany, which is also a major importer of Russian oil and gas.

Gabuev contends that Chinese investors are turned off by Russia's risky business environment, which has been hit by numerous arrests of well-known business tycoons. Another factor is China's contentious history with Russia, with which it shares a long border

Moreover, Chinese businesses prioritize large, growing markets like the U.S. and Asia's emerging economies.

Whatever the reasons, that China's investment in Russia is barely growing despite importing huge amounts of resources has its partner on edge.

With Beijing promoting its Belt and Road Initiative -- an ambitious international infrastructure investment program -- more Chinese private-sector investment in Russia will be crucial for strengthening bilateral economic relations. 

Meanwhile, Russia continues to nurture its economic ties with Japan.

In his June 29 meeting with Japanese Prime Minister Shinzo Abe, Putin lauded the eight-point plan for expanding the bilateral economic cooperation that Abe announced in 2016. The blueprint calls for Japanese public-private support for structural reform of the Russian economy in heath care, urban development, high technology collaborations, and production output.

And while Russia still depends on exports of resources, it is also keen to acquire foreign partners to help restructure and diversify its economy.

A Japanese government official says Tokyo will focus on the kind of economic cooperation Moscow needs. This includes more cooperation in resource development, as Moscow wants to prevent itself becoming even more dependent on China for growth.

Russia's pursuit of Japanese companies, including trading giant Mitsui & Co., in its Arctic-2 natural gas project reflects this sentiment. Moscow hopes the presence of Japanese businesses will lessen China's increasing influence over Russia's resource development.

The Putin-Abe meeting on June 29 produced no progress on a long-standing territorial dispute, which has been a thorn in the side for Tokyo. But this does not mean the outlook for bilateral economic cooperation remains bleak.

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