Economic Relations between Russia and China – …bruegel.org/.../2016/06/Heli-Simola-Russia-China-presentation.pdf · Economic Relations between Russia and China – Increasing

Suomen Pankki

Economic Relations between Russia and China – Increasing Inter-Dependence? Bruegel 21 June 2016 Heli Simola, Senior Economist, BOFIT

21.6.2016 1

Suomen Pankki – Finlands Bank – Bank of Finland

Economic Relations between Russia and China

Russia and China seem to have huge potential for economic cooperation – Large neighboring markets – Complementary production structures

Economic relations between countries have long time been even surprisingly narrow despite many years of high-level dialogue

21.6.2016 2

”Year of China” in Russia in 2007

Suomen Pankki – Finlands Bank – Bank of Finland

Trade has increased notably and its structure has changed

21.6.2016 3 Source: Author’s calculations based on OECD-WTO TiVA data

0

5

10

15

20

25

30

35

40

1995 2000 2005 2011

Trade between Russia and China, bn USD (in value added terms)

Exports from China to RussiaExports from Russia to China

0 %

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

100 %

1995 2011 1995 2011

Chinese exports to Russia Russian exports to China

Structure of bilateral value added trade, %

Other

Financialintermediationand businessservicesTrade andtransportservices

Machinery,equipment andtransportequipmentMining andquarrying,petroleumproductsAgriculture andfood industry

Suomen Pankki – Finlands Bank – Bank of Finland

Bilateral dependency still low

21.6.2016 4

0 %

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

100 %

1995 2011 1995 2011

China Russia

EU28 NAFTA East and South East Asia China/Russia Other

Supply (import) dependency Demand (export) dependency

0 %

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

100 %

1995 2011 1995 2011

China Russia

EU28 NAFTA East and South East Asia China/Russia Other

Source: Author’s calculations based on OECD-WTO TiVA data

- Bilateral dependency has increased, but remains low - Both more oriented towards other markets - Rather one-sided dependency of Russia from China than inter-

dependency

Suomen Pankki – Finlands Bank – Bank of Finland

Russia’s statement of ”pivot to Asia” – Hope to receive additional income and

financing under western sanctions

Much attention for new steps in cooperation – Agreements on natural gas supplies

from Russia to China – Contract on Russia selling missile

defense system to China – Joint declaration on cooperation in

coordinating development of Eurasian Economic Union and Silk Road Economic Belt

21.6.2016 5

High-level relations blooming after Russia’s relations with West cooling

Sources: Kremlin, Xinhua.

Suomen Pankki – Finlands Bank – Bank of Finland

Trade development more moderate and again one-sided

21.6.2016 6

-60 -50 -40 -30 -20 -10 0

Korea

Japan

EU

China

EAEU

US

Total

Change in Russian goods imports in 2013-15, %

Sources: Russian Customs, IMF DOTS

0

5

10

15

20

25

China's sharein Russian

imports

China's sharein Russian

exports

Russia's sharein China'simports

Russia's sharein China'sexports

Share of Russia and China in each other's goods trade in 2013 and 2015, %

2013 2015

Suomen Pankki – Finlands Bank – Bank of Finland

Investment flows have continued small and fallen

Russia and China not among each others’ most important investment partners

– FDI stock from Russia to China (incl. Hongkong) 1.5 bn USD

– Estimates for Chinese FDI stock in Russia vary from 1.5 bn to 25 bn USD

Chinese credit to Russian companies has not increased notably in general except some individual deals

– Chinese banks take Western sanctions into account

– Difficulties to agree on price

21.6.2016 7

N.B. Figures from different sources are not comparable due to different methodologies.

Sources: MOFCOM, China Investment Tracker, CBR, author’s calculations

0

1

2

3

4

5

6

7

MOFCOM MOFCOM adj. CIT CBR

Chinese direct investment flows to Russia, USD bn

2011 2012 2013 2014 2015

Suomen Pankki – Finlands Bank – Bank of Finland

Oil trade volumes and inter-dependency have increased – reflecting earlier developments

21.6.2016 8

Sources: CEIC, UN Comtrade

0

5

10

15

20

25

30

35

40

45

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Volume of oil exports from Russia to China (million tons)

Saudi Arabia15 %

Russia 13 %

Angola11 %

Iraq10 %

Oman9 %

Other42 %

China's oil imports by area in 2015

EU 61 %

China16 %

Belarus9 %

Japan 6 %

Korea5 %

Other3 %

Russia's oil exports by area in 2015

Suomen Pankki – Finlands Bank – Bank of Finland

Natural gas agreements an important step forward, but much work remains to be done

21.6.2016 9 Source: IEA

China - Myanmar pipeline (12 bcm)

China – Central Asia pipeline (55 85 bcm)

Power of Siberia ( 38 bcm)

Power of Siberia 2 ( 30 bcm)

LNG facilities (55 bcm 88 bcm)

Suomen Pankki – Finlands Bank – Bank of Finland

Arms trade an exception in economic relations

Arms trade between countries has been declining during past decade

In arms trade opposite situation

than in other economic relations SIPRI estimates that Russia still accounts 60-70% of Chinese arms imports

21.6.2016 10

Source: SIPRI

0

20

40

60

80

100

120

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Russian arms exports to China, volume index 2005=100

Suomen Pankki – Finlands Bank – Bank of Finland

Practical implications of regional cooperation unclear and challenges remain

21.6.2016 11

Source: HKTDC

Suomen Pankki – Finlands Bank – Bank of Finland

Future perspectives for economic cooperation depend largely on political relations

Best potential for further increasing and deepening cooperation in the fields of energy and raw materials, infrastructure

– Politically the most sensitive areas – Especially in these areas both seem to be rather striving for reduced dependency on

any country instead of increasing inter-dependency

Russia wants financing but is not willing to give up on economic

independency China aims at securing diverse raw material supply and finding new

markets for domestic industrial production – Emphasis might be shifting to latter with China’s rebalancing of growth model and

already vast and diversified supply secured – Often implies majority stakes and / or use of domestic materials, labour etc.

Can a balanced approach acceptable to both be found or is it easier

to find other partners?

21.6.2016 12

Suomen Pankki – Finlands Bank – Bank of Finland

Limited potential for increased cooperation in other sectors

Traditional attractions of Chinese

markets offer less possibilities for Russian companies

– Poor competitiveness in most other products than energy and raw materials, especially consumer products

– China is no more a market of cheap labor at least for Russian companies, as average wage in China appears to be already higher than in Russia

Russia’s relatively large markets interest Chinese companies, but

– Investment hampered by problems in business environment

– Further increasing exports might be restricted by Russia’s protectionist policies (reducing import dependency, import substitution)

– In sanctioned products China has less to offer and providing finance limited by risks

21.6.2016 13

Main entrance of the Matryoshka Park in Manchuria (Source: Kommersant)

Suomen Pankki – Finlands Bank – Bank of Finland

Conclusions

Bilateral inter-dependency has increased, but remains low and is rather one-sided

Recent warming of political relations has led to some

important steps forward also in economic relations, but less results in practice

In the near term, development of economic relations

continues to rely largely on political considerations

21.6.2016 14

Thank You for Your Attention