Business

Could Russia re-direct its economy towards China?

Storage tanks on the Russia-China oil pipeline in Mohe, north-eastern China
Image caption The oil pipeline opened earlier this month runs between eastern Siberia and north-eastern China

Despite Russia being the world's main exporter and China the main consumer of energy resources, these two neighbours have not been doing much trade with each other.

According to Russia's Federal Customs Service, trade with China accounted for just 9.6% of Russia's foreign trade in the January-November period of 2010, or $53bn (£33bn), up from 8.4% in the same period a year earlier.

This is a far cry from the figure of 49.6%, the European Union's (EU) share of Russia's foreign trade.

"The Eastern destination emerged not very long ago", observes Vladimir Portyakov, deputy director of the Institute of Far Eastern Studies of the Russian Academy of Sciences, which goes some way towards explaining why the EU has traditionally been Russia's leading trade partner.

In addition, he points out, some 80% of Russia's economic potential is concentrated in the European part of the country.

However, when comparing China to individual European countries rather than to Europe as a whole, China emerges as one of Russia's main trading partners, says Nikita Popov, senior consultant at Beijing Axis Strategy.

"Moreover," he says, "China is Russia's top supplier."

Machinery and electronic goods are among the main products China exports to Russia.

However, Russia's importance to China is also very low. As a trading partner, it ranks bottom of the top 10 countries China is trading with.

Energy security

Due to the structure of the Russian economy, the country exports mostly energy and mineral resources.

"Apart from natural resources, Russia has very little to trade with China at the moment," says Mr Popov.

But in its economic dealings with China, Russia's role "is and will be" to help Beijing guarantee the country's energy security, rather than be a major oil supplier, Mr Portyakov believes.

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He says that the launch earlier this month of the first oil pipeline linking Russia and China definitely serves the purpose.

Mr Popov agrees.

"China has many alternatives to its energy resources imports, such as African countries, Iran, Venezuela [for oil]; and Central Asia countries [for gas]; and Australia, Indonesia [for coal]," he says.

There have been talks about Russia selling its gas to China, but the two sides have so far failed to agree on price.

In the January-November period of 2010, Russia's import from China was twice as big as its export to the country, according to the Russian official data.

Experts agree that Russia wants and needs to diversify its energy export routes, as well as its foreign trade in general.

"Russia's and the EU's dependence on each other has been way too excessive," says Mr Portyakov.

But Russia's eastern energy export expansion will not be easy, as the Asian part of the country lacks the necessary infrastructure and will require huge investments.

Investment barriers

Despite Russia and China having signed some cooperation agreements and decided to use both the rouble and the yuan in mutual trade, Chinese businesses do not invest much in Russia.

In fact, investment from China in its northern neighbour's economy accounts for only 1% of total foreign direct investment in Russia.

Experts agree that there has been interest from China in doing business in Russia.

"In fact, not only in resource related fields, "says Mr Popov. "There are good examples of China's investments into industrial construction, real estate, car manufacturing.

"But serious problems exist on the way for China's investment spree to Russia."

Corruption in Russia, opposition from officials who sometimes lobby on behalf of the interests of Russian businesses, undeveloped infrastructure and suspicion towards "the Chinese expansion" are seen as the main barriers.

Also, Mr Portyakov says, the two sides often have different interests.

"While Russia is mainly interested in attracting investment into its manufacturing industry, Chinese businesses want to invest into natural resources," he says.

Limited potential?

The volume of Russia's trade with China has been growing steadily, apart from in 2009 when it was hit by the global financial crisis.

Mr Popov believes that there is potential for Russia and China to increase their economic cooperation, "but in a very limited number of areas".

Apart from energy and mineral resources being the major direction of the cooperation, the two sides could, for example, join forces in high-level processing of natural resources, either in Russia's or China's territories, says Mr Popov.

"There are examples of both: agreement between CNPC and Rosneft about construction of the refinery in Tianjin, agreement between Russia's Metropol and China's MCC Overseas about construction of ore mining and a processing enterprise in Buryatia, among others."

Lilian Luca, managing director at Beijing Axis Procurement, believes that Chinese manufactures could also use Russia as a "window to Europe".

They could do it by first entering Russian markets - for example, the car market - and then further expanding into Europe, says Mr Luca.

Mr Portyakov says that military technologies are one of Russia's niches as well.

He also believes that innovations are needed for Russia to be competitive in its trade with China.

"We need to re-industrialise our economy and improve its structure," says Mr Portyakov.

The Russian government seems to agree.

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