China’s Relations with Russia in a New Age

September 8, 2022 Posted by China Briefing Written by Chris Devonshire-Ellis Reading Time: 15 minutes

It’s gone under the radar, but China’s trade and investment in the Russian Far East is significant and growing fast.

Several discussions between Chinese and Russian officials at a senior level, including with China’s Chairman of the Standing Committee of the National People’s Congress Li Zhanshu, Russian President Vladimir Putin, and others took place at the Eastern Economic Forum this week.

These outlined the future direction of China-Russia relations, new investments, and cooperation and serve as a preamble towards a meeting between Presidents Putin and Xi, expected to be conducted in Samarkand, the capital of Uzbekistan, at a heads of state meeting of the Shanghai Cooperation Organisation next week from September 15-16. It will be the first meeting between the two since the Beijing Winter Olympics, although they are known to have frequent, detailed conversations on a regular basis.

This report brings readers up to date on China-Russia trade, investment, challenges, and developments in 2022 and beyond, with a focus on North China and the Russian Far East.

The Russian Far East – an introduction

The Eastern Economic Forum is primarily a business and trade event, designed to develop investment and economic development knowledge about the Russian Far East, a huge area of Asia that includes the Arctic and Pacific Oceans. This area is divided up into several provincial-style regions, extends further east than China, and shares a 4,195km border with China’s Heilongjiang and Inner Mongolian Provinces. It borders the Russian region of Siberia to the West, and the United States to the East across the Bering Straits. To the south lie China and Mongolia.

The Russian Far East covers a territory of some 6.2 million square kilometers, about 1/3 of Russia’s total land mass, and has a population of about 12 million – equivalent to Moscow. The region, though sparsely populated, has numerous advantages, massive agricultural potential, significant reserves of a huge variety of materials from oil and gas and minerals to timber and fresh water, and acts as two increasingly strategic access points to Russia, and under normal circumstances, to Europe.

Vladivostok Port – Trans-Siberian Railway

This includes the Vladivostok Sea Port, an all-year round deep-water port that is also the Eastern Terminus of the Trans-Siberian railway. Vladivostok is becoming relevant to both Chinese and Southeast Asian exporters as the railway provides access to all areas of Russia, has routes extending into Central Asia – and continues west to the European side of Russia to Moscow, St. Petersburg, and during normal times, on towards Europe.

This has become of increasing interest to Chinese exporters as they look to supply the consumer gap left in Russia by exiting Western suppliers, and to countries in South and Southeast Asia, such as India and Vietnam, who have already established direct shipping routes to Vladivostok from Chennai and Ho Chi Minh City (HCMC), respectively. I previously discussed ASEAN’s relationship with the Russian Far East here.

Northern Sea Route

Also of growing significance is the Northern Sea Route (NSR), to which Vladivostok now serves as a gateway. The NSR extends northwards from Vladivostok, and then heads West across the Arctic Ocean, bypassing the northern coastlines of Far East Russia, Siberia, (where the huge LNG reserves are located) before extending to Western Russia and Murmansk, near the border with Norway. Murmansk is well connected by rail to both Moscow and St. Petersburg, while numerous other routes via the Norwegian coast lead to markets in Western Europe. This route, and especially at present, to the gas fields in Siberia, are already being utilized by China and India for shipping LNG to their respective domestic markets. I discuss China’s involvement in the NSR further in this article.

China-Russia Trade 2022 YTD

Zhang Hanhui, the Chinese Ambassador to Russia, participated in a session on China-Russia trade, which also included several Chinese and Russian officials from the various Ministries and China-Russia trade organizations. During this meeting (and several times during the Eastern Economic Forum), it was mentioned that both China and Russia are ‘self-sufficient’ and that economic and political ties between them were the same. Discussions were pragmatic, open to the various problematic areas of sanctions and Russia’s SWIFT disconnection, as well as looking at areas of promise and areas which could be improved. Trade turnover 2022 YTD (January-August) was said to have risen 4.9 percent, despite problems with on-going Covid issues in China, disruptions to supply chains, inflation, and sanctions; however, both sides stressed that “trade relations are stable on a fundamental level.” Trade volumes during 2021 had increased 30 percent and touched US$145 billion mark. During the period January-July this year, turnover has reached US$97 billion. Both countries wish to reach a target of US$200 billion by 2024.

China-Russia investments and infrastructure

Despite reports elsewhere to the contrary, Chinese Belt & Road Initiative investment into Russia has not dried up, it’s just that it has flown under the radar or has not been officially notified. In fact, a plethora of new infrastructure investments have, or are about to, reach maturity, including in nuclear power as well as other energy projects (the gas pricing of the planned Power of Siberia 2 pipeline via Mongolia has been agreed) now coming into development or online.

Other important ‘self-sufficiency’ related intent comes in that China has agreed with Gazprom, Russia’s main gas provider, to pay for Russian gas in Rubles and Chinese Yuan, shutting the US dollar out of one of the largest on-going energy transactions in the world.

Investments are also being made in Russia’s Sibur petrochemicals business, with Chinese investment into plants in Buryatia (Eastern Siberia, north of Mongolia) currently under construction. Sibur is one of the world’s fastest growing petrochemical businesses.

New bridges, roads, and railways are being jointly financed, with some now operational, such as the Amur River Bridge between Heihe and Blagoveshchensk. That connects huge volumes of trade passing through Heilongjiang Province to the Trans-Siberian railway – and vice versa. The Amur is known as the Heilong Jiang 黑龙江 in China and the Black Dragon River in English.

The two sides also mentioned that several other Amur River bridges would be jointly developed, creating additional cross-border trade avenues, as the border between the two countries extends down the Amur center line. Specifically mentioned was a non-border bridge in the Sakha Republic (Yakutia). The Amur feeds the Lena River, which is navigable and reaches the Arctic Ocean to the North.

Russian Railways have reported a six percent increase in cross-border volumes between China and Russia in 2022 YTD, and it was pointed out that combined, they possess about 50 percent of the total global rail track. Increased connectivity will improve these bilateral routes. Rail volumes had increased 40 percent in 2021, with a variety of issues affecting this year’s growth (which I will discuss later in this article).

Heihe- Blagoveshchensk

It became apparent during the discussions that both China and Russia view the Heihe-Blagoveshchensk border cities as a key strategic development hub. Sited opposite each other on opposing banks of the Amur River, Heihe is part of the Heilongjiang Free Trade Zone (which is divided up into three component parts, the others being Harbin and Suifenhe). As mentioned, this is an access point to the Trans-Siberian railway and has access direct to Moscow as well as the many other significant Russian cities in between. Consequently, this twin-city cluster is poised to thrive. With a combined population of about 1.7 million, the two cities are connected by bridge, ferry, and cable-car, the latter of which will be operational from 2023. Residents are not required to pass through immigration controls to reach each other, while Chinese is being taught in Blagoveshchensk schools, and Russian in Heihe.

The area is developing in terms of China-Russia trade cooperation, with Heihe being positioned as a huge ‘China sourcing center’ not dissimilar to the type of facility seen at the Canton Trade Fair, yet more easily accessible to Russian buyers. This will result in a trade boom, which requires additional facilities, such as bonded warehousing, special facilities for dangerous goods (oil and gas related), as well as for short shelf-life products (such as aquaculture). The new bridge here, already operational, is processing about 3,000 vehicles daily – it has a capacity to reach 14,000.

The Amur River

Heilongjiang-Primorsky Krai-Vladivostok connectivity

These are two important provincial regions, with the capital cities being Harbin and Vladivostok. Trade between these two regions increased by over 70 percent in H1 2022, as I discussed in a report earlier this week here. The significance of the relationship between the two is that Heilongjiang is a landlocked province, while Primorsky Krai’s Vladivostok is a deep-water port. This has made the border crossing between Suifenhe and Pogranichny increasingly important as these lead, via the Trans-Manchurian railway, to Vladivostok Port.

While the Heihe route is preferable for Russia imports and exports, Vladivostok offers connectivity to markets in Japan and South Korea, as well as south to other ports, such as in Shanghai and Hong Kong, or direct to India’s Chennai and Vietnam’s HCMC. With China now part of the RCEP free trade agreement that includes Japan and South Korea, this route is also showing significant growth potential. China and Russia also have free trade agreements with Vietnam via ASEAN and the Eurasian Economic Union (EAEU).

The Suifenhe border has been developing as a center for Russian agriculture and dairy, with a Suifenhe dairy processing plant being expanded to process 1 million tons of raw milk from Russia by end 2023. An estimated 500 tons of other dairy products are already being sourced and sold onto Chinese markets.

Xinjiang-Altai

There is a short western China-Russia border between Xinjiang Province in China’s west, and Russia’s Altai Province, close to their respective borders with Kazakhstan. This border is high-altitude and extends for about 100km, with no check points or available crossings at present. The nearest cities of note are Biysk in Russia, an industrial center connected to the Russian national rail network, and Beitun, connected to China’s national rail. Both are also connected to their respective highway networks and possess local airports. There has been some discussion of developing a border crossing and railway between the two and create a western China-Russia corridor although it would appear plans are at an early stage at this juncture.

Northern Sea Route (NSR) and Northeast Asia development

Li Zhanshu, Chairman of the Standing Committee of the National People’s Congress of China, stated at the Eastern Economic Forum Plenary Session that China wanted to be the biggest investor in the Northern Sea Route, and that together with Russia would be developing 13 ports along this, earmarking an expenditure of 1.8 trillion rubles, or about US$28 billion. That, he said, would encourage and attract more Chinese investment to invest in industries. He noted that China had already spent an estimated US$14.7 billion in Russian Far East agricultural projects (some of this may be in long-term land leases by Chinese companies, a sensitive issue in Russia).

He did however stress that China regarded the opening up of Northeast Asia (including the Russian Far East) as a significant step – and that China believed it is becoming a globally significant region. That is partially a comment aimed at the recent RCEP free trade agreement, which includes China, in addition to Japan and South Korea. This makes sense, with China’s Northeastern Provinces possessing direct access to Japan and South Korea, and vice-versa, a significant trade impact is already occurring. This is also manifesting itself with Russia, which although not part of the RCEP deal, is negotiating, via the Eurasian Economic Union, a Free Trade Agreement with South Korea – a deal, which when struck, will make Russia a junior partner of the RCEP agreement.

Li stated that Northeast Asia possessed unique countries – but with complimentary economies and resources. That was an issue incidentally echoed this week by Ridha Wirakusumah, a director of Indonesia’s Sovereign Wealth Fund, who also called for greater ties between Northeast and Southeast Asia at the 7^th Belt and Road Initiative Forum in Hong Kong. He suggested that considering Hong Kong being fast tracked into the RCEP agreement, it could play a key role in accessing Northeast Asian investment finance in Japan, South Korea, and Taiwan and help to utilize that in ASEAN.

For the main part, the development of the NSR is seen not just as a supply chain for gas supplies from Russia’s Arctic Yamal fields, but also as an infrastructure play in terms of developing additional infrastructure projects into mining and agriculture. While global BRI media attention has been dismissive of Russia and Northeast Asia in general, it appears from the Chinese side, at the highest levels, significant interest and investment capital is being earmarked to develop the Russian Far East. Within the decade, it may become one of the largest recipients of Chinese investment capital, when China’s current focus on the Middle East has been completed and the geopolitical situation and trade as concerns Russia stabilizes.

Other China-Russia trade developments

Liaoning

There are discussions underway to develop a joint China-Russia Industrial Park in Liaoning, with Shenyang probably the location. That is likely to include bonded warehousing and to offer Russian manufacturers and exporters a showcase for accredited products for the Chinese market.

China-Russia challenges

There are significant bottlenecks. President Putin estimated these to have cost Russia in exports about 1.5 trillion rubles, or about US$23 billion in lost China trade during this period in 2022 alone. The positive sign is the demand is there, while the challenges are in correcting this.

Differing infrastructure

These impact in many ways, from the Russian side not being effectively coordinated in its intra-Ministerial measuring systems, with Ministries such as State Planning using different criteria than the Ministry of Economy, which uses different methodologies and measurements than say Russian Railways. This makes it harder for Russia to adequately plan ahead and agree on a coordinated approach. China, in contrast, is rather better aligned internally.

There are also differing infrastructure in customs procedures, which have been erratic on both sides, and subject to change without notice. This has slowed down cross-border traffic – such as physical vehicle inspections being carried out at border check points, documentation not complying with required standards, and other related issues. Better coordination between Customs ministries is required – while a constant theme was the urgent need to digitize procedures and introduce blockchain technologies. There may also be resistance to this, as local provincial Customs may not always wish to be technologically compliant as it removes the opportunity to levy extra-judicial ‘fees’.

It was pointed out that even on a bilateral trade space and in getting buyers and sellers together, China and Russia use different internet spaces and that e-commerce platforms, while they exist, are not sufficiently well aligned, or developed, with trade barriers and payment bottlenecks all interfering with smooth sourcing and transactional flows.

Soft infrastructure development

Apart from the obvious need for better inter and intra-governmental coordination, positive steps are being taken to increase cargo flows. China and Russia are working together to increase cloud computing capacity and introducing digital technologies at their cross-border processing terminals.

The current 23 land border crossings have all been earmarked for expansion and development, including new dry cargo sites. Faster processing and throughput capacity are being developed.

Improvements need to be made at all China-Russia border crossings, and the number of these capable of being upgraded to cargo and vehicular traffic increased. Here, not just administrative solutions need to be found, but infrastructure built, such as cargo facilities including warehousing, cold storage, dangerous goods, processing, packaging, and efficient transit via multi-modal services effected. This was especially true at the Heihe-Blagoveshchensk Amur River hub, which requires facilities to load containers seamlessly between trucks, railway wagons, and ferries.

Interestingly, President Putin said that in terms of Russia’s economic performance during 2022, sanctions had an effect, but key issues had been resolved. Because of this, he stated that Russia’s Federal Districts would be seeing their State budgets increase by 20 percent for 2023 – leaving no doubt that the capital investment is there on the Russian side to implement the necessary upgrades. Both Putin and the Russian Federation of Industry expressed confidence that existing current bottlenecks in China-Russia trade should be eradicated by the end of 2023.

China-Russia financial transactions and sanctions impact

There has been a threefold impact on bilateral trade development: the impact of sanctions on Russian businesses in China, the threat of secondary sanctions, and the SWIFT disconnection.

In terms of sanctions, and secondary sanctions, this has more of an impact on Chinese SOEs and MNCs who stand to lose other markets should they fall foul of existing Western sanctions. For this reason, there has been a retrenchment of Chinese SOEs from Russia, and from Russian trade. However, this trade is now being reorganized into smaller Chinese businesses who only possess regional markets and for whom the threat of international sanctions is largely irrelevant. This would account for the estimated 19,500 new Chinese incorporations made over the past seven months who have expressed ‘Russia’ as a trade activity on their business licenses.

While this has taken time to manifest itself, this army of smaller Chinese SMEs will take up the mantle of Russian trade in future, meaning that the pure trade aspects of sanctions and secondary sanctions is diminished.

It was acknowledged that Chinese banks however remained ‘overly cautious’ in handling Russian clients in China, in processing payments between the two countries, and have been since 2014. That was when the annexation of Crimea occurred and initial sanctions on Russia imposed. Again, while the major Chinese banks may still be wary, it has been noted that some ‘sanctions education’ may be provided in terms of identifying the exact areas to avoid and which can be undertaken. In addition to that, smaller regional banks – and investment funds – may also be established to concentrate on the China-Russia trade space without other intended overseas trade facilities, thereby neutralizing the overall sanctions threat.

These may develop as quasi-hybrid banks trade in both rubles and yuan to circumnavigate the US dollar and SWIFT usage, while also offering cryptocurrency services. Russia indicated last week it would permit the use of cryptocurrencies in cross-border trade settlements. Trade settlement between Chinese and Russian banks in yuan and ruble is already permissible and does not require SWIFT.

There are existing channels in Russia for Chinese citizens (and traders) to access finance via China’s Union Pay network, which is already operational throughout China, while the use of Russia’s MIR cards in China can be anticipated in due course.

Both China and Russia stated that they wish to develop ‘immunity’ to Western sanctions – the measures shown illustrate exactly how this may be accomplished while leaving Chinese MNCs free of sanctions and internationally compliant. China has just called up entrepreneurial battalions of SMEs to take on the challenge – a positive one from the Chinese small business perspective as it is State policy to push for a doubling of the existing bilateral trade figures, being another US$100 billion being requested and encouraged, and that China is investing significant sums into the Russian Far East in particular.

China-EAEU Free Trade Agreement

China signed off a FTA with the Eurasian Economic Union (EAEU) in 2018. The EAEU includes Russia, along with Armenia, Belarus, Kazakhstan, and Kyrgyzstan. Of note to China especially is that it shares borders with three of these countries (Kazakhstan, Kyrgyzstan, and Russia) while Armenia and Belarus are avid partners in the Belt and Road Initiative. However, the FTA is currently non-preferential, meaning that no tariff reductions have currently been agreed. This is significant in terms of getting some customs clarity into China-Russia trade as the Russian aspect of the EAEU comprises about 90 percent of all EAEU trade volumes.

However, the China-Russia Business Council stated when asked that in terms of developing the China-EAEU FTA, this was now being expanded into a far wider reach of the EAEU with the Belt and Road Initiative. There are two implications to this: firstly, that future tariff discussions between China and Russia (and the EAEU nations) are more likely to take place on a bilateral basis, not dissimilar to the structure of the Commonwealth of Independent States (CIS) a grouping of the EAEU members named above, together with Azerbaijan, Moldova, Tajikistan, Turkmenistan, and Uzbekistan. This multilateral bloc is not a Free Trade group, but members do have their own individual trade agreements with each other. It appears that China-Russia tariffs and the reductions of them is and will be organized in the same fashion.

To some extent, this makes sense – both China and Russia are huge and complex economies, with some protectionism issues at stake. Rather than attempt to deal with everything under one broad agreement, specific tariff reductions and eliminations can be agreed on an ‘as-needed’ basis, which gets both faster and directly to any market need without the need to go through entire and complex FTA formalities, regulations, and amendments.

On a broader scale, there appears to be talk about a ‘Belt and Road Initiative’ Free Trade Agreement, which would include, if ever ratified, 142 countries. When pressed, I was told “Why not?” – an interesting observation as both China and Russia mentioned numerous times during the Eastern Economic Forum that both were open to anyone who wanted to engage in trade.

That is a polar opposite from the West, where the imposition of sanctions has the exact opposite effect.

Reading between the lines then, it appears the BRI is developing not just as an infrastructure play but also as a mechanism to softly integrate trade agreements among the BRI members, without having to formalize or institutionalize them into a particular document.

It may be said that this approach does away with the need for the years of dedicated work that China put into place with the short-lived EU-China Comprehensive Agreement on Investment (CAI), and the effort it also put in, along with several other nations (including Japan), on the Trans-Pacific Partnership (TPP) free trade agreement that the United States walked away from in 2017. For China at least, a softly-softly approach appears to be a better return on investment than making huge institutional agreements, and the China-EAEU deal will remain a bilateral play between members than a larger formatted agreement.

Executive summary

Despite general assumptions, the China-Russia trade and investment space is far from moribund – although challenges exist as I pointed out. The takeaways are that collectively, China and Russia regard themselves as ‘self-sufficient’ with the implications that they can survive and prosper without the need for engagement, with the United States or European Union. Both parties regard the relationship as stable, with Chinese analysis of Russia’s position as also ‘stable and adapting’.

In terms of China and Russia, however, the problems that have existed and have been placed upon them during 2022 appear to be both well understood, and capable of being, if not removed, then circumnavigated. The role of China’s SME’s and the rapid development of non-US influenced financial mechanisms to facilitate trade is indicative of this. That leads one to predict that the China-Russia trade and investment space is not just adapting but is likely to positively thrive from 2024 onwards once bottlenecks are cleared and the two countries can attain the trade capacity it seems clear they are capable of.

That will only be increased from 2025 onwards as China-Russia-financed infrastructure builds themselves start to have an impact and to generate cashflows. The two are cooperating in numerous fields, notably energy but also agriculture – much of the heartlands of Siberia, for example, has lain fallow since the breakup of the Soviet Union in 1991. The land remains viable – China has a huge population to feed and the combined China-Russian agricultural expertise will get the required productivity levels up. Both countries are already among the largest grain suppliers in the world today.

Both also have expressed interest in developing industry – with the delayed CR929 aircraft China-Russia joint venture a much-needed long-haul commercial airliner becoming a pressing need given Airbus and Boeing sanctions on Russia. Moscow intends to place an order for over 500 aircraft to upgrade and replace aging Western models in its Aeroflot fleet. Smaller aircraft are also being developed for the developing Siberian and Far Eastern routes. Then there is the significant road, rail, bridge, and port infrastructure both have said is underway and will be continued in the Russian Far East.

In terms of gauging China’s BRI spend in Russia this can be difficult to quantify as it is not always officially announced and some of the projects mentioned can be sensitive, especially in Russia, where there have been concerns of potential Chinese encroachment of Russian lands. Therefore, some of the spend appears to have gone unnoticed and is why this may continue. Nevertheless, the Chinese rarely say they will do something and then do not, and with a general growing Asian awareness that Northeast Asia has both huge volumes of investment capital (Beijing, in addition to Tokyo, Taiwan, and Seoul) and the new RCEP agreement to project trade both regionally and into ASEAN (all ASEAN countries are members of RCEP) then the increasing trade and investment ties between China, Northeast Asia, and Far East Russia become clearer to see.