Source: Valdai    Published: 2022-10-21

China is the most worthy global partner for Russia’s economy. Against the backdrop of the United States’ continuous policy of containing China, the strengthening of economic cooperation between China and Russia as well as other non-Western countries is also an inevitable trend, writes Wang Wen, Executive Dean, Chongyang Institute for Financial Studies, Renmin University of China.

Invited by Valdai Club, I came to Russia in early September. This visit to Russia is my first time abroad since the COVID-19 outbreak, making me the first Chinese think tank scholar to visit Russia since the outbreak, and this is my first visit to Russia since the start of Russia’s special military operation. I hope to get to know Russia more deeply.

In the past five weeks, I have visited the Russian Ministry of Foreign Affairs, the Eurasian Economic Integration Committee, and the Russian Free Economy Society in Moscow. I have also been invited to Vladivostok for the Eastern Economic Forum, and went to St. Petersburg State University for a lecture exchange. Here I must give special thanks to the Valdai Club for the invitation.

After adjusting to Moscow in mid-September, I set off to visit Volgograd, Rostov-on-Don, Simferopol, Sevastopol, Yalta in Crimea, Krasnodar, Sochi, and Grozny in Chechnya. After returning to Moscow for a three-day rest at the end of September, I flew to Yakutsk to give lectures and participated in a forum, and then visited Khabarovsk and Kamchatka. In five weeks, I’ve visited 14 Russian cities, participated in more than 20 seminars, and spoke with more than 100 Russians and local Chinese. Next, I plan to visit more cities. It’s possible that no Chinese scholar has had such a visit experience in the past.

I define it as a trip to “rediscover Russia”. I hope to exchange ideas with Russian colleagues on four points, namely, 1) Rediscovering Russia’s three surprises, 2) The current situation and potential for China-Russia economic cooperation, 3) Rediscovering China’s three recommendations, and 4) Suggestions for future China-Russia cooperation.

Rediscovering Russia’s Three Surprises

During these five weeks, I’ve had three “Russia Rediscovered” surprises:

First, the stability of Russian society is beyond my imagination.

Since the beginning of September, the Russian army has retreated in Ukraine, which was regarded by Western media as a “big rout”, and there were even rumours that a coup d’état has occurred in Russia. After the partial draft order was issued on September 21, there were also rumours that the Russians were collectively deserting the military.

However, I have been to supermarkets and shopping malls in 14 cities in Russia, and the reality I see is that cities remain stable and orderly, there is no shortage of supermarket goods, no citizens rushing to buy goods, and there has been no bank run.

People live their lives as usual with no apparent daily shocks. In 2022, inflation in Russia is expected to be 13%, with unemployment below 5%. The overall functioning of society is still normal.

There is definitely a small number of people who will desert the military. I have communicated with about 100 Russians. Some are anxious, some are worried, but they all believe that Russia will win and support the federal government.

An event being touted as “Russia’s largest military operation since World War II” and “the most influential international event since the Cold War” has lasted at this point for nearly eight months, but it basically has not affected the lives of the vast majority of urban people. I was struck by this stability of Russian society.

Second, the Russian economic foundation has not collapsed. As long as reforms, adjustments and stimulus are put in place, the re-emergence of the “de-Westernized” Russian economy is more than just a dream.

Russia’s resources (oil, natural gas, coal, grain, etc.) still make it one of the most abundant countries in the world. All elements in Mendeleev’s periodic table can be found in Russia. There is no problem in the future nourishment of the Russian economy, “decoupled from the West.”

US and Western sanctions cannot isolate Russia, and Russia’s economy has a strong ability to withstand pressure. In this “sanction vs. anti-sanction” struggle, Russia has firmly grasped the initiative in the currency war through its resource advantages, and has promoted global economic and currency system reform.

The ruble became the world’s strongest currency in 2022. In the first nine months of 2022, Russia’s oil and natural gas price hikes generated more than 40% of additional fiscal revenue, which basically covered the cost of special military operations against Ukraine.

According to the World Bank, the International Monetary Fund and other institutions, the impact of the war on the Russian economy will be a 5-10% hit to the country’s GDP. Also, the First Deputy Prime Minister of Russia, Andrei Belousov, predicted in late August that Russia’s economy will contract by 2-3% this year, and the inflation rate will be 12-13%. In my opinion, these conclusions overestimate the impact of the war.

Judging from the appreciation of the ruble, the increase in Russia’s public finances and the integration of the four eastern Ukrainian states into Russia, Russia’s real GDP may grow.

However, it has to be said that GDP is only an economic figure and cannot represent the quality of the economy. From my research experience, Russia’s infrastructure is quite backward; economic factors have not been fully realised, market vitality has not been stimulated, and 5G-era digital development hasn’t even begun.

I have spoken with a number of local officials, and the enthusiasm of local governments to pursue federal budget transfers is far higher than the enthusiasm to increase fiscal revenue through local economic growth.

Some scholars have commented that Russia’s urban construction, high-speed rail, highways, airport facilities, and internet speed are 10-15 years behind that of China.

This kind of evaluation may embarrass my Russian friends, but scholars must have objective and honest pursuits. I must say that this “10-15 years behind” evaluation is objective. In terms of some infrastructure, Russia may be as many as 20 years behind China.

Third, the rich, high quality, cultural literacy and strong national identity of ordinary Russians are admirable and make it impossible for the so-called “Western dismemberment of Russia” fantasy to come true.

Even in remote places like Yakutsk, Khabarovsk and Kamchatka, ordinary people are proud to be Russian, and even in Chechnya, the Russian identity is far beyond my imagination.

What’s more, I found that everyone who drives in the city will stop at a crosswalk and give way to pedestrians.

The infrastructure of Russian cities is indeed old, but it is meticulously maintained. Even in very old hotels, the rooms are still clean and tidy.

All Russian cities have several high-end theatres and high-quality museums. The income of Russians is not high, but they still enjoy vacations are able to lift their spirits visiting local theatres and museums.

There are more and better universities that focus on the arts and stage performances in Russia than in China. There are many painters and galleries all over the country, and the artistic atmosphere is very rich. This is much better than in China; the Chinese still prefer to pursue material things.

The high-quality life of the Russians bolsters their self-confidence; they even become conceited and arrogant. However, I must say that Russia’s attitude towards foreigners always seems to be on a high level of vigilance. In the eyes of Russia’s local governments, “security” seems to be more important than “development”.

The economic openness of Russian cities is very limited. There is very little foreign investment, and there are quite a few complaints from foreign investors about the business environment in Russia. Foreigners in Russia still find long-term business visas difficult to come by.

A lack of sufficient foreign investment will present a huge obstacle to the growth of a “de-Westernized” Russian economy.

Of course, my journey “rediscovering Russia” is still ongoing, and I have to spend more time in order to accumulate, think, and dig for more material.

The Current Situation and the Potential of China-Russia Economic Cooperation

Most people believe that the Russian-Ukrainian conflict will accelerate the decoupling of Russia from the West, and that the “Looking East” policy will accelerate its transformation into action.

China is the most worthy global partner for Russia’s economy. Against the backdrop of the United States’ continuous policy of containing China, the strengthening of economic cooperation between China and Russia as well as other non-Western countries is also an inevitable trend.

In recent years, China-Russia cooperation has made great progress. For example, China-Russia trade reached 140 billion US dollars in 2021, its highest level ever.

This has a lot to do with the continuous promotion by the two governments, especially the strategic interaction established by the profound friendship between President Xi Jinping and President Putin, who meet five times a year, on average.

However, on the whole, the total amount of Sino-Russian economic cooperation remains limited, and the huge potential remains untapped.

The 140 billion US dollars in Sino-Russian trade fails to correspond the level of strategic mutual trust. China-US relations are tense, but the trade volume between China and the US in 2021 reached USD 750 billion, more than five times the total trade volume between China and Russia.

China imports nearly 3 trillion US dollars in goods from the world every year, but only about 2% of those goods are imported from Russia, and the import trade structure is simple, mostly concentrated in bulk commodities.

The financial relations between China and Russia lag far behind the political and economic relations between the two countries. The amount of mutual investment between the two countries is small.

China’s average annual non-financial direct investment in Russia does not exceed USD 1 billion, which is less than 1% of China’s foreign investment. China’s foreign investment in 2020 exceeded 150 billion US dollars, as it surpassed the United States to become the world’s largest foreign investor.

Russia’s direct investment in China barely exceeds 10 million US dollars, less than 0.1% of foreign investment in China. The supporting mechanism for financial cooperation between China and Russia is not yet perfect, and the two countries lack market risk aversion tools, sufficient information exchange and supervision mechanisms.

In addition, despite both being hit by EU and US sanctions, China and Russia still lack efficient payment and settlement channels. As a result, the total amount of cross-border receipts and payments between the two countries is not high, and the growth of local currency settlement remains stymied. Private and state-owned enterprises in China and Russia have not adopted active policies and stimulus measures to promote their national currencies.

There are about 30,000 young Chinese students studying in Russia every year, but most of them want to return to China after graduation. Over the past 30 years, an average of 300,000 Chinese students have gone to study in the United States every year. According to statistics, about 12% of them would like to stay in the United States to work and become a new force to help build the country.

Of course, the number of Russian students enrolled in Chinese schools is not high. As a result, the people of the two countries have a weak foundation for understanding each other’s economic environment and social culture.

In China, it is almost impossible to see modern Russian films, music, novels, and art. Similarly, in Russia, in addition to Chinese language courses, Chinese films, music, novels, and art are hard to find.

Therefore, I think that in the post-pandemic era, the Chinese need to “rediscover Russia”, and the Russians need to “rediscover China”.

Three Recommendations for “Rediscovering China”

What aspects of China are most worthy of rediscovery by Russia? Here are my three points:

First, China’s economic policy capabilities. Over the past 30 years, China has maintained an average annual economic growth rate of 9%.

In 1991, the size of the Chinese and Russian economies were similar. In 2021, however, China’s economy was 12 times larger than Russia’s. In 1991, the per capita income of the Chinese was about 1/6 of that of Russia. In 2021, the per capita income of China was 1.2 times that of Russia.

China is only endowed with about one third of the natural resources of Russia, but China’s policymaking ability to release market vitality internally, allocate global resources externally, and promote its own long-term economic growth is worthy of re-discovered by Russia.

On October 16, the 20th National Congress of the Communist Party of China was held. It is strongly recommended that Russian friends pay attention to the relevant strategies and formulations of the 20th National Congress of the Communist Party of China.

Second, China’s industrial manufacturing capacity, especially infrastructure construction capacity, is worthy of consideration.

China’s industrial production capacity is the most diverse in the world: 666 industrial sub-categories have complete production chains in China, and China’s output of more than half of all industrial products ranks first in the world. China has been the world’s largest manufacturing country for 11 consecutive years, and its total industrial output value in 2021 exceeded the aggregate manufacturing output value of the G7 countries.

China has been the world’s largest automobile producer for seven consecutive years, and its production volume in 2021 was nearly three times that of the United States. Among them, the production and sales of new energy vehicles accounted for more than half of the world’s total. The installed capacity of hydropower, wind power, photovoltaics, biomass power generation and the scale of nuclear power under construction all ranked first in the world, and the charging infrastructure built was also the largest in the world.

In China, the number of 5G terminal connections now exceeds 200 million, ranking first in the world. The level of modern service industries such as information, business, research and development, and marketing are all nearly the most advanced.

In terms of infrastructure construction, 70% of all high-speed rail construction is in China. The mileage of highways in China now exceeds 160,000 kilometres, nearly twice that of the United States. Of the world’s 20 largest ports, 16 are in China. Of the 10 cities in the world with more than 100 skyscrapers (150 meters), six are in China. In 2022, the number of large Chinese companies among the Fortune Global 500 has exceeded that of the United States for three consecutive years, ranking the first in the world.

It is not arrogance or ostentation to list these data, just a statement of fact.

I bought ice cream at the weekend market in Rostov-on-Don and ate it as I walked. It was delicious, but a Russian approached me and said: “You can’t find it in China, right?” I smiled at him at the time, and I knew he harboured no ill-will towards me. What I was thinking about was how to invite him to visit China in person.

Third, China’s high-tech growth capacity.

Over the past 30 years, China’s investment in high-tech has increased by more than 20% annually. China’s fear of falling behind amid the ongoing technological revolution is innate.

The Chinese were absent during the first industrial revolution in the 18th century and the second industrial revolution in the 19th century, and they were beaten for having fallen behind. At the end of the 20th century, during the third industrial revolution, the information revolution, the Chinese were desperately catching up, and large companies such as Huawei, Alibaba, and Tencent were born.

Amid the intelligent revolution of the 21st century, China is facing chip suppression from the United States and must solve a large number of technological “stuck-neck” problems. In 2021, China’s R&D investment and the number of intellectual property applications were basically the same as those of the United States. However, China has formulated a national science and technology development strategy, and must maintain the trend of catching up in the high-tech field.

China-Russia high-tech cooperation is imperative. BRICS countries including China, India, Brazil and South Africa should be willing to contribute to Russia’s technology import substitution in order to comply with international rules, mutually benefit, promote equality and achieve win-win results.

Suggestions on Sino-Russian Economic Cooperation

As a Chinese think tank scholar, I believe we must put forward some well-intentioned suggestions for the development of Russia and China-Russia relations. This being said, I know there are many excellent scholars in Russia who are making suggestions for the development of the country.

First, it is recommended that Russia should develop the local economy, stimulate market forces, and improve infrastructure.

Chinese people usually say, “It you want to get rich, build roads first,” which means that by improving infrastructure and enhancing the efficiency of logistics and the people and information flow, you save on transaction costs and are able to turn resource advantages into economic growth.

The scenery I saw in Crimea, Vladivostok and Kamchatka was very beautiful. However, if the problems of narrow roads, slow networks, old hotels, and an insufficient variety of restaurants can be resolved, the tourism revenue will increase significantly.

In this regard, local governments should give full support to the development of the market economy and stimulate the vitality of market players. However, several Russian city officials I spoke to seemed to place more emphasis on federal budget transfers.

In fact, as long as more infrastructure is improved, more investment can be attracted, and then there will be huge economic growth. “Infrastructure Economics” is an important experience from China’s economic development.

Second, I’d suggest that Russia improve its business environment, opening up the Far East market, and introducing Asian capital.

Asia is the most important region for outbound investment in the third decade of the 21st century, especially for Chinese capital. It is suggested that Russia should make huge reforms in labour visa issuance, project promotion, tax policy, legal environment, etc.

It’s strange to me that every time I go to a Russian city and check into a local hotel, I am asked for a visa on arrival. This is a strange regulation that is not found in any other country.

That being said, I would like to thank the Russian Ministry of Foreign Affairs, the Valdai Club, and the Russian Embassy in China for their help in getting a visa to travel to and from Russia several times per year.

I have suggested to several Russian foreign ministry officials that, even despite the tension between China and the United States, the US government still grants 2 million ordinary Chinese visas every year with “multiple entry for ten years”.

A Russian-Chinese business-friendly person explained to me that this is a security issue. I’m curious, don’t the confident Russians of the 21st century believe that the Chinese who come to Russia are helping Russia develop?

In the Kamchatka dredging project undertaken by a Chinese company, I was moved to tears. In a land with unfavourable natural conditions, a group of young people from a Chinese company completed a sea channel dredging project nearly 200 metres wide and 7 kilometres in length, reaching a depth of 30 meters.

No European company was willing to undertake this arduous, difficult, challenging, and extremely important dredging project for gas transportation in Russia’s Arctic waterways.

In the past 30 years, what China’s companies and people brought to Russia is cooperation, trade, construction and friendship. Some Russian media or scholars are completely unreasonable to suspect or guard against China.

Third, strengthen people-to-people and cultural exchanges between China and Russia, so that the next generation will truly be familiar with each other.

At present, about 100,000 Chinese are engaged in business, infrastructure, and agriculture in Russia, making great contributions to China-Russia cooperation. There are fewer than 10,000 Russians in China, mainly engaged in commercial work.

China-Russia cooperation also needs more engineers, scientists, sociologists, scholars, artists, writers, and so on. In recent years, China-Russia strategic cooperation and political trust have continued to deepen, but cooperation at the economic and social levels must continue to be followed up. The societies of the two countries need to know more about each other’s films, novels, plays, architecture, science and technology, academic ideas and so on.

Young people from China and Russia will deepen their understanding of each other, develop a sense of intimacy, and learn more about each other’s financial systems and economic development, which will help to enhance financial cooperation and the bilateral use of currencies between the two countries.

The most urgent need in improving China-Russia financial and economic cooperation is to further use local currency in bilateral trade, and then to get rid of the excessive dependence on the US dollar in the settlement and payment system. With the promotion of the two governments, the proportion of China-Russia trade settlement in local currency may reach 45% or even 60% in 2022, which is very fortunate.

The relationship between China and Russia cannot follow the old path of “great power struggle”, as in Western international relations theory. China and Russia need permanent peace and mutual trust, so they may move towards a new era of civilization featuring human cooperation, mutual trust and respect. Building this requires more high-level experts. We, as think tank scholars, are also duty-bound.

Fourth, it is suggested that Russia should strengthen popular awareness of the “Looking East” maxim and turn it into a movement to promote Eurasian integration.

Putin’s “Looking East” policy is correct. However, the sense of urgency among the top decision-makers promoting the “Looking East” strategy does not seem to have translated into “going east” actions that are fast or efficient enough.

As stated in the conference paper “The 21st Century is the Century of the Far East” submitted at the Eastern Economic Forum, the Far East represents the collective rise and integration process of China, ASEAN and many other countries. The Far East Economic Circle, which includes East Asia, Southeast Asia and South Asia, contributes more than 50% of all global economic growth.

The Far East is emerging as the world’s largest industrial manufacturing belt, and an international pattern of a cross-border division of labour is being formed between China, Japan, South Korea, and ASEAN. The total export volume has exceeded that of the European Union and North America combined. The largest transfer of wealth in the history of the world is benefitting the Far East. The Far East is becoming the innovation highland of the intelligent revolution; more and more talent is attracted to the Far East.

In the 17th century, Peter the Great went to Europe to learn about technology. At that time, Europe had just begun to ascend. The modesty and diligence of the Russians at that time started a process which finally led to the rise of modern Russia.

In the 21st century, Asia is on the rise, calling for new Peter the Great-style Russian scholars and Russian politicians to come to Asia to investigate, rediscover Asia, and rediscover China.