Source: Valdai Club    Published: 2023-06-26

Deepening comprehensive China-Russia economic and trade cooperation is actually a puzzle, as the two countries learn from each other’s strengths and make up for each other’s weaknesses.

1) China-Russia cooperation, under the impetus of internal and external factors

For many years, China-Russian cooperation has not been seen favourably by the international community. In recent years, the United States launched a trade war against China, blocked China with technology, and attempted to decouple from China. The Ukrainian crisis in 2022 has resulted in more than 10,000 sanctions against Russia. These new variables have added uncertainty to Chinese-Russian cooperation.

However, the fact remains that bilateral trade between China and Russia has grown by leaps and bounds in recent years. The total trade volume between China and Russia was US$68 billion in 2015, which increased to US$107 billion in 2018, approximately US$147 billion in 2021, and approximately US$195 billion in 2022, with an average growth rate of more than 20% over seven consecutive years.

In the first four months of 2023, the trade volume between China and Russia reached US$73 billion, a year-on-year increase of 41%. If this trend develops, the US$200 billion China-Russia trade target set by the leaders of China and Russia in 2023 will be completed ahead of schedule, and may even reach US$250 billion.

The profound all-round potential for cooperation between China and Russia is exploding under the impetus of internal and external factors.

In the past year, I visited Russia three times, surveyed 21 cities, and deeply felt Russia’s economic resilience. I have published more than 30 articles expressing my views on the rediscovery of Russia in the media of China and Russia.

As everyone knows, the Western world has imposed more than ten rounds of sanctions on Russia, affecting over ten thousand items, in an attempt to defeat the country. However, they underestimated Russia’s political, social, and economic stability, as well as its ability to withstand pressure, and underestimated the collective cohesion and strategic will of the Russian people. Not only did Russia’s economy not collapse, its inflation rate has even been lower than that of other European countries.

The ruble was the strongest currency in the world in 2022. Russia’s total GDP ranking in the world in 2022 rose from 12th to 8th. All these fully proved Russia’s resilience.

While engaging in “hard” decoupling with Russia, the US is simultaneously trying to engage in a “soft” decoupling with China. It does so by restricting Chinese companies’ overseas investment, abusing export controls, suppressing Chinese high-tech companies, and so on. These blockades have not restricted China’s technological development. For example, China’s 5G technology leads the world, the launch of the C919 large aircraft has broken the monopoly of European and American large aircraft, and Chinese chips are also breaking through the 14-nanometer bottleneck.

The West’s external pressure on China and Russia is forcing China and Russia to accelerate, deepen and broaden all-round cooperation.

2) The end of “peak theory of China-Russian trade”

External factors aside, from the perspective of internal factors, three levels of forces are also promoting Sino-Russian cooperation.

First, at the strategic level, the leaders of China and Russia have a high degree of mutual trust. Russia can boast to have accounted for the largest number of bilateral meetings between Chinese and foreign heads of state. The leaders of the two countries have met more than 40 times over the past ten years. The joint statement signed by the two sides in March this year once again demonstrated the determination of the Chinese and Russian leaders to cooperate practically.

Second, at the economic level, the economies of China and Russia are highly complementary. From energy to agriculture, and from talent to infrastructure, China and Russia have their own strengths. Deepening comprehensive China-Russia economic and trade cooperation is actually a puzzle, as the two countries learn from each other’s strengths and make up for each other’s weaknesses.

Third, at the public level, China and Russia have a social foundation for deepening comprehensive cooperation from the bottom up. In the past, only the Chinese knew modern Russian literature as well as art such as Gorky and The Moscow Nights song. In recent years, Russian ice cream, and Russian national pavilions that have been “looted” by netizens on Chinese e-commerce platforms have suddenly become popular in China.

President Putin is the best-known foreign leader, with the most fans in China. In Russia, friendliness towards the Chinese is also improving.

It can be seen that the external coercion of European and American countries, as well as internal factors at the political, economic and social levels of the two countries are all driving improvement. There is no upper limit for China-Russian cooperation, and there will be no cap. The “peak theory of China-Russian trade” that has spread in the Western media is doomed to bankruptcy.

3) Five optimization suggestions for China-Russia cooperation

Of course, unlimited trade between China and Russia does not mean that the trade between the two countries cannot be optimized. I would like to put forward some optimization suggestions from the five aspects of trade: structure, energy cooperation, agricultural cooperation, investment finance and infrastructure.

One is the structural optimization of China-Russian bilateral trade. While China and Russia should steadily develop their total trade volume, they should also seek structural optimization and explore potential space. China has been Russia’s largest trading partner for 13 consecutive years. The mainstay of Russia’s exports to China is energy, which accounted for 75% of its exports in 2022. Obviously, the excessive proportion of energy makes the trade structure between the two countries unique.

From January to April 2023, China’s exports to Russia were 33.6 billion US dollars, a year-on-year increase of 67%. According to the latest data in April, China exported US$9.6 billion to Russia and imported US$9.6 billion from Russia. China’s exports to Russia of automobiles, smartphones, home appliances, construction machinery, etc. have increased significantly, and the bilateral trade has become more balanced and diversified. In 2022, China’s exports of high-tech products to Russia surged by 51%, and its exports of automobiles and parts increased by 45%.

In the first quarter of 2023, Russia has jumped to become the largest overseas market for China’s automobile exports.

However, the overall proportion of China-Russian trade is still relatively small. In 2022, the total trade volume between China and Russia only accounted for 3% of China’s total foreign trade volume, less than the total trade volume between China and Malaysia, China and Vietnam, and only about a quarter of the trade volume between China and the United States. Russia is only China’s 10th largest trade partner.

However, I have confidence in Sino-Russian trade. If the current growth rate is maintained, Russia will surpass South Korea by 2030 to become one of China’s top three trade partners. In this regard, China and Russia should seize the opportunity and move from the short-term filling of gaps towards a long-term, mutually beneficial and win-win alternative.

Second, China and Russia should strive for a breakthrough in energy cooperation. China and Russia should steadily develop traditional energy cooperation, and at the same time strive for breakthroughs in cooperation methods and broaden the prospects for green energy cooperation.

China consumes the most energy of any country in the world, while Russia is the country with the most abundant natural resources and energy reserves in the world. China should become Russia’s largest energy importer. In February 2023, Russia surpassed Saudi Arabia to become the largest crude oil exporter to China, and it is hoped that this trend will continue.

In terms of natural gas cooperation, China and Russia still have room for development. In 2022, China imported less LNG from Russia than it did from Australia, Qatar and Malaysia. Russia accounted for only 10% of its LNG imports; pipeline natural gas imports were lower than imports from Turkmenistan, accounting for only 25%.

With the upgrading of existing pipelines and the construction of new pipelines, China’s pipeline natural gas imports from Russia should increase by about 25 billion cubic meters per year from the existing 15 billion cubic meters within the next few years.

Through the steady development of traditional energy cooperation, China and Russia should also explore new cooperation models; for example, in natural gas, the two countries should explore a greater space for expanding cooperation in the “China-Russia + third-party market” model. In the future, China and Russia can further carry out exchanges and cooperation in technologies such as energy saving and consumption reduction, carbon capture, and carbon recovery.

Third, China and Russia should seek connectivity in agricultural cooperation. China and Russia should establish investment cooperation channels in adjacent areas to optimize the business environment.

From 2010 to 2020, the trade volume of agricultural products between China and Russia increased from US$617 million to US$5.55 billion, with an average annual growth rate of more than 10%. In 2022, the trade volume of agricultural products between the two countries increased 43%, and the value of Russia’s agricultural product exports to China increased to US$7 billion. However, this is still not the limit of Sino-Russian agricultural cooperation.

China imports about 110 million metric tonnes of grain every year, and only about 1 million tonnes of it is imported from Russia, accounting for less than 1%. China imports only 1% of soybeans from Russia. China’s population is 10 times that of Russia’s, and Russia’s arable land area exceeds that of China. The high degree of complementary advantages in agricultural development between the two countries has not yet been fully reflected.

Agricultural trade between China and Russia is not only an example of economic cooperation, but also related to food security: it can help both sides reduce their dependence on Western food. The two countries should study and formulate an agricultural cooperation strategy, eliminate policy differences, jointly build a good business environment for agricultural cooperation, and alleviate a series of obstacles and problems, such as the high risks associated with Chinese agricultural enterprises investing in Russia and the difficulty of labour going to Russia. Uneven import and export standards underscore agricultural product policy barriers.

Fourth, China and Russia should promote the synchronization of rules governing finance and investing. The two countries should build independent financial organizations, continue to promote settlement in their own currencies, and pragmatically increase mutual direct investment.

The local currency settlement ratio of trade between the two countries has grown rapidly, exceeding 45% in 2022, but the mutual investment between the two countries is small. China’s annual non-financial direct investment in Russia does not exceed US$1 billion, less than 1% of China’s foreign investment. Russia’s direct investment in China was only more than 10 million US dollars, less than 0.1% of China’s foreign investment.

Sino-Russian financial and investment cooperation should keep up with the pace of bilateral political, economic and trade cooperation. Building a Sino-Russian financial ecosystem and promoting the establishment of independent Sino-Russian financial organizations can help the two countries eliminate the risks and constraints caused by European and American financial sanctions.

Fifth, China and Russia should complement each other in infrastructure construction. The two countries should increase investment in infrastructure, especially in order to improve connectivity in adjacent areas.

In 2022, the first China-Russia road bridge across the Amur River opened, connecting Heihe and Blagoveshchensk, followed by the Tongjiang Railway Bridge, the first cross-border railway bridge between the two countries.

I researched 21 Russian cities and saw that the development of Russian infrastructure is relatively slow. There is a lot of room for the construction of high-speed rail, expressways, and networks. China, which has been called an “infrastructure maniac”, can actively expand the Russian market, tailor a number of infrastructure projects, promote Russia’s rapid development, and help realize the all-round docking of the transportation systems of the two countries.

It’s been suggested that the two countries should build a fourth China-Russian railway between the Altai region of Xinjiang, China and the Altai region of Russia, given that the transportation capacity of the two railway ports of Horgos and Alashankou in Xinjiang is almost saturated. There would then be a main artery directly connecting the western regions of China and the central regions of Russia without passing through a third country.

In addition, there is still much room for cooperation between China and Russia in the fields of high technology, talent, education, the digital economy, local cooperation and cultural exchanges.

In short, the road for China-Russia cooperation is long and wide, and it will definitely get longer and wider.

China and Russia should seize the opportunities created by the changing situation, provide stewardship to the full-scale explosion of cooperation potential, and “add fuel to the fire”. At the same time, we should reflect on and correct the deficiencies which troubled Sino-Russian cooperation in the past, such as “hot top and cold bottom”, “hot politics and cold economics”, as well as formalism in cooperation and exchanges, and the non-implementation of signed agreements.

In the future, China-Russian cooperation should pay special attention to being pragmatic, timely, and implemented, and promote the implementation of specific projects to produce a desired effect. At the same time, it should actively guide public opinion and strengthen all-round communication and mutual trust between the two sides. Chinese enterprises and society are slowly exploring the development potential of Russia, and China’s vast market is opening its arms to Russia.