China-Russia Trade to Boom in 2015
The Western news outlets have been full of stories the past few weeks of the coming collapse of the Russian economy triggered by a drop in Oil prices and sanctions inflicted by numerous nations in the wake of the Ukrainian crisis. There are always of course two sides to every piece of bad news however, and while international media reports may be somewhat exaggerating the domestic impact within Russia, it is also true that a seriously weakened Rouble offers bargains for those armed with foreign currency, and especially Euros and Dollars.
Yet while arguments about Russia’s historical borders, rights and wrongs will rage well into next year, there is no doubt that one nation not affected by the United States led sanctions on Russia has plenty of those precious dollars to spare. That of course is China, whose foreign reserves are the highest in the world. They currently stand at USD3.88 trillion according to the People’s Bank of China and the last issued figures as at September 2014.
Both China and Russia have long been uneasy about the United States monopoly of the US dollar as the international trading currency of choice, and neither are in a position to alter that. Yet using those dollars to shore up the Russian economy while oil prices remain low is already starting to become a reality. Chinese Foreign Minister Wang Yi stated just last Saturday that China would assist Russia, while at the same time acknowledging it is, for now, a risky market.
“Capital investors may be more interested in a volatile stock or foreign exchange market. But in terms of concrete cooperation between the two nations, we shall have a balanced mentality and push forward those co-operations” Wang stated, and going further to reiterate calls that future Russian-China trade could be dominated in the RMB rather than the USD.
Pro-Washington media has been pushing out headlines displaying the impact of sanctions and the manipulation of low oil prices upon the Russian economy. Yet appeasing the West and lifting these sanctions and price suppressions of Russia’s largest traded commodity – oil – are not the only route that Russia has to getting out of its problems.
On the domestic front, Russia is a member of the Commonwealth of Independent States (CIS), a throwback to the old Soviet Union. Members included are not internationally bandied about names when it comes to global trade, but some of these economies should not be understated. They include Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, and Uzbekistan, while participating states include Turkmenistan and the Ukraine.
The economics of the CIS remain little understood in the West, however as a Free Trade Zone in its own right, the bloc realised some USD136 billion in trade in the fiscal year 2013-14, according to the Interstate Statistical Committee of the Commonwealth of Independent States. To put that into context, US sales to China are currently at about the USD100 billion mark.
That USD100 billion figure seems to be a lucky talisman, China also stated last week that it expected bilateral trade to Russia to also reach USD100 billion for 2014. That can be expected to increase, and perhaps significantly. As I noted earlier, a weaker Rouble means bargains are on offer to pockets full of US dollars.
So what can China expect to buy from Russia? Again, Western media has been playing up Russia as “merely an oil and gas merchant”. That may well be true – however is not especially surprising given that Russia holds the world’s largest reserves. It is also true that President Putin may have yet failed to get much needed investment into parts of Russia’s manufacturing sector.
However, sanctions on providing equipment or commodities to Russia are having a stimulating effect. President Putin’s immediate response to Western sanctions – to bar the importation of Western consumables – may have seemed odd to Western observers – and means that it is now far more expensive to buy Australian beef in Russia for example.
But the underlying motivation behind this actually appears to have been far more strategic – to wean Russia off expensive Western commodities and push trade more towards its CIS partners, other friendly trading nations, and to encourage investment in Russia’s own industries. It makes no sense, for example, to be served Norwegian salmon in St. Petersburg. A decade of reinvestment in Russian industry may well be triggered as a result of these sanctions.
Meanwhile, what is portrayed as a Russian weakness in the West – its dependence upon oil and gas – is of vast strategic importance to China. The nation is energy poor, and just last month signed off a USD400 billion deal to purchase Russian gas over 30 years. That’s a lot of state cash flow coming into Russia, and more can be expected.
But Russia has far more than oil and gas to its name. While the oil and gas sector does constitute 70 percent of Russia’s exports, it contributes just 16 percent of its total GDP, suggesting it has a rather more balanced economy than it is generally given credit for. Here is a list of some of Russia’s other industries, and where the nation ranks in global production terms:
Surprisingly absent from these – and now subject to a major push for domestic investment by President Putin, are the Forestry and Agricultural industries. Russia has significant assets in both, however has not been quick to improve efficiencies. Should these industries start to come online, Russia can be expected to take its position as a major global player. Yet Russia can also count upon an economy that includes manufacturing of machinery – including new manufacturing technologies such as robotics, microelectronics, IT and telecommunications – as up and coming industries that the Chinese will be especially interested in.
Beyond these industries, there are other trade mechanisms that can assist the China-Russia bilateral development continue apace. Amongst these are the Shanghai Co-Operation Organisation (SCO) which includes most of Central Asia and is pivotal to a “New Silk Road Development” project that is a personal favourite of Chinese Premier Xi Jinping. Then there is the BRICS forum which also includes India, another country keen to access Russia’s assets at bargain prices. The BRICS Development Bank is to be based in Shanghai and Chaired by an Indian national.
Neither the SCO or BRICS forums include the United States. What all this boils down to then is that while the Washington-led sanctions upon Russia have garnered plenty of Western media exposure, the reality is, that as is common with sanctions, they will only partially work. Indeed, it could be observed that all they will do is have the effect of making Russia more self sufficient and drive it to trade more with its own CIS partners, redevelop its own underinvested industries, and strike up and develop new trade routes to circumnavigate the old ones. It should be noted that at the same time as media has been predicting the economic demise of Russia, Cuba announced the restoration of diplomatic relations with the United States, a somewhat ironic reminder that over half a century of sanctions against Cuba didn’t bring that country down either.
The winners in this complicated array of arguments that surround the controversies concerning Ukraine will be both Russian and Chinese bilateral trade, and this will spill over into Russian and Chinese trade with other CIS nations as well during 2015. It can also be expected that Russian-Indian bilateral trade would also pick up. As the Chinese Foreign Minister wisely noted “volatility” exists in this trade space.
However, China and Russia signed off on a new Double Tax Treaty just two months ago, setting the stage for increased trade motivation. Russia is also under negotiations with India concerning a proposed free trade agreement. Both nations regard their current level of bilateral trade as well below potential, and are actively looking to increase it.
Meanwhile, armed with the largest single pile of US dollar reserves, it is somewhat ironic that it will be Chinese risk-savvy entrepreneurs who earned that money by trading with the United States in the first place who will be flocking to Russia next year in the search for new trade routes and production capability while the Rouble remains so undervalued. The China-Russia trade space will be one to watch during 2015.
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Sanctions Affecting International Business
This current issue of Russia Briefing gives you an overview of the regulations on US and EU sanctions and also goes beyond this by trying to find out the potential effects they have and – most important for you – what to do in order to find out whether or not your business is affected by the sanctions.