China’s Trade With Eastern Europe and the Caucausus

January 22, 2015 Posted by China Briefing Reading Time: 9 minutes

As China and Russia begin to move closer together in terms of mutual trade and economic support, a related issue is the development of trade between China and Russia’s neighbors along its western border. While some, such as Georgia and the Ukraine have developed relations with the European Union, others are members of the Commonwealth of Independent States, and some of these are part of the new Eurasian Economic Union.

Sitting within Russia’s sphere of influence and at the edge of Europe, these countries constitute a trade border with both. How has China been approaching trade with these hinterland nations, with faces both East and West?

Russia’s new economic problems introduce a sudden new dynamic to China’s relations with these countries. As problems continue in Ukraine, Russia faces sanctions from the E.U. and is beginning to turn its face towards the East. This includes further development emphasis upon its own trade blocs, as well as an interest in how China views the region, and considering developing infrastructure in an increasingly mutual China-Russia development axis. This means that Chinese influence in Russia’s neighboring states will start to have an impact upon future Russian trade, as well as how the region develops up against the borders of the expanding European Union.

Armenia

Armenian trade with China has reached historic highs, attaining some US$600 million by 2013, against some US$6 million at the turn of the century. Much of this has been driven by Armenia’s status as an iron ore exporter, while imports from China to Armenia are diverse and include clothes, shoes, machinery, chemicals, equipment, construction materials, furniture and food. Armenia’s trade with China, then, is largely reliant on a buoyant Chinese economy. A large synthetic rubber plant has been invested in by both sides in Shanxi, with the Armenian side owning some 40 percent. The plant’s annual capacity reaches 30,000 tons. US$220 million has been invested in its construction, and the enterprise’s annual income is now estimated at US$100 million.

China is also involved in a variety of different energy projects in Armenia, including the reconstruction and repair of Soviet-era thermo-electric power plants. One such project is in the Armenian capital Yerevan and another is located in the city of Hrazdan, where the Chinese side is carrying out the bulk of the repair and reconstruction work on the Hrazdan Thermo-electric Power Plant. After reconstruction, the natural gas-operated turbine will generate up to 440 MW of electricity, more than produced by Armenia’s Metsamor nuclear power plant.

China is also interested in participating in the building of a railway that would link Armenia with the Iranian ports on the Persian Gulf. Chinese investors, such as the China Communications Construction Company (CCCC), have already announced their readiness to finance 60 percent of this ambitious US$3 billion project. Connecting Armenia to Iran’s ports, roads and railway network will assist the country’s integration into major Asian trade routes.

Chinese companies are also opening up the Armenian market. They are particularly involved in medical supplies, food and beverage, textiles, footwear, household appliances and restaurants.

China’s Confucius Institute has a branch at the University of Yerevan. Meanwhile, Armenia joined the Eurasian Economic Community in January this year, thus cementing its ties with the Russian market. This could see Armenia start to become a conduit for Chinese products into the southern parts of Russia, as Russian President Putin begins to look for alternative low-cost product supply routes in alternative to those from the E.U.

Azerbaijan

China-Azerbaijan trade now stands at about US$1.5 billion, and has been rising at a rate of about 15 percent per annum. The country is rich in both oil and gas, and thus has attracted some 70 Chinese investors – mainly in the petrochemical industry and infrastructure development. Some 20 Azerbaijani companies are operational in China. China is particularly interested in the energy aspect of the economy, and Beijing has already carved out a stake in Azerbaijan’s oil sector. China’s energy giant, Sinopec, has invested in two major projects – K&K and Gobustan – injecting a total investment of US$ 250 million.

However, the oil and gas sector is not the only one in which the two countries are cooperating. China has been involved in developing infrastructure in Azerbaijan, and is reconstructing and repairing old Soviet built thermal and hydropower plants. China National Electric Equipment Corporation (CNEEC) is rebuilding the Azerbaijani Thermal Power Station and modernizing its seven power-generating units. This thermal power station accounts for 45 percent of all the electric power generated in the country. In 2013, the Azerbaijani Thermoelectric Power Station generated 7.63 billion kilowatt-hours of electricity.

In recent years, the trade volume between the two countries has risen dramatically. If these trends continue, China will soon become one of Azerbaijan’s most important trading partners.

The Confucius Institute opened a branch at the University of Baku in 2011.

Belarus

Belarus remains politically close to Russia and has been enjoying a mini-boom recently as it has become a conduit for sanctions-affected E.U. produce transiting and then entering the mainstream Russian market. Its infrastructure for getting supplies into Russia is generally excellent. With Belarus-China bilateral trade currently sitting at about the US$4 billion mark, the two countries have clearly established strong trade links; and given Russia’s efforts to secure alternative supply routes, China is set to take advantage of this. Minsk already operates repacking and labeling facilities for Chinese products destined for the Russian market, and there are numerous Chinese trading companies operating in the capital. A branch of the Chinese state-owned Beijing Hotel opened in Minsk last September, while three Confucius Institutes are operating in the country. Belarus is very much in the minds of the Chinese government as a key point in the new Silk Road route and a general trade gateway between Russia and China.

Georgia

Georgia left the Commonwealth of Independent States in 2008 after a brief war with Russia and has replaced these with partnership and cooperation agreements with the E.U. Two of the country’s regions separated after the war to become unrecognized micro-states. While deep mistrust towards Russia remains, Georgia’s bilateral trade with China has reached the US$600 million mark, with growth rates averaging about 15 percent.

Much of the Chinese interest in Georgia lies in its strategic location and as part of the New Silk Road project. Consequently the transportation and communications industries are both key areas of cooperation between the two countries. China is increasingly taking on infrastructure projects in the country, such as the development of a tunnel linking east and west Georgia.

Redevelopment of Georgia’s creaking hydropower infrastructure has been another investment focus. China’s Sichuan Electric Power Import and Export Company built the Khadori Hydropower Plant on the Pankisi River, the largest hydropower plant built in Georgia since it declared independence.

The Confucius Institute has also opened a branch in the University of Tbilisi.

Moldova

China-Moldova trade remains relatively small at just under US$200 million, but it has been growing rapidly. Moldova’s main export to China is wine, where the country has managed to capture a small but nonetheless significant market share. Chinese products tend to be low-end trade related.

Moldovan trade overall tends to be weighted on the side of the E.U., while nonetheless maintaining a healthy balance with Russia. This has made Moldova a new entry point for E.U. goods under sanctions to be transshipped to Russia, and as Russia turns its face towards the East and its neighbors once again, this trade can be expected to continue. Chinese infrastructure investment into the supply chain to deepen both Moldovan trade links to Russia and the E.U., as well as back to China, can therefore be expected.

The Confucius Institute has a presence at the University of Moldova.

Ukraine

Ukraine enjoys bilateral trade with China of some US$11 billion, which has been increasing at rates of about 9 percent per annum.

According to the Ukrainian Foreign Ministry, the main items exported to China during 2013 were minerals (at 67 percent) – mainly iron, titanium, and zirconium ore -, fats and oils of animal or vegetable origin (14 percent), and equipment and machinery (10 percent) – mainly gas turbines. The main imported items from China during 2013 were machinery, equipment and tools (36 percent), base metals and metal products (12 percent), textiles and textile products (10 percent), footwear, headgear, and umbrellas (9 percent), and plastic and rubber (7 percent).

However, China has been making significant new steps in investment policy in Ukraine, most notably in food supply. China has leased 3 million hectares of land from Ukraine to be used for the production of grains and meat products, mainly pork.

Given the ongoing conflict in Ukraine, and the fact that China will be unwilling to take an opposing stance against Russia, it should not be a surprise to note that bilateral trade can be expected to have dropped off during 2014. Nonetheless, China, with 20 percent of the world’s population and just 10 percent of its arable land, will be looking to secure similar agricultural deals to both help rebuild Ukraine and provide itself with a new supply of foodstuffs once hostilities cease. There are five Confucius Institutes in Ukraine.

Summary

As can be seen, China has been active in developing trade links with these former Soviet nations. Relations between China and these countries started off slowly, as they became independent after the disintegration of the Soviet Union. Given China was faced with its own internal development issues at that time, it is no surprise that Chinese investments into the region have tended to take a lesser importance. This is now changing.

In addition to this, China wishes, along with Russia, to see its political allies deepen their own trade links. These former Soviet nations represent a border of sorts, and with Chinese assistance offer both an injection of goods and products into Russia from China, but also strategically important control of some of the E.U. supply chain accessing the country. They also act as a potential conduit for Chinese goods, travelling along the ancient Silk Road, to later end up in E.U. markets.

Given the economic collapse that occurred after the fall of the Soviet Union, China has a critical role to play in reinvigorating the old Soviet-era supply chain as well as act as a well-meaning partner when it comes to repairing and upgrading much of the old Soviet built energy plants.

China’s trade window with the Caucasus and Russia’s western borders may be small in comparison to larger trade volumes elsewhere. But in uniting and integrating a region left somewhat backward by the collapse of the USSR, China’s involvement is now re-energizing these Eastern European countries. The implications for the E.U. and the access to E.U. markets for cheaper, more “eastern” goods, both made by China as well as along the Central Asian and Caucasus trade routes, and especially consumables, should not be underestimated.

Chris Devonshire-Ellis is the Chairman of the Dezan Shira Asian Alliance and Publisher of Asia Briefing. Chris can be followed on Twitter at @cde_asia. Dezan Shira & Associates have a strategic relationship with Russia Consulting of Moscow. The two firms provide foreign direct investment, strategic advisory, legal, tax and accounting services to foreign investors in their respective regions. Please contact the practice concerning the China-Russia and China-Caucasus trade at china@dezshira.com or visit the practice website at www.dezshira.com

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