Xi’s Moscow Trip Augers Well For US$80 Billion Sino-Russian Trade Boost

July 3, 2017 Posted by China Briefing Reading Time: 6 minutes

CDE Op-Ed Commentary

Chinese President Xi Jinping is in Moscow this week, meeting with Russian President Vladimir Putin and Prime Minister Dmitri Medvedev. Expectations for a re-balancing of Chinese-Russian trade look extremely positive as Russia continues to turn its face East as the West’s sanctions continue to bite, while Beijing needs Moscow on board to facilitate much of China’s One Belt, One Road plans.

China’s Deputy Foreign Minister, Li Hualai, said that Russian and Chinese companies plan to sign dozens of deals worth over US$10 billion during the visit, which will cover issues from energy and trade to strategic cooperation. China also expects bilateral trade to reach US$80 billion this year, a record high.

China’s wooing of Russia continues the ongoing re-balancing of Asian trade flows. Beijing is currently negotiating with Moscow over a free trade agreement with the Eurasian Economic Union, a bloc that also includes Armenia, Belarus, Kazakhstan, and Kyrgyzstan. This may seem a somewhat unusual grouping until one appreciates that from China, goods can travel via Kazakhstan and Russia through to Belarus, right on the border with the European Union. China’s negotiations with the EAEU, if successful, would effectively bring Chinese manufacturing capacity right up to the borders of the European Union.

This is why Chinese companies such as AliExpress are already entrenched in Russia’s E-Commerce market, for example, which has grown 20 percent this year and is currently worth US$16 billion.

It’s not just China that wants an FTA with the EAEU. Over 50 countries have expressed interest and are actively negotiating, including India, Iran, Singapore, and Turkey. Vietnam already has an FTA with the EAEU in a relationship that is expected to see Russian-Vietnamese trade hit US$30 billion by 2030 from a base of close to zero.

Both China and Russia have also discussed the formation of the “Greater Eurasian Partnership“, a free trade area that would include not just China and the EAEU, but members of ASEAN and the Shanghai Co-Operation Organization.

Such proposals for a Shanghai Co-Operation Organization Free Trade Zone or a Greater Eurasian Partnership are game-changers. Although details still have to be hammered out, the fact that the highest authorities in both Beijing and Moscow have suggested this means it will almost certainly take place in some form. An FTA that involves China and India, let alone Russia, Pakistan, and others, is going to be of huge significance. It also absolutely determines where the bulk of China’s overseas direct investment is going to be heading – to Eurasia rather than to the US or the EU.

These concepts – both of free trade agreements between the EAEU and Asian nations, and the Greater Eurasian Partnership idea – demonstrate that the desire for Russia to engage with free trade throughout Asia is certainly there. However, there are significant steps to take before Russia may be able to actively promote a direct involvement in free trade with Asia.

Firstly, it remains to be seen exactly what sort of response this would produce in Washington. The US is firmly anti-Russian in its views, and seeing Moscow potentially signing up free trade agreements with the US’ own strategic trade partners may not go down too well, even if Trump has exited the TPP. Political pressure to refrain from dealing with the EAEU, transmitted from Washington, may be too much for some parts of Asia. However, a joint Sino-Russian effort to bring Russia into Asia’s sphere may well suit both Beijing and Moscow, and lead to an increasingly world trade isolated Washington, with just the EU as its main trade ally.

Secondly, aside from Russian traditional industrial industries such as oil and gas, heavy machinery, nuclear technology, and agricultural produce, Russian companies still lack the international competitiveness that is necessary if extensive free trade negotiations are to make sense for the Russian economy. But times are changing:Russia is involved with jointly developing new commercial aircraft with China to compete with Boeing and Airbus, and will be looking to export this technology to new markets less tied to American and European dominance. Russia’s domestic auto industry is also surging, and Russian IT is world class.

It is for these reasons that Chinese businesspeople and political leaders are hailing the relationship with Russia as an increasingly vibrant and sustainable trade opportunity. China’s Vice Minister of Commerce, Wang Shouwen said last week that he hoped trade turnover with Russia would pass US$80 billion this year, which if correct would surpass China’s trade with France. Chinese-Russian bilateral trade grew by 26.1 percent between January and May this year, China’s fastest growing market by far. In 2016, bilateral trade hit US$69.5 billion.

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It should also not be forgotten that Russia hosts next year’s FIFA World Cup Soccer Finals, a quick market entry and exit opportunity for Asian entrepreneurs in light of sanctions placed upon Russia by the EU. Football fans will also be able to enter Russia visa free during the event, and they will be as hungry and thirsty as ever. There are short-term market opportunities for food and beverage sales during the World Cup window.

China and Russia have also been co-operating on far reaching infrastructure projects, designed to further open up each other’s markets. These will have a significant impact on China’s OBOR ambitions. Among the more recent are the following:

The Primorye-1 Transport Corridor, now operational, which opens up China’s northern Heilongjiang Province to sea ports on the Pacific;
Plans to build High-Speed Rail between Moscow and Beijing;
Opening up the Northern Sea Passage through developing Russia’s Arctic Ports;
Financial & Trade Services. Russia has just signed a Double Tax Treaty with Hong Kong, while Moscow is now an international RMB Clearing Cente r, which facilitates trade in RMB not just in Russia but throughout much of Central Asia.

These projects – and many others – will have implications for certain cities in Russia, most notably Vladivostok, which has recently announced foreign investment incentives and provides foreign travelers with an e ight day visa issuance on arrival. The city, one of Russia’s largest ports, contains a free trade zone and the types of incentives China used to offer – low tax rates, low import duties, and even free land. Vladivostok offers the northern Chinese Provinces of Heilongjiang, Jilin, and Inner Mongolia access to the Pacific Ocean and markets in North America, Japan, and Korea.

The implications are clear. Russia is now an important market for China, and vice-versa. China’s OBOR plans only serve to make their bilateral trade relationship more intense, as Beijing needs Moscow onside to realize its dreams of developing trade across Eurasia. The China-Russia trade corridor is about to become one of the world’s fastest growing and most dynamic, and it can be expected that Xi and Putin will increase their mutual co-operation. For Asian businesses, it is time to start getting involved.

Chris Devonshire-Ellis is the Founding Partner of Dezan Shira & Associates – a specialist foreign direct investment practice providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam, in addition to alliances in Indonesia, Malaysia, Philippines and Thailand, as well as liaison offices in Italy, Germany and the United States. For further information, please email china@dezshira.com or visit www.dezshira.com.

Chris can be followed on Twitter at @CDE_Asia.

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