The inaugural Eastern Economic Forum, attended by more than 1,000 investors from 24 countries including China in Vladivostok this month, shows the momentum of Russia’s pivot to Asia.
China is an important strategic partner for Russia, with which it shares a 4,000-kilometer border.
This relationship is exemplified by a US$400 billion gas deal and a US$242 billion high-speed railway project, among other mega deals signed between the two countries last year.
Now, however, both sides are facing economic challenges including currency depreciation, high capital outflow and stock market uncertainty.
Will this new economic reality push Russia and China to work closer together?
“The current crisis could have an impact, but from a long term perspective it will not influence Russia’s attitude toward the Chinese market, because we have a long-term relationship with China and the Asia Pacific region,” Eddie Astanin, chairman of the executive board of National Settlement Depository (NSD), Russia’s central securities depository, told EJ Insight.
Despite this long-term partnership, the financial infrastructure between China and Russia remains underdeveloped.
Traditionally, Asian investors including the Chinese tend to invest in Russia through global custodians, brokers, investment banks or other agents which are often based in London.
However, Russia and China are catching up with building a new financial infrastructure that bridges the two central depositories, according to Astanin.
He cited the access of ICSDs (international central securities depositories) such as Euroclear and Clearstream firstly to Russia’s corporate and municipal debt markets and then to the Russian stock market this year.
“We believe this experience could be used in establishing links between the Russian and Chinese CSDs, providing investors with mutual access to our markets,” Astanin said.
The record increase in the volume of Moscow yuan trade may offer a reason for Russian regulators to stay positive about having a direct link to China.
Moscow’s MICEX exchange introduced trading in the yuan-ruble currency in 2010 and the volume of Moscow yuan trade increased fourfold from July to August this year to 18.4 billion yuan (US$2.89 billion).
Nevertheless, other aspects of this Sino-Russian economic alliance such as foreign direct investment and trade have raised red flags to investors and businesses.
China’s foreign direct investment in Russia has been falling even before the stock crash and currency depreciation.
According to China’s Ministry of Commerce, there was an increase of nearly 30 percent in China’s foreign direct investment in the first half, but its direct investment in Russia fell as much as a quarter.
Pricing and ownership in assets are the two major obstacles that hinder Chinese investment in Russia, according to Artyom Lukin, an asociate professor and deputy director for research of the school of regional and international studies at Far Eastern Federal University (FEFU).
“Chinese corporations are striving to buy Russian assets as cheaply as possible, biding their time and betting that cash-strapped Moscow would eventually accept their terms,” he said.
He cited a memorandum of understanding between Rosneft and China National Petroleum Corp. (CNPC) signed in 2014.
Even though Rosneft and CNPC have agreements on the sale of a 10 percent stake of Vankor oil field in Eastern Siberia, both companies are still haggling over price, according to Lukin.
Meanwhile, Rosneft announced a deal to sell a 15 percent stake of Vankor to India’s Oil and Natural Gas Corp. at the EEF in Vladivostok.
A similar obstacle arises with ownership in assets.
Summa Group’s Bolshoi Zarubino Port project near the border with China was once seen as a potential game changer that would give China’s Jilin province direct access to the Sea of Japan and allow Russia’s infrastructure to facilitate intra-China trade.
Yet, little progress has been made since Summa Group signed a framework agreement with some Chinese companies including China Merchants Holding International, a joint venture between China Merchants Group and Goldman Sachs last November.
“Summa is reluctant to give Chinese investors more than a 25 percent stake while the Chinese companies want the rights to manage the port,” Lukin said.
Still, some experts see opportunities from the current crisis.
Ivan Zuenko, a researcher in the Russian Academy of Sciences (Far East branch), said the ruble remains weak against the yuan despite depreciation of the latter.
The yuan had a single-digit percentage decrease in value while the ruble lost almost half of its value in the past 12 months.
“Local businesses along the border find a weak ruble an advantage,” Zuenko said.
“Russian goods, especially ecological products, have become more popular because they appear very economical to Chinese consumers.”
According to his research, agriculture offers huge potential in moving Sino-Russian partnership forward.
His argument is in line with figures cited by the Institute of Modern Russia which shows exports of dairy products, honey and egg increased 14 times in the first half of 2015.
However, FEFU’s Lukin said the skewed structure of Sino-Russian bilateral trade remains.
In fact, total volume of Sino-Russian trade dropped 25 percent in the first half of 2015 compared with a year earlier.
“The fundamental impediment to the development of Sino-Russian economic partnership is the skewed structure of bilateral trade,” Lukin said.
“Russia’s exports to China are predominantly energy, raw materials and commodities while the percentage of industrial and hi-tech goods has been steadily declining,” he said.
Hong Kong Economic Journal