June 11, 2019

St. Petersburg Economic Forum - 2019

Will Russia's Hopes for China Come True?

 

The leadership of the Russian Federation continues to take active steps to expand the circle of its foreign partners, which seeks to compensate for the USA and EU's political and economic sanctions. In this regard, importance is attached to holding various international events to demonstrate the RF's “attractiveness” and benefits of cooperation with it in the trade, economic, investment and other spheres.

In particular, last week, the 23rd St. Petersburg International Economic Forum - 2019 - one of the most representative of the above- mentioned events, took place in the Russian city of St. Petersburg. The forum was attended by the President of the RF V. Putin (traditionally opens the Forum since 2005), the President of the PRC Xi Jinping, leaders of about 20 other states, delegations from more than 140 countries, as well as representatives of 2,5 thousand Russian and 1, 3 thousand foreign companies. All in all, 19 thousand people.

The peculiarity of this year's Forum was its being held during a peak of the complication of the economic situation in Russia against the background of unresolved problems. Thus, according to the Federal State Statistics Service, in the first quarter of this year, the GDP growth rate of the country declined to 0.5% year on year, which is far below the forecasts of the Ministry of Economic Development and Central Bank.

At the same time, according to independent experts (in particular, of the “ Loko-Invest” analytical department), in reality the situation in the Russian economy is much worse and is characterized by not GDP growth, but its decline by 1.6% as compared to the first quarter of the past year. At the same time, in January-April this year, the net outflow of capital from Russia amounted to 34.7 billion US dollars, which is almost twice as much as in 2018.

Based on this, experts conclude that Russia is entering a new cycle of recession that began last year. The reasons for this trend are both, a decrease in the confidence of foreign investors in the Russian economy as a result of further strengthening of Western sanctions and miscalculations in the work of the government.

For example, most critical consequences for Russia were those from the USA's law “On Countering America's Adversaries Through Sanctions”, which was adopted in 2017 and partly put into effect last year. Besides, the extremely negative resonance in world business circles was caused by the arrest by Russian law enforcement agencies of one of the largest foreign investors - the founder of Baring Vostok - American businessman Michael Kalvi.

As always, these problems were in fact ignored in the speeches of Putin and other official representatives of the Russian authorities. At the same time, the deterioration of the country's economy and, as a consequence, the government's inability to comply with social decrees of the Russian President, were clearly voiced by other members of the Forum from among the non-governmental expert circles.

Similar differences take place in the comments of the results of the Forum in St. Petersburg. Thus, according to statements by pro-Kremlin media, the results of the event may have a significant positive impact on the development of the Russian economy. In favor of such prospects they mention “record number of contracts”, which were concluded between representatives of Russian businesses and their foreign partners, namely - about 650 for a total of 3.1 trillion rubles.

At this, special hopes are fastened on China as “Russia's closest and most powerful partner”. In particular, the emphasis was placed on personal meetings between V. Putin and Xi Jinping, which took place within the framework of the Forum and had “unprecedented” time duration. Besides, they point out the high level of representation of the Chinese delegation, which was the largest at the Forum (1072 people). Consequently, the confidence in further strengthening of ties between Russia and the PRC in all spheres is expressed.

Contrary to optimistic assessments of the state and prospects of cooperation between Russia and China, a number of other Russian mass media and individual experts recognize the maintenance of significant problems in the relations between the parties. Examples of this are:

 

  • firstly, Moscow's groundless expectations regarding the possibility of compensation for Western credit sanctions by obtaining loans from the PRC. For example, since 2014, Chinese banks have imposed restrictions on the issuance of loans and other forms of cooperation with Russian companies and businessmen who are subject to US and EU sanctions. In addition, the leading state-owned banks ExIm Bank and CDB, for the most part, provide loans to their Russian customers only on condition of spending the money received from the PRC;

 

  • secondly, the low level of real volumes of Chinese investments into Russian economy, despite the significant number of deals and agreements between the two countries on the implementation of joint economic projects. As of the beginning of 2018, their size amounted to only 4.189 billion US dollars, which accounted for 2% of China's total investments in foreign countries. And last year within the framework of the overall process of outflow of foreign capital from Russia, China withdrew from it 1.199 billion US dollars (or 24% of its investments). By comparison, during the same period, Chinese investments into Kazakhstan's economy grew to 15.6 billion US dollars;

 

  • thirdly, the imbalance in trade between the two countries, as well as the lack of real results of Russia's efforts to diversify its foreign economic ties at the expense of China. Thus, today, oil and gas account for up to 80% of Russian exports to the PRC, and machine building products.- for about 60% of imports. On the one hand, this makes Russia a raw material appendage of China, and on the other - it increases the RF's economy's dependence on world energy carriers prices. In particular, the growth of trade volumes between Russia and the PRC for 2014-2018 by 13 billion US dollars (from 95 to 108 billion US dollars) was mostly due to the nearly doubled oil price. Yet, this in no way allowed Russia to compensate for the losses from the fall in trade with the EU by 86 billion US dollars (from 380 to 294 billion US dollars). There is also no solution to the issue of expanding Russian-Chinese trade in national currencies;

 

  • fourthly, the actual failure of the plans of Russia and the PRC to combine their strategic political and economic projects. Thus, in 2018 an agreement was signed on trade and economic cooperation between the Eurasian Economic Union (EUA) and China. However, due to disagreements within the EAEU, including trade with the PRC, the agreement has practically failed to produce real results. Plans to turn Russia into a key link in the transport communication between China and Europe within the framework of the Chinese initiative “One Belt – One Road” have not been implemented either. Due to a number of organizational, bureaucratic and financial problems, the project “Eurasia”, which included the Beijing-Moscow-Berlin high-speed railroad, also failed. As a result, most of the trade between China and Europe is still being carried out by sea. In the period from 2014 to 2018, the share of transportation by trains increased from only 0.65% to 1.37%, but solely because  Chinese border provinces reduced transport tariffs.

In general, the above-mentioned circumstances confirm the purely situational and declarative nature of the “strategic partnership” between Russia and China. In fact, to date, such a partnership is a kind of “friendship against the United States” and is not backed by a powerful economic base.

Moreover, economic relations between the two countries are becoming increasingly uneven in favor of the People's Republic of China. For example, while China keeps widening its access to Russian natural resources, which is fully in line with its interests, Russia still cannot achieve its strategic goal - to compensate for Western sanctions by reorienting economic ties to the Chinese direction. In turn, this does not allow Russia to resolve its economic problems and only makes it a raw material appendage of the PRC.