Beyond being friends: Russia and China need an exclusive trade deal

RIAC 6e The conference “Russia and China: Cooperation in a new era” at the beginning of June once again demonstrated the will of the two countries to develop exclusive relations. Over the past 1.5 years, during the global COVID crisis, the two sides even strengthened mutual trust. In December 2020, Russia and China extended their agreement on notification of missile launches for ten years. The document was first signed in 2009. In March, the Treaty of Good Neighborliness and Friendly Cooperation has been extended, an agreement that was cement relationships between the two countries for 20 years.

Economy contrasts with diplomacy

However, despite the long-standing foreign policy rapprochement, Russia and China are far from fully utilizing their bilateral economic potential. In 2020, according to the Russian Federal Customs Service, China accounted for 15% of Russian exports, slightly more than the CIS (14%), but significantly less than the European Union (41%). In the structure of Russian imports, China is also behind the EU (24% vs. 35%), even though European food producers have been excluded from the Russian market since 2014.

In turn, Russia’s share was only 2% in Chinese exports in 2020 (with the United States’ share at 17%) and only 3% in imports (compared to 7% for the United States). United, according to ITC).

The same proportions are typical of mutual investments. In early 2020, according to the Bank of Russia, China represented less than 0.1% of cumulative direct investment from Russia (the share of the United Kingdom and Germany being respectively 4.7% and 2.2%). As for cumulative direct investments in Russia (private equity and debt instruments), China’s share reaches only 0.8% at the start of 2020, when France’s share stood at 4.5%.

State support and guarantees

So far, Chinese investments have mainly focused on energy projects, supported directly or indirectly by the state. The Yamal LNG factory is a good example (20% owned by CNPC, 9.9% by Silk Road Fund): to start construction, Novatek raised a loan from the NWF (the national sovereign wealth fund). Another example, Sibur’s Amur Gas Chemical Complex (AGCC) (40% owned by Sinopec) – the project will benefit from tax advantages as a resident of one of the Far Eastern territories with priority social and economic development .

Equally important is securing guaranteed demand, as is the case with AGCC, which is located in close proximity to the world’s largest consumer of polyethylene and polypropylene, the basic petrochemicals. It is no coincidence that Sinopec acquired the share in the GCC of Love in December 2020. At that point, it became clear that the consequences of the COVID-19 pandemic would not jeopardize China’s growing demand for petrochemicals and chemicals for gas : according to Forecast CIHI, China’s share of global polyethylene imports will rise from 35% last year to an even more impressive 43% by 2030.

In search of viable opportunities

The lack of appropriate state support and guarantees restricts exports in a number of other industries that could have benefited from demand in the Chinese market. This is evident in the trade frictions between China and the United States (in 2019, China imposed a 25% duty on methanol imports from the United States) and Australia (end of 2020, China stopped buying australian coal). And vice versa, it is possible to increase exports by seeking opportunities in market niches where Russia’s sales potential is coupled with absolute competitive advantages, such as in the helium market, where Russia could. become one of the main suppliers in the years to come.

Another option is the supply of Russian hydrogen, which could allow China to partially replace oil imports from other markets.

In 2018, according to the International Energy Agency (IEA), some 1,790 hydrogen vehicles have been used in China out of 12,952 vehicles worldwide; the Chinese fleet has grown to 6,180 units out of 23,354 at the end of 2019. And by 2025, China plans to increase the number of buses and trucks using fuel cells to 50,000, increasing to 1 million by 2030.

In addition, by 2035, according to official plans from the Chinese authorities, half of the vehicles sold should be climate neutral, while the other half should be powered by hybrid engines or fuel cells. A similar change will need to occur in Japan, where the IEA projects the number of fuel cell vehicles to increase from 3,633 in 2019 to 200,000 in 2025 and 811,200 in 2030.

Russia has its competitive advantage in the development of hydrogen energy, taking into account both the global leadership in natural gas reserves (used for blue hydrogen stored in ammonia) and more than 50 years of experience in nuclear and hydroelectricity, necessary for the production of yellow and green hydrogen. Understanding of these benefits is already reflected in regulatory plans: for example, according to the energy strategy adopted last year, Russia increase its hydrogen exports from 200,000 tonnes in 2024 to 2 million tonnes in 2035.

Towards a new trade agreement

We must admit, however, that a long-term strategy requires long-term investment, while the latter requires a sure return. To ensure that there is a horizon to plan for your business, you don’t necessarily have to rely on budget support – this is where exclusive trade agreements can come in. This is exactly what the Trump administration did in January 2020, concluding a deal this forced China to increase U.S. imports by $ 200 billion above the 2017 level in two years, including energy ($ 52.4 billion), industrial production ($ 77.7 billion ) and agriculture ($ 32 billion). The deal, among other effects, boosted US oil exports to China: supplies rose to 482,000 barrels per day (bpd) after a drop at 137,000 bpd in 2019 against a backdrop of trade wars.

An exclusive trade deal between Russia and China could be smaller in volume and longer (aimed at increasing trade revenue by $ 100 billion in at least five years) to help resume, for example, the project Eastern Petrochemical Company, in which ChemChina planned to participate before but that stayed on paper. In return, Russia could extend the tax advantages, now granted to residents of priority economic and social development territories (TOSER), to all projects with Chinese participation. Thus, the success of the cooperation between Sibur and Sinopec in the GCC of Love would be reproduced and should give new impetus to bilateral relations.

From our partner RIAC

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