Sino-Russian Relations: Current Status and Challenges … · Sino-Russian Relations: Current Status and Challenges Ahead ... SKOLKOVO Business School ... HOPU Investments, China Investment

Sino-Russian Relations:

Current Status and Challenges Ahead

April 20th 2015

Hong Kong

Elena Sushkova

SKOLKOVO Institute for Emerging Market Studies

SKOLKOVO Business School - Institute for Emerging Market Studies (IEMS) 2

Evolution of Sino-Russian relations R

ussia

C

hin

a

1949 1989 1956 1969 1979 2001 2013

The blossom of

Sino-Russian

Friendship

Sino-Soviet

Treaty of

Friendship,

Alliance and

Mutual

Assistance

USSR builds

plants, bridges

and roads in

China, assists

with education,

healthcare and

weapons

Sino-Soviet split

Ideological debate between Nikita Khrushchev and

Mao Zedong;

cancellation of all mutual agreements;

Sino-Soviet border conflict (Damansky island)

After the short period of Khruschev Thaw, USSR

enters the era of Stagnation and gets involved into

Afghanistan. All relationships with China are ceased

The revival of Sino-Russian relations

Mikhail Gorbachev’s visit to Beijing in 1989 laid a foundation for the

revival of relations;

Russia and China signed mutual declarations in 1992, 1994, 1996

and 1997;

In 2001 Jiang Zemin and Vladimir Putin signed a major agreement on

Sino-Russian relations - Treaty of Good-Neighborliness and

Friendly Cooperation Between the People's Republic of China

and the Russian Federation

2014

The new stage of Sino-

Russian relations

Vladimir Putin’s visit to

Beijing in May and

October 2014 have

triggered a series of

agreements and allowed

Russia to strengthen ties

with China

Western sanctions

accelerate Sino-

Russian relations;

More than 40

agreements are signed

in banking, energy,

transportation, finance,

agriculture, etc.

Socialist Transformation (Mao Zedong)

Era of Economic reforms (Deng Xiaoping,

Jiang Zemin)

Economic growth and

rising importance of

domestic issues (Hu

Jintao)

The era of structural changes, new

round of reforms under Xi Jinping

USSR enters the period of perestroika and eventually breaks up

in 1991. Russia launches new economic reforms, transists to

market economy with privatization of industries

China has undergone a turbulent period of Great

Leap Forward, Anti-Rightist Campaign and

Cultural revolution

Border conflict

Economic

reforms

Mikhail

Gorbachev’s

visit

China entered

WTO

Third Plenum

Reform Plan

Western sanctions End of USSR

1991

Through Economic reforms and openness policy China has achieved an

unprecedented growth during several decades. However alongside fast industrial

development China faced the necessity of structural changes

In November 2013 Xi Jinping unleashed

an set of economic and social reforms

aimed at the rebalancing of the economy

Three levels of relationship

Private Business

General Public

Government and State companies



Intergovernmental cooperation

Supernational Government

Organizations

Shanghai Cooperation Organization

BRICS

Asian Infrastructure Investment Bank

APEC

Intergovernmental commissions

Russian-Chinese commission for preparation of the regular

government head meetings*

Russian-Chinese Commission for Investment cooperation

Russian-Chinese commission for Energy cooperation

Russian-Chinese commission for Academic cooperation

Associations

Chamber of Commerce and Industry of Russian federation in

China

Russia-China Chamber for Trade Cooperation on Machinery and

Innovative Products

Russian-Chinese Business Council

Russian-Asian Union of Industrialists and Entrepreneurs

*includes subcommissions on trade and economy, science and technology,

transport, nuclear energy, communication and information technologies,

cosmos, finance, environment, civil aviation and avaiconstruction, customs

and agriculture


State-backed industrial initiatives Industry Russia China

ENERGY Gazprom (30-year contract with CNPC), Rosneft, Novatek, RusGidro, Rosatom, InterRao, RAO Energy Systems of East, Rosseti, Sibur Holding

CNPC, Sinopec, PowerChina, China Atomic Energy Authority, Huanen, Dongfang Electric Corporation, State Grid Corporation of China

PETROCHEMICALS Sibur Holding (Joint Venture with SinoPec) SinoPec

CONSTRUCTION Eurocement China CAMC Engineering, China Triumph International Engineering, SINOMA International Engineering

TRANSPORTATION United Aircraft Corporation (Joint Project with COMAC on wide-body aircraft), Russian Railways, Russian Machines, Moscow city government, UralVagonZavod, Volga Group

COMAC, China Railway Corporation, NORINCO, China Railway Construction Corporation Limited, Jizhou Zhongyi FRP Co. Ltd., Chinese Harbour Engineering Co

SCIENCE, TECHNOLOGY AND

IT

Rostelecom, Russian Railways, Foundation for development of the New Technologies Development and Commercialization Centre (SKOLKOVO)

Huawei, Zhongguancun Science Park,

SPACE Russian Federal Space agency (cooperation of GLONASS and BeiDou navigation systems)

China Satellite Navigation Office

FINANCE VEB, VEB-leasing, Gazprombank, VTB, Russian Direct Investment Fund (Russia-China Investment Fund), Export Insurance Agency of Russia

The Export-Import Bank of China, China Development Bank, Bank of China, Vcanland, HOPU Investments, China Investment Corporation, China Export&Credit Insurance Corporation

RESOURCES Baikal Mining Company Hopu Investments

MILITARY Air-defence missile system S-400, heavy helicopter Mi-26 production in China

Politics drive Sino-Russian alliance

The economy remains largely politicized. State and state affiliated companies get full government support and financial incentives, as well as access to accumulated government and academic expertise, usually have resources to develop internal China research departments

Political leverage helps business. The relationship between Chinese and Russian companies is usually based on intergovernmental cooperation framework. State companies rely on intergovernmental agreements and sign contracts backed up by government support

Cross-border relationship is getting the momentum. Recent government initiatives have triggered the development of the region and activated bilateral projects. (Special development zones; localized resources transfer; Vladivostok free port; key attractiveness in infrastructure, resources, energy&electricity, agriculture)

Sensitive point for the government is the area of Eurasian integration. Some regional Russian and Chinese interests overlap, while many regional infrastructural and industrial initiatives are being discussed



Russia-China Trade

Source: EY, Rosstat

$53 677 bln $41 607 bln

Russia mainly sells mineral resources to China and imports

machinery, industrial products and durable goods


Bilateral Trade and Export&Import

In 2014 Russia and

China’s combined trade

reached $95 285 bln

(6,8% up).

The growth increase is

mainly due to Russian

export to China (+15,2

p.p.)

Export from Russia to

China reached

$41 607 bln (+4,9%)

Import from China

reached $53 677 bln

(+8,2%).

In 2014 ruble depreciation have had a downward influence on bilateral trade


Private Business

Large Enterprises •En+ (with Shenhua) •Lukoil (ex-partner with Sinopec)

•Vimpelkom (loan from CDB and Bank of China)

•Yandex (e-commerce project with PayEase)

Small and Medium Enterprises •Yota Devices (YotaPhone 2) •PC & Consumer Electronics: Roverbook, Bork, Scarlett

•Clothes& Foot wear: Gloria Jeans, Carlo Pazolini

•Electronics: Fly, iconBIT, Prology, Treelogic

Except for several big projects (related to resources), Russian private business mainly have a certain element of the value chain placed in China (such as production or assembly)

Majority of private businesses purchase goods in China in order to resell them in Russia and CIS

Private business has no external support

– Lack of external financial support

– No access to government financing

– Low quality risk insurance mechanism

– Lack of lobbying mechanism on Chinese territory

Challenges: language, culture, distance

Private Business

Russian business has 20-year experience gap with China compared to the western counterparts. Russian business is very young, it mostly emerged in late 80s-90s. Currently, both Russian and Chinese businesses operate in parallel world.

Russian private business, apart from few resources projects, mainly purchase certain goods (electronics, consumer goods, clothes&footwear, etc.) from China for future resale. – Small and medium enterprises invest into production in China or place orders

for certain goods. Very few companies sell to China (YotaPhone, Splat).

– However, the agriculture industry seems to be relatively prospective, as Russian agricultural products (grain, vegetables, etc) and food & beverages are gaining the momentum.

On the opposite, Chinese companies sell a lot to Russia. IT companies are conquering domestic market, automobile giants are building plants in Russia. – Chinese export to Russia is growing significantly. In 2014 machinery stood for

36,2% of Chinese export to Russia.

– Moreover, the level of FDI is also growing as Chinese involve into joint projects on Russian territory, especially related to land or resources

Joint businesses are hard to execute, due to lack of mutual business culture understanding and common business experience.


People perception of China

SKOLKOVO Business School - Institute for Emerging Market Studies (IEMS)

Perception gap. General public lack of clear understanding of China. On the one hand, Russians tend to perceive China as a closest “friend” (Source: Russian Public Opinion Research Center, 2014)

– 49% of Russians think that China is primarily an economic partner

– 43% of Russians see China as a friend in the future, 36% - as a close partner

– 60% of Russians are confident that Russia-China partnership is mutually beneficial

On the other hand, in discussions related to China political discourse is dominating. Mutual understanding is very fragmented (except for food and cinema).

11 Source: IEMS

China coverage in Russian mass media


Educational gap. Lack of mutual academic and business programs

Western countries has been actively studying China, creating academic programs and building business partnership with Chinese companies for more than 30 years. During this period western countries have raised their own professionals in Chinese culture, politics and economy, who possess not only theoretical knowledge, but also practical experience.

Russian Soviet sinological school was very strong, but during Sino-Soviet split (especially after 70s) the quality of studies started to decline. With the improvement of relationship with China in 1989, more professionals were trained, but due to lack of business cooperation they mostly stayed in academic or government institutions. Only in the recent 3-4 years there has been an increase demand for the business practitioners.

Moreover, Russian entrepreneurship is still very young (25 years), and most of the professional managers and entrepreneurs have been trained in the West and lack understanding of China. Russian companies are less competent in developing international business, and also less confident in their actions on Chinese market. Very few have a deep understanding of Chinese business and political culture, therefore in the next 3-5 years a great demand for such specialists will exist.

Education


Travel

– 1st place in inland tourism: more than 1 mln Chinese visited Russia in 2014

– The depreciation of ruble and no-visa regime attracted more tourists

The gender imbalance provides incentives for cross-cultural marriages, especially in the Far East:

– Russia has 77 million women to 66 million men

– In China men outnumber women by at least 30 million (20% of men will be unable to marry in the future)

Social lift for less privileged Chinese citizens

– Free land to boost Chinese population in Russia’s Far East

Demographic situation

Source: Index Mundi

Key Findings

The government relationship is very warm as it has never been in the several decades

The business relations still tend to be very cautious: the absence of 20-year western China knowledge and basic “doing business in China” skills might make business with Chinese quite a painful process for business

The relations on general public level can be characterized as controversial due to perception gap.



Documents

Sino-Russian Relations: Current Status and Challenges … · Sino-Russian Relations: Current Status and Challenges Ahead ... SKOLKOVO Business School ... HOPU Investments, China Investment