China-Russia Trade Breakdown and Future Development Trends

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The increase in China – Russia trade is well acknowledged; however details remain scarce as to the exact details. We provide a detailed breakdown and identify the coming trends – a US$400 billion bilateral trade potential and Russia’s developing use of China as a transit nation to markets in ASEAN .

China-Russia 2022 Bilateral Trade

The Main Customs Administration of China has summed up the results of 2022: For the first time in its history, Russia became one of China’s top ten trade partners, while for Russia, China has been primary trade partner now for several years.

Their bilateral 2022 trade turnover increased year on year by 29.3%, reaching US$190.27 billion. Exports from Russia to China grew by 43.4% to US$114.15 billion, while exports from China to Russia increased by 12.8% to US$76.12 billion. This is a rare case of Chinese exports being the smaller in bilateral relations, in this case by a margin of US$28 billion.

These figures have also put the much-vaunted goal of reaching US$200 billion in trade by 2024 as being well ahead of schedule. During the first two months of 2023, Russia-China trade rose by 25.9%, reaching US$33.6 billion. If expanded across the full year with those same growth rates, that would indicate total Russia-China trade for 2023 achieving roughly about US$237 billion.

The 2022 result was made possible by a combination of two underlying factors. The first are the global changes in the foreign trade situation, provoked by the Ukraine situation and the introduction of anti-Russian sanctions by Western countries. The second is the subsequent increase in prices for energy resources (primarily oil and gas), which are the basis of Russian exports, which followed the sanctions.

China’s Energy Discounts

China buys Russian raw materials at a discount of US$10-12 per barrel compared to similar grades from other suppliers, meaning the discount is equivalent to about 20-30% of the cost. However, this contributed to the increase in Russia’s income, as the percentage share of China’s oil purchases due to the competitiveness of Russian energy products, also increased to 18-20%. According to this indicator, Russia became the world’s top energy supplier during 2022, overtaking Saudi Arabia. Due to this huge turnover, this trade provided the lion’s share of Russia-China bilateral trade growth over the year.

Similar processes are recorded with other energy resources. Russian LNG is also supplied at a discount (about 10%) in the format of spot shipments. However, the main increase in gas supplies to China is due to the Power of Siberia pipeline gradually reaching its design capacity. In 2022, deliveries through this increased by 49%, reaching a volume of 15.5 billion cubic metres of gas (with a design capacity of 38 billion cubic metres). Switch on the gas to cook dinner in Shanghai, and that is the Power of Siberia reaching into far east Asia.

Russian coal is another energy resource that China has been able to obtain purchase discounts. By the end of autumn 2022, Russian coal imports by China increased by 57% compared to the same period in 2021. These figures would have been even higher, but the limited capacity of railways and Far Eastern ports prevented this. These bottlenecks are now being urgently addressed meaning future Chinese coal imports from Russia will increase.

China’s Exports to Russia

In the opposite direction, the supply of manufactured goods from China also increased. In some industries, there was real market breakthrough growth. Russian imports of Chinese cars increased by 30%. Chinese electronics and household appliances took first place in sales on the Russian market. The share of Chinese laptops has reached 45-50% of all Russian computer purchases.

This was achieved in most consumer sectors, enhanced by the voluntary departure of Western brands from Russia. Designed to punish Russian consumers, and place domestic social pressure on Vladimir Putin, it was almost fully absorbed and compensated for instead by mainly Chinese and domestic Russian businesses.

For example, the complete McDonalds food franchise operation – with about 900 stores throughout the country have all been absorbed by the main Russian franchiser – now a restauranteur itself – and rebranded as ‘Tasty Dot’. That business is now expanding into Central Asian markets. This trend, of Chinese, Asian and Russian producers replacing Western manufacturers will only intensify during 2023. The on-going M&A concerning VW’s Kaluga auto manufacturing plant is another example.

The exit of Western manufacturers from Russia has handed the Russian consumer market – the worlds 12th largest in GDP spending terms – on a plate back to the Russian manufacturers who supported the original Western investors, and to the Chinese, amongst others. It is a market that has now gone and will cost the West – primarily the EU – hundreds of billions in lost revenues and investment capital.

Meanwhile, the share of Chinese brands in the Russian auto market is now in full swing. This took time to restructure, as sudden demand for Chinese components capacity had to be built up in China, as well as from other auto component manufacturers working with Russia, such as Turkiye and, Iran and India. Russian manufacturers, who previously worked with Europe, have now re-arranged their supply chains.

Russia’s China trade to equal Russia’s EU trade

All this suggests that the US$200 billion goal – a target set by the Russian and Chinese Presidents in 2019 – will be reached this year, 12 months ahead of schedule. If this happens, it could get close to the total trade volume that Russia achieved with the EU in 2022 – €258.6 billion. Despite the EU’s sanctions, and decreases in EU exports to Russia, EU imports from Russia increased. Overall, Russia-EU trade increased by 2.3% in 2022, a statistic that has not generally been highlighted by EU politicians.

This has additional implications – EU politicians and investors are losing their significance and influence in Russia, while Chinese influence is growing.

The growth of trade between Russia and China is extremely important from the point of view of strengthening the Chinese – Russian strategic partnership. Increased trade inevitably leads to economic interdependence, something that the Moscow-Beijing alliance previously lacked.

To place that into context, by the end of 2022, the total volume of China’s foreign trade grew by 4.4% and amounted to US$6.310 trillion. Exports from China increased by 7%, to US$3.595 trillion, and imports by 1.1%, to US$2.716 trillion. As can be seen, trade with Russia is increasing at a much higher rate (20% +) than China’s overall average.

China-Russia trade potential

The potential for China-Russia bilateral trade to grow yet higher can be estimated to volumes given current capabilities at somewhere between US$300 – 400 billion. Both countries are setting the bar to reach this and putting infrastructure and capacity into place to do so. It is a figure that should be attainable within the next decade. There is precedent – between 2012-2022, China-Russia bilateral trade more than doubled from US$88 billion to US$190 billion.

However, it should be recognized that fast trade increases and market breakthroughs, as occurred during 2022, are unlikely to occur again. The mutual transport and logistics infrastructure involved in Russia – China trade is currently working at its contemporary limits, while energy prices are unlikely to increase as much as last year. A reasonable assumption is to expect an increase in mutual trade by 15-20% by the end of 2023.

Asia

Russia’s growing trade with ASEAN

However, there is more to the Russia-China trade angle than purely their mutual trade. China is also a gateway for Russia to access ASEAN. China has very well-established supply chain routes to and from ASEAN and especially via its border connectivity with Vietnam.

China’s trade with Russia is now about at the same level as its bilateral trade with Vietnam at US$234 billion and Malaysia at US$209 billion. China’s trade with ASEAN is growing at a pace comparable with Russia, and reached 11.2% growth in 2022, achieved a total trade balance of US$975 billion.

However, China’s trade with the EU increased by only 2.4% (US$847 billion), and with the United States by 0.6% (US$759 billion). These trends are marked given political pressures upon China from both the EU and US and are unlikely to change. This means that the Russian and Chinese economies will continue to converge, and not only will Russia’s dependence on China grow, but vice versa.

The ASEAN aspect is also important to Russia as it spreads its pivot to Asia further east and south. It has a successful free trade agreement, via the Eurasian Economic Union (EAEU) with Vietnam. Russia already supplies Vietnam with energy, is keen to expand this (the Power of Siberia 2 pipeline will assist) while non-energy trade is also rapidly expanding. Rail connections already head south from China’s border with Kazakhstan to Yunnan and connect with Vietnam’s rail system, which is being developed to provide connectivity to other ASEAN markets.

Vietnam is a developing agricultural play, while Russia and Belarus export fertilizers and agricultural machinery, a point that was discussed at some length between Chinese President Xi Jinping and Belarus President Lukashenko last week. Belarus is also a member of the EAEU and keen to expand trade east as it too is sanctioned by the EU.  Vietnam sells Russia seafood; Russia sells Vietnam pork and beef. That bilateral trade has grown from also zero to US$622 million in five years. Although geographically far apart, their mutual trade efficiencies match while rail infrastructure has made them closer.

Russia’s desire to trade east means that its relationship with China is also expanding into China becoming not just a valuable import and export market, but also a transit nation between Russia and ASEAN. It should be noted that while Singapore has currently suspended negotiations to engage in an FTA with the EAEU, fellow ASEAN members Cambodia, Indonesia and Thailand have all officially applied. Russia’s trade with these countries today is relatively small; China onboard as a transit route and pending free trade agreements will change that.

Summary

Both Russia and China are consciously and systematically diversifying their partnerships, while the complementarity of the two economies is obvious. Russia can relatively painlessly compensate for the loss of Western goods in China. In turn, Russia can obtain a reliable supplier of relatively cheap strategic resources; important for both, as short overland logistics minimizes the risks of transportation and supplies in the event of a potential trade or military conflict with the United States. That fear is already being raised by Washington over claims China could supply Russia with weapons in its conflict with Ukraine.

Meanwhile, achieving a mutual US$300-400 billion in trade between China and Russia appears possible, firstly, as the infrastructure of the Russian Far East develops; secondly, as a result of increased supplies of natural gas to China. Without Russian gas, China cannot solve its ambitious transition to green energy resources, which should be completed by 2050. Russia delivers ten times less gas to China via pipeline than it supplied to Europe in 2021, meaning the growth potential is enormous, and China in turn can achieve its green energy targets.

These developments will require serious political decisions and significant investments. The result will be mutually beneficial cooperation with China, one of the largest economies in the world, and genuine development of the Russian Far East, turning the region from a subsidized periphery into a new growth pole for the whole country – as well as a trade resource, especially in agriculture and energy transit to feed China – and Southeast Asia’s additional rapid growth and needs.

Source Russia Briefing