15 октября 2009

Александр Лукин: China Sees Diminishing Returns With Russia

Prime Minister Vladimir Putin held talks with his Chinese counterpart, Wen Jiabao, in Beijing on Tuesday. An official meeting between the two countries` prime ministers will be held annually under the auspices of Russian-Chinese strategic cooperation and as part of efforts to form a permanent bilateral commission. Issues involving trade and economic cooperation are usually the main focus of these talks. During the latest visit, Putin and Wen signed more than 20 agreements on projects involving bilateral cooperation.

A joint communique was signed announcing the start of cooperation on ballistic missiles and missile delivery vehicles, as well as the establishment of cultural centers. There also were agreements on improving customs controls, developing high-speed train lines in Russia and cooperation between Russian and Chinese special economic zones.

The results of this visit are extremely important because it is precisely in the area of trade and economic cooperation that the greatest number of problems exist. Since early this year, bilateral trade volumes have dropped by more than 35 percent compared with the same period last year. And although China`s trade volume has also dropped with most other countries as a result of the crisis, it is falling at the greatest rate with Russia.

The global economic crisis has further aggravated old problems in bilateral trade and economic relations, leading to the current situation. As a result, it is now clear that the goal set by the leaders of both countries to increase the trade volume to $60 billion to $80 billion by 2010 will not be met. The same is true regarding investment targets. It is possible that Russia will drop from being China`s eighth-largest trading partner to the 15th or 16th largest, falling behind countries such as Malaysia, Singapore, India, the Netherlands, and possibly Britain, Brazil, Thailand and France. That would further decrease the mutual importance of Russia and China as trading partners.

Two additional trends characterize Russian-Chinese trade relations. First, Russia is running a substantial trade deficit that first appeared in 2007. Second, the share of automobiles and equipment in Russian exports has dropped sharply. The trade deficit has decreased somewhat during the crisis because of an even sharper decline in Russian imports compared with exports. (Imports fell by 48.2 percent in the first half of 2009, while exports fell by only 24.1 percent over the same period.) Of course, that hardly constitutes a long-term solution to the problem.

In this sense, the crisis has only underscored the main problems of Russian-Chinese trade and economic cooperation - problems that were well known beforehand and that analysts pointed out long ago. They include:

* Systemic corruption. This problem has spread through all areas of o trade, a significant portion of which is carried out by organized criminal groups among the business communities in both countries, as well as by representatives of Russian government agencies such as the border and customs services, the Interior Ministry and regional administrations. In the current system, a significant percentage of all goods crossing the border are never declared, with the result being that both official figures for trade volume and budgetary income from customs fees are correspondingly lower. Russia is battling illegal trade. One measure was the closure in June of Moscow`s Cherkizovsky Market - a main retail outlet for contraband goods. However, these measures are insufficient and haphazard. When the authorities shut down one place where contraband goods are sold, traders quickly find another venue for doing business. It would be far more effective to block the transit of contraband goods across the border, but to do that would require an overhaul of the entire Federal Customs Service.
* The unfavorable investment climate in Russia. Chinese businesspeople complain about Russia`s confusing laws and other regulations, corruption in regional administrations and law enforcement bodies, and underdeveloped infrastructure as evidenced by the lack of decent roads, hotels and even toilets.
* The low quality of vehicles produced by the Russian automobile and truck industry that cannot effectively compete against vehicles available to Chinese buyers and made by other countries.
* Russian businesspeople`s lack of familiarity with the Chinese market and business culture.
* The underdeveloped condition and high prices of Russia`s tourism o services. As a result, the number of Chinese tourists visiting Russia has steadily declined since 2004, while the number of Russian tourists visiting China has increased.

Without solutions to these problems, no further development in bilateral trade and economic relations will be possible - even after the crisis. In that case, the only way to raise the trade volume would be through a drastic increase in Russian imports of Chinese goods - but that would only exacerbate other problems. At this stage, the main obstacle on the path to improved trade and economic cooperation is the condition of the Russian economy, and Russian society as a whole. Any further growth in bilateral trade will not be possible without ending corruption, developing an innovative economy and overcoming serious problems with the country`s infrastructure.

Ultimately, most of those problems are essentially political, inasmuch as they require political will from the Russian side to resolve.

Pressure is building to find solutions, and not only for the sake of Russia`s relationship with China but for the development of the country as a whole. Failure to resolve those problems will lead to Russia becoming far more dependent on the Chinese market than China is on Russia. Last year, China became Russia`s third-largest trading partner, accounting for 7.6 percent of Russia`s total foreign trade turnover, while Russia was China`s eighth-largest trading partner, accounting for just 2.2 percent of China`s foreign trade volume. What`s more, Russia will become nothing more than a raw materials appendage of China - just as it has already become for Europe. Worst of all, the character of the Russian people makes solving most of these problems an extremely daunting task.

Alexander Lukin is director of the Center for East Asian and SCO Studies at Moscow State University for International Relations.

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