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In June 2011, at a meeting in Moscow, Russian and Chinese presidents Dmitry Medvedev and Hu Jintao set targets of achieving $100 billion in bilateral trade by 2015 and $200 billion by 2020. Initially, the two countries were on track to meet these goals. More recently, this task has become impossible, because of falling energy prices, currency devaluations, and Western sanctions on some Russian industries.
Between 2011 and 2014, trade between Russia and China grew nearly 30 percent and reached $96 billion in 2014. Russia exported $42 billion to China, mostly oil and gas, but also ferrous and nonferrous metals and timber, while China exported $54 billion to Russia, mostly light machinery, apparel and shoes, chemicals, and food products.
To enhance trade between the two countries, a new rail connection—the Trans-Eurasia railroad from southwestern China through Kazakhstan and Russia, then Belarus, Poland, and finally to Germany—was launched. The 11,200-kilometer rail line, now complete, is primarily used by China to ship $3 billion worth of goods to Europe annually. Russia is also starting to utilize the new rail line for its exports: About $260 million worth of goods were shipped to China last year.
When Presidents Medvedev and Hu announced their bilateral trade goals, the Chinese economy had nearly double-digit GDP growth (9.3 percent in 2011), world oil prices were $110 per barrel (Brent crude), and an extension of the Eastern Siberia–Pacific Ocean oil pipeline to supply China with additional 300,000 barrels a day was just completed, boosting Russian exports.1 Several bilateral megaprojects were under discussion too. The most ambitious among those: the negotiations by Gazprom and China's National Petroleum Corporation (CNPC) on the construction of the Power of Siberia pipeline, worth a projected $400 billion; the Altai gas pipeline, terminating in the Xinjiang region of China; and Novatek's Yamal liquefied natural gas (LNG) project, in which CNPC planned to increase its stake from 20 to 30 percent, with a capacity of 16.5 million tons of oil per year.2
Since then, bilateral trade has hit a snag. According to the Russian Statistical Office, over the first half of 2015 Russia's trade with China dropped by 27 percent, to $31 billion. The main reason for the falling trade is the plunge in natural resource prices, particularly the price of oil and gas. Fossil fuels account for nearly two-thirds (62 percent) of Russian exports to China. However, natural resource prices are not the only factor, as Russia's economy has entered a recession following the sanctions imposed by the European Union and the United States. As a result, Russia imported 36 percent fewer Chinese goods in the first half of 2015 relative to a year earlier. If this trend continues to the end of the year, bilateral trade will amount to $65.5 billion, far off the targeted mark. Part of this fall is due to the currency devaluation. No wonder that at the most recent meeting between the two current heads of state (President Putin and Xi Jinping), on September 2 in Beijing, there was a proposal to base future trade relations and joint investment projects on local currencies (the ruble and the yuan).3
Lower energy prices, the slowing Chinese economy, and Western sanctions on selling technology for oil and gas exploration have slowed down or frozen all megaprojects: The Power of Siberia project may be pushed back by a year, and negotiations on the Altai pipeline have been temporarily suspended, as has further Chinese investment in the Yamal LNG project. These suspensions are in part because CNPC has scaled back its forecast for Chinese demand for gas in 2020 from 400 billion cubic meters to 310 billion cubic meters.4
With this in mind, when will Russia-China trade hit the coveted $100 billion mark? The year 2020 may be a good new target date. The recovery and subsequent growth of Russia-China trade will depend on the price of raw materials, as does the overall state of the Russian economy and the ruble. Current estimates are for another three to four years of low prices.5 Also, the relaxation of Western sanctions on Russia will spur bilateral trade, but such relaxation may take time to negotiate. China itself has to wade through a period of economic weakness.
In the meantime, Russia needs to find ways to diversify its exports to China. One sector that has benefited from the imposition of sanctions, at least temporarily, is food processing. Turning this into a lucrative export sector is not an easy task, but it is achievable over a 5-year span. Meat and dairy products are one promising subsector that can gain efficiency and create export-driven growth. Other such sectors are nanotechnology, heavy machinery and equipment, and aviation. All require further investments and less meddling by the state. This is possible, and will go a long way towards achieving more diversified exports.
Author's note: Dara Batomunkueva, a student at the New Economic School in Moscow, provided able research assistance.
Notes
1. In June 2009, Russia and China signed a deal to build an extension pipeline to China by which Russia supplies 15 million tons of oil each year for 20 years in exchange for a loan worth $25 billion to Russian state-owned companies Transneft and Rosneft for pipeline and oil fields development. The pipeline extension was completed in February 2011 and is now operational.
2. Keun-Wook Paik, April 2015, Sino-Russian Gas and Oil Cooperation: Entering into a New Era of Strategic Partnership?, Oxford Institute of Energy Studies, Oxford: University of Oxford,.
3. Elena Mazneva, Anna Baraulina, and Yuliya Fedorinova, "Putin's Got a New Problem With China," Bloomberg, September 1, 2015.
4. Alexander Gabuev, "Pivot East Lets Russia Down," Moscow Times, September 13, 2015.
5. World Bank, Commodity Forecast Price data, accessed September 20, 2015.
