VTB Capital
Since Russia and China established diplomatic relations 65 years ago, links between the two Eurasian countries have remained relatively low key. Only in recent years has cooperation accelerated, culminating in the 30-year, $400 billion deal to supply Russian gas to China signed in May this year.
The fact that the two parties have been able to set aside differences and agree terms is in itself an important moment and might prove to be a new launch pad for even closer ties.
There is little surprise that efforts have been focused on the oil and gas and natural resource sectors to date. China’s insatiable appetite for commodities has necessitated building links across borders to secure the demand for its enormous manufacturing base. Rhetoric around further integration and collaboration has been high, but sizeable deals such as this show that words are finally turning into action. Huge strides in nuclear power, electricity, finance, technology, aviation and aerospace also show that the partnership is stretching out beyond conventional sectors.
However, despite progress in other sectors, energy still dominates bilateral economic relations. Geographical proximity to China and the vast natural resource base in Siberia enable Russia to capitalize on Asia’s growing demand and support the regional economic development of Russia’s Far East. For example, in 2011 a crude-oil pipeline almost 1,000 kilometres long began full operation, transporting 15 million tonnes of crude oil a year.
This pipeline and the Gazprom deal mentioned above will foster further energy cooperation and enable Russia to exploit other untapped energy reserves in Siberia. For China, it will open the door to a relatively clean energy solution that supports the continued growth of China’s industrial regions while reducing pollution.
The Russian government hailed both deals as key strategic achievements that provide a guaranteed revenue stream, but also support the diversification of its energy exports. But for China they are equally important. China imports the bulk of its core mineral resources from Australia, Brazil and South Africa, which can take between 14 and 35 days to deliver. By contrast, better infrastructure and transport links with Siberia will enable trade links to be forged that tap into the enormous resources of Russia’s Far East, allowing delivery within four days.
Infrastructure offers another attractive opportunity for collaboration. Russia’s Far East is one of the government’s focus areas for regional development. With large natural resource reserves the region has great potential, but it is in urgent need of foreign direct investment to build new infrastructure and to bolster the region's economic growth. Investment of this nature will also attract qualified and skilled labour while driving further diversification of energy export routes. With Chinese investors currently under-represented in the Russian equity market, encouraging more investment from the Far East is an important strategic goal, which will support the Russian government’s ambitious infrastructure and development objectives.
Indeed, the Russian government has set bold targets for increasing bilateral trade as well, aiming to reach $200 billion by 2020, up from $87.5 billion last year. The Chinese government is also making substantial commitments to increase bilateral trade. According to the Ministry of Trade of China, the country invested $4.1 billion in Russia in 2013, five times more than in 2012. China has further promised to pump $20 billion of investment into domestic projects in Russia, focusing on transport infrastructure, highways, ports and airports.
This growth should be supported as rouble-renminbi transactions gain momentum, helped by the authorities’ decision to use the rouble and the renminbi as mutual trading currencies. Both governments are also considering the inclusion of each other’s currencies into their respective central bank reserve strategies.
Russian banks are also more active in the Chinese financial market, with VTB Capital recently mandated as a joint lead manager and joint book runner on the placement of a $300 million high-yield bond issue for Logan Property, a leading Chinese real estate company.
Tighter bilateral ties between Russia and China will benefit both countries and help bolster growth, taking advantage of their proximity and a growing level of trust between Moscow and Beijing. This might just be the start of a genuine shift in the global economic centre of gravity and, if bilateral partnerships can continue to be nurtured, the Russian bear and Chinese dragon might be a formidable force for the global economy.