Russia’s economic policy and Russia-China economic relations

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Russia's economic policy and Russia-China economic relations

1. Russia's economic policy

The weight of the emerging countries in the world economy has grown rapidly and as a result their political importance has also been on the rise. Perhaps the most visible manifestation of this is the establishment of the G20 group of countries and its expanding role as a discussion forum. At the same time, the large emerging economies have tried to strengthen their mutual cooperation within the framework of the uno?cial alliance of the BRICS group. China is of course the dominant actor among this emerging group. Russia has bene?ted enormously from the growth of the world economy through increased demand for and higher export prices of its energy and raw materials. At the same time, it has sought to compensate for earlier losses of economic and political weight by taking an active part in new international groupings like BRICS and the Shanghai Cooperation Organization, in particular through closer engagement with China. However, while relations between Russia and China are arguably better than ever and trade between them has increased rapidly, some super?ciality and lack of vision seems to plague their dealings, and the prospects for deeper economic integration are not very promising.

This paper examines economic relations between Russia and China and the impediments to their deeper economic integration. The analysis is predominantly from the Russian viewpoint because advances in integration and opening up would be more important to Russia than to China, as argued later in the paper. First we review the size and development of the Russian and Chinese economies since these factors largely determine the potential for cooperation, and they also a?ect how the countries evaluate each other. Next we analyze the growth of trade between the countries and focus on market share developments and changes in the structure of trade. The market share analysis is extended to the countries of the Commonwealth of Independent States (CIS) since this region adds an interesting dimension to the Russia-China mix. As energy issues are of utmost importance for the economic relations of Russia and China, they are examined separately. After this, we discuss how the industrial policies of Russia and China may hamper economic integration between the two countries. The last section summarizes the main ?ndings and comments on future prospects. Size and growth of the Russian and Chinese markets Economic relations between Russia and China are largely determined by the geography and economic potential of the countries and how this potential is exploited.

Developments in the last ten years reveal interesting changes in the relative economic power of Russia and China, which are important for understanding the evolution of their bilateral relations. Since the beginning of the last decade, the Russian economy has posted robust growth, although the global ?nancial crisis hit Russia hard in 2009. Due to the rapid economic growth and strengthening of the ruble, Russia's nominal GDP almost doubled between 2005 and 2010 to reach 1500 billion dollars. This places it 11th among the largest economies. However, Russia's - as any other country's - economic record pales in comparison to that of China. China's nominal GDP was nearly 5900 billion dollars in 2010, as China overtook Japan to become the world's second largest economy after the United States. While nominal GDP provides a metric for the size and growth of the market and is thus a key criterion for companies when they make strategic business and investment decisions, a better indicator of the “true” size of the economy and how much it uses resources is the purchasing power parity adjusted GDP (PPP). By the latter indicator, Russia's share of global output has remained around 3% over the last ?fteen years, while in the same period China's share has increased from less than 6% to almost 14%.

As a result of higher growth rates in China than in Russia, the disparity in living standards between the two has also diminished in relative terms. While in the second half of the 1990s the per capita GDP (PPP) of China was only one-third of the Russian level, ten years later China's income level is about half that of Russia. However, the absolute di?erence in income levels has actually increased and the Chinese will, of course, long remain on average much poorer than the Russians. When we consider economic growth in Russia and China during the last ten years, we would do well to note that the rise of Russia has been signi?cantly fuelled by price developments in energy and raw materials. In contrast, China has grown despite an increase in the prices of inputs, which emphasizes its achievements in growth policy. Excessive dependence on volatile export prices makes Russia's business environment problematic. Moreover, while energy prices may remain high in the future, they are not likely to increase at the pace seen in the last decade and hence there will be less support for economic growth from price developments in Russia. In connection with commodity price developments, and before we move on to discuss bilateral relations, it is worth emphasizing that China in?uences the Russian economy to a large extent indirectly through the world market.

A World Bank study based on a global general equilibrium model, ?nds that a major source of bene?ts to Russia from the growth of China and India is likely to be terms-of-trade improvements due to higher energy prices. The report notes that this transmission mechanism is quite di?erent from that for many developing countries which bene?t primarily through expanded bilateral trade with these emerging giants.2Russia-China trade developments Before the Second World War, the geography and poor transport connections as well as a complicated economic and political situation in both countries hampered the development of trade relations. In the 1920s and 1930s, China typically accounted for only 3-5% of the foreign trade of the Soviet Union. As regards the economic relations of that time, revolutionary activities in China and their ?nancing by the Soviets probably received more attention than conventional trade issues.3 The birth of the People's Republic of China in 1949 and its construction of a Soviet-type economic system, with massive support from the Soviet Union, led to the rapid growth of trade and economic relations between the countries. The importance of these relations was underlined by the East-West confrontation as well as the aim of communist countries to become economically self-su?cient. In the 1950s, China's share in the Soviet Union's foreign trade was 15-20%.

The share of the Soviet Union grew rapidly to account for more than half of China's foreign trade, and it was still about 40% at the start of the 1960s.However, long-held mutual suspicions, competition within the communist block and a lack of trust between the leaders in Russia and China caused an increase in disputes between the countries and ?nally led to a total political break and a collapse of trade by the mid-1960s. The share of China in the Soviet Union's external trade was only a few percentage points in the middle of the decade and after the border con?ict in 1969 there was practically no trade between Russia and China. Although relations improved, particularly after 1985 when President Gorbachev came to power, trade remained modest. In the last years of the Soviet Union China's share of its foreign trade was less than 2%. The share of the Soviet Union in China's foreign trade fell below 10% in the mid-1960s, and a quarter of a century later, just before the Soviet Union broke up, the share was about 3%.4 Even though political relations between Russia and China continued to improve after the break-up of the Soviet Union in the 1990s, their economic relations were burdened by Russia's unstable conditions and poor economic performance.

Added to that, the Chinese economy had yet to reach such a critical mass as would lead to deeper cooperation in respect of commodity exports from Russia to China. Finally, the Asian crisis in the latter part of the decade made the cooperation even more di?cult, as it caused growth concerns in China and, due to a collapse in oil prices, accelerated Russia's descent into a full-scale ?nancial crisis in 1998. After the turn of the millennium, trade between Russia and China ?nally gained new momentum, albeit from a very low level. China's strong growth began to have an increasingly visible impact on the global economy, as its demand for energy and raw materials boosted prices. At the same time, Russia increased its oil and raw material exports to China. As a result, the value of Russian exports quadrupled from $5 billion at the beginning of the 2000s to $20 billion in 2010. China's share in Russia exports, however, rose at best to just over 6%. In 2010, China was Russia's ?fth largest export market with a 5% share. The impact of increased trade with China is more striking in Russia's imports. After the 1998 crisis, the Russian economy started to recover rapidly at the beginning of the 2000s, and the rise in incomes was supported by the strengthening of the ruble and a rise in international energy and raw material prices. Imports also increased rapidly, particularly imports from China. As a result, the share of China in the Russian imports increased at an astonishing pace, from 3% at the start of the decade to 17% in 2010. As regards imports, China is now by far Russia's most important trading partner.

While the increase in China's market share implies ?rst of all that third countries have lost market shares in Russia, it of course also means much tougher competition for domestic Russian ? rms. In the latter part of the last decade, robust import growth turned Russia's trade balance with China into de?cit territory in spite of a rise in commodity prices. Only in 2009, when the global ?nancial crisis hit Russia's imports hard, did the trade between Russia and China move more or less into balance. In 2010, the Russian trade de?cit with China was some $19 billion, even as the total Russian foreign trade was almost $170 billion in surplus.5 In spite of the fact that the trade between Russia and China has grown rapidly, the importance of Russia, measured by market shares, has remained modest for China. The share of post-Soviet Russia in China's imports and exports hovers stubbornly around 2%. China's transformation from being the junior partner assisted by the Soviet Union in the 1950s to the current dominant global player is impressive. This must have some impact on how the Russians evaluate not only Russia-China economic relations but also Russia's position more generally in the modern world.

2. Changes in the structure of trade

In addition to looking at the growth of trade and developments in markets shares, one should also focus on changes in the structure of Russian-Sino trade in order to understand the development of economic relations between the two countries. The trade statistics of Russia and China indisputably show that during the last ?fteen years or so the share of energy and raw materials in Russia's exports to China has increased, whereas high-technology products have become increasingly important in Russia's imports from China. The Russian authorities have repeatedly articulated that Russia needs and aims to diversify and increase the share of high-tech manufacturing products in its exports. However, in reality the structure of exports has moved in the opposite direction. In the ?rst half of the last decade a private Russian oil company, Yukos, started to transport oil to China by rail. Due to increased volumes and prices, the share of energy and raw materials in Russia's exports started to rise. The share of oil and raw materials (SITC 2 and 3)6 in exports from Russia to China almost tripled from some 10% in the mid-1990s to about 30% by the start of the 2000s, and ?ve years later it was more than 60%. In 2010, oil and raw materials accounted for 70% of Russian exports to China. In addition, many other important product categories (food, chemical products, and base metals) comprise products that are not highly processed.

The share of machinery and transport equipment (SITC 7) in exports to China collapsed in the second half of the 1990s, and was only 1% in 2010. Overall, the proportion of highly processed products in Russian exports to China seems to be less than 10%. In this regard, the situation is similar to Russia's trade with developed countries. The development of the arms trade, which the Russians view as reflecting the high-tech potential of their country, clearly demonstrates the changes in the relative positions of Russia and China. According to information from the Stockholm Peace Research Institute (SIPRI), Russian arms exports to China peaked in 2005 and have since fallen rapidly, so that the quantity exported to China in 2010 was only 13% of the level of ?ve years earlier. At the same time, China's share of total Russian arms exports plummeted from more than 60% to less than 7%.

The collapse of arms exports to China is due to Russia's reluctance to sell the latest military technology to China but also because of China's own advances in the ?eld of military production and technology. During recent years, China has succeeded in substantially increasing its arms exports and is emerging as a major supplier in the international arms trade in this decade. The changes in the structure of Russian imports from China are at least as vast as in exports. They indisputably show the rise in the technology level of Chinese exports. Even though the value of imports of Chinese food products (SITC 0 and 1) has more than doubled since the mid- 1990s, the share of food products in Russia's imports from China has plummeted from 26% in 1996 to 5% in 2010.

Furthermore, the value of imports of miscellaneous manufactures (SITC 8), which consists mainly of clothing and shoes, increased sharply in the last decade. While these imports still play a big role, their share in Russia's imports from China has halved during the last ten years. Shoes and garments have had to make room for machinery and equipment (SITC 7), the share of which has increased to over one-third of Russian imports from China. This product group includes mainly computers, phones and home electronics. Within this product group, imports of motor vehicles have also risen rapidly, which has raised concerns among Russian carmakers. Rapidly increasing imports of base metals and products thereof (included in SITC 6) indicate growing competition also in this ?eld for Russian producers. Actually, Russia has already taken safeguard measures to restrict, for example, steel pipe imports from China, to protect Russian producers. Developments in the last ten years show that China's success in the Russian markets is not based solely on low-wage, low-technology industries. In addition to increased exports of goods like garments and shoes, China has diversi?ed its product range and has begun to export ever- increasing quantities of high-tech goods. This is something Russia has tried but failed to do. Moreover, while China has become a major player in the Russian market, Russia's role in the Chinese economy, with the exception of energy and some raw materials like round wood, has remained marginal.

3. China challenges Russia in the CIS region

Russia has traditionally played a central role in the economy of the CIS region. It has sought to maintain its position through various arrangements such as the customs union of Russia, Kazakhstan and Belarus. Russia also seeks to become a regional ?nancial center and wants to see the roble as a leading regional currency.

On the one hand, regional trade and ?nancial arrangements can reduce obstacles and enhance trade and economic cooperation among the participating countries. On the other hand, there is a danger that regional trade agreements are discriminatory vis-а-vis third parties and thus may reduce economic well-being. In fact, there are some signs that the increasing role of China in the area may provide an important motive for some of the CIS countries to join their mutual customs union. Nevertheless, economic cooperation and the building up of institutions in the heterogeneous CIS region has been di?cult. While the Russian position in the region is still very strong, foreign trade ?ows clearly indicate that the situation is changing, not least because of China's growing presence. The external trade statistics of the CIS countries are in many respects incomplete and unreliable, and in many countries a substantial part of the trade takes place beyond the reach of o?cial statistics. Nonetheless the statistics reveal interesting and plausible developments concerning the roles of China and Russia in the economies of the CIS region. economic trade incompatibility integration

However, before we move on to the analysis we should note that market share developments are signi?cantly a?ected by ?uctuations in energy prices. In fact, there have been several sources of energy price increases in the CIS region during the last two decades: 1) the average price of oil on the world market increased from about $20 USD per barrel in 1996-2000 to more than $75 USD per barrel in 2006-2010; 2) natural gas prices in the CIS region have started to track international oil prices more closely; 3) the pricing mechanism of energy supplies between Russia and the CIS countries has seen major changes as countries have begun to use prices that re?ect international market prices more closely. All this implies that Russia's loss of market shares in the CIS area during the last ?fteen years would look even more dramatic if comparisons were based on constant prices. Table 2.2, which describes trade developments in the CIS countries vis-а-vis Russia and China over the last ?fteen years, underlines the heterogeneity of the CIS region. While the geography, the distance between countries, transportation routes, and energy and raw material resources seem to largely determine trade ?ows, there are other factors involved. Russia plays a major role in the foreign trade of its western neighbor's, Ukraine and Belarus, although its share has fallen considerably. While the share of China in these countries' external trade is still modest, imports from China have increased rapidly in recent years. The same applies to Armenia and Azerbaijan, although for these countries Russia is not as important a trade partner as it is for Belarus or Ukraine. The decrease in Russia's share in the exports of Azerbaijan in the early 2000s is partly linked to the completion of a new oil pipeline from Baku to Georgian Supsa on the Black Sea at the end of the 1990s. After the mid-2000s, a pipeline from Baku to Turkish Ceihan on the Mediterranean gave Azerbaijan oil an additional route external to Russia. Central Asian Kazakhstan is a particularly interesting country due to its natural resource base and its location between Russia and China. Kazakhstan plays an important role in China's energy strategy, and the Chinese state-owned energy companies have acquired substantial stakes in Kazakhstan crude oil production, re?neries and pipeline transports.

The completion of the oil pipeline from Kazakhstan to China at the end of 2005 signi?cantly increased the oil export capacity of Kazakhstan. The new gas pipeline from Turkmenistan to China, which was completed at the end of 2009, is also to be used to export Kazakh gas to China. Moreover, China is involved in the production of other raw materials in Kazakhstan. China's ability to provide ?nancing for energy projects gives it a big competitive advantage over Russia and other competitors. In spring 2009, when China's state energy giant CNPC acquired a majority stake in MMG, an energy company in Kazakhstan, the deal included China's $10 billion credit to Kazakhstan. The Indian and Russian state energy companies also sought a stake in MMG.8 Although Russian companies are still key players in the economy of Kazakhstan; the in?uence of Chinese companies is becoming more and more visible. In fact, during the last ?ve years, China seems to have been the most active player in Kazakhstan. This is also re?ected in the trade statistics. Russia's share of the exports of Kazakhstan has fallen from almost one-third in the latter half of the 1990s to about 10% in the last ?ve years. In the same period, China's share of Kazakhstan's exports has doubled to around 15%. As regards Kazakhstan's imports, Russia's market share is about one-third and, in spite of its share having declined, Russia still enjoys a strong position in Kazakhstan. However, the growth of China's share in Kazakhstan's imports from only about 2% to almost a quarter in ten years clearly demonstrates the force of the Chinese economy.

Regarding the other Central Asian countries, problems with trade statistics are even more obvious, and the picture presented by statistical data is in many cases suggestive at best. In Kyrgyzstan, both Russia and China have increased their role in imports, but the changes on the export side are modest. Kyrgyz dealers trade huge amounts of goods from China to Kazakhstan and other countries in the CIS region, and in order to ensure continuance of this business Kyrgyzstan has plans to join the customs union of Russia, Kazakhstan and Belarus.9 In Tajikistan, both Russia and China have increased their import shares. As far as Tajik exports are concerned, China has for Tajikistan become equally as important a trade partner as Russia. The gas pipeline from Turkmenistan through Uzbekistan and Kazakhstan to China, completed in December 2009, opened up an important new export market for Turkmenistan gas.

This is evidenced by the increase in China's share of Turkmenistan exports from zero in the latter part of the 1990s to almost one-third in 2010. In Table 2.2, which reports ?ve-year averages, this is re?ected in the increase in China's share to 7% over the period 2006-2010. At the same time, the share of exports to Russia has plummeted, which is partly explained by the explosion of the Turkmenistan-Russia gas pipeline in spring 2009. As regards Turkmenistan imports, China is already an equally important player in the Turkmenistan market as Russia. In Uzbekistan, Russia has maintained its leading position, but China is there too and is rapidly increasing its visibility in both exports and imports. The opening up of opportunities to export to China has reduced Central Asia's dependence on Russia, which is re?ected, for example, in the higher prices of their exports. While China's demand has promoted competition in the area, the avalanche of Chinese products into Central Asia has already aroused fears of a narrowing of the domestic production base in these countries. Kazakhstan's decision to enter the customs union with Russia and Belarus is perhaps partly explained by the government's wish to prevent an excessive ?ood of Chinese goods into home markets and its policy to protect domestic production.

4. Energy in Russia-China economic relations

Energy issues are at the core of Russia-China economic relations, as evidenced above. China's growing demand for energy and dependence on energy imports o? er a natural basis for the expansion of the Russian energy industry into the Asian markets. In fact, developments in the energy sector reveal interesting aspects of the economic relationship between Russia and China. Imported oil already accounts for more than half of China's crude oil consumption, and its dependence on imported oil is growing rapidly. In 2010, China's own oil production was 204 million tonnes and its imports 239 million tonnes.

According to Chinese statistics, annual imports from Russia in recent years have amounted to some 15 million tonnes, or 3-4% of China's total oil consumption and 6-7% of its oil imports. China has e?ectively diversi?ed its oil imports; Russia is the fourth largest supplier of oil for China after Saudi Arabia, Angola and Iran. Kazakhstan's share in China's oil imports was just over 4% in 2010. China's share in Russian oil exports has slowly increased to the current level of 5-6%. However, the role of China and the other Asian countries in Russia's energy exports is expected to increase in the future. The Russian energy strategy adopted in 2009 suggests that Asia will account for 22-25% of Russia's oil exports by 2030. In 2008, after a long and di?cult negotiating process, the Chinese state oil company CNPC and the Russian state pipeline monopoly Transneft agreed on the construction of an oil pipeline from Russia to China. The construction work started the following year after the China Development Bank promised to lend a total of $25 billion to Transneft and the Russian state oil company Rosneft against future oil deliveries. Oil deliveries to China through the new pipeline began at the start of 2011 and the existing agreements imply that Russia is to supply 15 million tonnes of oil per year through the pipeline during the next 20 years. Until now, Russian oil has been transported to China by rail and via the Kazakh pipeline system, so the new pipeline signi?cantly increases the capacity for oil exports from Russia to China. However, this is not yet re?ected in actual oil deliveries, as in January-March 2011 China imported less oil from Russia than in the same period a year earlier. The pipeline to China is a branch of the East Siberian Paci?c Ocean (ESPO) pipeline, which is due for completion by 2013-2014.

Besides the oil pipeline issue, Russia and China have already been long negotiating over the possibility to construct a gas pipeline from Russia to China, but progress on this issue has been slow. In spite of several letters of intention, a dispute over the gas price has delayed the ?nal agreement. As far as is known, Russia wants to link the price of gas to China to the price of gas delivered to Europe; the Chinese have not accepted this, and have demanded a lower price. If Russian Gazprom were to strike an agreement on the pricing issue with the Chinese in the summer of 2011, the supply of gas through the Altai gas pipeline could perhaps start in 2015. Th ere are also plans to transport gas from the Russian Paci?c region to China. According to Russia's energy strategy, Asia's share in Russia's gas exports is estimated to rise from the current zero to about one-?fth in the next twenty years. Considering the emphasis given to energy issues in the speeches of the Russian and Chinese leaders during the past ten years, the progress has been slow.

There are several reasons for this. Russia's energy policy has been unpredictable, which has hampered investments in energy production and transportation. Private oil companies in Russia have not been able to proceed with their plans to increase supplies to China due to interventions by authorities and state-run energy companies. Moreover, high and increasing energy prices have given the Russians some ?exibility; with the result that there has not been immediate economic pressure to hasten China-related energy projects. Russian e?orts to force - in a very non-transparent way - potential Japanese and Chinese customers to compete with each other on alternative pipeline routes have slowed the progress on the projects, and such a policy is known to irritate both Japan and China. Naturally disputes on pure business matters such as the ?nancing of projects and the price of energy have also delayed energy projects. The Russians have repeatedly complained that the Chinese are not willing to pay market prices for their energy supplies.10 Mutual distrust is often cited as a basic reason for the problems in Russia-China economic relations.

The Russians are afraid of the growing in?uence of China, and economic issues are ultimately linked to security policy. On the other hand, the indecisiveness of decision-makers in Russia has made the Chinese suspicious about whether the opposite side is able to implement agreed business plans. Particularly in the Russian Far East, di?culties related to negotiations on energy and raw materials reveal the strong economic and political interests related to these sectors. The opening up of the energy-rich Central Asian region has brought a new dimension to the Russia-China energy game. In Central Asia, China has been able to invest directly in the production and transport of energy and, consequently, exports from Kazakhstan, Uzbekistan and Turkmenistan to China are growing rapidly. In Russia, foreign energy companies have found it di?cult to move ahead in the strategic energy sector, which has slowed the development of the Russian energy sector and China's energy imports from Russia. From the viewpoint of Russia, deepened economic cooperation between the Central Asian countries and China has reduced its negotiating power in relation to both China and Central Asia. In the longer term, the increased competition and the emergence of new options will force Russia to re-evaluate its current policy stance not only in relation to China but overall as well.

5. Incompatibility of Russia's economic policy with true economic integration

Aside from foreign trade in goods, there are other forms of economic cooperation, not to mention deeper economic integration, between Russia and China. While the statistics on foreign direct investment are very unreliable in the globalized world, when combined with other information they do reveal that investment ?ows between Russia and China are very small. According to Russian statistics, the total FDI to Russia in 2010 was about $52 billion, and only $300 million of this came from China. Similarly, total investment by Russian enterprises in other countries was $41 billion, but in China only some twenty million dollars. Chinese statistics also demonstrate that Russia's role in China's inward and outward FDI is almost non-existent.

The low level of direct investment between Russia and China is an interesting phenomenon. Given the fact that enterprises in both countries have actually started to globalize only recently and that both countries have a relatively poor record in numerous international business environment comparisons, it is perhaps understandable that Russian and Chinese companies have found the markets in third countries more attractive. Moreover, it is relatively easy to understand the small amount of Russian investment in China, as outside of the energy and raw material sectors there are simply no Russian companies as yet which could successfully compete in the Chinese markets. As regards the Chinese energy sector, the market is dominated by the gigantic Chinese state enterprises, which makes it challenging for foreigners to enter this market. It is more di?cult to understand the low level of investment from China to Russia. China is already accustomed to large investment projects in energy and raw materials sectors geographically much further from Russia and in conditions that are more unstable than those in Russia. Thus it would seem that there is something peculiar in the workings of Russian markets and politics that may explain at least to a degree the lack of Chinese investment in Russia. The interest of Chinese labour-intensive industries to invest in Russia is dampened by Russia's higher wage level and relatively low labour productivity. Large-scale investments in these sectors would require Chinese workers to move to Russia.

This is not yet a real possibility although there are perhaps some hundreds of thousands of Chinese involved in the agriculture and construction sectors particularly in the Siberian region and in the Russian Far East.11 As regards capital-intensive sectors, the small amount of Chinese investment is due to Russia's overall unwelcoming attitude to foreign investors and to Chinese investors in particular.12 In the energy sector, foreign companies have seen many turnarounds in Russia and many of them have had to give up their businesses in favor of Russian state companies. Even when foreign companies have been private, their problems with Russian companies have also often in?uenced state-level relations. Th is may partly explain why the Russian government has not allowed huge Chinese state enterprises to acquire major holdings in the Russian energy sector. In the strategic energy sector political considerations override economic factors. In some respects, the same applies to other raw materials. A few years ago, an increase in export duties on roundwood was apparently directed mainly at China, but due to uniform trade policy considerations, higher duties were also applied in the European parts of Russia in spite of the fact that they were economically imprudent and caused political problems with the EU. Strategic sectors and industrial policies have considerable weight in the economic policies of Russia and China.

This may, however, complicate economic cooperation between the countries, as the priority sectors are largely the same in both countries, and there are strong protectionist tendencies associated with these sectors. In both countries, strategic industries include, inter alia, shipbuilding, aircraft manufacturing, nuclear power and telecommunications. China is already the world's leading manufacturer of conventional cargo ships, and the domestic Russian shipyards, particularly in the Russian Far East, face tough competition not only from the Chinese but also from the South Korean and Japanese shipyards. In the aeroplane industry, China's determination, ?nancing possibilities and cooperation with the leading European and American parts suppliers already gives one the impression that it will soon surpass Russia, if it has not already done so, also in this ?eld. China's achievements, such as those with jumbo jet and stealth ?ghter projects, attest to its progress in the aeroplane industry. While in 2010 a Chinese company lost a bid to build a nuclear power plant in Belarus to a Russian competitor, it is estimated that in a few years China will reach a level where its own technology and lower cost level will enable the Chinese suppliers to seriously compete in the international nuclear power business. In telecommunications, the Chinese telecom giants ZTE and Huawei ranked second and fourth in the list of companies that ? led the most international patents (PCT) applications in the world in 2010.

The number of patent applications from each of these companies was about three times the total number of international patent applications from Russia. A good example of the success of industrial policies in Russia and China is the car industry. In both countries, the small numbers of cars per capita and rapidly growing incomes have promoted the growth of the auto market. In Russia, the domestic automotive industry has not been able to take advantage of the situation, as the growth in demand has been satis?ed by imports, and from 2003 onwards, increasingly by foreign car manufacturers doing their assembling in Russia. In 2010, the number of cars produced in Russia was some 1.2 million, and the number of cars exported from Russia is very small. In China, car production has increased rapidly and exports are also on the rise, although from a relatively low level. The Chinese car manufacturers have applied for permits to set up production plants in Russia, but so far there is only some small-scale assembling of Chinese cars by Russian manufacturers and the domestic Russian carmakers have managed to convince decision-makers to prevent the entry of Chinese car manufacturers into Russia.

The integration process between Russia and China in the real sector has been slow and di?cult, and the same applies to the ?nancial sector. Th e possibility to use the rouble and the yuan in the Russia/China border areas or the swap arrangements between the Central Bank of Russia and the People's Bank of China do not yet justify saying that there is signi?cant ?nancial integration between the two countries. While Russia hopes to make the rouble at least a regional key currency and Moscow an international ?nancial center, these plans will face a formidable challenge from China, as the international role of the yuan is already rapidly increasing and Shanghai and Hong Kong are superior as global or regional ?nancial centers compared to any Russian city. Actually, the absence of strong common interests - or in many cases, the presence of con?icting interests - is also re?ected in the multilateral international cooperation. It is di?cult to imagine that the BRICS group, for example, could become a real player in the global economy. As both Russia and China protect and support largely the same key sectors, the scope for deeper economic integration between them remains relatively narrow. China and Chinese companies have in many respects been extremely di?cult partners for foreign operators, but China's cheap labour as well as the size and growth of the market have made the country an indispensable business partner.

Cooperation has been facilitated by the fact that China is truly outward oriented and wants to integrate into the rest of the world economy. China's WTO membership in 2001 is a concrete display of the country's approach, and the usefulness of this approach to China itself and the other WTO members is beyond doubt. Given the discussion concerning strategic sectors and industrial policy, it is well worth bearing in mind that China's exceptional economic growth and technological rise are mainly due to private sector activities and competitive export production, and not a result of the protection of large state enterprises. Compared to China, Russia does not have the huge and fast growing markets or cheap/e?cient labour to compensate for an otherwise poor business environment. Russian economic policy lacks a genuine desire to open up, which is demonstrated by its indecisiveness and unwillingness during the WTO negotiations. Russia's industrial policy is reduced to protectionism and state interventionism. Finally, as both Russia and China seem to consider cooperation with other countries more attractive than mutual interaction, the basis for deeper integration is still quite ?imsy.

Conclusions

After the break-up of the Soviet Union, it took a dozen years before trade between Russia and China gained momentum. Although political relations between the two countries are arguably better than ever, the growth of trade has been driven by economic forces. China's phenomenal economic growth, its export success, and the need to ?nd new energy and raw material suppliers have been the engine of growth in Russia-China trade. Political breakthroughs directly supportive of economic relations have been rare and the necessary decisions have been reached only after lengthy and di?cult negotiations. While it is easy to give individual examples of mutual investments, economic cooperation between Russia and China is largely limited to trade in goods. As regards crucial energy issues, China has proceeded much faster with the Central Asian countries than with Russia. A certain super?ciality and lack of vision plagues Russia-China dealings, and the prospects for deeper economic integration are not promising.

This is often said to re?ect the burden of history and mutual distrust. In this paper, we argue that Russia-China economic relations are also burdened by industrial policies that emphasize strategic sectors, which has led to a rise in protectionism, particularly in Russia. The fact that the actors are often state-owned companies, which in addition to business factors take into account the owner's political interests, complicate the situation. Russia-China economic relations are currently reduced to individual business projects with no clear framework or direction. While this resembles Russia's cooperation with other countries, the approach is in striking contrast to the rules and institutions-based approach which characterizes (naturally in relative terms) China-US or China-EU economic relations. The current situation is not a problem for China: it can get the energy and raw materials it needs from Russia, and regular talks concerning mutual investments and cooperation within the BRICS are enough to satisfy the political needs. Moreover, China's rapidly developing economic relations with other CIS countries enhance its negotiation power vis-а-vis Russia as regards energy issues. From the Russian point of view, the situation is far from satisfying, as Russia-China economic relations to a large extent highlight the overall weaknesses of the Russian economy. Falling behind China, which has succeeded in modernizing and diversifying its economy, and the fact that Russia has become a pure raw materials supplier even among the emerging markets, is not what the leaders in Russia had promised.

The major barrier for wider economic cooperation between Russia and China - or any other country - is Russia's inward-looking, statist and protectionist economic policy. While Russian decision-makers seem to think that the Russia-China economic relationship and Russia's role in the CIS region somehow grant it a speci?c role and rules in the global economy, the actual situation is likely to be quite the opposite; the rise of China's economic power in Russia and the CIS region will force Russia to re-evaluate the costs and bene?ts of its current approach. This may take time, and meanwhile enterprises in Russia and China will of course continue to search for new business and cooperation opportunities and will keep the weak integration process alive.

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