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    China Business
     May 3, 2012


China, Russia sign strategic trade deal
By Robert M Cutler

MONTREAL - China and Russia have signed commercial contracts worth a total of US$15 billion at a trade and investment forum in Moscow during a visit by Chinese vice premier Li Keqiang, who is expected to become premier early next year.

The bundle of contracts covered a series of "transport, energy, communications, high-technology and investment projects," Li announced. He mentioned in particular the possibility of joint design of a wide-body long-distance passenger plane.

China's ambassador to Russia, Li Hui, set the visit up with press interviews referring repeatedly to a "comprehensive strategic partnership of coordination" between the two countries. Last year marked the halfway point in the 20-year validity of the bilateral Treaty of Good-Neighborliness, Friendship and Cooperation

 

signed in 2001, which posits a "strategic cooperative partnership" to be developed between the two countries "from a long-term view and in a comprehensive manner".

Ambassador Li asserted that his country has become "Russia's top trade partner" with a total trade turnover of $80 billion in 2011, up 42.7% from 2010. The numbers, based on an unofficial Beijing estimate dating from last autumn may not be an enormous exaggeration. Bilateral trade of $57 billion in 2008 fell to $39 billion in 2009 in the wake of the global financial crisis before rebounding to $59 billion in 2010.

Official Russian estimates earlier this year for 2011 put bilateral trade at "over $60 billion" while an upper bound of $70 billion was the commonly accepted consensus. However, calculations based on official statistics appear to suggest a bilateral trade level of $79 billion in 2011.

Officials in China's northeast border province of Heilongjiang reported in February that just their own trade with Russia increased 154% year-on-year to $19 billion last year. This will increase still further as a high-voltage direct-current converter station opened in the province at the beginning of 2012 to import electricity from Russia for local industrial use.

Last year saw the start of operations of the East Siberian-Pacific Ocean (ESPO) oil pipeline, nominally planned to transit 300,000 barrels per day from Skovorodino, Russia, to Daqing, China. This would have contributed a significant proportion of any annual bilateral increase.

One of the deals signed reportedly involves a $1 billion agreement between Oleg Deripaska's Basic Element with China's state-owned North Industries Corporation (Norinco) for construction of a rolling mill in Russia for metal production for the purpose of increasing Russian aluminum exports to China.

In particular, Deripaska's Rusal would sell the metal to a joint venture to be established between it and Norinco called North United Aluminum.

Reports indicate that Rusal might also purchase Norinco-manufactured equipment for a $1.5 billion aluminum smelter under construction at Taishet in Eastern Siberia, where the Baikal-Amur Mainline track branches off from the Trans-Siberian Railway.

China's Xinhua news agency quotes the head of China Investment Corp (CIC), the country's sovereign wealth fund, as suggesting that it will likely increase its investment in Russia. The China-Russia Investment Fund (CRIF), he said, would start operating before the end of June with a capital of $1 billion.

This is a pittance for the CIC, which at the end of 2010 had assets worth $410 billion. However, the move would make good on a promise made in October 2011, during Prime Minister Vladimir Putin's last visit to China, to invest such a sum in the Russia Direct Investment Fund (RDIF).

The RDIF, originally intended to co-finance international investment and decrease Russia's dependence on energy exports (17% of gross domestic product) for access to capital, was conceived as a vehicle for implementing the privatization program announced by former finance minister Alexei Kudrin in 2009 as an element of President Dmitry Medvedev's announced modernization project.

The latter, however, still awaits formal implementation. The RDIF's head, Kiril Dmitriev, suggested in 2010 that Russia would contribute $10 billion to the fund over the next five years out of what he hoped to be a total of $60 billion.

It is not clear that the desired goal of expanding beyond raw materials will be made via the RDIF or the CRIF. Song Hui, a researcher at Heilongjiang's provincial Academy of Social Sciences, observed that Russia and China, the world's major crude oil supplier and consumer, "need each other to maintain economic momentum," even if the bilateral energy cooperation goes beyond the hydrocarbon sector.

A senior China energy official attending the trade forum in Moscow said China had proposed "a completely new model for development of cooperation" on the stalled talks for two gas pipeline mega-projects from Siberia, according to Reuters. According to the preliminary form of the deal, Russia would sell 68 billion cubic meters per year (bcm/y) of natural gas to China.

The sticking point emphasized in the press is the price, as Russia's gas export monopoly Gazprom refused to accommodate China's demands, arguing that it could sell the same gas to Europe for a higher profit; China cannot accept Russia's offer without restructuring its domestic gas price rates, thus eroding its competitive advantage in manufacturing.

In point of fact, the two sides have also differed over the order in which to build the two pipelines. Russia has wanted Chinese investment for the Eastern Siberian pipeline first, while China has preferred to start with the more accessible West Siberian gas.

Dr Robert M Cutler (http://www.robertcutler.org), educated at the Massachusetts Institute of Technology and The University of Michigan, has researched and taught at universities in the United States, Canada, France, Switzerland, and Russia. Now senior research fellow in the Institute of European, Russian and Eurasian Studies, Carleton University, Canada, he also consults privately in a variety of fields.

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A fly in China's Russian ointment (Apr 17, '12)

Russia, China clash over oil price, supply (May 5, '11)


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