Economic Relations between China and Russia: Development and Potential

At a recent Kennan Institute talk, Richard Lotspeich, Associate Professor, Department of Economics, Indiana State University, and former Title VIII-Supported Research Scholar, Kennan Institute, discussed the economic relationship between Russia and China. Lotspeich explained that there are three ways in which the economies of two countries can be linked—through trade, investment, and labor migration. All three aspects are present in the Russian-Chinese economic relationship, although trade predominates.

Lotspeich demonstrated that trade between China and Russia has been increasing since the normalization of relations between the two countries in 1989. Overall trade volume increased by more than four times. He noted that the Russian far eastern region is more tied to trade with China than most of Russia, due to geography. Khabarovskii Krai in particular has reoriented its economy toward the exports market, and much of this is sent to China. The composition of Russian-Chinese trade has changed over the past 15 years, he added. Today, intermediate industrial products such as metals, chemicals, fuels and timber, are the largest component of Russian exports to China. Much of this is based on Russia's wealth of natural resources. Chinese exports to Russia consist largely of consumer goods, such as clothing, finished leather goods, and footwear. Lotspeich cautioned that there are significant discrepancies between the trade statistics provided by the Russian and Chinese governments, with Russian statistics understating trade relative to Chinese reports. Although both sets of statistics demonstrate the same general patterns, the causes of the differences between the total numbers deserve further investigation.

According to Lotspeich, China and Russia are major trade partners, but neither country is the other's main source of imports or main destination of exports. He argued that despite the long border between Russia and China, trade between them is constrained by the great distances and poor transportation networks between the major population and industrial centers of the two countries. The most promising avenue for increased trade, Lotspeich said, is Russian exports of natural resources—particularly oil and natural gas—to China. However, the Russian government recently decided that a proposed oil pipeline in the Russian Far East would go to a Russian port rather than directly into China.

A final important area of Russian-Chinese trade is in armaments, Lotspeich contended. These exports are not included in trade statistics. The collapse of the Soviet Union and the end of the Cold War dealt a severe blow to the Russian arms industry, and exports to China have helped the industry to survive. From 1990 to 2002, 17 percent of Russian exports to China consisted of military equipment, and Lotspeich argued that arms will remain a major component of Russian-Chinese trade even if the European Union lifts its restrictions on military exports to China.

Russian analysts have paid a great deal of attention to the possibility of massive labor migration from China to the Russian Far East, according to Lotspeich. A small amount of migration has occurred, but Lotspeich believes that lack of economic advantage for Chinese in the Russian Far East will prevent migration from increasing significantly from current levels. Lotspeich reported that bilateral investment flows are beginning to grow. Levels of foreign direct investment (FDI) between the two countries are currently low in absolute terms. However, Lotspeich noted that in relative terms, China is an important destination for outward Russian FDI as well as an important source of FDI into Russia, accounting for around one fifth and one third, respectively, of the totals. Russia is relatively important as a destination for Chinese outward FDI (which has been growing rapidly in recent years) accounting for around one quarter of the total.