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Growing trade, but no cheer in Russia

China’s export steamroller is wheeling across Russia, threatening to crush many domestic producers and strain bilateral relations.

The healthy trade surplus that Russia had enjoyed with China since bilateral trade started to grow rapidly in the early 1990s suddenly turned into a gaping deficit this year.

The two-way trade surged 42 per cent in 2007 to reach nearly $33 billion, but the breathtaking growth rates today are a source of concern, rather than cheer in Russia. Imports from China jumped more than 80 per cent this year, while Russian exports grew less than 10 per cent. As a result, Russia has run up a deficit of $4 billion, and the gap is fast growing — in the past few months, Chinese exports have been growing at 100 per cent year on year.

What worries Russian officials and economists even more is the changing pattern of bilateral commerce. While Russian exports are increasingly dominated by raw materials, China is expanding sales of manufactured goods and engineering products in Russia.

Energy resources account for half of the Russian exports to China, while the share of engineering exports dropped from 20 per cent several years ago to 2 per cent today. At the same time, over a third of all Chinese exports are electronic and engineering goods.

For example, Chinese car sales in Russia in the first six months of this year soared six-fold over the past year. Even though, in terms of numbers, Chinese cars still account for less than 3.5 per cent of the Russian market — 40,000 out of the 1.2 million cars sold in Russia during January-June — experts warn that soon Chinese autos will not only oust the cheaper Russian Lada cars, but also offer serious competition to the more expensive Western models.

Russia’s situation is by no means unique. The U.S., Europe, India and Australia have all been feeling the heat of China’s export-oriented economy. But the Chinese juggernaut poses a bigger threat to Russia than to many other countries. Russian industry is still recovering from the break-up of the Soviet Union and the painful transition from a centralised to a market economy, and is therefore highly vulnerable to competition from cheap Chinese imports. The 3,640-km common border is facilitating China’s conquest of the Russian market, with the economy of the Chinese frontier provinces singularly geared to meet the needs of the poorly developed Russian regions of Siberia and the Far-East.

Trade imbalances will top the agenda of Russian-Chinese talks when Chinese Premier Wen Jiabao visits Russia for economic talks this week. Moscow hopes to reduce its trade deficit with China by getting it to buy more engineering goods.

“The problem of raising Russian engineering exports to China will be a key item at the Second Russian-Chinese economic summit,” said Russian Ambassador to China Sergei Razov.

The envoy revealed that the two sides would set up a trade chamber for engineering and innovative products in an effort to improve the structure of bilateral trade.

However, officials doubt if such measures would be of much help.

Russia’s trade deficit “is a long-term trend that will define the development of bilateral trade in the foreseeable future,” said Russia’s trade envoy to China, Sergei Tsyplakov. “Chinese goods are far superior to most Russian brands in terms of price and quality.”

Experts said Chinese producers had unfair advantages on the Russian market, thanks to support from the government. According to Dr. Yuri Saakyan of the Institute of Natural Monopolies, the Chinese government offered exporters various tax breaks, subsidies, easy-term credits, reimbursement of research and development, as well as retooling costs.

“In China, government support for the export drive is equivalent to 7 per cent of the country’s GDP, whereas Russia spends just over 0.7 per cent of its GDP,” said Dr. Saakyan. “Government support, together with low labour costs and cheap land prices in China, makes it impossible for Russian producers to compete with Chinese companies.”

He called on the Russian government to deny the most favoured nation treatment to China.

Moscow may not be prepared to take such harsh measures, but is resorting to protectionism in selected sectors. Thus, it has baulked at letting Chinese auto manufacturers set up industrial assembly plants in Russia even as requests from a dozen Asian, European and American auto giants have been granted.

Experts are urging the Russian government to evolve a coherent strategy in dealing with the Chinese trade expansion. According to Dr. A.V. Kuznetsov of the respected Institute of World Economy and International Relations, the government should devise effective mechanisms to support Russian exporters, build transport and other infrastructure along the border with China, attract Chinese investment in processing of Russian resources on Russian territory, and encourage cooperative ties between producers and exporters in the two countries.

Time is running out for Russia to rectify the situation. When it joins the World Trade Organisation, which may happen in a year or two, it will have to slash customs duties on many imports. In the case of automobiles, tariffs will go down from 25 to 15 per cent.

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