On November 5-6, Chinese Prime Minister Wen Jiabao paid an official visit to Moscow, in the framework of regular consultations on the level of heads of governments. Despite numerous agreements signed, the talks, focused on economic issues, failed to produce an agreement in most important area – Russian oil exports to China. Nevertheless, for the very first time, the Chinese side appeared to be ready to make some economic concessions to Russia and open its machinery and high-tech market for Russian enterprises.

BACKGROUND: Russian-Chinese economic relations have grown significantly over the past few years. China has become Russia’s second largest trade partner after Germany. Bilateral trade in 2006 reached US$30 billion, accounting for 8 percent of Russia’s overall trade (and little more than 1 percent of China’s). Trade in first nine months of 2007 has already reached US$35 billion (which is 40 percent higher than in the same period in the previous year), and is expected to reach US$50 billion by the end of 2007. However, in August 2007, for the first time since early 1990s, Russia lost its surplus (US$3 billion in 2006) and is running a US$4 billion deficit. The main reason is the dynamics of Chinese exports, which in the first half of 2007 skyrocketed, growing by 80 percent.

From Russia’s point of view, the main problem in its economic relations with China is the present structure of Russian exports. It is dominated by natural resources: crude oil and oil products account for 54 percent, timber and its products for 12 percent. Machinery accounts only for 1.2 percent (in comparison with almost 30 percent in the early 2000s). Arms sales, which were another important part of Russian export to China, have also decreased – in 2006 the Chinese market accounted for 40 percent of Russian global arms exports, but less than 20 percent in 2007. Russia is unwilling to sell its most advanced weapons systems to China, and rejects proposals for joint manufacturing.

For China, the most pressing issue in economic relations with Moscow is to get access to Russian natural resources. At present, Russia is selling China relatively small quantities by rail. In order to increase imports of oil, Beijing needs an oil pipeline to northern China. In order to avoid dependency only on one buyer, Russia is building the East Siberia-Pacific Ocean (ESPO) pipeline to Nakhodka, and declares its readiness to supply China with a branch line to Daqing. However, Moscow and China still do not have a formal agreement with regard to such a pipeline. Additionally, in mid-2007, Gazprom representatives declared that gas pipelines to China, provisionally agreed in 2006 and planned for 2011, will be delayed by at least one year. Gazprom also blocks the sale of natural gas from the Sakhalin-1 project to China, claiming that it should supply the Russian internal market.

For Russia, the most pressing issue is to diversify the structure of its imports from China. On the eve of the Chinese Prime Minister’s visit, on November 5, an anonymous source in the Russian government was quoted by Itar-Tass to declare that Russia wants to overcome its trade deficit with China, but not at the price of increasing exports of natural resources.

IMPLICATIONS: During Prime Minister Wen Jiabao’s visit, seven inter-governmental agreements were signed, while state and private companies signed 15 contracts, valued at US$1.6 billion. Both sides decided to establish a Russian-Chinese chamber for commerce in machinery and high-tech products. China declared its willingness to buy ten Tu-204 cargo airplanes as well as passenger airplanes for its airlines. Russian Prime Minister Viktor Zubkov announced better conditions for Russian mobile phone operators in the Chinese market. Atomstroiexport concluded a principal agreement on cooperation with regard to the next two units in the Tianwan nuclear power plant. There was also an agreement on cooperation in the area of peaceful use of atomic energy.

Up until now, the principal bone of contention between Moscow and Beijing has remained the asymmetry in bilateral trade. Aiming at diversifying its exports, Moscow would like to make use of its ‘unprecedented political relations’ with Beijing and facilitate Russian enterprises’ access to the Chinese market, especially in the area of machinery and high-tech products. Russia is interested in the nuclear sector, aviation, an mobile communication. As China perceives both economies as complimentary, it has refused to grant special concessions to Russia, claiming that the Chinese market remains open for Russian enterprises.

The visit indicates a slight change in the Chinese attitude towards Moscow’s claims. Wen Jiabao declared China’s readiness to improve the trade structure, and announced that Russian enterprises could acquire bigger stakes in the Chinese market. The Chinese Foreign Minister, summing up Wen Jiabao’s journey on November 8, declared that China acknowledges the need to optimize its bilateral trade with Russia. This change of the Chinese position seems to be a consequence of Russia’s policy of blocking the increase in natural resources exports and slowing down the build-up of pipelines to China.

However, no decision was made during this visit with regard to the oil pipeline issue. Besides the issue of trade structure, Moscow and Beijing seem unable to agree on the price that China would pay for oil. As Russia treats its energy resources as the main tool of its influence over China, it seeks to raise the price before striking a deal. In case Russia obtains special preferences in the Chinese market, it could likely increase its oil exports. As far as gas pipelines and the export of natural gas are concerned, Russia is even more unwilling to supply the Chinese market.

CONCLUSIONS: Both states declare that they want the level of bilateral trade to reach Us$60-80 billion by 2010. The dynamic of Chinese exports per se is enough for achieving such a goal. Nevertheless, the most conflicting issue of present Russian-Chinese economic relations remains the structure of the trade. Beijing perceives Russia as a supplier of natural resources, and aims to increase its imports from the northern neighbor. For Moscow, limiting oil and gas exports to China is one of its key instruments to influence Beijing and achieve political and economic concessions. Wen Jiabao’s visit suggests that China is warming to the possibility of opening its market to Russian enterprises. That said, the lack of agreement on key economic issues may in the longer term seriously harm the strategic partnership between Russia and China.

AUTHOR’S BIO: Marcin Kaczmarski holds a Ph.D. in political science, and is an analyst in the Russian Department of the Center for Eastern Studies in Warsaw, Poland, and an academic assistant at the Institute of International Relations, Warsaw University. His research focuses on Russian foreign and security policy.