Written by Richard Lotspeich.

The behaviour of Great Powers often generates great interest. The reemergence of China onto the world stage, first as an economic powerhouse of international trade and now, under Xi Jinping, as a contender for geopolitical influence, is a prime example. Russia may not be on par with China with respect to either economic or political heft but nonetheless has a large economy with a substantial military and outsized influence on world energy markets. Although Moscow’s ability to exert influence is diminished compared to the Soviet era, Russia remains a significant force in world affairs.

Prima facie, one would expect a great deal of attention to be paid to the evolving integration of the countries’ economies. However, the interest paid is scant. Are the world’s journalists, diplomats and academics missing something? Or is economic integration between China and Russia less significant in world affairs than their individual status would suggest? This article argues that evidence supports the latter conclusion. At the same time, a long-range view of economic fundamentals points to potential economic integration that could result in a potent commercial and political alliance.

History

As the Russian empire expanded eastwards in the seventeenth century, it inevitably contacted the Chinese empire. Economic integration was not a goal of either, but modest trade flows between the countries did evolve, helped along by defining state relations and territories in the Treaty of Nerchinsk (1689). Since Russian interests were in northern latitudes of eastern Asia, well above the territory of the Chinese empire, the relationship was peaceable, but with each side holding suspicion of the other’s military and territorial ambitions.

In the late nineteenth century, Russia was among the European powers that took advantage of the weak condition of the Chinese state, occupying territory in Manchuria, including the city of Harbin, where one still finds significant evidence of Russian occupation. Completion of the trans-Siberian railroad represented the first industrial-era infrastructure linking the two countries. But trade and cross-border investment languished, as political crises in both empires forced an inward focus and the vast space between the main population and industrial centres presented a barrier to economic connections.

The communist revolution in China provided a political impetus that resulted in a short but very active period of economic cooperation between the new regimes under Stalin and Mao. Moscow sent specialists into China to work with the new government, and large numbers of Chinese were sent to Russian universities and institutes, who were trained in science, engineering and the emerging management techniques of operating a command economy. Underlying tension between the countries eventually led Mao to break with the Soviet Union. The extensive cadre of Soviet citizens working in China were abruptly called home, leaving numerous industrial projects in states of partial completion, including China’s nuclear weapons program. The political tensions of this break effectively sealed the border between the Soviet Union and China and obliterated economic exchanges. Much of the border became militarized, and minor skirmishes occurred along the Amur (Heilongjiang) River.

This isolation lasted until the late period of perestroika when Mikhail Gorbachev visited Beijing to promote reconciliation and re-opening of trade. As economic transition unfolded in both countries, territorial disputes were resolved, military tensions were reconciled, and the border was reopened to trade flows. Periodic exchanges of leaders repeated a mantra of promoting trade. In the first decade, there was relatively little international investment between the countries and very modest cross-border labour flows. Although these other avenues of economic integration have moved forward more recently, the economic connection between China and Russia remains predominantly one of trade.

Economic Fundamentals

China and Russia have a long border stretching from North Korea to Mongolia. The potential for economic integration supported by this border lies in the flow of natural resource products from Siberia and the Russian Far East into China, and possibly in the flow of Chinese workers into Russia. Localized trade along the border occurs, but the long distance to significant population centres prevents this from becoming a robust connection. A striking feature of the border region is the difference in population on the two sides. Density on the Chinese side is about twenty to forty times more than on the Russian, partly due to the western migration of Russian citizens during the first decade of transition, leaving the region even more sparsely populated than it was in the late Soviet period. Although there has been a movement of labour from China into Russia in the border region and further north, this has been modest and predominantly short-term. Culture and politics play significant roles in cross-border labour flows, and the historical tensions between the two countries have prevented this source of integration from developing very far.

Russia is rich in natural resources, and China is a ravenous consumer of them. This is the predominant feature of the economic relationship, both what has emerged since Gorbachev’s visit in 1989 and in the potential for further development. Forestry products are important in trade, and China imports agricultural products from Russian regions close to the border, such as soybeans grown in the Amur Oblast. Yet Russian energy exports to China (petroleum, both crude and refined, natural gas and electricity) dominate the trading relationship. In the early years, petroleum was delivered by railroad into China. More recently Russia has constructed pipelines eastward for exporting crude oil and natural gas. Energy trade will be a central feature of the Chinese-Russian economic connection for the foreseeable future.

Russia has also offered China favourable terms on certain classes of highly engineered manufactures, such as vehicles and military equipment. In the first decade of economic transition, Russia’s military-industrial complex was extremely stressed and looked abroad to find sales opportunities. China became a huge importer of Russian military hardware, with the annual volume measured in the low billions of dollars. This value indicator is a special unit of account developed by the Stockholm International Peace Research Institute (SIPRI), what the Institute calls a Trend Indicator Value. It is roughly equivalent to the U.S. dollar. Armaments exported from Russia to China constituted as much as 32% of the total of all Chinese imports from Russia, as much as 97% of all Chinese armaments imports and as much as 56% of the total of all Russian arms exports.  Since 2005 these exports have declined, falling below $1 billion after 2009 and down to $643 million in 2016.

A third area of integration, after labour flows and trade, is investment, especially foreign direct investment (FDI). Through the 1990s very little FDI occurred between the countries, as both were largely recipients of FDI. Moreover, political and cultural features diminished prospects. This has changed in recent years with significant outward FDI from China, including into Russia. The main interest of China has been in natural resource projects, with the intention of exporting product to the home country.

Culture and Politics

Economic fundamentals rarely determine international economic relationships without influence from cultural and political features. In the case of China and Russia, this influence is perhaps stronger than other instances of bilateral relations. Both nations are governed by hierarchical administrations with distinct authoritarian streaks. Although centralized authority could facilitate forging of economic bonds, such a political structure can also stymie attempts by individual firms and lower level governments to seek economic opportunity abroad. Coupling this with the historic mutual apprehension of the two states, it is not surprising that favourable economic fundamentals have not led to more extensive integration of the two economies.

Striking examples of centralized influence were manifested in China’s early communist period when the Soviet Union’s energetic attempt at integrating two planned economies was followed by an abrupt end to all cooperation and a sealing of the border. In the transition era, central authorities have used a lighter touch, which has allowed increasing trade in the border region and the coastal provinces of the Russian Far East.  But the influence of central governments is still quite evident in the construction of pipelines for hydrocarbons, FDI and the armaments trade. Particularly in these three domains of integration, a changing political landscape has exerted significant influence on both the quality and volume of exchanges. The sanctions imposed by the United States and its allies on Russia following the expropriation of Crimea and invasion of the Don Bas drove Russia closer to China both for export markets and as a source of international finance. The reduction of mutual suspicion has led to less resistance within Russia to the export of technologically sophisticated weapons to China. If the current détente continues and deepens, we should expect to see further integration, especially through FDI.

Yet cultural influences might present a countervailing force against integration. I see two main aspects of this dimension:  Russians’ predilection toward xenophobia and the extensive corruption that pervades social systems in both countries.

International labour migration responds to a variety of influences, including relative earning opportunities at home and abroad, the cost of relocation, difficulties encountered in making border crossings, and the extent of cultural affinity in a potential migrant’s destination country. Russian citizens do seek economic opportunities in China, but the predominant potential lies in Chinese citizens moving into Eastern Siberia and the Russian Far East. As a rule, Russian locals, including local governments, have not been welcoming of Chinese moving into their territories. The historical presence of Chinese north of the Amur River and the wide disparity in population density evoke fear among many Russians that migration, if left unchecked, might eventually result in a loss of territory to China. Yet this is unlikely. Chinese citizens in the border regions do not currently see Russia as a source of opportunity beyond engaging in local commerce. Moreover, as Chinese labour productivity grows and the surplus supply of rural labour is diminished, opportunities that workers face at home are increasingly attractive – thus diminishing further the incentives to cross the border into Russia.

Corruption in the societies influences economic integration in at least a few ways. One is tied to export of consumer goods from China to Russia, which is the commodity class that dominates this flow. While many Russians willingly buy Chinese products, there is a suspicion that Chinese products are defective or impure because regulations on quality are not effectively enforced. This is not a reciprocal concern because the flow of consumer goods from Russia to China is insignificant, and it is easier to monitor the quality of natural resource products that dominate exports from Russia to China.

The impact of corruption on FDI is more significant. Investors in both directions require assurances that assets acquired across the border will be protected and that related contracts will be honoured.  Although entrepreneurs in both countries have learned to navigate corruption, skills that work in one country do not necessarily apply in the other.  Effectively, deficient Rule of Law significantly raises transaction costs associated with investments, which dissuades FDI that could potentially provide gains to parties on both sides of the border. Here again, the economic fundamentals, with Chinese firms possessing financial capital available for foreign acquisitions and the Russian economy in need of foreign investment, suggest a great potential for integration that is not actualized because of the challenge of meeting Chinese investors’ needs for reasonable levels of risk.

Developments to Watch      

Integration of the Chinese and Russian economies has come a long way since reopening of the border in 1989, but there is potential for more trade and more international investment. So if the recent cooperative direction of relations between Beijing and Moscow continues, economic fundamentals will drive integration deeper and broader. Yet this will likely be hindered by the tough problem of corruption. The prospects for labour migration are modest unless significant and unexpected developments shift the relative attractiveness of cross-border job prospects.

While Russia’s comparative advantage in natural resources vis-à-vis China will persist, the Russian advantage in engineering products has deteriorated as China raised its technological sophistication in numerous areas, including transportation equipment and military hardware. As it did with automobiles, China has played its importation of military equipment into a source of technology to raise the sophistication of its domestic production. Indeed, China has emerged as an exporter of military gear to other countries. Yet Russia still has more advanced military technology to offer China, and trade in armaments will likely persist if the political environment remains favourable.

Russia has not been deeply engaged in China’s broad infrastructure initiative across Asia, the Belt and Road Initiative, but that could change with improved state relations. Emerging climatic conditions in the Arctic present prospects for cooperation between China and Russia in new sea–lanes connecting Asia to Europe, what Xi Jinping has called an “Ice Silk Road.” China is actively pursuing interests in the Arctic, having joined the Arctic Council as an observer in 2013. Expect cooperative developments between China and Russia in the far north.

Richard Lotspeich is Professor of Economics at Xi’an International University and Indiana State University. Image Credit: CC by Wikipedia Commons.