How trade developed between Russia and China in 2023
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Over the past two years, China has become an obvious and often uncontested partner for the Russian economy amid the loss of Western markets. However, the surge in mutual trade in 2023 risks being a harbinger of stagnation: the possibilities for a significant increase in exports are close to exhaustion, and the growth of imports is beginning to conflict with the interests of Russian industry. Moreover, a number of critical positions cannot be bought in China anyway.
This year, trade turnover between Russia and China has almost doubled, exceeding $200 billion. As a result, not only Beijing has strengthened its position as Moscow’s main trading partner, but Russia has also become the sixth largest market for China after the EU, USA, Japan, South Korea and Taiwan. Russian President Vladimir Putin said in March that Russian-Chinese cooperation has “truly limitless opportunities and prospects.” But after almost two years of intensive interaction with China, Russian business is beginning to understand that this direction has its limitations, in some cases difficult to overcome.
Trading logic
The main advantage of China over all other trading partners available to Russia, in addition to the scale of the market, was its surprisingly balanced export-import structure. Russian exports to China in 2023 reached approximately $110 billion with imports of about $100 billion. This made it possible to transfer almost all payments into yuan and rubles, since both sides need these currencies to pay for operations, which radically reduced the impact of sanctions on trade relations .
For comparison: Russia doubled its trade with India in January-October 2023, to $55 billion, but almost 95% of this was Russian exports, mainly oil. Accordingly, Russian companies are not ready to accept payments in rupees, because they have nothing to spend them on, and Indian companies have nowhere to get rubles.
However, the growth potential of Russian exports to China, which mainly consists of raw materials and, above all, energy goods, is close to exhaustion in the near future. If for Urals oil exporters supplies to China are simply less profitable than to India or Turkey, then for steel and aluminum producers this year they were often simply unprofitable. The situation is similar for wood, where expensive logistics and low prices on the Chinese market destroy exporters’ margins, which is why supplies to China will grow by only 3% by the end of the year.
To give a new impetus to exports, joint projects and the signing of new large contracts are necessary, but Chinese companies are in no hurry to do this, preferring to maintain a purely trade logic of relations.
The most striking illustration of this approach is the delay in negotiations on the Power of Siberia-2 gas pipeline, which will pass through Mongolia. At first, hopes that the contract would be signed were pinned on Xi Jinping’s visit to Moscow in March, then on Vladimir Putin’s return visit to Beijing in October, and then on Prime Minister Mikhail Mishustin’s visit to China on December 18. Following the results, Deputy Prime Minister Alexander Novak once again said that during the negotiations the parties “emphasized the importance of reaching agreements as quickly as possible.”
The main obstacle to concluding a contract is China’s desire to reduce the cost of gas as much as possible.
The Chinese side understands that Gazprom urgently needs to find a market for its gas from Western Siberia, while China has other supply options, including LNG.
A number of Kommersant’s interlocutors in government and business note that under the conditions of sanctions, Chinese companies have only confirmed their reputation as tough and uncompromising negotiators. “The Chinese want everything, preferably for free,” notes one of them.
Not what you need
If the reorientation of exports to China mainly occurred in 2022, then it was in 2023 that import opportunities were fully revealed. Its volume more than doubled at the end of the year. The most important item was cars and components: Russian automakers were generally successful in finding Chinese suppliers, sometimes they managed to get complete copies of Western components under a different name.
The main difficulty here is the need to re-pass all the tests of the finished car. Imports of cars from China have increased significantly, since Chinese automakers, due to the huge capacity of the domestic market, can offer attractive prices relative to their poorly scalable Russian counterparts. The situation is similar in developments: Russian players, due to the small scale of the market, cannot afford to invest in the creation of new platforms, but now they use Chinese ones instead of Western donor models.
At the same time, the approaches of the Chinese auto business, especially teams that have not previously worked for export, differ from Western ones. Sometimes this helps: finished cars were sold to Russian importers directly from factories in China, which greatly facilitated parallel imports and lowered prices. But the requirements for the quality of components and especially for after-sales service of cars are still very different from what Russian automakers and distributors are used to.
In some sectors, Chinese industrial goods have become absolutely no alternative.
This happened in the market for gas piston power plants: after the departure of Western suppliers, the industry was forced to switch to Chinese brands that were previously of no interest to anyone. The Chinese immediately took advantage of the situation and raised prices to the level of European brands, although in terms of technical indicators they do not reach them. But gradually competition began to develop between Chinese players, which strengthened the position of Russian buyers.
The Russian Federation hoped for help from the PRC in the sector of high-power gas turbines, which are urgently needed by power engineers. But practice has shown that the Chinese do not have proven cars that could replace Western brands. The only development AGT-110 from AECC Gas Turbine, being considered for thermal power plants in Yakutia, has not yet been in commercial operation.
Negotiations on attracting Chinese suppliers to wind generation projects are going on with difficulty – Forward Energo (owned by the Finnish Fortum, managed by the Federal Property Management Agency), Rosatom and Power Machines have been conducting them for two years now.
It turned out that the Chinese are ready to talk for a long time and find out the details, but very quickly refuse cooperation due to the slightest risks. Chinese companies are considered one of the leaders in the field of renewable energy sources, but the current volume of the Russian market of 2 GW is tiny for them.
You can’t give in
While most of the Russian mechanical engineering industry seeks to find a replacement for Western suppliers in China, and many do, some industries are already sounding the alarm and want to limit or ban supplies from China. For example, in the railway engineering industry, the entire certification system is set up to protect the Russian market, says one of Kommersant’s interlocutors: you cannot simply buy a unit of rolling stock in China and import it into the Russian Federation.
This situation should be maintained, Kommersant’s source is sure, otherwise the situation of the mid-2010s will be repeated, when the market was flooded with Chinese parts of dubious quality, and Russian factories were operating at half capacity. Now there is a shortage of wagons, their cost has risen sharply. “However, under no circumstances should we give in, otherwise our factories will take a begging position in order to overcome the momentary shortage,” says Kommersant’s interlocutor. “We will write off several thousand cars from the future production of Russian enterprises. The SVO will end, people will need to be occupied with civilian products, and that day is not far off.”
The situation would be different if China were not so developed in terms of railway production, but the industry of both countries is at its best, says another Kommersant interlocutor. Thus, one of the problematic parts—cassette bearings, the availability of which dropped sharply in 2022 due to the departure of all three main foreign partners from the Russian market—had been largely resolved by the fall of this year. By September, our own production covered 82% of the Russian Federation’s needs, although bearings continue to be imported en masse from China. The EEC, while maintaining duties on Chinese supplies, noted that Russian manufacturers have localized everything except rollers and lubricants, which they plan to do by the summer of 2024.
According to one of Kommersant’s interlocutors, cooperation with China in the field of purchasing components, which are also produced there under a foreign license, can bring unpleasant surprises.
He talks about an attempt to purchase in China critically needed components for railway engineering, which both here and in China were produced by joint ventures with the participation of the same manufacturer from an unfriendly country. The approved parts for the Russian and Chinese markets are different, so it was not possible to purchase the Chinese version. And the foreign partner stopped the attempts of the Chinese joint venture to manufacture a part according to Russian drawings. However, another Kommersant interlocutor says that such situations are almost always surmountable, since most licensed production facilities in China have an enterprise “across the fence” that “offers a similar product, but with a different name.”
Over the past two years, China has become a market for Russian exporters and importers that has allowed them to survive. However, as companies begin to think about the transition to more sustainable development, few of them want to increase the scale of these connections. For most exporters, they are the least marginal, and the continuation of a sharp increase in imports is increasingly in conflict with the position of the industry lobby and Russian industrial policy. The solution could be a higher degree of integration and the creation of joint ventures with Chinese companies. But, although Russian officials talk about the correctness of this path, Chinese business in practice has not yet sought to follow it.
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