Geneva Business School    

     

 The economic relations between Russia and China

   

   

     

Essay          

Name: Aidar Nuraliyev

Submission date: 10/01/2015

Word count: 5526

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Table of contents

Section 1: Introduction .........................................................................................................................3

Section 2: The trade dynamics of Sino-Russian relations.…………………………...……...….…..3

2.1. Sino-Russian trade relations in 2015…………………………….........................……………4

2.2. SWOT analysis of Russia and China…………………………………….……….…..……….4

2.3. Analyzing SWOT factors and their impact on the Sino-Russian relations……………………8

2.3.1. Russia’s energy resources and Chinese consumption…………………...….…………..8

2.3.2. Russian market, Chinese investments, the competitiveness of the Russian and

Chinese producers and manufacturers…………….………………………..……………..……10

2.3.3. Cheap labor force in China………………………………..…………….………………..11

2.3.4. Export from China to Europe via Russia…………………………..………..………….11

2.3.5 Chinese market…………………………………..………………..……..………………….12

Section 3: Sino-Russian relations in the period of Globalization...................................................13

3.1. Sino-Russian relations and political side of globalization………………………...………...13

3.2. Sino-Russian relations and economic side of globalization. WTO…………..….…….……14

3.3. The role of United States in Sino-Russian relations…………………..………...…………..15

Section 4: Major economic crises and Chinese policy.....................................................................16

Section 5: The impact of falling oil price on the oil and gas projects jointly implemented by

Russia and China................................................................................................................................18

Section 6: Conclusion ........................................................................................................................20

References .................................................................................................................................…..…22

           

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1. Introduction

Economic relations between Russia and China should be regarded to difficult relations, the

development of which was related to overcoming many problems hindering the establishment of

effective relations between the two countries. Ultimately, the countries agreed on the need for

trusting partnership aimed at strategic interaction and co-development. The foundation of a

partnership was the Treaty of Good-Neighborliness, Friendship and Cooperation between Russia

and China, signed in July 2001 for 20 years (Chudodeev, 2013).

Currently, trade between Russia and China becomes an important independent significance. Both

countries have demonstrated a far more vivid interest in enhancing and developing their economic

relations (Hsu and Soong, 2014).

This paper starts with description of the trade dynamics between Russia and China followed by

providing SWOT analysis of these countries. The founded SWOT factors will be analyzed in terms

of their impact on the Sino-Russian relations. The next section will discuss to what extent the

current relations are influenced by the globalization and the hegemony of the United States. The

major economic crises in the last 20 years, such as subprime mortgage crisis, tech-bubble crisis, and

the Thai currency crisis, will be discussed, including how China has managed to overcome them,

continuing its high economic growth. Finally, the last section will illustrate the impact of falling oil

price on the oil and gas projects jointly implemented by Russia and China; additionally, the role of

currency devaluation in the trade relations will be briefly presented.

2. The trade dynamics of Sino-Russian relations in 1995-2014 (see Table 1)

Trade is the major feature of economic cooperation between Russia and China. Since the signed

Treaty in 2001, the trade dynamics of Sino-Russian relations have been positive. While in 2000

trade exchange between both countries amounted to $6.2 billion, in 2008 this rose to almost $56

billion. However, in 2009 the value of Sino-Russian trade dropped to $39.5 dollars due to the global

financial crisis. Nonetheless, the development of trade relations between the two countries regained

its positive dynamic in the next year, reaching almost $60 billion of bilateral trade exchange.

Subsequent years the bilateral exchange continued on an upward trend reaching almost $90 billion

in 2014 (Federal State Statistics Service, 2015).

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Table 1. Trade between Russia and China in 1995-2014

(adapted: Federal State Statistics Service, 2015) $ billion

2000 2005 2008 2009 2010 2011 2012 2013 2014

Trade 6.2 20.3 55.9 39.5 59.3 83.2 87.3 88.8 88.4

Export to China 5.2 13 21.1 16.7 20.3 35 35.7 35.6 37.5

Import from

China

1 7.3 34.8 22.8 39 48.2 51.6 53.2 50.9

2.1. Sino-Russian trade relations in 2015

Russia President Vladimir Putin hopes that Sino-Russian trade will increase to $200 billion by 2020

(Sonne and Marson, 2015; Maslov and Karpov, 2015). However, in 2015, trade relations feel the

record fall (Burrows and Manning, 2015). According to the Russian Ministry of Economic

Development (2015), the trade turnover between January and September has amounted to $50

billion (-29%), including: Russia's exports to China - $24.8 billion (-20%), imports from China -

$25.2 billion (-36%). Hence, there is a need to analyze and understand the major reasons for the

slowdown of bilateral trade.

According to experts, there are many reasons for the decrease in the Sino-Russian trade relations,

such as the drop of world demand, the price fall of energy resources, sanctions against Russia,

currency devaluation in both countries etc. However, there is a need to find more system problems

related to relations between Moscow and Beijing.

2.2. SWOT analysis of Russia and China

S-strengths, W-weaknesses, O-opportunities, T-threats Russia China

S RS1. Big market (territory and population).

Russia's population is nearly 150 million people (9th

in the world), the area of 17 million square kilometers

(1st in the world) (Wikipedia, 2015).

RS2. Significant number of commodities, especially

oil and gas resources.

According to BP (2015), Russia controls 6% of world

oil reserves (6th place) and almost 30% of gas (1st

place).

CS1. Enormous market (territory and population).

China's population amounts to 1.36 billion people (1st

in the world), the territory of 9.6 million square

kilometers (3rd in the world) (Wikipedia, 2015a).

CS2. Rapid economic growth

The GDP in China amounted to 10,4 trillion US dollars

in 2014 (2nd in the world). The GDP value of China

represents 17 percent of the world economy. For 35

years, the GDP of the country increased by 48 times

with an average 9% growth every year (Trading

economics, 2015)

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Russia China

S RS3. Emerging of middle-class

In 2013, the Russian middle class constituted 104

million people that are 70 percent of the population

(Slastin, 2013).

CS3. Coastline potential

15,000 km of coastline in order to use the marine and

fishing potential. A large number of ice-free ports on

the Pacific. 1.5 million square kilometers of land

located less than 100 km from the coast, with good

transport interchange, an abundance of water resources

(Smith, 2014).

CS4. Significant amount of cheap labor force

The majority of the Chinese population has a meager

income due to high competitiveness and poverty. This

allows China to have an advantage in labor costs

(Smith, 2014).

CS5. Huge monetary reserves looking for

investments

The Government and the private sector in China have a

significant amount of monetary reserves (1st in the

world), aimed at investments in various projects

(Chudodeev, 2013).

W RW1. Low level of competitiveness in

manufactured sectors

According to the Global Competitiveness Report

2015-2016 (2015), Russia is ranked 45th place among

140 countries.

RW2. Low transport infrastructure

Russia's transport infrastructure has a relatively low

level of development in contrast to the European

countries. Russia's economy due to poor transport

infrastructure annually loses 3% of GDP (PAEI,

2013).

RW3. High level of corruption and excessive

bureaucracy.

Transparency International (2014) has defined Russia

only in 136th position among 176 countries in terms of

the corruption perceptions. Also, Russia ranked 51st

place in the Doing Business ranking (World Bank

Group, 2015).

CW1. High population (consumption)

Population is excessive, which in turn causes the

greatest global consumption (Smith, 2014).

CW2. High level of poverty

The average monthly salary in China equals $725,

however, it can not be taken as a real figure, as there

are many multimillionaires and a lot of people earning

very little: in 2013, about the half of population lived

on less than $5 a day (Smith, 2014).

CW3. Pollution

China most in the world produces CO2 emissions,

which causes desertification in some regions and health

problems of people. Environmental pollution has

reduced the quality of water 60% of which is

undrinkable (Smith, 2014).

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Russia China

W RW4. High degree of political impact on the

market development

Unlike most countries, the Russian market is

dominated by large state-owned companies and

enterprises (Gref, 2011).

RW5. High spending on national defense and

security

In 2015, the expenses of National defense, security

and law enforcement have been constituted over half

of the whole federal expenses (Ministry of Finance of

Russian Federation, 2015).

RW6. Weak integration with European union.

During the last years, the efficient partnership between

Russia and EU is facing many economic and cultural

factors that are currently extremely difficult to be

solved on mutually beneficial conditions.

CW4. Human rights

Human rights in China are seen by most Western

countries and human rights organizations as the most

problematic.

CW5. High Corruption and low condition for

business development.

According to Transparency International (2014), China

is in 100th position in the corruption perceptions.

World Bank (2015) has ranked China in 84th place in

terms of doing business in the country.

O RO1. Europe and Asia

Russia has a good potential of being the key player in

bridging the gap between European and Asian

countries due to its location

RO2. Uncovered sectors

There are many uncovered sectors of the market in the

country, which means there are a lot of profitable

projects.

CO1. Integration with Southeast Asia countries

China may provide effective integration with Southeast

Asia countries (600 million people) with a combined

GDP of $2.4 trillion (Forbes Kz, 2015).

CO2. Savings on labor cost

Poor living conditions of the Chinese population have

prepared people to believe that the work in a foreign

factory is a great opportunity, even with a very intense

work schedule and low-wage (Smith, 2014).

CO3. The authority of government

One-party communist state system controls the

working people through the authorized trade union, and

therefore there is a low risk for investors to face

problems with trade unions as in other countries, such

as Mexico or Brazil (Smith, 2014).

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Russia China

T RT1. Dependence on oil and gas price

High dependence on oil and gas price leads the

country to periodical financial instability. Falling of oil

and other commodities prices are interdependent

(Bloomberg Business, 2015)

RT2. Russian forces presence in Syria

Russian military campaign in Syria may be prolonged

for an indefinite period in the conflict zone, which

may negatively reflect on development for Russian

economy.

CT1. Dependence on external demand.

Global crises that occurred in 2008 and 2015 have

negatively affected China's economic growth, since its

economy is highly dependent on exports (Losev, 2015).

CT2. Perceptions of China's policy in other

countries

The world's major powers have prepared a number of

reasons (human rights, labor conditions, democracy,

censorship, ecology, etc.) for which, when required,

will be a ban on the export, as well as on the import of

Chinese products (Smith, 2014).

CT3. High level of poverty (social inequality) can

lead to instability in the country.

Domestic market has a low purchasing power.

Employees see the goods produced by them, but they

are not able to buy them. The feeling of frustration is

being generated among workers that can be a very

risky factor in maintaining stability (Losev, 2015).

CT4. Population aging

The population of China is converted into elderly

population, mainly due to the policy of one child and to

the increase of life expectancy. It is likely that in the

long-term perspective, the responsibility of many old

people will fall on the shoulders of the youth that will

constitute numerical minority (Chudodeev, 2013).

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2.3. Analyzing mentioned SWOT factors and their impact on the Sino-Russian relations1

2.3.1. Russia’s energy resources and Chinese consumption

Russia has significant number of oil and gas resources, and with the world economy dependent on

carbon fuels, Russia is in an important position (RS2), which complements China’s increasing

energy needs (Economy, 2011; Ericson, 2012). According to Biersack and O’Lear (2015) more than

50% of Russia’s government revenue at the state level is from oil and gas, whereas China’s oil

consumption has been increasing in recent years (see image 1) and accounted for one-third of total

world consumption in 2013; and its natural gas consumption is expected to more than double by

2020 (CS1; CW1).

Development and increase of oil and gas supplies from Russia to China provides benefits to both

countries (Hsu and Soong, 2014). For Russia, it is new strategic and perspective Asian markets

(CO1), the modernization of economy in the regions with Chinese investments (CS5), the

advantage in negotiations on the prices of resources with European consumers. For China, it is a

safe and secure supply of resources (CW1), the development of the north-eastern regions of the

country, the transition to a clean energy - from coal to natural gas (CW3) (Ivanov et al., 2015).

Image 1. China’s Oil production and consumption in 1980-2014 (Source: Cunningham, 2015)

                                                                                                               1  It should be noted that all SWOT factor have been marked with abbreviations and numbers like 'CS1' or 'RW2. For example, CS1 means 'China's Strength 1' and RW2 means 'Russia's Weaknesses 2' respectively. Analysis includes these abbreviations and numbers in order to navigate the reader what type of strength, weakness, opportunity or threat is used in the analysis.  

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Cunningham provides (2015) that the vast majority of China’s oil import comes from the Middle

East and Africa (see image 2). Consequently, some experts consider China has many alternatives in

oil suppliers. However, more than half of China's oil supply comes from unstable regions of the

Middle East and Africa (Chudodeev, 2013; Hsu and Soong, 2014). For example, in 2011, South

Sudan supplied China with 260 thousands barrels of oil per day. That number shrunk to zero the

following year due to the outbreak of violence. China also lost oil supplies from Libya due to the

civil war (Cunningham, 2015). Moreover, Abdelal et al. (2015) see deepening reliance on Middle

Eastern oil may intensify China’s susceptibility to the US foreign policy. It can be said that the

United States controls the sea-lanes between China and the Middle Eastern producers. Hence, there

is risk for China to be threatened in case of conflict (CT2). Thus, diversification and activation of

Russian energy sources supplies have particular importance to Chinese energy security.

Image 2. China’s oil suppliers (Source: Cunningham, 2015)

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2.3.2. Russian market, Chinese investments, the competitiveness of the Russian and Chinese

producers and manufacturers

In addition to the mentioned substantial amount of natural resources (RS2), many world

corporations consider Russia as an attractive market via its high population (RS1) and many

uncovered sectors of the market (RO2). Furthermore, 70% of the Russian population is regarded to

middle class with relatively good incomes (RS3). Russian tourists spent over $50 billion abroad in

2014, taking the 5th position in the world ahead of France, Canada and Italy (Luxton, 2015). These

factors illustrate opportunities in Russian market for efficient business development.

At the same time, Russia needs large-scale investments that cannot be provided by the state or by

domestic companies (Gref, 2011). China is seen by Russia as a major investor for the next decade

(Ivanov et al., 2015). Xi Jinping stated that within 10 years China is going to send to foreign

investment and the support of their companies abroad $1.25 trillion (CS5) (Losev, 2015; RBK

news, 2015).

However, although there is a high attractiveness of the Russian market, the investments of China to

Russia has insufficient fraction (2.4%) among all outward investments of the country (see table 2)

amounted to $21 billion within 10 years. For example, investments in US within 2 years (2013-

2014) amounted to more than $22 billion. According to RBK news (2015), in 2014, China invested

in British and Italian economics $5.1 billion (+34%) and $3.5 billion (+41%) respectively, whereas,

the amount of Chinese investment in Russia was $3.2 billion (-36%).

Table 2. China’s outward direct investments in 2005-2014

(adapted: The Heritage Foundation, 2015) $ billion

Country Investments Country Investments

1. United States 72 6. United Kingdom 23.6

2. Australia 61 7. Kazakhstan 23.5

3. Canada 39 8. Russia 20.9

4. Brazil 31 9. Nigeria 20.7

5. Indonesia 30 10. Saudi Arabia 19.5

 

On the one hand, low proportion of Chinese investments and reduction of investments in 2014 are

due to reduction in price and demand for energy, on the other hand, these factors have been caused

by system problems, such as high level of corruption and excessive bureaucracy (RW3).

Transparency International (2014) has defined Russia only in 136th position among 176 countries

in terms of the corruption perceptions. Also, Russia ranked 51st place in the Doing Business

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ranking (World Bank Group, 2015) and 81st place in observance of property rights (The

International Property Rights Index, 2015).

Another important reason for the low Chinese investment activity in Russia is the low

competitiveness of Russian companies on the world market (RW1). This factor is also the reason

for the slowdown of bilateral trade (mentioned in section 2.1), which is confirmed by the

commodity nature (oil and gas) of Russia exports to China, accounting for 75% of the overall

export. Russia's manufactured companies are unable to compete with Chinese counterparts (Maslov

and Karpov, 2015). In terms of technical and economic characteristics of manufacturing, China has

reached to the level of developed countries (Ivanov et al., 2015), which allowed the country to

provide large-scale technology and engineering products in many countries (RBK news, 2015).

According to the Global Innovation Index, in 2014, China is in 29th position, whereas Russia at

49th position (Ivanov et al., 2015). Thus, currently the demand for the Russian manufactured

production can be considered as very low in China.

Gref (2011) considers that low competitiveness of Russia's manufactured companies is due to high

degree of political impact on the development of the market (RW4). Unlike most countries, the

Russian market is dominated by large state-owned companies and enterprises, which, in turn,

negatively influence the market environment. Moreover, there is a high state spending on national

defense and security (RW5). In 2015, the expenses of National defense, security and law

enforcement have been constituted over half of the whole federal expenses (Ministry of Finance of

Russian Federation, 2015). Some proportion of this money could be used for the development of

doing business in country.

2.3.3. Cheap labor force in China

High population (CW1) and poverty (CW2) in China have caused the significant amount of cheap

labor force (CS4) in the country. Involvement of Chinese labor force can generate the development

of competitiveness in Russia (Ivanov et al., 2015). However, Russians fear that declining population

in the Far East together with massive Chinese immigration may lead to a long-term Chinese

occupation and perhaps annexation of large parts of eastern Russia (Hsu and Soong, 2014).

2.3.4. Export from China to Europe via Russia

Russia has a good potential to help China in bridging the gap with Europe due to its location (RO1).

However, inadequate infrastructure (RW2) in Russia can become a serious barrier for the

development of this opportunity (Ivanov et al., 2015). Another important issue is a weak integration

between Russia and European union (RW6). Ukrainian crises has showed that trade and economic

relations between Russia and European union is not yet evolved into a true strategic partnership.

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According to experts, the sanctions were one of the major causes of the financial crisis in Russia

(The Voice of America, 2014). Hence, China is cautious about supplying its export to Europe via

Russia to avoid problems at the Russia-EU borders.

2.3.5. Chinese market

From the perspective of Chinese market, the country is the most populated in the world (CS1). The

majority of the Chinese population has a meager income. This leads to the fact that the workers

consider a foreign factory as a great opportunity, even with a very intense work schedule and low-

wage (CO2). Also, there is a low risk for investors to face problems with trade unions as in other

countries (CO3). The marine and fishing potential and significant number of ice-free ports on the

Pacific provide investors good opportunities to find different business projects in the Southeast

coastline of China (CS3) (Smith, 2014). Moreover, according to Forbes (2015), China can be seen

as a connection with Southeast Asia countries that constitute $2.4 trillion of GDP (CO1).

However, at present, there are three business zones in China, regulating foreign investment (see

Table 3).

Table 3. Business zones for foreign investment in China

(Adapted: Maslov and Karpov, 2015)

Description Requirements

Business zone 1 The zone is opened to all kinds of foreign capital.

There can be financial exemptions for foreigners.

The minimum capital

of the company must

be $150-200 thousand. Business zone 2 Restricted zone, only allowing the creation of joint

enterprises with China.

Business zone 3 The forbidden zone for foreign capital (the military

sector, the production of Chinese medicine drugs,

genetically modified foods, etc.).

-

As table shows, there is a high barrier to get into 1 and 2 zones. Especially, it prevents a small

Russian companies to enter the Chinese market, although they could easily meet the demands of

China in some technological fields (Maslov and Karpov, 2015).

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3. Sino-Russian relations in the period of Globalization

One of the most important developments of modern economic system is globalization, which often

refers to countries and their economies become more integrated. On the one hand, globalization

influence the international trade and finance to be progressed towards efficiency and openness; on

the other hand, it makes major contributions by offering greater economies of scale due to an

enlargement of the effective market size (Zhang, 2014; Lee et al., 2015). Globalization can be

viewed within the political and economic contexts.

3.1. Sino-Russian relations and political side of globalization

Both countries are quite dynamically promoting their integration policies at the regional level.

China launched negotiations on the Regional Comprehensive Economic Partnership - RCEP (see

image 5), at the same time Russia implements a number of economic polices to unify the

neighbours under the Eurasian Economic Community - EAEC (see image 6). The scope of these

organizations is considerably different. The RCEP covers 16 countries with 3.4 billion people and

22% of global GDP (Meirmanov, 2015), whereas EAEC consists of 6 countries with 0.2 billion

people and 3% of global GDP.

Image 5. Regional Comprehensive Economic Partnership (Source: China Briefing, 2012)

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Image 6. The Eurasian Economic Union map (Source: EAEC, 2015)

Both Russia and China are the members of BRICS countries and Shanghai Cooperation

Organization, where meetings between high-level officials are frequent. Generally, many experts

give great value on the work of these organizations in the promoting of political and economic

dialogue between the two countries.

3.2. Sino-Russian relations and economic side of globalization. World Trade Organization

(WTO)

WTO can be seen as major economic representation of globalization, where both countries are full

members. In general, there are great incentives for the Russian and Chinese companies to improve

their performance, quality and competitiveness. The terms and conditions of WTO allow companies

to enter the international market and open branches abroad, which may provide a good impetus to

the economic development of both countries (Korneychuk and Nretyak, 2013).

However, WTO can have negative consequences. For example, the benefits are unequally

distributed: a substantial part of the benefits goes to industrialized countries, while developing

nations are forced to deal with the many challenges of WTO (EAG, 2015). Consequently, many

studies have emphasized the positive effects of WTO towards China economy due to its huge size

and rapid economic growth. (Golley, 2002; Gao, 2004; Lee et al., 2015). Thus, from the perspective

of the Sino-Russian relations, WTO is beneficial primarily to China.

Russia should reduce tariffs on some commodities based on relevant WTO principles and rules,

which is extremely beneficial for expanding China’s exports to Russia (Yin, 2013). The emergence

of a large number of Chinese products in Russian market can cause serious risks for Russian

producers. The low competitiveness of Russian goods may be overcoming, but its implementation

for small and medium companies can be very challengeable (EAG, 2015). Otherwise, it could lead

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to the collapse of many Russian companies (Korneychuk and Nretyak, 2013), contributing to the

high level of unemployment among the local population (Kabakov, 2013).

3.3. The role of the United States in Sino-Russian relations

American impact on Sino-Russian relations has gradually increased in the last years. Primarily,

although both countries now tend to cooperate at the international level, and in some cases share

similar goals or even the same position on international issues (Hsu and Soong, 2014), there is a

need to understand that United States is more important partner for China than the Russia. For

example, trade in goods between United States and China has reached $440 billion in 2015 through

September (Bloomberg Business, 2015a). America has become the main trade partner of China (1st

place), whereas, Russia's share is only 2% (11th place) (Maslov and Karpov, 2015). In addition,

ships with Chinese goods pass through the waters controlled by the United States (America patrols

waters of the Pacific Ocean around Japan and Southeast Asia) (Smith, 2014). It should be also

mentioned, that the initiator of the sanctions against Russia was the United States government, and

under the impact of which, the sanctions have been supported by the European Union. Sanctions

have been also supported by Big Seven states and other United States partners (Russian news

agency, 2014). Hence, in proportion to its capacities, China is challenging the American hegemony

indirectly (Abdelal and Tarontsi, 2013), trying to avoid any direct confrontation. And, in case of the

inevitable choice between Russia and the United States, China would probably prefer America.

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4. Major economic crises and Chinese policy

Over the past 20 years the world economy has suffered from three serious impacts: the Thai

currency or Asian crisis (1997), tech-bubble crisis (1999-2001) and subprime mortgage crisis

(2007-2008).

The reason for the Asian crisis was the extremely rapid growth of the economies of the 'Asian

tigers' (South Korea, Singapore, Hong Kong and Taiwan), which contributed to the massive inflow

of capital to these countries, the growth of government and corporate debt, the overheating of the

economy and a boom in the property market.

The tech-bubble was formed by the result of increased shares of Internet companies. Such high

prices were justified by many commentators and economists, who claimed that this was the "new

economy". However, in reality, these new business models have failed. As a result, the tech-bubble

burst in March 2000, when it became clear that the shares were strongly overvalued, which led to a

wave of bankruptcies and a sharp drop in the NASDAQ index (Walker, 2005).

Subprime mortgage crisis manifested by a sharp increase in the number of defaults on mortgage

loans, the increasing incidence of alienation of immovable property mortgaged by banks, which led

to a drop in prices for securities (Donnelly and Embrechts, 2010).

The crises (except tech-bubble) became more substantially for countries with a less regulated bank

systems and weak fundamentals. For many market-oriented countries, large short-term external

borrowing was very attractive tool, especially in order to finance current account deficits.

Gradually, large amounts caused many banks to provide funding and lending without appropriate

supervision. This trend led to widespread moral hazard in the markets because financial institutions

were inadequately regulated and companies had little accountability to shareholders. As a result,

companies borrowed excessively to invest in risky projects, financed by loans from banks that, in

turn, borrowed heavily (and unhedged) from abroad. At the same time, foreign creditors were

willing to lend large amounts to banks, as most of the banks were state-owned or had connection

with their Governments, which meant that they had implicit or explicit sovereign guarantees.

Hence, risky investments were financed through excessive leverage, and especially through

excessive short-term unhedged external borrowing (Fernald and Babson, 1999; Cowen, 2011).

The Chinese economic model cannot be considered as pure market system. There are mixed

socialist principles and elements of capitalism. There is a great importance of the state regulation

that contributed to financial stability and keeping China's fundamentals strong. Despite the

criticism, the state management of all financial organizations prevented Chinese financial

institutions from borrowing excessively abroad, and therefore helped to keep the country's

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economic balance, thereby it played an important role in avoiding China from the worst aspects of

the crisis (Fernald and Babson, 1999; Yueh, 2012). At the same time, economic environment in

many countries continued to deteriorate due to the crises and a number of investors moved into

other stable markets, including China.

Thus, it can be seen that, on the one hand, China holds serious impacts of several crises due to its

financial and economic policies, on the other hand, the arrival of new investors contributed to the

new development of the economy in the country.

As a result, China’s growth rate of 7.6 percent has been its lowest rate since 1996 (see Table 4),

whereas, most economies in the world showed unstable growth, or even some countries managed to

have negative growth.

Table 4. China’s GDP between 1996 and 2013 (Source: China NBS, 2014)

1996 1997 1998 1999 2000 2001 2002 2003 2004

Growth % 10 9.3 7.8 7.6 8.4 8.3 9.1 10 10.1

2005 2006 2007 2008 2009 2010 2011 2012 2013

Growth % 11.3 12.7 14.2 9.6 9.2 10.4 9.3 7.8 7.7

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5. The impact of falling oil price on the oil and gas projects jointly implemented by Russia and

China.

Oil and gas relations between Russia and China can be characterized by the two major projects: the

construction of Eastern Siberia–Pacific Ocean oil pipeline (ESPO) and the implementation of

Power of Siberia.

The first project was reached its first phase in 2009 with the route between Taishet and

Skovorodino and a branch line to Daqing (China). In 2012, the second phase (Skovorodino –

Kozmino) was commissioned, making the ESPO one of the longest pipelines in the world (4740

km) with a 50 million tons per year capacity. This project increased the volume of oil supplies and

reduced the high costs of delivery by train from eastern Siberia or by sea routes (Abdelal et al.,

2015; Hsu and Soong, 2014).

The second project (Power of Siberia) is the pipeline to supply gas from Yakutia to the Russian Far

East and the Asia-Pacific region (see Image 7). In 2014, Russia and China have signed a contract

for estimated $ 400 billion on gas supply in the framework of the project. The pipeline

infrastructure capacity could deliver Russian gas to China in the amount of 38 billion cubic meters

of natural gas per year (BBC News, 2014). An analyst estimates the cost of constructing processing

facilities and pipeline to China will cost Russia $70 billion (Wan and Abigail, 2014). This cost will

be partially offset by a $50 billion loan from China in exchange for a lower price paid for the

natural gas once it flows (Perlez, 2014).

Image 7. The route of Power of Siberia (Source: Gazprom, 2014)

  19  

However, the slowdown in energy demand, the fall of oil prices and the transformation of the global

gas market have gradually changed China's energy strategy. In terms of oil relations, oil deliveries

to China have been decreased and have not reached the agreed volumes. In 2015, instead of 5

million tons under the agreement, it was shipped 1.5 million tons. In terms of gas relations, Moscow

and Beijing have not come to an agreement on advance payments in the framework of Power of

Siberia, since the issue of the gas price is still open. Therefore, China has not yet allocated the first

$ 25 billion for the construction of the gas pipeline. Moreover, there is a probability, that a number

of large oil and gas deals, concluded in recent years, will be canceled or postponed. Pipeline

megaprojects may eventually lose the profitability (Burrows and Manning, 2015).

It should be added that the situation with oil price has led to drop of the world demand, which, in

turn has resulted in currency devaluation in both countries. And, as was mentioned in Section 2.1,

this was one of the main reasons of the record fall in Sino-Russian trade relations.

  20  

6. Conclusion

Although the relations between Russia and China are currently strong, the future is quite uncertain.

This paper has provided the system problems arising within the Sino-Russian relations influenced

by the different external factors.

According to SWOT analysis, Russia may provide required amount of oil and gas to China. These

opportunities have been discussed repeatedly at the highest level between countries, resulting in

signing of several agreements on the supply of oil and gas from Russia to China. However, the

current situation with the oil price and geopolitical situation with Russia has led to China's cautious

policy towards Russia, which, in turn, affected the supply of oil from Russia and the development

of the Power of Siberia project.

Another important aspect is the significant investments that China is planning to direct into foreign

projects. Russia is very interested in attracting these investments, however, Russian companies have

less competitiveness that the foreign and Chinese counterparts. Therefore, in terms of attracting

Chinese investment, Russia needs to focus on the further development of the energy sector, where

they are very successful and have huge reserves.

The factor of low competitiveness of manufactured companies may lead Russia's economy to

negative consequences in the event of further development globalization processes.

It should be also noted that Russia is not one of the main partner for China. Therefore, in the case of

further complications in the relations between Russia and Europe and the United States, China may

also suspend relations with Russia until all the problems will not be solved.

6.1. Recommendations

- Russia should continue the policy of resource-based economy, but at the same time try to redirect

its oil and other resource revenues towards the development of the manufactured industry. There is

a need to invest into knowledge-based industries and attract foreign consultants, which are also

available due to the globalization.

- Russia should not seek the economic and political support of China. It is necessary to move

towards normalizing relations with Western partners, whereas, Sino-Russian relations should be

continued in a stable economic and political conditions.

- The Russian Government should get the long transition periods for a total accession to the WTO.

This will allow companies to be more effectively prepared.

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- China needs to develop its domestic market and to improve the living conditions of its population,

and therefore have an alternative to sell their own products, in case of the external demand

reduction. If the Chinese authorities are not be able to redirect part of industrial activity into

domestic consumption, the excess capacity can cause an imminent collapse of the Chinese

economy.

  22  

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