14.11.23 China Review

Dead-end u-turn: Russia's pivot towards the East has fallen into a trap of non-competitiveness, transforming it into a raw material province of China

Russia's dependence on China as an external trade partner has continued to grow. In the first nine months of 2023, China accounted for 36% of all Russian imports, compared to 25% in 2021.The most notable surge was in automobile imports which grew from $3.1 billion in the first nine months of 2021 to $16.4 billion in 2023. For many categories of export, China plays the role of Russia's 'last resort' — there's virtually no alternative for these imported goods. But the situation with Russian exports is roughly the same: China currently buys 37% of Russian crude oil, constituting 30% of Russia's total exports in 2023. Unlike Russia's energy trade with Europe prior to its invasion of Ukraine, China now represents not just a market but a primary consumer. As a consequence, Russia is selling its oil to China at a discount. The 'pivot to the East' has had three important effects: first, the critical dependence of the Russian economy on China; second, the 'bottleneck effect' in foreign trade; and third, Russia has fallen into a trap of non-competitiveness. Asian economies are vying for the same non-resource-based markets where Russian businesses could compete, yet the loss of access to Western technology and equipment has rendered Russian businesses uncompetitive.

As a result of the economic schism with the West, Russia is systematically turning into a raw materials appendage of China. Its trading dependence on China, as Re:Russia has previously highlighted, only grew in 2023. Recent monitoring by Bloomberg shows that nearly a third (31.5%) of Russia's maritime oil shipments in October 2023 went to China. India accounted for roughly the same amount, but if pipeline shipments to China are added to maritime shipments to China, the Chinese economy accounted for an estimated 37% of Russia's crude oil exports.

China's share in Russian exports rose from 14% in 2021 to 19% in 2022. As noted in the summer review by the Stockholm Centre for Eastern European Studies, last year's growth in Russia-China trade was primarily driven by the expansion of Russian exports (up by 43% to $114 billion), while imports to Russia increased only marginally (by 12% to $76 billion). However, in 2023, Chinese imports surged rapidly (in April, they surpassed Russian exports to China for the first time).

If we turn to the data of the Central Bank and the ‘mirror’ statistics of the Chinese customs, the picture of dependence becomes even more vivid. In the first nine months of 2023, Russia exported goods worth $316 billion, with $95 billion directed to China (nearly 30% of Russia's total exports). China was already the largest importer to Russia in 2021, but its share in Russian imports was just 25%. In 2022, this surged to a record 42%, mainly as a result of the overall decline in Russian imports, which affected shipments to China to a lesser extent. In the first nine months of 2023, Russia's total imports amounted to $227 billion, with $81.4 billion coming from China, which comprised 36% of all imports. This is a 1.7-fold increase compared to the same period in 2021.

If we examine the structure of Russian imports from China (based on Chinese customs data), a substantial portion (37%) for the nine months of 2023 falls within the category of 'Machinery, equipment, and devices’. Despite a 1.5-fold increase (from $19.4 to $30.4 billion), the proportional composition remains nearly unchanged compared to pre-war times: in 2021, this category constituted 41% of China's total imports. But, of course, the share of this group in the structure of all Russian imports has changed (15% of its total volume instead of 9% in 2021). Profound changes, however, are evident in the scale of Chinese 'vehicles' imported to Russia. Compared to the first nine months of 2021 (i.e. before the war), its value increased 4.6 times — from $3.7 billion to $17.1 billion. Almost all of this growth can be attributed to automotive imports, which surged in value from $3.1 to $16.4 billion. Additionally, imports of Chinese chemicals and plastics nearly doubled (from $5 to $9.8 billion). The growth in Chinese textile imports was moderate — from $4 to $5 billion — while roughly the same growth was seen within the category of 'Non-precious metals and their products', which grew from $4.3 to $5.2 billion. These six categories accounted for 83% of Chinese imports to Russia.

Structure of Russian imports from China, 2021–2023 (million USD)

The most important indicator of trade dependence is the asymmetry of commerce. China's share of Russia's foreign trade turnover for the first nine months of 2023 amounted to 32% (30% of Russia's total exports and 36% of imports). Russia's share in China's foreign trade turnover stands at just 4%: imports from Russia made up 5% of all Chinese imports, while exports to Russia accounted for 3.2% of China's total exports. These figures represent the disparity between a large and a small economy. In essence, Russia's share in Chinese external trade turnover aligns with that of China’s other key trade partners — Japan (5.4%), South Korea (5.2%), Taiwan (4.2%), Australia (3.9%), Germany (3.6%), and Vietnam (3.7%) — with only the US surpassing these at 11.2%. The issue lies in the fact that nearly all of these countries hold strong positions in China's high-tech imports, replacements for which are typically difficult or impossible to find. Meanwhile, Russia's oil and gas deliveries to China, while important because they are at a discounted price, are relatively replaceable. However, the more critical aspect is that when it comes to imports to Russia, China is the 'last resort' for many items, making replacements for these supplies practically non-existent.

After its break with the West, Russia’s foreign trade is generally experiencing a bottleneck. While China accounted for $95 billion (30%) of Russian exports in the first nine months of 2023, another $34.7 billion went to Turkey, $41.2 billion to India (although data is, thus far, only available for January-August) and $6.8 billion to Brazil, according to statistics from these countries. Hence, a significant portion — another third — of Russia's exports relies on the Turkish corridor, since that sea routes from Russia to India, Brazil, and many other countries pass through Turkey. Together, the Chinese and Turkish routes account for over 60% of Russia's exports.

The Russian authorities hope to alter this situation in the future using the 'North-South' corridor, which is expected to pass through Azerbaijan and Iran, ultimately reaching the Persian Gulf. Dreams of this corridor, which would bypass not only the Bosporus but also the Suez Canal and, as per the words of a Kremlin bureaucrat, 'remain unaffected by any sanctions on [the Russian economy]’, are evidently linked to Russia's betrayal of its long-time ally in the South Caucasus — Armenia. In March 2023, Vladimir Putin spoke of the need to complete this corridor, and in May, an intergovernmental agreement was signed for the construction of the final section of the railway through Iranian territory (funded by Russia), scheduled to start operating in 2028. However, its capacity will be limited due to the lack of appropriate infrastructure. 

Generally speaking, Russia's trade dependence on China today is already of critical significance. Further, by pivoting eastward, the Russian economy finds itself trapped in an uncompetitive state. Asia’s emerging economies, primarily China, are themselves vying for niches in the global market that Russia could theoretically occupy. The narrow categories of technological goods that Russia could export to Asia will likely further diminish, as Russia's advantage here was generally tied to the use of Western technologies and equipment.

Russia is almost fated to remain stuck in this trap of non-competitiveness. Moreover, its role as a raw material source has drastically transformed: deprived of alternative markets, Russia has become a dependent supplier (particularly on China), forced to accept the dictates of the consumer. In contrast to the West, China gains almost limitless economic (and consequently, political) power over Russia in this situation. Hence, the future discourse surrounding Russia may focus less on it being a 'raw material appendage' and more on it being a 'raw material satellite' or a 'raw material province' of China.