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bne July 2017 Cover Story I 19
to keep existing sanctions at least until 2H18 or later?
It is very difficult to get exact figures for China investment into Russia but the fact that the volume has picked up strongly
is clear enough. Russia’s Central Bank reports that direct investment from Chi- na in 2015 and 2016 was only $645mn and $350mn respectively. But reports from China say the total was $3bn in 2015 and rose to $14bn in 2016.
The reason for the difference is that
the Central Bank only accounts for direct transfers from a China-located bank while the China-sourced figures take into account the reports of China investors from all sources. Anecdotally, given the announcements of individual deals, the higher figures also make more sense. What is not unclear is that the value of cross-border trade between the two countries has risen from $16bn in 2013 to almost $70bn last year and, with the completion of new projects under construction, is realistically set to reach $200bn early in the next decade.
The focus of investment is still over- whelmingly in hydrocarbon and extractive industries but we are seeing
a shift away from direct investment
into production and pipelines and into processing plants. The key hydrocarbon projects are still the Power of Siberia gas pipeline, which will pump 38bn cm of natural gas to China starting sometime in 2019, the Yamal LNG plant, in which Chinese investors own a 29.9% stake, will start to send LNG to China later this year, and the 2nd leg of the Eastern Sibe- ria Pacific Ocean (ESPO) pipeline which will double direct crude oil exports into China’s heartland to 600,000 barrels per day when completed in 2018.
In addition, Chinese investors have proposed investing 6bn yuan ($880mn) into building a petrochemical complex on the Russian side of the border and sending the products to China. This is the latest phase of investment from China and reflects Moscow’s stronger negotiat- ing position as the economy returned
to growth, and investment from other countries is picking up; it no longer has to sell raw materials cheaply for process-
ing in China but is able to insist on value- added processing in Russian territory before exporting the products.
Recently the Minister for Regional Development reported that Chinese investors have proposed plans for 13 separate projects in the Far East with a value of $11bn. These cover extraction and processing of minerals, agriculture and transport projects.
Moscow is certainly keen to attract Chinese investors into the Far East and is offering tax breaks and “administrative preference” for China-backed projects in the region, especially outside of extrac- tive industries. The $3bn invested by Chinese investors into the Primorye 1 & 2 Transport Corridors, which helps Chinese exports use Russian port facilities on the Pacific Coast, is a tangible example.
The opening up of the One Belt, One Road network, which in February saw
a 100-container train transit Russia from China to London in 18 days, is also a potential game-changer in terms of China investment. Officials in Beijing have stat-
had to make the tough choices, such as letting the ruble freely float, and saved itself. That is a lesson that the Kremlin has learned and it has shaped trade and investment and political relations since. Russia is no longer interested in the sort of close and vulnerable relationship it once had with the US and EU, and which it nearly fell into with China in 2014. Been there, done that, didn’t work out.
Today the policy is one of diversification. India’s Prime Minister was prominent
at the recent St Petersburg Forum and Japan’s Prime Minister has become a frequent visitor to Russia. According to FDi Monitor, Russia was the third most attractive investment location for EU investors in 2016, attracting $12.0 bil- lion in deals, most from German compa- nies. The November deal with Opec has greatly improved relations with Saudi Arabia and other Arab states and invest- ment from that region is also picking up.
One example is the project to develop the former Tushino military airbase, in north-west Moscow, into one of the largest technology parks in Europe. The investors
“We were in a long line of people looking for money and nobody called us to the front of the queue”
ed that they expect, and will encourage, a lot more investment along the network routes to take advantage of more efficient transport links and local resources.
In 2016 China investors created tens of thousands of jobs in such sectors as auto- manufacturing, food and tobacco and other consumer focused sectors. The num- ber of individual projects was more than 30, up from 21 in 2015 and 12 in 2014.
But, as mentioned, Moscow’s per- ceived need for Chinese investment has changed since 2014. Partly this is because the economy is in relatively better shape and the widely predicted doomsday scenarios failed to materi- alise. A major reason for that is that Russia, faced with no easy way out,
in the project are the Russia-China Invest- ment Fund (a 50-50 $2bn venture between the Russia Direct Investment Fund and the China Investment Corporation) and some Arab sovereign fund investors.
This project does also show how, on the one hand, Moscow has diversified its investor base and has a more confident position when it comes to deal structures, but of course it also shows how China has adapted its approach. The Tushino Park will be home to Rostec, the state company at the core of the military industrial com- plex and owner of many of the advanced weaponry that Beijing would still like to buy from Russia. Now they will be neigh- bours in a Moscow suburb. Somebody should tell US Congress that they should be careful what they wish for.
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