In the 1990s, Russia-China trade was relatively small (Fig. 1) but even then, China was more important for Russia than Russia for China. According to Chinese statistics, Russia only took 1 percent of China’s total exports and provided 2.8 percent of China’s total imports, while according to Russian statistics, China took 4.7 percent of Russia’s exports and provided 3.3 percent of Russia’s imports. Other than the limited nature of trade between the countries, certainly compared to today, it is important to note that Russia maintained a moderate trade surplus with China during the 1990s (Fig. 2).¹

Fig. 1.

Russia’s exports to and imports from China (USD billion).

Sources: UN Comtrade; Russian reported data.

Fig. 2.

Russia’s trade balance with China (% of Russian GDP).

Sources: Natixis; UN Comtrade.

During this period, because of its clearly more advanced position in industrial production, Russia was able to export to China a wide range of goods including raw materials, especially oil and gas, iron, steel, fertilizer and non-ferrous metals, and capital-intensive products such as transport equipment and road vehicles (Fig. 3b). China’s exports to Russia, during the same decade, specialized in traditional labor-intensive products, especially textiles (Fig. 3a).

Fig. 3.

China top 10 exports to and imports from Russia, 1992-2000 (annual average, USD billion).

Sources: Natixis; UN Comtrade and by 2-Digit Standard International Trade Classification (SITC) Rev. 3.

The key moment for China’s economic development, in the context of its opening-up policy, was its accession to the WTO in 2000. Since then, China has witnessed miraculous growth while Russia’s economy has stagnated, especially in years of weak commodity prices. In fact, by the early 2000s, China’s economy was four times larger than Russia’s. Two decades later, China’s GDP has reached USD 13 trillion while Russia’s has remained relatively flat and is now USD 1.6 trillion. In addition to their increasingly unbalanced economic sizes, China’s easier access to export markets through its membership of the WTO, and very large inward FDI into the manufacturing sector, have contributed to China’s massive increase of exports to Russia. At the same time, Russia’s exports to China have grown at a much slower pace, pushing Russia’s bilateral trade balance with China to a deficit of around USD 1.2 billion on average from 2001 to 2014, accounting for approximately 1.2 percent of Russia’s GDP but less than 0.03 percent of China’s GDP. Russia’s trade deficit with China continued until the drastic reversion in 2018 to a surplus of more than USD 15 billion, because of China’s massive imports of oil, contributing 64 percent of the increase in imports.

Generally, China has become more important for Russia since 2000, moving from the latter’s sixth largest trading partner in 2000 to its top trading partner in 2018. In other words, China has now surpassed Germany with a trade share of 15.5 percent compared to 9.3 percent for Germany. While the EU is still much more important than China, with a share of 44 percent of Russia’s total trade, China is reducing the gap year after year. In turn, Russia has become less important for China since 2007 and only accounted for 0.8 percent of China’s total trade (the sum of exports and imports) in 2018. However, the recent large increase in China’s oil imports from Russia, if sustained, will make Russia much more important strategically for China.

Going beyond gross trade to value added, China has significantly moved up the technology ladder since its accession to the WTO. Most of its exports to Russia are now at a higher technology level than in the past, including machinery and transport equipment, while the share of labor-intensive goods has declined (especially textiles and footwear). These higher-end goods started to show up in China’s top 10 list of goods exported to Russia right after China’s WTO accession (2001 to 2007), though remaining only a small share of the total (Fig. 4a). Since then, their share has ballooned (Fig. 5a). At the other end of the spectrum, Russian exports to China have continued to focus on raw materials, especially oil and gas (Figs 4b and 5b). Although some capital-intensive goods remain among Russia’s top 10 exports to China, their importance has declined significantly. This is especially the case with the automobile sector, which was the eighth largest export category for Russia from before 2000, but dropped out of the top 10 list after 2000. In turn, China has gradually become an important supplier of automobiles to Russia (see Fig. 5a).

Fig. 4.

China top 10 imports from and exports to Russia, 2001-2007 (annual average, USD billion).

Source: Natixis; UN Comtrade and by 2-Digit Standard International Trade Classification (SITC) Rev. 3.

Fig. 5.

China top 10 imports from and exports to Russia, 2008-2017 (annual average, USD billion).

Source: Natixis; UN Comtrade and by 2-Digit Standard International Trade Classification (SITC) Rev. 3.

In the last few years, the pace of Chinese outbound investment and lending has accelerated because of increasingly low domestic returns and the need for international diversification. Nevertheless, the amount of Chinese FDI going to Russia continues to be moderate and has actually come close to zero since the peak in 2014 (Fig. 6). The stock of China’s direct investment in Russia is tiny compared to that of Europe (Fig. 7).

Fig. 6.

China’s FDI flow into Russia, 2014-2018 (USD billion).

Source: Bank of Russia.

Fig. 7.

FDI position in Russia, 2018 (USD billion).

Source: Bank of Russia.

Admittedly, the direct investment statistics are always blurred, because a large share of China’s outward FDI is intermediated through offshore centers such as Hong Kong (60 percent of China’s total outward FDI is parked in Hong Kong temporarily). In other words, it is quite likely that China’s FDI in Russia is underestimated. As a complement to the official data, we also use the transaction-level database provided by fDi Markets (for greenfield data) and Mergermarket (for merger and acquisition data) to analyze China’s direct investment influence in Russia. The sum of the two yields a significantly larger flow figure of USD 7.7 billion in 2017, though this is still significantly smaller than FDI from the EU-28 reported in official data, e.g., USD 15.1 billion.

As for the type of direct investment, China seems to have opted for more greenfield investment rather than mergers and acquisitions (M&A). In fact, Chinese greenfield investment in Russia has significantly increased since 2012 (Fig. 8). In three of the five years from 2012 to 2017, the value of Chinese greenfield investment in Russia amounted to more than half of its greenfield investment in the EU-28 and even the US (Table 1). In other words, given Russia’s relatively small economic size, the scale otf Chinese greenfield investment is quite impressive. An industry breakdown of this investment further indicates that China is focusing on Russia’s traditional comparative advantages, namely the industrial and automobile sectors, and raw materials such as oil, metal and coal.

Fig. 8.

Chinese greenfield investment in Russia.

Source: fDi Market.

Table 1Download as CSV 

Share in China’s total outbound greenfield investment (%).

Year	EU-28	Russia	US
2013	16.2	2.7	25.4
2014	13.5	9.4	13.0
2015	4.0	2.7	7.2
2016	10.4	1.8	7.5
2017	11.1	6.7	11.8

Source: fDi Markets.

China’s enthusiasm for investment in Russia is less prominent when acquiring companies. For most of the past six years, Russia has contributed less than 4 percent of China’s overall outbound M&A. Furthermore, there were hardly any acquisitions in 2017 and 2018. Interestingly, though, 2019 has seen a huge rise in activity because of a very large transaction, namely China National Petroleum Corporation and China National Offshore Oil Corporation’s acquisition of a 20 percent share of Novatek’s Arctic LNG 2. This deal alone amounted to 16.7 percent of China’s total outbound M&A in the first half of 2019 (Fig. 9 and Table 2). Because of China’s sharp increase in oil imports from Russia, it confirms that China is viewing Russia as an important strategic partner (Wittmann, 2019).

Fig. 9.

Chinese M&A in Russia.

* Forecast based on the deal value of the first half of the year. Source: Bruegel based on Mergermarket and American Enterprise Institute.

Table 2Download as CSV 

Share of China’s completed M&A (by deal value, %).

Year	EU-28	Russia	US
2013	7.7	3.3	34.1
2014	47.5	3.8	12.0
2015	40.8	0.1	17.4
2016	33.0	1.1	32.7
2017	25.6	0.7	21.8
2018	47.4	0.0	5.9
2019 H1	42.8	16.7	11.7

Source: Bruegel based on Mergermarket and American Enterprise Institute.

In terms of lending, especially project finance, China has rapidly become more influential in Russia. According to the American Enterprise Institute statistics, there were hardly any Russian projects financed by China before 2009, but such activities accelerated thereafter and peaked in 2017, with USD 6.34 billion in projects built and financed by China. Russia now accounts for more than 6 percent of China’s total external project finance value — a share much higher than Russia’s trade share. Since the peak year of 2017, however, Chinese project finance in Russia has moderated. The key sectors for lending reflect China’s comparative advantage, namely raw materials (including chemicals, metals and energy), and also China’s expertise, with project finance also covering infrastructure and real estate (Fig. 10).

Fig. 10.

Chinese project finance in Russia and its industry breakdown (USD billion).

Source: American Enterprise Institute.

The surge in Chinese trade with Russia clearly poses challenges for European firms. In 1995, the EU accounted for 40 percent of Russia’s total imports and that share went up to 53 percent in 2002 and down again more recently to about the level it started at in 1995, namely 40 percent. However, China’s share of Russia’s imports has increased steadily from less than 3 percent to 21 percent.

In terms of sectors, half of the Chinese and EU top 10 most exported goods to Russia overlap, including electrical products, general and special machinery and road vehicles (Fig. 11). According to Russia’s own statistics, the total value of the five overlapping groups of products imported from China reached USD 16.01 billion in 2017, already more than half of the equivalent imports from the EU28 (USD 28.92 billion). Another important example is telecommunications and sound equipment, which is China’s top exported product category to Russia but is missing from the EU’s top 10 list of exports to Russia.

Fig. 11.

China’s and EU’s exports to Russia, 2017 (USD billion).

Sources: UN Comtrade and by 2-Digit Standard International Trade Classification (SITC) Rev. 3.

Garcia-Herrero and Xu (2016) confirmed quantitatively that Chinese exports are increasingly relevant substitutes for EU exports on the Russian market, especially in capital-intensive sectors such as electronic products. That said, China’s export growth over the past two decades is concentrated on the processing trade, or the business activity of importing parts and components from abroad for processing or assembly, with the finished goods re-exported to the rest of the world. However, China has been moving up the ladder by incorporating a larger share of domestic production in the final goods it exports (Fig. 12). This is also true for China’s exports to Russia, with average domestic value added increasing from slightly above 75 percent to over 80 percent from 2005 to 2015. Meanwhile, the domestic value added of EU exports to Russia is still higher than China’s, but has remained stagnant since 2005 and has even dropped more recently² (Fig. 13). This evidence suggests that an increase in China-Russia economic cooperation could have a negative impact on European exports, which is confirmed by the simulation exercise carried out by Garcia-Herrero and Xu (2016).

Fig. 12.

Domestic value added in China and EU gross exports to the world, 2005-2015 (%).

Sources: Natixis; OECD Tiva.

Fig. 13.

Domestic value added embedded in China and EU gross exports to Russia, 2005-2015 (%).

Source: OECD Tiva.

All in all, the increase in China’s market share in Russia that we find when looking at gross trade data (Fig. 14) is confirmed when controlling for the value added of European versus Chinese exports (Fig. 15). This is in line with our finding that the domestic share of China’s value added exports to Russia has increased very steadily (see Fig. 13), and is also in line with the changes in the top 10 Chinese products exported to Russia.

Fig. 14.

EU-28 and Chinese market shares in Russia, 2005-2018 (%).

Sources: Natixis; UNCTAD.

Fig. 15.

Share of the value added embedded in Russia’s final demand, 2005-2015 (%).

Source: OECD Tiva.

China-EU competition in the field of investment is much less pronounced. As section 2 showed, while Chinese investment in the world has surged, its exposure in Russia is limited and remains much less than the EU’s. For example, the Chinese FDI flow into Russia was only USD 140 million in 2017 (only 0.1 percent of Russia’s GDP), and the value even dropped into negative territory, to minus USD 13 million, in 2018. Meanwhile, the EU-28 total FDI flow into Russia reached USD 2.6 billion and USD 15 billion in 2017 and 2018, accounting for 2.1 percent and 11.6 percent of Russia’s GDP respectively (Fig. 16).

Fig. 16.

FDI flow into Russia (USD billion).

Source: Bank of Russia.

In addition, the industry focus of Chinese investment has been very different to that of the EU-28. In 2018, the biggest target of Chinese direct investment in Russia was the real estate sector, with the financial and manufacturing sectors attracting less Chinese investment. EU companies have much broader interests in manufacturing and a number of service sectors including wholesale and retail (Fig. 17).

Fig. 17.

Industry breakdown of the EU’s FDI position in Russia, 2018 (USD billion).

Note: Only sectors with FDI larger than 0.1 billion are reported. Source: Bank of Russia.

Following the annexation of Crimea by Russia, the financial role the EU played in Russia was taken over by China because of the enforcement of sanctions by Western countries in 2014. Indeed, there was a sharp decline in the EU’s financial claims in Russia in 2016, only two years after the sanctions were imposed. In the meantime, China has continued to support projects developed in Russia, as shown by the steady increase in Chinese project finance.

While the trend is clear, the EU still has a much larger financial exposure than China in Russia. First, EU portfolio investment in Russia is clearly larger than China’s. As for bank lending, while there are no official statistics on the role of Chinese banks as cross-border lenders, an upper limit (including all the undisclosed countries in the Bank for International Settlements cross-border lending statistics) indicates that China could be equal to as much as one-third of the EU-28’s lending position in Russia (Fig. 18). Chinese project finance, while increasing, still does not equal even one third of the EU’s lending flows into Russia. In fact, according to the American Enterprise Institute, the cumulative sum value of Chinese project finance in Russia since 2005 was USD 18.7 billion in 2018. For the EU countries, total cross-border lending for the 14 largest EU economies shows accumulated claims in Russia of about USD 57 billion in 2018 (Fig. 19). EU project finance data was unfortunately not available to us.

Fig. 18.

Portfolio investment assets (sum of equity and debt) of Russia (USD billion).

Source: Bank for International Settlements.

Fig. 19.

Comparison of EU and Chinese lending position to Russia (USD billion).

Note: Cross-border lending data was estimated as the difference between Russia’s total liabilities minus the available BIS reporting country’s lending to Russia . Source: Cross-border lending data from Bank for International Settlements, and project data from the construction projects collected by the American Enterprise Institute.