Fear of Chinese Expansion Makes Russia a Country of Unfinished Industrial Projects

19.05.2009 — Analysis

The policy of the Russian authorities that turn a cold shoulder to Chinese investors leaves no chance for salvation to a multitude of investment projects that have been suspended because of the crisis. On top of this, there is the unwillingness to see SCO as anything more than the "mini-NATO from the East". The delegates of the 15th Russian Economic Forum believe that, as the Ekaterinburg SCO summit is approaching, the choices for Russia are clear: to get rid of sinophobia, or to say farewell to the plans of developing the Far East and Siberia, losing important economic ground in the Central Asia in the latter case.

According to Alexander Kharlov, Minister for International Affairs and Trade in the Sverdlovsk Oblast government, the economic integration is not on the SCO summit agenda. This is clear from the results of the meeting of Ministers of foreign affairs of the member states that took place in Moscow on 15 May 2009.

Russia primarily considers SCO as a military and a political union that is aimed at combating terrorism and drug traffic, and supporting stability of the neighbouring countries' regimes. "China's point of view, however, is quite the opposite: not to deny the need for military and police cooperation, Beijing offers various investment projects to its SCO partners", says Albert Yeganyan, Managing Partner of the Vegas Lex law firm. Russia is cautious of the eastern competitor that considers the Far East and the Trans-Baikal region to be within its range of interest; therefore it is reluctant to let the Chinese capital into the country.

The discussion on investments is hindered by a dramatic difference in approach to planning. While Russia cannot structure major joint projects with "junior" SCO members for their lack of national development strategies, China, with its 50- to 100-year planning scope is not satisfied with Russia's 10- to 20-year horizons.

Besides, the absence of the down-to-business approach on the Russian part is telling. "After 8 years of discussions, details of electricity exports to China are still not agreed upon; exports were started for a 5-year trial period. The Chinese say: let us pilot the project for 50 years, collect the statistics and then decide what we do next", explains Albert Yeganyan.

Given all this and the huge gap in economical development, it is difficult for Russia to find any common objectives for cooperation with the People's Republic of China. The trend is illustrated by the Sverdlovsk Oblast, its negative trade balance with China has been steadily widening since 2006. "In most industries China is far ahead of us and doesn't see us as partner. Russia, however, is a transit route for Chinese goods to many markets, so China is interested in us having a good transportation infrastructure. This is the sector where we have a lot of high-potential projects, especially important for Ekaterinburg and the Middle Urals", believes Mikhail Maksimov, Vice Prime Minister of the region's government.

The combat for the trunk railway construction contracts has been hopelessly lost by the Russian business - it simply cannot handle the required volumes and is not competitive price-wise. Albert Yeganyan gives an example: "In 2008, the Russian Railways announced that it needed 108 billion roubles to build 1,000 kilometres of track. European bidders offered 52 billion roubles. The Chinese bid was 26 billion roubles, with a 45-year credit financing and an 18-year quality guarantee".

"Today, Russia is dominated by the following doctrine - why spend 26 billion where you can spend 108 billion on the same thing?" - sarcastically says Valeriy Fadeyev, Chairman of the Public Chamber's Economic Development and Entrepreneurship Support Commission.

Despite the lost contracts, it is much more important for Russia to retain its influence upon the logistics and cargo flows' distribution over the Eurasian territories covered by SCO. It is with the country that wins this position that Europe and the Near East will be negotiating transportation flows and energy traffic.

More specifically, it is about the Western Europe - Western China transport corridor, 2,200 kilometres of which will lie in Russia and 2,800 kilometres in Kazakhstan. While Russia and China are arguing as to who will be the beneficiary of the logistics arrangements, Kazakhstan is acting. "Despite the credit crunch, it raised 4 billion U.S. dollars from the World Bank to finance the construction of infrastructure for its part of the corridor, and is currently involved in planning the long-term integrated development of the neighbouring areas. This is not happening in Russia", - says Bulat Stolyarov, Director of the Regional Politics Institute.

There is desperately few resources left in Russia for the joint projects with Kazakhstan and next to none for activities in Tajikistan, Uzbekistan and Kyrgyzstan. Moreover, projects within Russia itself need to be saved. That is why the question is so relevant - what are the volumes and formats of Chinese investments Russia might agree to?

The Federal Development Strategy for the Far East is scheduled for approval in late May - early June. According to Bulat Stolyarov, this document is a carbon copy of the big business investment plans in the Trans-Baikal region and Far East over 2005-2008. Most projects (up to 85%) have been suspended, pushed back, or ruined.

As of 2008, the big business has structured about 150 projects worth over 1 trillion U.S. dollars. Projects in progress are worth over 250 billion U.S. dollars; about 40% of them could be completed with the help of Asian investments.

About 70% of all potential investments within SCO are within Russia. The least Russia can do to avoid becoming a land of unfinished industrial projects is to consider all the resources available, Chinese included, and think of pilot loans. "It might be worthwhile accepting some financing on certain conditions, perhaps starting with hand-picked projects, in non-strategic industries, without handing over the controlling stakes", - believes Bulat Stolyarov.

Generating capacities launched in China in 2006 are equal to 45% of the Russia's total. For five years in a row, China has been commissioning metallurgy plants every year with an output comparable to the Russia's whole sector. A similar situation can be observed in coal mining, property development and other industries.

"We, with our microscopic volumes, are afraid of boosting China's development and being left with the raw exports role; this is ridiculous", - says Bulat Stolyarov. "Today it is high time to get rid of sinophobia. Whether we are going to accept Chinese investments, or develop the East of Russia is a purely internal affair, the Chinese do not basically care".

Denis BORODKIN