Wednesday, Mar 29, 2017, 7:05 PM CST – China

International

Russian Investment Promotion in China

Eastern Promise

Russia is stepping up efforts to tap the Asia Pacific region to make up for lost ground in European markets. Chinese investors, however, remain hesitant when responding to business overtures from the Russian bear

Mou Wanlong, a Chinese trader from Heilongjiang Province, has been doing business in eastern Russia since the 1990s. He has been impressed by the frequent visits to China by Russian Far Eastern officials, and the return visits of Chinese business delegations at the invitation of Russia since early 2015. “Russia used to be lukewarm about China’s enthusiasm towards trading with Russia, but now seems to be more eager than China,” he told NewsChina.

This change of heart is widely thought to stem from Russia’s economic difficulties following both US and EU sanctions slapped on Moscow after its annexation of Crimea in March 2014, plus a steady fall in the global price of oil – the main contributor to the Russian exchequer. Even before the onset of this recent economic crisis, turning east was already on President Vladimir Putin’s agenda. In May 2012, the Ministry of Development of the Russian Far East was created by the Dimitry Medvedev cabinet. Until the Ukraine crisis, however, progress in this area was slow.

As Russia’s largest neighbor, boasting decades of rapid economic growth, China is regarded as a big business partner. Russian Prime Minister Dmitry Medvedev noted at a meeting in early 2014 that Russia could draw on China’s experience in setting up special economic zones to attract foreign investors. New legislation introduced by the Kremlin and put into effect in April 2015 would grant tax incentives, faster administrative approval and infrastructure improvement in such zones, all of which were major tools of China’s Reform and Opening-up.

This does not mean that a gold rush is on the horizon. For Asia Pacific investors, including those from China, Russia’s Far East remains a precarious option, not least due to potential competition from other Asia-Pacific companies welcomed in to diversify the risk of Moscow becoming too reliant on funds from China.

New Momentum

Russia has placed high hopes in its eastern regions not only lifting the country out of its current economic difficulties, but also improving the market strength of its non-raw materials industries. Yury Trutnev, Russia’s Presidential Plenipotentiary Envoy to the Far Eastern Federal District, explained at a press conference in October 2013 and in a recent interview with Russian magazine Kommersant Vlast that the Kremlin’s primary vision for the country’s Far East is to build a localized, export-oriented manufacturing economy in situ, rather than shipping natural resources 9,000 kilometers back to the densely populated “European” part of the country.

President Putin held a meeting on April 3 to urge ministers to “use to full effect” the new laws designed to attract investment in the country’s Far East. Putin has repeatedly stressed the importance of turning the current challenges imposed by Western sanctions on Russia into an opportunity to speed up Russia’s import substitution strategy and boost both domestic consumption and employment. The Far East, and its growth potential (according to President Putin, the area showed far higher industrial and agricultural output than the national average in 2014), figures heavily in this grand plan.

China is regarded as both a good example to follow and a business partner with enormous potential yet to be tapped. Currently, bilateral trade is only one-sixth of that between China and the US. In December 2014, Trutnev led a delegation including a number of senior officials from the Far Eastern Federal District on a visit to Beijing, where they highlighted proposed tax reduction policies to 33 corporate executives from big State-owned and private Chinese companies. Trutnev agreed with analysis comparing Russia’s Far East to the Special Economic Zone (SEZ) of Shenzhen, the first major proving ground for China’s Opening-up in the early 1980s. Three priority development zones in the Far East, based on a concept similar to China’s SEZs, have been approved so far, with 20 scheduled for completion before the end of 2015.

Since Trutnev’s visit, officials from Russia’s Far East have become known for their promotional activities in China’s northeastern provinces of Heilongjiang, Jilin and Liaoning. Thousands of Chinese officials and businesspeople have also been invited to return such visits, particularly in the light of Chinese ambitions to link Asia with Europe through a number of routes, including one through Russia. On April 13, 2015, Heilongjiang Province, which shares more than 3,000 kilometers of land border with Russia and accounts for one fourth of bilateral trade, unveiled a plan for a network of railways, ports, airports, roads, bridges, power lines and telecommunication cables in place to build an economic corridor connecting Russia, China and the EU.

Beyond Taxes

In his recent article in Russian daily newspaper Kommersant (“The Businessman”), Alexander Gabuev, head of the Russia in the Asia-Pacific Region Program at the Carnegie Moscow Center, noted that Russia needs to show investors how its new priority zones in the Far East are different from existing special economic zones in Russia, as investors face the problem of small market size and high cost of labor cost due to the Russian Far East’s small population, a problem that tax breaks alone are unlikely to solve. The Russian government is struggling to implement a new policy encouraging Russians to move to the underdeveloped Far East by granting plots of free land.

For Chinese investors like Mou Wanglong, making Vladivostok, Russia’s largest Pacific port, open-access as was proposed by President Putin at the end of 2014, holds more appeal than the establishment of new priority zones. A more relaxed visa system and specialized parks dedicated to tourism, science and industry are reportedly slated for construction in the area.

Doubts, acknowledged in Gaubev’s Kommersant article, about diverting attention away from natural resources and towards hi-tech investment, refuse to dissipate. Indeed, investor uncertainties are compounded by delays in officially announcing details of the Vladivostok plan. In addition, erratic bilateral commodities trade activity in Russia’s Far East since the second half of 2014 caused by dramatic fluctuations in the Russian currency has led to the current unfavorable situation in which, according to Mou, “the market has nearly frozen.”

While eager to court Chinese investment, Russia remains wary of an excessively strong China presence, with some media outlets warning this will indicate to China that Moscow has nowhere else to turn. In his recent interview with Kommersant Vlast, Yury Trutnev answered such concerns by stressing the importance of both securing Chinese investment while seeking to “work with everyone” in the Asia Pacific region.

On April 13, 2015, Dmitry Medvedev and his Vietnamese counterpart Nguyen Tan Dung, meeting in Hanoi, agreed to sign an FTZ agreement by mid-2015 between Vietnam and the Eurasian Economic Union (EEU) which includes Russia, Armenia, Belarus and Kazakhstan, with Kyrgyzstan scheduled to join soon. This will be the EEU’s first FTZ with a foreign country. On April 15, Medvedev offered the same opportunity to Thai military leaders during a visit to Bangkok, while the Russian International Affairs Council declared in May 2014 that South Korea was “Russia’s most promising partner for technological and investment cooperation in the Far East.”

For Russia and China, two neighbors with a long history of both cooperation and conflict, adaptibility will prove essential going forward. In trade, as in politics, money matters, but never defines everything. 

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