ECONOMICS AND SECURITY 174 ESC 05 E Original: English NAT O   Pa rl i a me n t a ry  As s e mb l y RUSSIAN-CHINESE TRADE AND ECONOMIC CO-OPERATION: CURRENT SITUATION, PROBLEMS AND PROSPECTS DRAFT SPECIAL REPORT VICTOR VOITENKO (RUSSIAN FEDERATION) SPECIAL RAPPORTEUR* International Secretariat 17 October 2005 * Until  this  document  has  been  approved  by  the  Economics  and  Security  Committee,  it represents only the views of the Rapporteur. Assembly documents are available on its website, http://www.nato-pa.int

174 ESC 05 E i TABLE OF CONTENTS I. INTRODUCTION ................................................................................................................... 1 II. RUSSIAN-CHINESE TRADE AND ECONOMIC CO-OPERATION........................................ 1 A. The History of Russian-Chinese Relations.................................................................... 1 B. Current state of Russian-Chinese Trade and Economic Co-operation.......................... 2 III. THE  PROBLEMS  AND  PROSPECTS  OF  RUSSIAN-CHINESE  TRADE  AND  ECONOMIC RELATIONS........................................................................................................................ 5 IV. CONCLUSION....................................................................................................................... 8 V. APPENDIX .......................................................................................................................... 10

174 ESC 05 E 1 I. INTRODUCTION 1. Russia   and   China   have   a   long   history   of   trade   and   economic   co-operation.   Such co-operation  has  a  great  potential  for  development,  thanks  to  the  two  countries’  geographic proximity, economic compatibility, high level of interstate relations in the past and present, and a multitude of other factors. 2. The  history  of  Russian-Chinese  relations,  including  that  of economic co-operation, may be divided into three main stages. Stage one saw the establishment of friendly relations between the two  countries.  At  stage  two,  the  relationship  evolved  into  constructive  partnership.  And  at  stage three, the two countries started defining their relations as strategic partnership. 3. At present, Russian-Chinese relations have a solid legal base that underlies their economic ties.  It  includes  key  intergovernmental  agreements  on  such  topics  as:  trade  and  economic co-operation; encouragement of investment and the mutual protection of investment; co-operation in  science  and  technology;  avoidance  of  duplicate  taxation  and  the  prevention  of  income  tax evasion;  co-operation  and  mutual  help  in  customs;  joint  initiatives  on  protection  of  intellectual property, etc. Dozens of interdepartmental agreements accompany these interstate treaties. 4. It  can  be  stated  confidently  that  Russian-Chinese  relations  have  never  seen  a  friendlier period   than   today.   The   Russian-Chinese   Treaty   of   Friendship,   Good-Neighbourliness   and Co-operation  has  laid  the  foundations  for  the  promotion  of  strategic  partnership,  good  will  and friendship between our people. 5. Russian  and  Chinese  leaders  have  stated  that  the  promotion  of  good-neighbour  relations, mutually-beneficial  co-operation  and  strategic  partnership  remains  a  strategic  priority  for  both  of our countries in outlining our foreign policy, regardless of any changes in the international climate. The  two  heads  of  state  meet  regularly  within  a  framework  that  provides  vast  opportunities  for discussion  and  feedback  while  taking  decisions,  as  well  as  a  solid  political  base  and  a  friendly environment for the development of trade and economic co-operation.  Such a relationship is fully compliant  with  the  basic  needs  of  the  two  countries,  as  well  as  the  requirements  for  peace  and economic development in the entire region. 6. The  Russian-Chinese  relations  of  friendship  rest  on  the  two  nations’  shared  basic  needs. There is a favourable environment as well as mutual interest for promoting these relations. Both China  and  Russia  strive  to  develop  their  own  economies  and  move  on  with  their  trade  and economic co-operation. 7. Russian-Chinese relations are deeply rooted, promising and broadly influential. Both states have  permanent  membership  in  the  United  Nations  Security  Council,  which  gives  their  bilateral interaction a global impact. II. RUSSIAN-CHINESE TRAD E AND ECONOMIC CO -OPERATION A. ON THE HISTORY OF RU SSIAN -CHINESE RELATIONS 8. Russian-Chinese relations date back four centuries. Russia’s first religious mission assigned by czar Peter the Great arrived in Beijing in the early 1716, laying the basis for regular political, economic, scientific and cultural exchange between the two countries. 9. Diplomatic and consular relations between Russia and China were established on May 31, 1924, with the signing of the Treaty on the Main Principles for Resolution of Disputes.

174 ESC 05 E 2 10. Several factors long shaped Russian-Chinese relations. Boundary disputes predominated for 300   years.   Despite   the   signing   of   several   agreements   between   the   two   countries,   border delimitation  remained  unsettled  until  the  late  20th  century.  As  a  result,  tensions  at  the  border smouldered for centuries and occasionally turned into armed conflicts. 11. In 1969, Soviet Head of Government Alexei Kosygin and Chinese Prime Minister Zhou Enlai agreed  to  preserve  the  Russian-Chinese  border  as  it  was  then  delineated.  The  two  states  then embarked   upon   a   new,   prolonged   negotiation   that   lasted   until   May   19th,   1991,   when   the Soviet-Chinese Eastern Border Treaty was signed. The demarcation process was only finished in 1999. 12. Thanks  to  the  good  will  and  diplomatic  effort  of  both  countries,  Russian-Chinese  relations have finally been normalized. A new stage of development began with the Joint Declaration on the Guidelines  for  Mutual  Relations  between  the  People’s  Republic  of  China  and  the  Russian Federation.  This  Declaration  was  adopted  on  April  25th,  1996,  after  the  first  Russian-Chinese summit, when Russian President Boris Yeltsin paid an official visit to Beijing. 13. The Declaration was the first act that officially proclaimed an equal and confident partnership between Russia and China with a view to strategic co-operation in the 21st century. The Chinese see  strategic  co-operation  as  a  new  principal  concept  of  their  relationship  with  Russia.  Co- operation with Russia is considered to be a more efficient mode of relationship rather than a union. 14. The  Treaty  of  Friendship,  Good-Neighbourliness  and  Co-operation  between  the  Russian Federation  and  the  People’s  Republic  of  China  was  signed  by  Russian  President  Vladimir  Putin and  PRC  Chairman  Jiang  Jeming,  in  Moscow,  on  July  16th,  2001.  This  act  outlines  the  main principles of Russian-Chinese relations and identifies the major spheres of bilateral co-operation. Chairman  Jiang  Jeming  clearly  expressed  the  Chinese  position  in  his  accompanying  speech, stating   that   long-term   friendship,   good-neighbourliness   and   mutually   beneficial   co-operation should neither be based upon confrontation, nor upon an alliance; nor should it be directed against a third party. Mr. Jeming called such relations “a new model for the 21st century.” 15. The  heads  of  both  states  now  communicate  quite  frequently.  Not  only  official  visits  bring them  together,  but  also  bilateral  meetings  at  the  summits  held  by  the  Shanghai  Co-operation Organization  (SCO),  Asia-Pacific  Economic  Co-operation  (APEC),  etc.  A  hotline  established between the leaders of the two countries efficiently facilitates such bilateral communication. 16. All this contributes to ensuring peace and stability in the region and promotes development of trade and economic co-operation between Russia and China. B. CURRENT STATE OF RUSSIAN-CHINESE TRADE AND ECONOMIC CO-OPERATION 17. Russian-Chinese  trade  and  economic  co-operation  has  intensified  over  recent  years.  In 2004, the bilateral commodity turnover achieved its highest level of Russian-Chinese trade since the  early  Soviet  period.  It  now  accounts  for  $21.2  billion,  up  35%  from  last  year.  The  trend  has continued in the first quarter of 2005, with the quarterly turnover topping $5.4 billion and making 23.1% more than in the same period last year. 18. Russia has traditionally been a major trade partner for China. At present, it is one of the top ten trade partners to China. Russia’s share in China’s foreign trade volume made 1.84% in 2004. However, the significance of Russian imports is much higher in several goods important for China. For  instance,  Russia  is  China’s  number  one  supplier  of  timber  (64.7%  of  all  timber  imports  to

174 ESC 05 E 3 China),  fertilizers  (47.5%),  seafood  (44.5%),  and  an  important  supplier  of  oil  (8,75%),  ferrous metals (13.9%), paper pulp and cellulose (12.8%). 19. Last year’s totals make Russia China’s 9th biggest trade partner, following the United States, Japan,  Hong  Kong,  South  Korea,  Taiwan,  Germany,  Malaysia and Singapore. Russia’s share in China’s overall commodity turnover has remained between 1.8— (1.83% for the first quarter of 2005). 20. One  of  the  characteristic  features  of  modern-day  Russian-Chinese  trade  is  the  continuous decrease of Russia’s trade surplus. It was $3.03 billion in 2004, down 18% from 2003. However, this year’s economic situation has been favourable for Russia; its trade surplus for the first quarter of 2005 was $1.14 billion, with a 13.4% increase from last year. 21. Russia’s exports showed a growth rate of 24.7% last year, up from 15.7% in 2003. Russia’s export volume made up $12.1 billion in 2004.  At the same time, China’s exports to Russia have gone up 50.9%, their value reaching $9.1 billion. Data for the first quarter of 2005 show a more balanced growth for both Russia’s exports to China ($3.27 billion, up 19.3%), and China’s exports to Russia ($2.13 billion, up 22.9%). 22. The  structure  of  Russian-Chinese  trade  has  remained  generally  unaltered  in  the  recent years.  Raw  materials  still  make  up  for  the  bigger  part  of  Russia’s  exports.  Last  year,  Russia’s exports  of  the  four  basic  groups  of  raw  goods  (oil  and  oil  products;  ferrous  metals;  timber; chemicals) accounted for over 65% of Russia’s overall exports (some 64.1% in the first quarter of 2005). 23. Russia  was  the  fourth  largest  oil  supplier  to  China  in  2004,  after  Iran,  Saudi  Arabia  and Oman. Its share in the overall oil supplies to China reached 9.2% in 2004, up from 5.8% in 2003. Russia delivered 2.62 million tons of crude oil to China in January— for 25.8% of Russia's overall exports volume. 24. Timber remains Russia’s second biggest export item to China (12.2% in the first quarter of 2005). Chinese statistics indicate that Russia covers up to 60% of China’s demand for timber. It should be noted, however, that unprocessed lumber makes up for 98% of those exports. 25. In  2004,  Russia’s  exports  went  up  on  such  major  items  as  chemicals,  fertilizers,  fish  and seafood, and metal ores. At the same time, the export of ferrous metals has decreased, due to an unstable price situation in the Chinese market, as well as to the anti-dumping measures that were in place throughout most of 2004. 26. Statistics  for  the  first  quarter  of  2005  show  that  last  year’s  trends  have  continued,  with chemicals  accounting  for  9.2%  of  Russia’s  overall  exports  to  China  (up  1.1%  from  last  year); fertilizers 11.4% (up 61.9%); fish and seafood 7.1% (up 85.5%); ores, slag and ashes 2.2% (up 163.3%); ferrous metals 8.5% (down 52.1%). 27. Russia’s supply of engineering products to China dropped by half in 2004. This item’s share in  Russia's  overall  exports  to  China  was  only 5% in 2004, down from 13% in 2003, and 20% in 2002.  The  trend  has  not  turned  in  the  early  2005:  Russia  exported  a  $84.07  million  worth  of machinery  to  China  in  the  first  quarter  of  2005,  56.8%  less  than  in  the  similar  period  of  2004. Engineering   products   accounted   for   only   2.6%   of   Russia’s   overall   exports   to   China   in January-March, 2005. 28. China’s exports to Russia still consist mainly of consumer goods and food (80% overall, 65% of  that  due  to  consumer  goods).  It  should  be  noted  that  official  statistics  do  not  account  for  the so-called “shuttle trade”, with its estimated value of $5—

174 ESC 05 E 4 29. China's presence in various segments of the Russian market continued to increase in 2004. Machinery  and  equipment  supplies  grew  dynamically  (worth  $1.56  billion,  up  47.5%),  as  have China’s  traditional  exports  including  fur  products  ($1.2  billion,  up  to  2.3  times  higher).  Leather goods,  textile  fabrics,  footwear  and  knit  work  have  remained  among  China’s  most  important exports. 30. The  Chinese  business  community  has  shown  more  interest  in  investing  in  the  Russian economy;  yet,  the  scale  of  investment  co-operation  has  remained  very  moderate.  The  Chinese Ministry of Commerce endorsed 47 investment projects for Russia in the first 10 months of 2004 (up  from  41  projects  throughout  2003),  with  a  total  value  of  $140  million.  The  overall  volume  of Chinese  direct  contract  investment  in  Russia  has  topped  $680  million,  which  is  about  5%  of China’s  total  overseas  investment.  The  Chinese  government  is  currently  seeking  to  expand  its investment presence in Russia, planning to invest $12 billion by 2020. 31. Russian-Chinese  Investment  Forums  have  provided  a  good  opportunity  for  stepping  up investment.   The   first   Forum   took   place   in   Khabarovsk   in   the   summer   of   2004   and   saw 12 investment projects concluded with a total value of $690 million. In June 2005, the 2nd Forum was  held  in  Saint  Petersburg.  This  time,  the  total  value  of  investment  projects  doubled.    This suggests that Chinese investment in Russia is increasing. 32. The investment agreements concluded at the Saint Petersburg Investment Forum provided for  timber felling and processing in Khabarovsk; for an agro-industrial centre to be set up in the Novgorod Oblast; and for the joint construction of a fruit-and-vegetable storage facility in Irkutsk.   A Memorandum of Co-operation was also signed between a Russian electronic enterprise and the Chinese Sichuan Electronic Company. 33. The bulk of Chinese investment is currently concentrated in Russia’s Far East, particularly in Khabarovsk Krai and Primorye Krai. Most Russian-Chinese joint ventures licensed in those areas are trade enterprises.  At the same time, Chinese capital is gradually entering Russia’s restaurant and  hotel  businesses.    Primorye’s  investment  situation  is  particularly  characterized  by  wholly Chinese  ventures  in  hospitality  services,  catering,  retail  trade,  construction,  freight  services  and timber cutting. 34. In  general,  potential  investors  in  China  still  feel  unsafe  about  Russia’s  investment  climate and  don’t  see  this  country’s  investment  protection  guarantees  as  adequate.    China  has  been urging  Russia  lately  to  sign  an  agreement  on  the  mutual  protection  of  investment,  as  well  as  to elaborate  a  system  of  benefits  for  investment  projects,  particularly  in  terms  of  taxation  and migration policies.  A lack of information on various investment opportunities in different Russian regions constitutes another obstacle to a significant increase of investment from China. 35. In 2004, China abandoned some of its restrictions on Russian goods entering its domestic market. The proportion of Russian imports limited by anti-dumping duties fell from 10% to 6.4%, thanks to the lifting of import restrictions for Russian metal products.  In September, the Chinese government   gave   in   to   both   domestic   industries   and   foreign   suppliers   and   suspended   its anti-dumping duties for cold-rolled metal imports.  China’s anti-dumping investigation on hot-rolled metals expired on December 30th, 2004, at which point the situation for metal trade went back to normal. 36. Chinese presence in several traditional and new segments of the Russian market is currently expanding. In developing trade and economic co-operation with Russia, the Chinese counterparts generally seek to obtain access to raw materials, as well as to Russia’s science and technology. Expanding  its  presence  in  specific  sectors  of  the  Russian  market  is  another  feature  of  Chinese business.

174 ESC 05 E 5 III. THE   PROBLEMS   AND   PROSPECTS   OF   RUSSIAN-CHINESE   TRADE   AND ECONOMIC RELATIONS 37. Trade  and  economic  relationship  between  Russia  and  China  are  currently  beset  by  a number of problems. 38. One of the problems is that the structure of bilateral trade has not grown more diverse in the recent years, particularly the share of engineering products in Russia's exports to China has not increased. Russia’s major companies engaged in China (such as Silovye Mashiny open-type JSC, TekhnoPromExport   federal  state  unitary  enterprise,   AtomStroiExport   open-type  JSC,   Gornoe Oborudovanie  open-type  JSC)  did  not  receive  any  new,  large-scale  orders  for  thermoelectric, nuclear  and  hydroelectric  power  plants,  nor  for  mining  equipment,  despite  these  items  being Russia’s priority engineering products.  The situation is aggravated by a number of critical delays on several pending large-scale projects.  To name a few, there has been a delay in constructing the  first  phase  of  China’s  Tyanwan  NPS;  and  a  2001  contract  for  five  Tu204-120C  jets  to  be delivered to China has also been held up, etc. 39. As  the  Russian-Chinese  Subcommission  on  Trade  and  Economic  Co-operation  held  its 7^th meeting  in  Moscow  in  August,  2004,  it  was  agreed  that  the  Russian  Ministry  of  Economic Development  and  the  Chinese  Ministry  of  Commerce  should  draw  up  and  exchange  memos  to promote machinery trade as a means of positioning and promoting Russian engineering products in the Chinese market. Such memos were issued and consequently signed by the Russian and the Chinese prime ministers at their 9th regular meeting in September 2004. 40. These    arrangements    were    complemented    by    an    Annual    Plan    for    Interministerial Co-operation  in  Stimulating  Machinery  Trade  that  was  jointly  endorsed  in  December  2004.  The Plan provides for a series of business seminars, a Russian engineering expo to be held in Beijing, a  Russian  machinery  and  equipment  exhibition  to  be  set  up  at  the  Harbin  Economic  and  Trade Fair, and relevant Russian expositions to be presented at the China International High Tech Fair in Shenzhen and the Shanghai International Industry Fair, etc. 41. In December 2004, Russia’s Ministry of Economic Development, the Russian Trade Mission in  China  and  the  Chinese  Ministry  of  Commerce  held  their  2nd  Seminar  on  Co-operation  in Engineering.    Some  30  Chinese  blue-chip  companies  sent  their  representatives  to  Moscow  to attend this forum. 42. Seeking  to  introduce  Russia’s  engineering  industries  to  the  Chinese  business  community, the Russian Ministry for Economic Development has produced a catalogue of Russian machinery and equipment items available for export to China.  The catalogue includes data on over 50 major engineering enterprises based in Russia and is currently being translated into Chinese with a view to future distribution among relevant Chinese businesses. 43. In March 2005, Beijing hosted a Russian-Chinese High Tech Co-operation Forum aimed at marketing  Russian  high  tech  products  in  China.  Licensing  Chinese  businesses  for  full-term assimilation of Russian technologies may bring Russia approximate revenue of $230-250 million. 44. Mutual  market  accessibility  between  China  and  Russia  is  also  shaped  by  the  still-active anti-dumping  restrictions  on  a  number  of  Russian  export  items,  as well as China’s anti-dumping investigations (ADI).  As of early 2005, seven ADI cases were launched against Russian exports. One   of   the   seven,   namely   the   ADI   on   cold-rolled   metals,   has   been   suspended   since September 2004; and so far, no anti-dumping duties have been imposed with regard to the newly initiated ADIs.

174 ESC 05 E 6 45. The anti-dumping restrictions in question concerned metal products (cold-rolled metals and electro-technic  steel¹)  and  chemicals  (trichloroethylene,  bisphenol  A,  epoxipropane,  butadiene- styrene rubber, etc.) 46. Russia  and  China  have  developed  a  framework  for  early  warning  and  consultation  on  the “soft spot” items of their trade; this framework was subject to practical testing throughout the year 2004.  In  January  2005,  expert  consultation  took  place  in  Beijing  in  an  effort  to  update  this framework. A degree of progress was achieved; ministerial representatives have been authorized to participate in business-to-business consultation. The parties also came to an understanding on the possibility of interministerial consultation to be held before an ADI is formally launched; it was jointly noted, however, that such consultation should not be regarded as part of the early warning framework.  The  parties  failed  to  agree  on  mutual  notification  upon  accepting  an  AD  petition  for examination. 47. Livestock    product    and    vegetable    trade   has   also   remained   a   vulnerable   area   of Russian-Chinese economic interaction in 2004, due to a set of technical restrictions on trade. 48. In  May  2000,  China  imposed  a  ban  on  Russian  imports  of  cleft-footed  cattle and livestock goods, including milk and dairy products. Beijing has maintained this ban throughout 2004-2005. 49. There  were  also  problems  with  Chinese  exports  into  Russia.  Following  an  outbreak  of  the avian flu epidemic that hit numerous poultry farms in the Chinese provinces of Hubei, Hunan, and the  Guangxi  Zhuang  autonomous  region,  the  veterinary  Department  of  Russia’s  Ministry  of Agriculture imposed temporary restrictions on poultry imports from China.  The ban, introduced on January  29th,  2004,  applied  to  any  import  of  live  bird,  incubatory  eggs,  poultry  meat  and  any poultry  products,  as  well  as  birdseed  and  any  forage  additives.    On  September  17th,  2004, Russia’s Federal Veterinary and Phytosanitary Control Service imposed temporary restrictions on both  import and transit of any live livestock from China, as well as any Chinese livestock goods that have not been heat-treated. 50. Informal trade and the problems that arise out of it caused some of the biggest tensions in Russian-Chinese   economic   relations   in   2004   and   2005.      A   special   Joint   Working   Group, established to regulate trade, came together for its first meeting in Beijing late in August 2004. 51. Russian Economic Development and Trade Minister German Gref and Chinese Minister of Commerce Bo Silai met at the 9th regular Russian-Chinese Meeting of Heads of Government to sign   an   interministerial   Memoradum   of   Understanding   on   Regulating   Bilateral   Trade.      In October 2004, the two countries, prompted by Russia’s Federal Customs Service, agreed to test a framework   for   real-time   electronic   data   exchange   on   freight   and   vehicle   traffic   over   the Russian-Chinese  border.  In  February   2005,  Beijing  provided  Russia  with  a  list  of  Chinese companies recommended as potential customs brokers. 52. Despite some practical measures taken by the two countries in 2004 in order to resolve the problem of informal trade (such as an institutional framework established to that end), this area of Russian-Chinese economic interaction is not free of tensions. This became evident in 2005, when Russian law enforcement agencies caught several Chinese companies smuggling large stocks of Chinese footwear into Russia. 53. In May 2005, Chinese Ministry of Commerce proposed to summon the Joint Working Group on  Trade  Regulation  for  its  second  meeting  in  order  to  elaborate  specific  mechanisms  for implementing the Group’s resolutions.   1 Antidumping duties on certain electro-technic steel expired on 30 December 2004.

174 ESC 05 E 7 54. Another  challenge  is  to  improve  the  efficiency  of  Russia’s  raw  material  exports  to  China, primarily timber and seafood. 55. In  April  2005,  a  regular  meeting  of  the  Russian-Chinese  Permanent  Working  Group  on Forest Resource Development and Utilization was held in Beijing. In the course of the discussion, Russian  representatives  stressed  the  need  to  drastically  step  up  co-operation  with  regard  to promoting  combined  wood  processing  within  Russia.    They  also  expressed  Russia’s  discontent with the poor progress made in implementing the Intergovernmental Co-operation Agreement on Forest Resource Development and Utilization, signed in 2002. 56. According to China’s Ministry of Commerce, China currently maintains 43 projects on forest resource  development  in  Russia.  Most  of  them  are  confined  to  timber  felling.  Chinese  timber companies  operating  in  Russia  logged  1.92  million  cubic  meters  of  timber  in  2004.  Russia  and China’s joint plans of constructing two pulp and paper mills in Russia’s Khabarovsk Krai and Chita Oblast are presently set for practical implementation.  The mills will have the capacity of 300 and 600  tons,  respectively.    By  now,  feasibility  studies  have  been  undertaken  for  both  projects,  and relevant Chinese authorities have already endorsed them. 57. Fish and seafood trade is facing a number of hard issues as well, mainly due to poaching and illegal shipment of those goods from Russia to China. As the relevant Russian-Chinese Mixed Commission  held  its  15th  meeting  in  December  2004,  the  parties  displayed  a  critical  clash  of opinions  on  a  number  of  matters,  such  as  co-operation  in  intercepting  Russian  vessels  that illegally ship sea products to Chinese ports; the size of industrial fishing quotas to be imposed on Chinese fishing boats in Russia’s exclusive economic zone in 2005; or China’s failure to clear its arrears for the use of Russian bioresources in 2003— 58. Russia  believes  that  if  these  problems  are  to  be  resolved,  and  if  trade  and  economic exchange is to grow, large-scale technological co-operation should be promoted between Russia and  China,  particularly  through  increasing  Russia’s  exports  of  technological  products  to  China. Russian  officials  want  increased  co-operation  in  science  and  production  by  means of joint basic process research, joint design elaboration, as well as risk and result sharing. 59. The past few years have seen an increase in direct scientific contacts, which focus on high tech projects that have not been yet completed testing. Completing half-done Russian technology projects often requires much less money than buying a license abroad. 60. Many experts believe that developing strategic partnerships between Russian and Chinese trans-national  companies  would  provide  a  good  opportunity  for  further  promotion  of  trade  and economic co-operation. Encouraging mutual flow of national capital would prove vital to this end, as well as establishing more joint ventures, not only in Russia and China, but also in various CIS countries. China’s current trade turnover for CIS countries (Russia excluded) is merely $2 billion. 61. At present, China hosts a little over 1,400 Russian ventures, their overall investment capital amounting to some $720 million. About 1,000 Chinese companies are at work in Russia; 573 of them  are  based  in  the  Primorye  Krai  and  have  an  aggregate  capital  of  only  $13.3  million.  The Russian Federation and the People’s Republic of China have no intergovernmental agreements to promote  and  to  protect  investment.  At  the  moment,  there  are  plans  to  create  a  large  Chinese wholesale  trade  centre  next  to  Moscow’s  “Sheremetyevo”  airport,  provided  with  its  own  railroad, customs and storage facilities, and a hotel. Other plans envision a Chinese health and recreation centre, and a Chinese business centre to be established in Moscow. A “Chinese Quarter” is to be set up in Saint Petersburg; this project’s value is assessed at $1 billion. 62. The  situation  with  frontier  trade  calls  for  drastic  changes.    This  trade  is  estimated  to  be 30-70% of overall Russian-Chinese trade turnover.  A desirable, civilized development of frontier

174 ESC 05 E 8 trade   is   hindered   by   its   illegal   nature,   combined   with   the   absence   of   intergovernmental arrangements concerning the status of national currencies involved in frontier payments.  Traders on  both  sides  of  the  border  have  committed  serious  violations  of  trade  regulations.    Chinese merchants evade taxes on a massive scale, which essentially reduces their activity to smuggling. Chinese sales proceeds are often used for export of Russian timber, metals and other materials; the money is also often exchanged into dollars and smuggled into China. It is imperative that such problems be dealt with. 63. There  is  reason  to  believe  that  once  Russia  adopts  a  Law  on  the Legal Status of Frontier Territories,  providing  for  a  Unified  Trade  Zone  to  be  created  from  Chita  to  Khabarovsk,  frontier trade will operate within legal boundaries. 64. China’s  steadily  increasing  demand  for  energy  in  the  recent  years  has  influenced  the strategies of Russian oil and gas companies, encouraging numerous bilateral projects. 65. For Russia, it would be more rational to build a unified corridor for energy supply, leading to the Sea of Japan along the Trans-Siberian Railway and the Baikal— a project would go hand in hand with a large-scale development strategy for Russia’s Far East, yet it would require considerable amounts of time and funding. 66. Promoting  such  infrastructure  compatibility  would  prove  beneficial  for  China’s  long-term development as well, especially since it corresponds with the current plans of establishing an oil and   gas   pipeline   network   throughout   the   Asia-Pacific   Region   within   the   so-called   Energy Community. 67. Russia is strongly interested in participating in the integration process within East Asia’s oil and  gas  sector.  However,  we  must  admit  that  at  the  moment,  Russia  has  no  comprehensive strategy for developing the mineral resources of Siberia and the Far East. 68. Russian-Chinese   banking   relations   face   a   number   of   challenges   as   well.   A   set   of co-operation    agreements  on  monitoring  credit  institutions,  signed  by  the  Central  Bank  of  the Russian Federation and the People’s Bank of China, provides legal grounds for banking relations. Russian-Chinese  mutual  payment  practices  suffer  from  a  number  of  imperfections.  The  mutual correspondent   relations   framework   between   Russian   and   Chinese   banks   remains   poorly developed; cash payments remain the norm, especially in frontier trade; and Chinese banks lack the needed trust of Russian commercial banks, etc. Such shortcomings hamper the development of  Russian-Chinese  trade.  It  should  be  mentioned,  however,  that  the  situation  is  gradually improving. 69. In order to ensure continuous and steady development of trade and economic co-operation between the two countries, Russian President Vladimir Putin and PRC Chairman Hu Jintao have adopted an Agenda for implementing the Treaty of Friendship and Co-operation.  In accordance with this Agenda, Russia’s Ministry of Economic Development and China’s Ministry of Commerce have launched a joint elaboration of a medium-term programme for the promotion of bilateral trade and economic co-operation in 2006-2010. IV. CONCLUSION 70. Promoting trade and economic co-operation including energy and investment co-operation is crucial to further enhancement of the strategic partnership between Russia and China. 71. Present-day  accounts  of  Russian-Chinese  trade  and  co-operation  reveal  a  number  of positive  trends,  yet  there  is  still  ample  room  for  improvement.    The  two  countries  are  willing  to

174 ESC 05 E 9 draw  up  medium-term  and  long-term  plans  in  order  to  ensure  deeper  co-operation.   Such plans should help improve the structure of bilateral trade; expand machinery and electronics trade; find the best means to advance economic and investment co-operation and promote large-scale joint projects  in  various  areas.  The  two  countries  are  encouraging  co-operation  in  energy  sector, co-operation   is   also   expanding   on   the   peaceful   use   of   nuclear   energy,   space   research, development   of   new   materials,   chemistry,   biotechnologies,   information   technologies,   and communications. 72. Russian-Chinese  trade  and  economic  co-operation  is  based  upon  shared  interests,  the current  favourable  situation,  and  the  two  countries’  sincere  commitment  to  forging  a  mutually beneficial partnership. 73. Based  on  these  common  aspirations,  the  two  countries  are  building  equal  and  confident co-operation in all spheres.

174 ESC05     E Appendix 10 APPENDIX APPENDIX 1 Russian—   Chinese Commodity Turnover (Totals in billion dollars, Growth Rates in percentage) Year Turnover Export Import Balance Total Growth rate Total Growth rate Total Growth rate Total 1998 5481 -10,5 3641 -10,9 1840 -9,7 +1801 1999 5720 +4,3 4223 +15,9 1497 -18,7 +2726 2000 8003 +39,9 5770 +36,6 2233 +49,1 +3537 2001 10670 +33,3 7959 +37,9 2711 +21,4 +5248 2002 11928 +11,8 8407 +5,6 3521 +29,9 +4886 2003 15760,62 +32,1 9726,07 +15,7 6034,55 +71,4 +3691,52 2004 21231,95 +34,7 12129,46 +24,7 9102,49 +51,0 +3026,97 January —   April 2005   7841,0 +25,9 4801,0 +21,0 3041,0 +34,7 +1760,0 APPENDIX 2. Russia’s Exports to China: Main Commodity Groups (in percentage) 1998 1999 2000 2001 2002 2003 2004 1st quarter 2005 Export total 100,0 100,0 100,0 100,0 100,0 100,0 100,0 100,0 Mineral   fuels,   oil   and   oil products 3,2 7,8 13,5 10,2 15,3 21,5 34,5 34,2 Timber and woodwork 3,7 6,7 6,8 7,5 12,6 10,8 11,8 12,2 Ferrous metals 16,4 18,5 15,3 15,1 12,0 18,5 11,7 8,5 Chemicals 6,7 10,0 11,2 8,9 8,4 8,2 9,1 9,2 Fertilizers 17,5 15,2 9,1 7,4 10,3 6,9 8,0 11,4 Fish and seafood 7,6 6,1 6,0 6,1 7,4 6,8 6,4 7,1 Non-ferrous metals 7,2 10,3 16,0 5,5 4,4 6,5 5,2 6,5 Machinery and equipment 25,3 14,9 4,5 28,7 20,1 12,9 4,8 2,6 Paper pulp, cellulose 2,8 5,0 6,1 4,4 4,3 3,8 3,6 3,3 Ores, slag, ashes 0,1 0,1 0,2 0,3 0,5 0,4 2,1 2,2 Paper, cardboard 1,7 1,8 1,9 1,4 1,3 1,1 0,9 0,9 Others 7,8 3,6 9,4 4,2 3,9 3,0 1,9 1,9

174 ESC05     E Appendix 11 APPENDIX 3 China’s Imports to Russia: Main Commodity Groups (in percentage) 1998 1999 2000 2001 2002 2003 2004   1^st quarter 2005 Import total 100,0 100,0 100,0 100,0 100,0 100,0 100,0 100,0 Machinery and equipment 5,2 7,2 8,2 11,0 15,8 17,6 17,2 20,5 Fur 2,0 1,3 1,8 2,4 2,3 5,8 13,1 3,4 Leather goods 23,9 20,5 20,3 18,8 14,4 15,8 12,3 13,8 Textile wear 12,6 13,0 16,0 16,6 12,7 13,1 11,3 10,8 Footwear 8,9 11,9 15,4 14,1 13,7 9,0 8,8 10,9 Knitted wear 10,6 15,0 11,0 6,6 7,9 8,3 8,6 7,2 Chemicals 3,1 5,0 4,8 4,9 4,9 4,9 5,4 6,9 Textile goods 2,5 1,6 1,9 2,9 1,7 3,2 3,2 3,2 Toys, sporting goods 1,4 0,9 1,4 1,8 2,4 1,8 1,7 1,7 Meat 9,1 1,4 0,2 1,6 3,7 1,9 1,3 1,0 Pottery 1,0 1,0 1,0 1,1 1,2 1,0 1,3 1,4 Furniture, mattresses 0,7 0,3 0,5 0,5 1,0 1,2 1,2 1,3 Metal goods 0,4 0,4 0,5 0,5 0,7 0,7 1,2 1,5 Vegetable and fruit products 0,1 0,2 0,6 1,5 1,6 1,4 1,1 1,8 Vegetables, pulses 1,1 1,3 0,7 0,7 1,0 1,0 0,8 0,9 Mineral fuels 2,9 4,1 2,2 1,9 1,2 1,0 0,8 0,5 Meat foods 0,9 0,6 0,6 1,1 1,1 0,8 0,7 0,9 Fruit 1,9 1,3 1,0 0,9 1,2 0,9 0,7 1,0 Jersey fabrics 1,5 0,3 0,6 1,1 1,0 0,9 0,7 0,6 Grain crops 0,4 3,8 2,6 0,7 1,5 1,2 0,4 0,7 Others 9,8 8,9 8,7 9,3 9,0 8,5 5,7 5,7