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Russia and China: Cooperation in a New Era



May 30, 2018

Beijing

Fares Kilzie: Investors from China should consider feedstock processing

Since political relations between Russia and the West deteriorated, the bilateral partnership between Moscow and Beijing has gained importance. At least since 2014, politicians from both countries have increasingly and resolutely proclaimed a closer alliance of the major powers. Consequently, a more comprehensive cooperation between the countries, was also claimed at the major bilateral China-Russia Conference, which took place on May 29 and 30 in Beijing. As a partner of the Russian International Affairs Council (RIAC), CREON Group supported the summit in Chinas capital. Almost 300 delegates participated in the event, which was organized by the China Strategic Cooperation Council with Russia and the Institute for Russia, Eastern Europe and Central Asia. Both organizations belong to China's Academy of Social Sciences (CASS).

The title of the top-class conference promised optimism: "China and Russia: cooperation on the way to a new era." Dai Bingguo, a former deputy of the People's Republic of China and co-chairman of the Chinese-Russian Committee for Friendship, Peace and Development, praised the common strategic interests of both countries. Igor Ivanov, Russia's former foreign minister (1998-2004) and current chairman of the RIAC, was pleased with the intensification of the relationship in recent years, the importance of which should not be underestimated in an increasingly unstable world. Politically, according to the quintessential high-level discussions, China and Russia became recently closer than ever before.

And economically? There is still room for improvement, as representatives of both countries openly explained. Li Sin, senior academic researcher at the academy and Director of the Center for Russian and Central Asian Studies at the Shanghai Academy of Social Sciences, noted "an absolutely insufficient level of direct investment" from the Chinese side in Russia and vice versa. The reason for this: "There is a lack of mutual trust and understanding."

Yevgeniy Nadorshin, Chief Economist of the investment company "FK Capital" said, he was missing "equal relations", so he came to a similar conclusion. Chinese were wrong if they try to explain their low investments in Russia with existent investment barriers: "China has already overcome much larger investment hurdles in Africa years ago." Instead, it should be time to admit: "We do not trust each other, that is not a question of customs barriers." Andrey Klepach, Chief Economist and Vice-President of Vneshekonombank (VEB), found reasons for the mutually low level of foreign direct investments (FDI) also in Russia: "We must allow investments in the extraction and processing of natural resources and large-scale infrastructure projects", the former Vice Minister of Economic Development demanded. It appears to him that China's investment activity in Russia is too limited to the role of a creditor.

CREON had already systematically collected information about the FDI-influx for the conference one year ago: $ 62 billion, the total amount invested by Chinese financial institutions in the Russias energy sector. This rough figure has not changed significantly for a year. And it continues to apply that 98 percent of China's FDI flow into the commodity and energy sectors.

China, it seems, still considers Russia as a pure raw material supplier. For Fares Kilzie, the founder of the Creon Group, this is a dangerous perception: "If the oil price moves up or down harshly, there will be conflicts between supplier and customer. Investors should swiftly diversify their economic relations with Russia." However, this does not necessarily mean to invest in completely different industries instead: "Diversification can be achieved easily by just processing raw materials into products in Russia in order to export them to China, " Kilzie suggested. Projects dedicated to the processing of gas to methanol or agrochemicals, for instance, would be completely free of sanctions while being economically very attractive. The Creon Group offers Chinese as well as European partners to accompany such projects as a co-investor. There are a lot of projects to be realized.


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