BOFIT: Putin visits China; US sanctions also make trade between China and Russia more difficult

BOFIT: Putin visits China; US sanctions also make trade between China and Russia more difficult
Russian President Putin travelled to China to meet President Xi Jinping in a display of their tightening relations, despite the Western sanctions / bne IntelliNews
By Bank of Finland Institute for Economies in Transition (BOFIT) May 17, 2024

Russian President Vladimir Putin travelled May 16 on a state visit to China to meet President Xi Jinping. In addition to Beijing, the destination is Harbin in northeastern China. The political relations between the countries have become closer after the war of aggression against Russia, says the Bank of Finland institute for Emerging Economies (BOFIT) in its weekly update.

The last time Putin visited China was at the forum of the Belt and Road project in October. According to Russia, the meeting will discuss cooperation in areas of innovation, such as high technology, space technology and renewable energy. The information about the meeting did not mention the Power of Siberia 2 gas pipeline. The pipeline agreement, which has been in discussions for a long time, would be important for Russia. According to the Russian gas company Gazprom's plans, the pipeline would be in use in 2030, although an agreement with China has not yet been reached.

The growth of trade between the countries has waned. According to Chinese customs data, the value of goods exports to Russia decreased by 3% in January-April from a year ago. The value of imports increased by 11%. In particular, the export of vehicles to Russia has decreased. This can be partly explained by the boom at the end of last year, when Russians bought Chinese cars before Russia stopped at the beginning of April the possibility of reimporting cars to the country through the Eurasian Economic Union with lower taxes.

The increase in imports is mainly due to crude oil imports, which grew in January-March in terms of volume by 13% (China's total oil imports +1%) and in dollars by 20% y/y. Imports of oil products and natural gas from Russia also increased at the beginning of the year. Coal imports, on the other hand, decreased. Russia is China's most important oil importing country with a 20% share. According to customs data, a ton of oil imported from Russia cost 3% less than imported oil on average and 7% less than Saudi Arabian oil in January-March.

In recent months, trade between the countries has also been hampered by Western sanctions against Russia. Late last year, the United States made it possible to impose secondary sanctions on foreign financial companies if they help Russia evade sanctions. According to press reports, China's three major state-owned banks (BOC, CCB and ICBC) have refused to accept payments from sanctioned Russian companies, and Chinese banks have been more reluctant than before to pass on payments that could have any connection to sanctioned companies. Banks have started to demand extensive explanations from the seller and the buyer about which shipments the payments are related to. According to newspaper reports, this has caused long delays in payment traffic between the countries. Some Russian companies have started to relay payments through third countries, which increases costs. This year, Chinese companies have been urged to switch to using the yuan in Russian trade. Last year, a good quarter of international trade was in yuan. According to press reports, this spring many Chinese banks (including ICBC) have also stopped accepting yuan payments from Russian companies and some have stopped their operations in Russia completely. Smaller banks with no other international operations are increasing their market share.

As a result of Russia's war of aggression and sanctions imposed by Western countries, Russia's dependence on China has increased. China (including Hong Kong) already accounts for about 40% of Russia's goods imports. Russia has also increased its importance as China's trading partner, and the country's share is 5% of China's goods imports and 3% of its exports. However, travel between the countries has decreased significantly since the time before the pandemic. According to Rosstat's statistics, last year Chinese tourists visited Russia only a quarter of the number in 2019. Similarly, the number of Russian tourist trips to China fell to less than a third from 2019.