Blog Post

China’s growing presence on the Russian market and what it means for the European Union

The European Union’s relationship with Russia is strained, but the two economies are nevertheless highly intertwined. A huge share of Russia’s exports go to the EU, while in the early 2000s, EU countries supplied more than half of Russia’s imports. The EU is also a major investor in, and lender to, Russia.

By: , and Date: November 6, 2019 Topic: Global economy and trade

Russia doesn’t just look West, it looks East – and increasingly so. China’s economy has developed very rapidly over the past two decades, becoming the world’s largest exporter from a low base. Its goods have flooded Russia, eating into the EU’s export share. The changing global environment has helped re-orient Russia’s economic relationships eastwards, especially towards China. Chinese-Russian ties are also developing in the context of China’s massive Belt and Road Initiative.

This raises the question of the extent to which China might be able to displace the EU in Russia, in terms of trade, investment and lending. In a Bruegel working paper (written with the support of the EU Russia Expert Network on Foreign Policy), we assessed the deepening of Russia’s economic ties with China and what this might mean for the EU.

The data sheds light on some key issues EU policymakers should pay attention to. Since 2002, the EU’s share of Russia’s imports has dropped from 53% to about 40%, while China’s share has risen from less than 3% to 21%. Therefore, the EU still dominates, but what China exports is changing – and that should also give cause for concern. The share of domestic content in the goods China sells to the world has been increasing, and Chinese exports are increasingly substituting EU exports on the Russian market, especially in capital-intensive sectors. Notable overlaps are vehicles, industrial machinery, electronics and metal components.

In investment, China’s encroachment on the EU’s position in Russia is less evident. While Chinese investment worldwide surged in 2016 and 2017, China’s exposure in Russia is limited and remains much less than the EU’s. Chinese investment in Russia even dropped into negative territory, to -$13 million, in 2018.

The industry focus of Chinese investment has also been very different to the EU’s. In 2018, the biggest target of Chinese direct investment in Russia was the real-estate sector. EU companies have much broader interests in manufacturing and  several service sectors, including wholesale and retail. Nevertheless, the 2019 acquisition by Chinese oil companies of stakes in one of Russia’s most strategic companies, the natural gas producer Novotek, seems to indicate that Russia is becoming a major strategic partner for China.

EU lending to Russia, meanwhile, has declined in the context of sanctions. But Chinese project finance in Russia has steadily increased. Nevertheless, the EU still has much greater financial exposure than China in Russia. EU portfolio investment in Russia is clearly larger than Chinese portfolio investment. As for bank lending, while there are no official statistics on the role of Chinese banks as cross-border lenders, the signs are that Chinese project finance, while increasing, still does not equal even one-third of the EU’s lending flows into Russia.

Europe thus remains Russia’s largest trading partner, lender and investor, but China is catching up quickly, especially on trade and project finance. It is in the trade data that competition between the EU and China on the Russian market shows up most clearly, with the EU losing market share and China ramping up the value-added of its exports to Russia. While it is hard to draw any causality from our descriptive analysis, previous empirical work we conducted on this topic using sectoral data does show that China has taken market share from European exports in key sectors where the EU has long kept a comparative advantage[1].

[1] Garcia-Herrero, Alicia and Jianwei Xu (2016),  The China-Russia trade relationship and its impact on Europe https://bruegel.org/2016/07/the-china-russia-trade-relationship-and-its-impact-on-europe/

 


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article More on this topic More by this author
 

Opinion

Xi, Biden switching strategies for dominance

The US now sees Asia more through an economic lens, while China shifts toward a security focus

By: Alicia García-Herrero Topic: Global economy and trade Date: May 25, 2022
Read about event
 

Past Event

Past Event

Three data realms: Managing the divergence between the EU, the US and China in the digital sphere

Major economies are addressing the challenges brought by digital trade in different ways, resulting in diverging regulatory regimes. How should we view these divergences and best deal with them?

Speakers: Susan Ariel Aaronson, Henry Gao, Esa Kaunistola and Niclas Poitiers Topic: Digital economy and innovation, Global economy and trade Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 19, 2022
Read about event More on this topic
 

Past Event

Past Event

Is China’s private sector advancing or retreating?

A look into the Chinese private sector.

Speakers: Reinhard Bütikofer, Nicolas Véron and Alicia García-Herrero Topic: Global economy and trade Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 18, 2022
Read about event More on this topic
 

Upcoming Event

Jun
23
14:00

BRI 2.0: How has the pandemic influenced China’s landmark Belt and Road Initiative?

China's Belt and Road Initiative is undergoing a transformation after two years of pandemic. How is it changing and what are the consequences for Europe.

Speakers: Alessia Amighini, Eyck Freymann, Alicia García-Herrero and Zhang Xiaotong Topic: Global economy and trade Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article
 

Blog Post

The EU needs transparent oil data and enhanced coordination

The EU lacks the coordination structure and transparent data necessary to most effectively navigate an embargo on Russian oil.

By: Agata Łoskot-Strachota, Ben McWilliams and Georg Zachmann Topic: Global economy and trade, Green economy Date: May 16, 2022
Read article
 

Blog Post

Now is not the time to confiscate Russia’s central bank reserves

The idea of confiscating the Bank of Russia’s frozen reserves is attractive to some, but at this stage in the Ukraine conflict confiscation would be counterproductive and likely illegal.

By: Joshua Kirschenbaum and Nicolas Véron Topic: Banking and capital markets, Global economy and trade Date: May 16, 2022
Read article More on this topic More by this author
 

Podcast

Podcast

The cost of China's dynamic zero-COVID policy

What does zero-COVID mean for both China and the global economy?

By: The Sound of Economics Topic: Global economy and trade Date: May 11, 2022
Read article More on this topic
 

Opinion

For Europe, an oil embargo is not the way to go

Even at this late hour, the European Union should consider taking a different path.

By: Simone Tagliapietra, Guntram B. Wolff and Georg Zachmann Topic: Global economy and trade Date: May 9, 2022
Read article More on this topic More by this author
 

Podcast

Podcast

Global trade Down Under

A conversation on the global trading landscape.

By: The Sound of Economics Topic: Global economy and trade Date: May 4, 2022
Read article More on this topic
 

Opinion

A tariff on imports of fossil fuel from Russia

A tariff on imports of Russian fossil fuels would allow Europe to hit Russia's energy sector without great suffering.

By: Guntram B. Wolff and Georg Zachmann Topic: Global economy and trade Date: May 2, 2022
Read article More on this topic
 

External Publication

How to weaken Russian oil and gas strength

Letter published in Science.

By: Ricardo Hausmann, Agata Łoskot-Strachota, Axel Ockenfels, Ulrich Schetter, Simone Tagliapietra, Guntram B. Wolff and Georg Zachmann Topic: Global economy and trade Date: May 2, 2022
Read article More on this topic
 

Opinion

A phase out of Russian oil may be less effective than a tariff at reducing Putin’s rents

A punitive tariff on all energy imports from Russia would be a better choice than a gradually phased-in embargo on selected fuels.

By: Simone Tagliapietra, Guntram B. Wolff and Georg Zachmann Topic: Global economy and trade Date: May 2, 2022
Load more posts