China-Russia trade likely to have 'plateaued' even as leaders hail 'unprecedented high level' relations

While Russia is likely to increase its use of the yuan and also sell more oil to China, bilateral trade may have reached a "plateau", according to analysts.

Russian Prime Minister Mikhail Mishustin, who expects bilateral trade to reach US$200 billion in 2023, hailed relations with China as being "at an unprecedented high level" after signing a set of agreements during a meeting with Chinese Premier Li Qiang in Beijing on Wednesday.

Mishustin later met President Xi Jinping, while Li added that China and Russia's "practical cooperation" has continued to develop steadily, with the bilateral trade volume having "increased significantly" by more than 40 per cent this year.

Do you have questions about the biggest topics and trends from around the world? Get the answers with SCMP Knowledge, our new platform of curated content with explainers, FAQs, analyses and infographics brought to you by our award-winning team.

Overall trade between China and Russia rose by nearly 30 per cent in 2022 to US$190 billion, according to Chinese customs data, but the room for significant growth in energy trade could be limited going forward, according to analysts.

"It is likely that Russia's energy exports to China have now reached a plateau after booming last year. Beijing is careful not to become overly dependent on a single energy supplier," said Agathe Demarais, global forecasting director at the Economist Intelligence Unit and author of Backfire, a book on US sanctions.

"The picture is the same for gas: China is reluctant to build a new pipeline, Power of Siberia 2 - which would boost gas supplies from Russia, also for fear of becoming overly dependent on Russian hydrocarbons."

Energy, especially crude oil, has accounted for a significant proportion for bilateral trade, and natural resources consultancy firm Wood Mackenzie forecasts that China is likely to import around 2.3 million barrels a day of crude oil from Russia, up from 1.75 million barrels in 2022, from its total of 10.6 million barrels a day in 2023.

"For natural gas, we do see a significant increase of pipeline gas imports by China from Russia in 2023 through Power of Siberia. China's [liquefied natural gas] imports from Russia will also be notably higher in 2023 versus 2022," said Kang Wu, head of macro, demand & Asia analytics at S&P Global Commodity Insights.

Wu predicts China's crude oil imports from Russia will be well above 2 million barrels per day, up from 1.7 million in 2022, from its overall total of 11.1 million barrels per day in 2023.

Beijing has yet to make a commitment to the Power of Siberia 2 project, which plans to deliver 50 billion cubic metres (1.77 trillion cubic feet) of natural gas per year from Russia's Yamal Peninsula in western Siberia to China via Mongolia.

In March, Xi and Russian President Vladimir Putin pledged to "significantly increase" trade by 2030.

Xi and Putin also promised "smooth settlement" between economic entities, as well as "supporting the expansion of the use of local currency in bilateral trade, investment, credit and other economic and trade activities".

China's yuan is now a reserve currency for Russia, which has been under sweeping sanctions from the US and its allies since its invasion of Ukraine last year.

Russia's central bank has been blocked from accessing its foreign reserves, and several Russian banks have been banned from the Swift international payments network.

Herman Gref, chief executive of Russia's largest lender, Sberbank, told a Russia-China forum in Shanghai on Tuesday that the yuan is the "undisputed leader" for its clients.

"In 2023, we expect a tenfold increase in the number of transactions in the yuan compared to last year [at Sherbank]," said Gref, who has also since been added to the list of individuals sanctioned by the US Treasury.

"Over the year, the share of the yuan increased from 2 per cent to 18 per cent in Russia's export operations, and from 5 per cent to 27 per cent in its imports, which is an impressive trend."

But Liu Huaqin, a researcher with China's Ministry of Commerce, said one of the key hurdles in China's trade with Russia has been the lack of diversification beyond energy.

Energy accounted for 74.5 per cent of Russia's total exports to China in 2022, up from 68 per cent in 2021, according to Liu.

"Over the years, the two sides have been promoting the diversification of the trade in commodity, striving to increase the trade share of high value-added commodities and expand trade in agricultural products etc, but the reality is farther away from this goal," Liu said in a journal published by Heilongjiang University last month.

Russia's trade barriers and restrictions on certain farm goods have been on the rise since last year following its invasion of Ukraine, making products such as sunflower oil and soybean more costly for importers.

"The Russian soybean export tariff is 20 per cent. This policy directly affects the implementation of the soybean supply plan between China and Russia," added Liu.

"Changing tariff policies are making the trade environment between the two sides more complicated, which is not conducive to the stable development of trade between the two countries."

China's trade deficit with Russia reached a record US$38 billion last year, according to Liu.

"From the perspective of trade balance, the quality of trade from China's side has declined, which is not conducive to the sustainable development of bilateral trade," Liu added.

In September 2019, China and Russia agreed to increase trade to US$200 billion by 2024 from US$107 billion in 2018.

Russia Minister of Economic Development, Maxim Reshetnikov, told Chinese state media CGTN in March that the two countries are "ahead of schedule" in meeting the target in 2023.

China's exports to Russia soared by 153.1 per cent in April, year on year, to US$9.62 billion, and by 6 per cent month on month, according to Chinese customs data

But China's imports from Russia grew by just 8 per cent in April, year on year, to US$9.61 billion, while dropping by 12 per cent from a month earlier.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2023 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2023. South China Morning Post Publishers Ltd. All rights reserved.