Economic Interdependence

3

rnutious approach to the I f China exhibiteci, in the beginning, a semewhat

development of Russo-Chinese political relations, no such caution existed in the

development of economic relations. Many Chinese officials and analysts believed that

after the end of Cold War the competition among states was shifting from the military

sphere to the economic sphere. Therefore, many analysts proposed that China's policy on

Russia should shift from the past geopolitical strategy to a geoeconomic one:

International relations and diplomatic relations are

increasingly becoming economic. This is an important

quality of the current world's developing

international relations. Economic and trade relations

for China and Russia are both now especially

important; for strengthening and developing Sino-

Russian relations and advancing friendship between

152

citizens of the two countries, their relations are

extremely significant. 401

After Deng Xiaoping's speech in January 1992 in South China, a new tide of reform and

openness arose in China. China wanted to open not only coastal areas but also inland

provincial capitals, even border areas where in the past foreigners were not allowed to set

foot.· China opened its border cities to Russia and gave policy privileges to the

enterprises and companies of border areas. Residents of border provinces who long had

lived in closed and poor conditions seemed to recognize an opportunity to get rich,

giving rise to the popular saying: "If you want to make money, go to the CIS

(Commonwealth of Independent States)."402

After the breakup of the Soviet Union, Russia experienced economic difficulties

and shortages of consumer goods. Many Russians had an extremely positive attitude

toward developing economic relations with China. At the beginning of March 1992, the

two sides signed the Agreement between the People's Republic of China and the Russian

Federation for Economic and Trade Relations,403 which established mutual most-

favoured nation status. The Russian side also proposed to abolish the original Sino-

Soviet rule that required bilateral trade to ·use foreign currency. The deputy premiers in

charge of foreign economic relations paid mutual visits, and the Committee for

Economic, Trade, and Scientific and Technological Cooperation began to function

again.404

The Chinese, in particular, recognized that current economic ties fall far short of

what is expected for a close partnership and that, given the way the world is becoming

401 Lu Nanquan, "Some issues on Further Development of Sino-Russian Economic and Trade Relations," Dongou Zhongya yanjiu, No. 1, 1993, pp. 30, 43. 402 Li Jingjie, "From Good Neighbours to Strategic Partners," in Sherman W. Garnett, Editor, Rapprochement or Rivalry?: Russia-China Relations in a Changing Asia, Carnegie Endowment for International Peace, Washington, D.C., 2000, p. 76. 4031bid. 4041bid.

153

integrated, close economic ties will be essential to sustain the partnership. From China's

perspective, there are at least four ways to achieve economic integration:

• Russian industry should rebuild using its strong, if aging, physical base and its

advanced science and technology, but also drawing on Chinese human resources,

entrepreneurship, and markets. Joint development zones in Russian cities and

along the Far Eastern border, discussed at the April 1997 summit, would

spearhead this cooperation.405

• Exploitation of energy resources in Siberia and the northern Russian Far East

should become the locomotive for regional cooperation, fueling China's rapid

economic growth and Russia's entry into the Northeast Asian division of

labour.406 Of course, other countries must provide most of the financing, but the

Chinese market and Chinese labour provide two indispensable ingredients for

successful projects on an enormous scale.

• Cross-border cooperation between Northeast China and the southern Russian Far

East offers the best hope for areas to meet the high hopes for regionalism voiced

widely early in the 1990's. Together Russia and China should proceed with the

long-proposed bridges, transit corridors, and other infrastructure projects to

achieve region-wide prosperity.407

• Chinese exports of foodstuffs, clothes, and other consumer goods will naturally

become part of the economic integration between the two countries. Chinese

exports of light industrial goods have skyrocketed around the world in the 1990's,

and Russia, too, will benefit from them.

405 Xu Xin, "On Russia's Economic Structure", Dongou Zhongya yanjiu, No. 6, 1996, pp. 24-33. This source stresses what Russia can do to revive its industry, high technology, and arms exports without noting China's potential role, which emerges from the planning of joint committees. 406 Specialised journals such as Northeast Asian Studies and Siberian Studies have long raise hopes of a regional takeoff based on a sharp division of labour in which Russia provides primarily natural resources, including energy. 407 Lin Heming and Jin Yan, "Set up a Chinese Heihe- Russia's Blagoveshchensk City Subregional Free Trade Zone's Realistic Model", Eluosi yanjiu, No.3, 1995, pp. 47-50.

154

Based on the above calculations, Russia and China have viewed no trouble envisioning a

huge volume of trade and economic integration ahead and, correspondingly, an all-

around partnership. If U.S.$20 billion was viewed as a reasonable target for trade in

2000,408 then by 2015, after Russia's economy has recovered, in part through integration

with China, a figure of U.S.$50 billion would not be beyond reach. After all, Chinese

trade with the United States and Japan climbed to about U.S.$65-70 billion in 1997.409

3. 1 RUSSIA AND CHINA IN CENTRAL ASIA: CONVERGENT AND DIVERGENT INTERESTS

While there is convergence between Russian and Chinese interests over common

Central Asian threats such as Islamic extremism, drug trafficking, arms

smuggling, and terrorism, there 1s also divergence in other areas, particularly with

respect to China's economic aspirations. In the Russian Far East, the governments have

been able to coordinate their efforts and exercise control over potential incidents; in

Central Asia, however, such coordination is difficult though the 'stakes are also high for

both countries.

Economically, Russia is deeply interconnected with the states of Central Asia,410

too much so to be indifferent to their economic viability. An economic collapse in these

states could lead to a serious refugee problem that Russia would not be able to handle.

On the other hand, Central Asia holds the world's second largest energy reserves; with

408 Alexei Nikolsky, "Russian-Chinese Military-Technical Cooperation: What Lies Ahead?" Vedomosti, No. 89, in RIA-NOVOSTI Daily Review, Vol. XLIX, No. 98, May 28, 2003, pp. 3-4. 409 Gilbert Rozman, "Sino-Russian Relations: Mutual assessments and Predictions," in Sherman W. Garnett, Editor, Rapprochement or Rivalry?: Russia-China Relations in a Changing Asia, Carnegie Endowment for International Peace, Washington, D.C., 2000, p. 158. 410 The five Central Asian countries are Turkmenistan, Kazakhstan, Kyrgyzstan, Uzbekistan, and Tajikistan. These are predominantly Muslim countries.

155

Russia's main export product being energy materials, Russia would not mind retaining

some control over the export route of Central Asia's oil and gas. From a security

perspective, Russia has to be concerned that one or several Central Asian countries might

tum into an extremist Islamic state, that they might join with Turkey and create a bloc

hostile to Russia, or that the long Russian-Kazakh border could become increasingly

porous to organised crime and drug trafficking. Finally, the mere presence of millions of

ethnic Russians in the region makes their welfare an important political issue in Russian

domestic politics.

Since the Commonwealth of Independent States (CIS) summit in May 1992,

Russia has stepped up its effort to reintegrate the Central Asian states under the banner of

the CIS, both politically (including the security dimension) and economically. Russia's

often overbearing attitude toward the states, however, has proven to be counter-

productive and its effort to reassert control has been met with strong resistance. With

backing from the west, Uzbekistan now regards almost every Russian move in Central

Asia as encroaching on Uzbekistan's aspirations for regional leadership. For its part,

Kazakhstan, which because of its ethnic composition traditionally went along with many

Russian initiatives, has been promoting intra-regional integration to counter Russia's

presence. In fact, the view has been expressed in Central Asia that "the CIS is an

acceptable model of cooperation among states in the transitional stage".411 Some Russian

analysts wonder if that stage is coming to an end, and because of this realization, Russia

may be ready to take a more economically oriented approach toward the region's

states.412

411 Quoted in "Forward in CIS?" Izvestia, January 9, 1998, in Current Digest of Soviet Press (CDSP), Vol. 50, No. 2, 1998, pp.l-3; and Gayaz Alimov, "Central Asia Won't Wait for Russia," Izvestia, March 28, 1998, in CDSP, Vol. 50, No. 13, 1998, pp. 17-18. 412 "Moscow Receives Karimov as Equal Partner," Commersant-Daily, May 6, 1998, in CDSP, vol. 50, no. 18, 1998, p. 20.

156

i57

China, after having absorbed the ideological shock of the collapse of both the

Soviet Union and the East European socialist bloc, moved cautiously into Central Asia

Though it promptly established diplomatic relations with all five Central Asian states

(Kazakhstan, Kyrgyzstan, Tajikistan, Turkeminstan and Uzbekistan), China did not fully

grasp the strategic weight of the region until 1993. By then, the country's oil

explorations in its own Tarim Basin had produced only disappointment and it became a

net oil-importer. With China forced to look for outside energy supplies, many Chinese

analysts viewed Central Asia as the ideal place for finding them.413

Although lingering fear persists, Chinese fears of Islamic extremism in Central

Asia had largely been alleviated by 1993 owing to the pragmatic policies the five

regional governments had adopted. It was also apparent by this time that China's trade

with Central Asia was one of the main engines for economic growth in Xinjiang Uighur

Autonomous Region (XUAR), which benefited greatly from serving as the transportation

and distribution hub for China's Central Asia trade. In 1993, Central Asia already

accounted for more than half of XUAR's U.S.$ 912 million foreign trade and XUAR's

exports to the five states were valued at U.S.$ 240.2 million, or 3.5% of Xinjiang's gross

provincial product.414 These impressive numbers, plus the unsettled situation in the

autonomous region due to Uighur secessionist activities, convinced Beijing that a

prosperous and stable Central Asia would be the best thing possible for XUAR's

economic development and stability.

413 "China Wins Sudan Oilfield Project Bid," Xinhua News Agency, January 31, 1997; Ahmed Rashid and Trish Saywell, "Beijing Gusher: China Pays Hugely to Bag Energy Supplies Abroad," Far Eastern Economic Review, February 26, 1998, pp. 46-48; and.Zhou Jiangmin, ~·can China Deal With Its Need for Oil in the Next Century?" Strategy and Management, Beijing, no. 2, June 1995, pp. 22-25. 414 James P. Dorian, Brett Wigdortz, and Dru Gladney, "Central Asia and Xinjiang, China: Emerging Energy, Economic and Ethnic Relations," Central Asian Survey (CAS) 16:4, December 1997, pp. 461-86.

158

Premier Li Peng's 1994 tour of the region marked the beginning of a more

coherent Central Asian policy on Beijing's part.415 China opened more border outposts

and routes to foster trade with Central Asian States and championed reviving the Silk

Road. In 1997, China outbid several Western oil companies and won a contract to

explore two of Kazakhstan's richest oilfields. As part of the deal, China promised to

build a 3,000-km pipeline that would run from Kazakhstan to China's northeast coast.

The project, sealed with handshakes and champagne, became a symbol of China's

strategic march into Central Asia (although the project is now on hold because of its

enormous cost).416

Despite Central Asia's growing importance to China, however, Beijing attaches

far more weight to its relationship with Moscow. Li Peng went to great lengths during

his 1994 Central Asian tour to deny that China was trying to fill the power vacuum left

by Russia. China carefully crafted its Central Asia policy to allay potential Russian

discontent. For instance, in its discussions over a potential gas pipeline project from

Turkmenistan, China pledged to build a branch of it to run from Russia's Irkutsk to

northeastern China. Furthermore, one analyst noted that China did not even get into the

pipeline battle until well after Western influence in the region had become obvious and it

was apparent that Russia was unable to maintain its previous standing there.417 China's

goal has been to promote economic growth in Central Asia while limiting its political

clout there, all while respecting Russia's dominant role in the region -Beijing has no

wish to jeopardize the Russo-Chinese strategic partnership by making too many bold

moves in Central Asia.

The reality, however, is that Russia so far has shown little interest in cooperating

with China over economic integration. Some alternative or complementary explanations

415 People's Daily, April24-29, 1994. 416 Anthony Davis," The Big Oil Shock," Asiaweek, September 24, 1997. 417 P. Stobdan, "Central Asia in Geopolitical Transition," Strategic Analysis (New Delhi), April 1998, pp. 95-118.

159

can be offered for Russia's behaviour. One is that Russia still regards Central Asia as its

"exclusive zone"418 and that economic integration in former Soviet space with an outside

player remains a taboo in Russia that not many dare to breach.419 Hence, even though

there are incentives to do so, economic integration in Central Asia with China is not

something that Russians could accept. And, cooperation with China in the strategic

partnership does not automatically lead to cooperation in another area.

A more intriguing explanation for Russian behaviour may be that Russia cannot

expect anything meaningful in return from China should Moscow take Beijing as its

partner in promoting economic integration in Central Asia. As Hans J. Morgenthau put

it: "No nation will concede political advantages to another nation without the

expectation, which may or may not be well-founded, of receiving proportionate

advantages in return. "420 Given that China already offered Russia all that it could when

Beijing made its commitment to the strategic partnership, including respecting Central

Asia as Russia's sphere of influence, Moscow has nothing to gain by cooperating over

economic integration in the region. In fact, Russia would stand to lose something,

namely, its political dominance in Central Asia. The gains it could make would come

only after integration had occurred; moreover, since they would be mutual, Russia still

would come out as having lost something. Indeed, Beijing faces a credibility dilemma.

On the one hand, it has to shore up its economic presence in Central Asia to build its case

for playing a role in regional economic integration; on the other, Moscow likely would

418 The last twelve months have already witnessed a noticeably more vigorous Russian approach to defending 'zones of special interest' in the FSU (former Soviet Union). In 2003 Moscow undertook a number of concrete steps to reassert its presence in former Soviet Central Asia, including the formalization of the Collective Security Treaty Organization (CSTO) and the establishment of a military base in Kant,

~l~!§':::~e Are Quietly Occupying Kazakhstan," Pravda-5, January 9, 1998, in Current Digest of Soviet Press (CDSP), 50:2 (1998), p. 21; Boris Rumer, "Disintegration and Reintegration in Central Asia: Dynamics and Prospects," in Central Asia in Transition: Dilemmas of Political and Economic Development, ed. Boris Rumer (Armonk, N.Y.: M. E. Sharpe, 1996), pp. 17-39; and Yuri Peskov, "Russia and China: Problems and Prospects of Cooperation with CIS Members in Central Asia," Far Eastern Af[airs, No.3 (1997), pp. 9-23, and No.4 (1997), pp. 48-58. 4 Hans J. Morgenthau, Politics Among Nations: The Struggle for Peace and Power, 5th ed. (New York: Knopf, 1973), p. 187.

160

view such moves with great apprehension and deem them as hostile to its interests in the

region. In essence, China is not in a position to signal Russia that its intentions are

benign in Central Asia.

Finally, one last plausible explanation for Russia's behaviour is that taking China

as its partner in Central Asian economic integration is in fact an ali-or-nothing deal for

Russia: once China's economic presence becomes institutionalised in Central Asia, it is

unlikely to be uprooted. For Russia, therefore, cooperation with China in Central Asia

does not cast the long shadow of the future. The weakness of such an explanation is that

China's presence in Central Asia already is a fait accompli and the chances of it being

eliminated cannot be high. From Russia's point of view, it may be better to accept the

situation and deal with it rather than refuse to accept it. Besides, taking China as its

partner for promoting economic integration would institutionalise Russo-Chinese

cooperation in the region and China would likely respect such an arrangement.

Despite the seemingly cordial relationship between the two giants, there is

lingering suspicion on both sides about the other's long-term commitment to the present

strategic partnership. Russia certainly understands that China is a competitor for

influence in Central Asia; if Moscow perceives Beijing to be aggressively challenging its

position in the region, then it is highly unlikely to partner with China there. Russia's

condition for cooperation is that China must acknowledge Russia to be the undisputed

dominant (outside) force in Central Asia.

Russia and China are the two most powerful states neighbouring Central

Asia, so it is only natural that the bilateral relationship will cast a long shadow on the

region. If the two countries can manage their strategic partnership successfully, it will be

possible for them to act in cooperative and constructive ways in Central Asia to the

region's advantage. Conversely, a clash would leave Central Asian states with the

difficult task of finding a balance between them. Given that Central Asia is only one of

161

many areas of concern facing the Russo-Chinese partnership, whether Russia and China

can cooperate in the region will not have a decisive impact on their overall bilateral

relationship. That said, Central Asian affairs can have a powerful influence on the health

of the partnership should one or both partners act improperly in the region. Establishing a

cooperative economic integration regime in Central Asia that involves both Russia and

China would decrease the risk of a rupture between the two over conflicts of interest in

the region. Such a regime would also promote regional growth and political stability.

Because there are such compelling common interests, the future of economic integration

in Central Asia may be an optimistic one.

Recently, the two countries have also reached a tacit understanding over their

respective roles in Central Asia. With Beijing effectively conceding Russia's leading

position,421 the threat of a renewed Great Game in the region has been deferred.

3.1.1 ECONOMIC INTEGRATION AND ITS RATIONALE.

Russia and China have compelling common interests to promote economic integration in

Central Asia jointly. First, as the region's largest neighbours and trading partners, the

two countries have huge stakes in its economic future. Economic integration could lead

to greater regional growth, which would benefit all seven states. Second, such integration

could further buttress the Russo-Chinese partnership and help defuse potential conflicts

between the two in this region. Finally, by promoting economic cooperation together

Russia and China could partially alleviate the fear among the Central Asian states that

421 Robert Legvold, "Great Power Stakes in Central Asia," in Robert Legvold, ed., Thinking Strategically: The Major Power, Kazakhstan, and the Central Asian Nexus (Cambridge, MA and London: American Academy of Arts and Sciences/MIT Press, 2003), p. 34.

162

one or the other will dominate the region422; such a joint move would make integration a

more likely outcome than it would be if promoted by either country on its own.

Significantly, a solid foundation already exists for an economic integration effort

in Central Asia that involves both Russia and China. It comes in the form of the annual

five-state summit meeting between Russia, Kazakhstan, Kyrgyzstan, Tajikistan, and

China. The security-oriented gathering was first held in 1996 in Shanghai, at which time

the participants signed a border confidence-building treaty. Meeting subsequently in

Moscow, Almaty, and Bishbek, the summits have provided the nations' leaders with a

regular forum for discussion. Unlike the CIS or ECO, which carry either political or

religious burdens, the five-state summit was established to deal purely with topics of

mutual interests and thus has a better chance of evolving into a genuine regional

economic cooperation regime that is open to all regional states wishing to join.

A call for the summit to discuss more economic issues rather than focus

exclusively on security ones has already been issued. It was done so by Kazakhstan's

President Nazarbayev in 1997. Thus far, his proposal has received only token support

from Russia and China. Their positions apparently remain fixed: Russia does not want a

greater Chinese presence in the region, while China undertakes no initiative there

without Russian support, or at least approval. With XUAR's economy increasingly

dependent on trade with Central Asia and stability in Xinjiang greatly dependent in turn

on economic development, it can be assumed that China has committed itself to

economic integration in Central Asia, but only as long as Russia concurs. The choice as

to whether such integration is to occur, then, is largely Russia's.

422 Sanoussi Bilal and Marcelo Olarreaga, "Regionalism, Competition Policy, and Abuse of Dominant Position," Journal of World Trade, 32:3 (June 1998), pp. 153-66.

163

3.2 RUSSIA AND CHINA IN THE RUSSIAN FAR EAST

B oth the Soviet Union and China had by the early 1990's arrived at the necessity

of regional opening, including with regard to each other. This assessment, which

was supported by improving state-to-state relations after 1989, not only survived the

demise of the Soviet Union but increased in significance as the implications of the new

geopolitical situation impressed themselves on the two countries' leadership.423

One consequence of the changed geopolitical situation - the independence of the

Central Asian states- was that it increased the importance of Northeast Asia as the focus

of the two countries' bilateral relations. Economic relations between the two countries

became linked to the issues of the regional development and external orientation of their

adjacent territories in the Russian Far East and the three Chinese provinces of the

Dongbei - Heilongjiang,424 Jilin425 and Liaoning.426 This also meant, however, that the

complementarity in terms of level of development and economic structure in these

regions and the existing pattern of their external relations would also shape the course of

opening.

Cross-border relations share a high level of geopolitical, geoeconom1c, and

geocultural significance with cross-national relations between Russia and China. Yet, by

involving a different set of actors with their own mix of local and national interests,

cross-border relations alter the dynamics and even the balance of power in Russia-China

relations. The timetable of transformations in these border relations is distinctive, as is

the challenge of setting ties back on a promising course. In 1992-1993, cross-border

relations led the way to improved bilateral ties; in ·1994-1995, they spoiled the mood of

423 Vladimir Shlapentokh, "Russia, China and the Far East: Old Geopolitics or New Peaceful Cooperation," Communist and Post-Communist Studies, Vol. 28, No.3, 1995. 424 Also HEILUNGKIANG. A province of Northeast China, on the Russian frontier; capital, Harbin. 42s Also KIRIN. A province ofNortheast China; capital, Changchun. 426 A province of Northeast China, bordered on the east by North Korea; capital, Shenyang.

164

the emerging "constructive partnership" with bad economic news; and in 1996-1998,

they put a brake on efforts to undergird the newly touted "strategic partnership" with

substance. Without synchronization of the two levels of relations, Russia and China can

never be confident that their stormy bilateral history will not be repeated.

This section looks at both sides of the 4,300-kilometre border, asking how

relations have changed and why, as well as at the linkages between local and national

levels.

On the Chinese side, primary attention goes to Heilongjiang Province, which

includes roughly three-quarters of the borderline and official border crossings.

Heilongjiang looms as the centerpiece in cross-border relations, even though Xinjiang427

Province is important for Central Asian multilateral and multiethnic relations, Inner

Mongolia draws attention for the principal rail line between Moscow and Beijing, and

Jilin receives notice for multinational cooperation involving the Koreas. Indeed, the large

crossings at Manzhouli in Inner Mongolia and Hunchun in Jilin may be seen as two

wings closely connected to the huge head of Heilongjiang that juts into Russia. Although

it does not border on Russia, Liaoning also merits consideration as the third province of

Northeast China (NEC) next to Jilin, especially for the Russian consulate in Shenyang428

and the region's foremost port in Dalian. 429

427 Also Sinkiang. An autonomous region of Northwest China, on the border with Mongolia and Kazakhstan; capital, Urumqi. 428 A city in Northeast China. An important Manchurian city between the lih and early 20th centuries, it is now the capital of the province of Liaoning. Former name MUKDEN. 429 A port and shipbuilding center on the Liaodong Peninsula in Northeast China, now part of the urban complex of Luda. Former name DAIREN.

165

·:.::~·:

KRASNOYARSKII KRAI

r--- . .. - ... -·"", )

I '-"'·-·

·. THE REPUBLIC OF SAKHA (YAKUTIA)

Yakutsk •

R.

, • . .. HEILONGJIANG ( \ Ulan Bator • t.r-" ' .(_ ····... .. Har~~~~ Suifenhe ~

_, I-· ., .. ·· .. :" ·. ·- .. :·-.. ~ r' _..• ll(ftv -·- MONGOLI A ,-.1 :·· ...

...... , r·-.i .;;.'< .. ...-~G ·, • 0 :

,'I' .'-·-:·-'·-· ' · ~0 ~'\ : . '· I 0 ~ ... . ••" : -e...._•_., / ' ~

>,- ... · --· <.:..~ ... ; .. · ,~~ \1:-

0"' ': ,'.-·:·· ....

c 0 .: .... )( .... ... < .

0;1\t )--- .. . :,;:/:::: ~v: Gf..tA./ ., G: · X · c..;

r _______ _:,_.....:...' ........ "'~ : :. z : ..... · . .· .... : .:( ! ....

Administrative division V: ; .. ··

lnterna~icnal boundary c:;:' ··· ... -:·· ···'

Capital city · ...... . • • Administrative capital · .. ·· .. __ .. ·\:~

. . q •

·-::r «:Y\ ~ J ~ s.\-w,~c<& ~

\~0..,/ ..

A-v,d..~5c>"''t L\~~ crf ~"v\r.- ~"5~1

~"1 fc'-".).•:•~c;~'\1 1 f\~\>~ V~V\ 1'-lo .?>lS',

\66

On the Russian side, the hierarchy of border territories must begin with

Primorskii Krai,430 which links Heilongjiang and Jilin to the Sea of Japan. Next comes

K.habarovskii Krai,431 the other populous and powerful territory of the Russian Far East

(RFE). It is followed by Amurskaya Oblast,432 inland and agricultural but most

dependent on China. Finally, the Jewish Autonomous Oblast, a small area dependent on

Khabarovskii Krai. Other border' territories, such as Chitinskaya Oblast further inland,

rank. low on the hierarchy, known for their transit functions between China and more

notable administrative units of eastern or western Siberia.

Geopolitically, if the Moscow-Beijing connection largely concerns great-power

relations on a global scale, relations between NEC and the RFE represent a potentially

significant force in the Northeast Asia (NEA) and the larger Asia-Pacific region (APR).

Russo-Chinese cross-border relations play an essential role in determining the degree to

which regionalism (involving also the Koreas, Mongolia, and Japan) will develop in

NEA and the extent to which Russia will be able to balance its status as a European

power with a much anticipated status as an Asian power. Russia's role in Central Asia

and possible link to India in South Asia alone do not realize this goal; Russia has set its

sights on a premier status in Northeast Asia, bringing as well broad access to East Asia

and full membership rights in the APR. Recognizing that it could gain no more than a

junior partner's standing in the well-institutionalised structures of Europe and the West,

Moscow by the fall of 1992 opted for a balancing role in more chaotic Asia, turning

increasingly to China as an equal partner but also requiring orchestration through the

RFE. Yet, the prickly issue of border demarcation with China came to symbolise for

some, especially in the RFE, entrance into the region on the basis of weakness. After the

430 Also MARITIME KRAI. A krai in the far southeast of Siberian Russia, between the Sea of Japan and the Chinese border; capital, Vladivostok. Krai is an administrative territory of Russia. In pre-revolutionary times krais were each made up of a number of provinces, becoming in 1924 large administrative units in the Soviet territorial system. By the time ofthe break-up ofthe USSR in 1991, there were six krais. 431 A krai (administrative territory) on the east coast of Siberian Russia.

167

completion of demarcation in November 1997, the issue slipped into the background, but

it could return.

For China, the stakes along the border are also large. In its proportion of the

country's population, industrial complex, and military clout, as well as in the strength of

traditional expectations about its rightful place in a resurgent country, NBC exceeds the

RFE. Chinese goals to remake the world and especially the regional order rest on a

geopolitical ordering in NEA as well as on the consolidation of Greater China at the

gateway to Southeast Asia. Russian-Chinese cooperation across their border creates a

united front capable of shaping the outcome on the Korean peninsula, limiting Japan's

regional power, and keeping the United States at arm's length.

Geoeconomically, Russo-Chinese border relations hold considerable meaning for

the development of Russia's natural resources and any strategy to escape from Russia's I

current malaise. Talk of new or revitalized Eurasian land bridges, vast networks of

energy pipelines, and Pacific port expansion invariably is premised on projects to exploit

the treasure-house of raw materials and energy deposits of Siberia and the RFE. Loss of

territory due to the breakup of the Soviet Union has left Russia much more of an Asian

country in its distribution of land area, access to warm water ports, and potential

economic prowess. Even if, from the vantage point of Moscow, Asian areas of Russia are

weakly developed and sparsely populated, many in and out of Russia argue for their

advantages. To achieve rapid growth, Moscow is strongly tempted to attach itself to the

dynamic engine of NEA development, hitching its Far East to the neighbouring

provinces of China as well as Japan in the process. The goal seems obvious; the means

and the priority are sharply disputed. Indeed, the combination of geostrategic alarm and

geocultural clashes in the Far East has cast doubt on economic ties as well. What looks

promising in the long run is floundering at present.

432 Oblast is an administrative division or region in Russia and the former Soviet Union, and in some constituent republics of former Soviet Union.

168

I Many in NEC became mesmerized by the prospect of and economic juggernaut

emerging once the Tumen River area project {Tumen) is launched at the juncture of Jilin,

Primorskii Krai, and North Korea, and economic ties expand in NEA. In managing

Russo-Chinese cross-border relations, they have searched for a breakthrough project as a

step to extend coastal dynamism to what is considered an inland region; as a means to

revitalize the region that still symbolises the albatross of debt-ridden, large, state-owned

industries; and as a necessity for overcoming national inequities in setting reform and

openness on an irreversible course.

Geoculturally, the struggle for a "national idea" in Russia is magnified by the

identity crisis in the RFE, which exists as an outpost amid Asian civilizations. Here

contacts with Asians are most intense, and fears abound of living in a sparsely settled

and little-subsidised periphery 6,000 kilometres from Moscow while neighbours amass

resources capable of overwhelming a dwindling residue of citizens. For Russians, it did

not take a book by Samuel Huntington to demonstrate that the RFE stands as the

frontline in a clash of civilizations.433

The slogan "Eurasianism" helped to rally support for Russia's search for Asian

partners to lessen its dependence on the West. But this is a broad concept that leads to

diverse interpretations. From the standpoint of the RFE, where Asia means East Asia

rather than Central Asia, the goal of giving higher priority to Asiatic Russia does not

stand in the way of an intense self-identification as Europeans in need of backup before

an onslaught of Asian culture and economic practices.

With pride in their own civilization and efforts to bask in the successes attributed

broadly to Eastern civilization, Chinese are not blind to the cultural differences faced on

their northern border. Allusions to special bonds of historic friendship to Russia hardly

433 See Samuel P. Huntington, The Clash of Civilizations and the Remaking of the World Order (New York: Simon & Schuster, 1996), p. 132.

169

mask the real tensions observed in recent years, which can ignite suspicions left from a

quarter century of vitriolic accusations by both sides.

3.2.1 THE EUPHORIA OF "BORDERLESSNESS":

1991-1993.

In the heyday of Soviet-Chinese friendship, cross-border relations started slowly,

depended on strict controls in Moscow and Beijing, and proved vulnerable to rapid

decline after Soviet advisers were withdrawn in 1960. When negotiations for

normalization resumed in 1982, local trade revived. It began as barter under tight control

in the old bureaucratized manner, but in the 1980's, three forces began to enliven it.

First, the model of special or free economic zones already developed in Southeast

China gave an impulse to this area. In 1984, the State Council434 extended precedents in

the Southeast to Dalian, on the coast at the southern tip of Liaoning Province, and this

city sought to become the "dragon's head," or leading force, for all NEC. Also that year,

Hu Y aobang visited Heihe on the Heilongjiang border with Amurskaya Oblast, where he

proposed the slogan "in the South there is Shenzhen,435 in the North there is Heihe.'.436

Growing envious of the economic growth in coastal China, Heilongjiang Province in

1987 announced its own strategy of "link to the South and open to the North." By this

strategy, Heilongjiang indicated that it could transfer the advantages of China's dynamic

coastal areas for opening its borders to trade with the Soviet Union.437

434 Article 85 of the Constitution of the People's Republic of China (adopted by the Fifth National People's Congress on December 4, 1982) states that the State Council is the Central People's Government of the PRC; it is the executive body of the highest organ of state power; it is the highest organ of state administration. The State Council is composed of the following: the Premier, the Vice-Premiers, the State Councillors, the Ministers in charge of Commissions, the Auditor-General, and the Secretary General. 435 An industrial city in southern China, just north of Hong Kong. 436 Wang Lizhun, "An Attempt to Explain the Development of Northern Border Sino-Russian Border Trade," Eluosiyanjiu, No.3, 1995, p. 45. 437 "The Strategic Framework of Heilongjiang Province's Trade and Economic and Technological Cooperation with the Soviet Union," in Zhang Haosheng, ed., Heilongjiang sheng duiSu jingmao zhanlue he celueh yanjiu (Haerbin: Heilongjiang renmin chubanshe, 1991), p. 101.

170

Second, Mikhail Gorbachev's perestroika set in motion a succession of changes

in Russian foreign trade, increasing the authority of territories in the RFE and of

enterprises. Opportunities for decentralized trade accelerated after Gorbachev's July

1986 Vladivostok438 speech,439 and a follow-up development proposal for the RFE gave

the green light to regional cooperation. If at first crude barter trade took the form of a

boatload of Chinese watermelons exchanged for a boatload of Russian fertilizer, in 1988

an agreement opened the way to less restricted border trade. 440

Third, at the end of the decade regionalism emerged as a hot topic, driven by

Japanese economic rim, South Korea's northern strategy of isolating North Korea by

luring its neighbours, and Jilin's excitement over proposals for the Tumen River project.

Both sides of the Russo-Chinese border took satisfaction from the steadily· increasing

trade from 1986 to 1990 and expected better things to come.

After two years of rapidly expanding border trade, Chinese labour exports, and

the creation of joint-venture enterprises, the mood along the border in 1992 grew much

more upbeat. Terms such as "border fever" and "hot spots" captured the frenzy of cross-

border relations.441 In China, Deng Xiaoping's go-ahead in January 1992 for a sharp shift

to a market economy and openness was followed in March by State Council approval for

Hunchun, Suifenhe, Heihe, and Manzhouli to become open border cities on a par with

many southern coastal ports.442 Companies from the South rushed to open branch offices

there. Major enterprises in Harbin and other large NEC cities extended their networks to

the border.

438 A city in the extreme southeast of Russia, on the coast of the Sea of Japan, capital ofPrimorskii Krai. It is the chief port of Russia's Pacific coast. 439 Hung P. Nguyen, "Russia and China: The Genesis of an Eastern Rapallo," Asian Survey, Vol. 33, No.3, March 1993, p. 289. 440 Xu Taojie, "Border Trade Cooperation of the Russian Far Eastern Region with the Northeast China Region," Xiboliyayanjiu, No.4, 1994, p. 2. 441 "Hot Points: Here and Always Hesitant," Yuandongjingmao xinxi, No.5, 1996, p. 17. 442 James Clay Moltz, "Regional Tensions in Russo-Chinese Rapprochement", Asian Survey, Vol. 35, No. 6, June 1995, p. 520; "Russian Far East & Siberia", in Asia 1994 Yearbook, Far Eastern Economic Review, December 1993, p. 197.

171

During his visit to Beijing on December 17-19,1992, Yeltsin agreed to lift many

of the visa restrictions impeding cross-border trade. Yeltsin signed an economic and

trade cooperation accord for 1993 which included an agreement to supply China with

three thermo-electric plants and equipment for a paper mill in Chiamussu. 443 The

following year, Moscow and Beijing signed an agreement under which the Russians will

assist China in building a 1 ,000-megawatt nuclear power plant in Liaoning Province.

Nuclear cooperation with Russia will help China alleviate its chronic energy shortage.444

The Taching (Daqing) Oil Field has also signed six cooperation programmes with

Russian firms. These include an agreement for the supply of natural gas and others

concerning technology and labour cooperation and oil prospecting in Russia.445

In 1993, thirteen ports, four bridges and three airports spanned the longest

section of the border, between Heilongjiang and the Russian Far East; and China had

opened a consulate in Vladivostok.446 Bilateral trade grew significantly, primarily the

result of efforts by thousands of small-scale, 'suitcase peddlers' gathering wares to sell

along the border or inside the RFE.447 Some 751,000 Chinese citizens reportedly visited

Russia during 1993, 200,000 of whom are believed to have crossed at one checkpoint

alone. An estimated 777,000 Russians traveled the other way.448

Once Beijing had transferred the authority to licence trading companies to

Heilongjiang Province, virtually any fly-by-night operator could obtain a licence through

forming the right connections with a larger firm or by bribing officials. Starting even

443 Ming Pao (Hong Kong), February 6, 1993, p. 8, cited in Ya-chun Chang, "Peking-Moscow Relations in the Post-Soviet Era," Issues and Studies, Vol. 30, No. 1, January 1994, p. 91. 444 Ming Pao (Hong Kong), March 22, 1993, p. 10, cited in Ya-chun Chang, "Peking-Moscow Relations in the Post-Soviet Era," Issues and Studies, Vol. 30, No. 1, January 1994, p. 91. 445 Ta Kung Pao (Hong Kong), June 16, 1993, p. 2, cited in Ya-chun Chang, "Peking-Moscow Relations in the Post-Soviet Era," Issues and Studies, Vol. 30, No. 1, January 1994, p. 91. 446 James Clay Moltz, "Regional Tensions in Russo-Chinese Rapprochement", Asian Survey, Vol. 35, No. 6, June 1995, p. 520; "Russian Far East & Siberia", in Asia 1994 Yearbook, Far Eastern Economic Review, December 1993, p. 197. 447 Peter Kirkow, "Regional Warlordism in Russia: The Case of Primorskii Krai", Europe-Asia Studies, Vol. 47, No.6, 1995, p. 924. 448 Vladimir Portyakov, "Are the Chinese Coming? Migration Processes in Russia's Far East", International Affairs (Moscow), Vol. 42, No. 1, January-February 1996, http:/ /home.eastview.com/ialindex.html.

172

from a one-room office in China, a "firm" needed only a tiny amount of cash to buy

goods and cross the border to sell or barter its wares or, with more ambitious acquisitions

in mind, to establish a joint venture in a room on the Russian side. A depressed area of

China with high underemployment saw its salvation in supplying an RFE market

troubled by acute consumer shortages with foodstuffs, clothing, and other daily

necessities, however suspect their origin. One popular slogan asserted "if you want to

think of getting rich, quickly come to Heihe. "449Larger operators could make a quick

killing by purchasing fertilizer, steel, cement, and lumber - the four staples - at a

fraction of world prices, at a time when the Soviet planned economy was collapsing and

industrial enterprises either could not find a market for their goods or sought to evade

artificially low Russian internal prices.

As their borders opened, Russian consumers and producers turned to Chinese for

obvious reasons. The Chinese were closest, arrived first, offered the cheapest goods,

bought items of marginal quality, and did not require hard currency. Before the Chinese,

Vietnamese brought to Russia as workers had been slipping away from their jobs,

turning to illicit trade, and forming criminal gangs. At the end ofthe 1980's, the Chinese

arrived, sometimes occupying another wing of the same second-rate hotel, quickly

overwhelming the Vietnamese in numbers while winning turf battles by resorting to

similar methods. The Chinese had no compunctions about barter trade and seemed to

know how to cut deals with minimal formality and paperwork. As government contracts

declined rapidly in 1990-1992 while local and border trade flourished, the role of these

unregulated traders became decisive.

Before 1994, renewed Russo-Chinese trade appeared set to contribute to a long­

term improvement in bilateral relations. The removal of visa restrictions and reopened

border crossings were accompanied by efforts in both Russia and China to liberalise

449 "Hot Points: Here and Always Hesitant," Yuandongjingmao xinxi, No. 5, 1996, p. 17.

173

trade. In 1992, Vladivostok declared itself an open city and announced a 'Greater

Vladivostok Project', with plans to modernise port facilities and develop international

transport infrastructure.45° Further along the coast, the port city of Nakhodka launched

the region's only free economic zone (FEZ), securing European Bank for Reconstruction

and Development (EBRD) feasibility-study funding and pledges of tax relief from

Moscow. Chinese construction workers and contract labourers traveled to the region, and

90 registered Chinese joint-ventures were set up in the Nakhodka FEZ. Some 61% of

new joint ventures in Vladivostok were with the Chinese. A consumer-goods shortage in

the Far East in 1991-92, and decisions by local authorities and enterprises to sell off

stocks - such as trucks and fertilizers - at a substantially discounted price, further

boosted trade.

The opening of trade relations between Russia and China, with regional and

provincial agencies, as well as enterprises themselves, gaining the right to conduct

foreign economic relations, including the setting up of joint-ventures in each other's

countries, led to a dramatic expansion in trade. From a base of around US$4 billion for

the Soviet Union as a whole in 1990 and 1991, Russo-Chinese trade volume increased to

US$5.8 billion in 1992 and reached US$7.8 billion in 1993. By 1993, China was

Russia's second-largest trading partner- official commerce alone accounted for 35% of

Russia's total business with Asia- while Russia was China's seventh.451 Border trade

between the Russian Far East and neighbouring Chinese provinces constituted up to 80%

of Russia's total trade with China.452 Heilongjiang recorded over $2 billion-worth of

exports to Russia in 1993; .Khabarovsk sourced two-thirds of its imports from China.

Nearly halfof.Khabarovsk's foreign trade was conducted with China in 1993 (43.5%, or

450 "Russian Far East & Siberia" in Asia 1994 Yearbook, Far Eastern Economic Review, December 1993; PK 196-99. 4 1 "Russian Far East & Siberia" in Asia 1994 Yearbook, Far Eastern Economic Review, December 1993,

ffz' 197. 2 Local economic statistics do not allow accurate assessment of border trade.

174

US$302.5 million).453 Primorskii Krai and Amurskaya Oblast registered similar levels of

exports.

3.2.1 (a) Barter trade.

In the early phase of expanding border relations, gtven the lack of access to hard

currency in both economies, Russo-Chinese trade took a primitive form of barter mixed

with direct administrative interference under weak market conditions and little

institutionalised oversight, which meant freewheeling disregard for contracts without

corrective punishment.454 Barter was particularly suited to the large bulk shipments with

which Russia paid for Chinese commodities. Steel, cement, fertilizer and timber were

standard Russian exports; whilst China's exports were typically light industrial goods

and consumables. Barter made possible the conduct of trade without access to hard

currency or a commercial and settlement system of international standards but it had a

considerable number of shortcomings:

• Growth in Chinese imports was encouraged by differentials between Russian and

world prices, which were eroded by Russian government export. taxes and by

price liberalization; imposition of quotas and licences on strategically important

natural resource goods also curtailed availability of Russian exports;

• Barter concentrated attention on quantity and not quality; neither side was likely

to barter in goods which could be sent for hard currency exports, thus forcing

down the quality of barter commodities and leading to loss of consumer

confidence on both sides;

• The lack of effective regulation of both trade itself and the methods of settlement

led to many irregularities;

453 James Clay Moltz, "Regional Tensions in Russo-Chinese Rapprochement", Asian Survey, Vol. 35, No. 6, June 1995, p. 522. 454 Fan Xinyiu, "Sino-Soviet Trade Awaits Further Development", Shije Jingji, Beijing, 10 December 1990, in Joint Publications Research Service (JPRS)-CAR-91-022, pp. 66-73; Zhang Hengxuan & Le Zhe, "The Importance and Possibility of Economic and Technological Cooperation Along the Sino-Soviet Border", Shije Jingji, Beijing, 10 February 1991, in JPRS-CAR-91-030, pp. 70-7 5.

175

• Change in both the price of goods and costs of delivery on the Russian side were

a constant factor behind non-delivery;

• Despite the fact that trade expansion was driven by surpluses and shortages in the

two countries it remained fundamentally unresponsive to market changes -

exports often consisted of what suppliers could locate rather than what importers

wanted;

• Ultimately the trade fell victim to the non-payments cns1s m the Russian

economy, which meant that only hard currency export was acceptable, a position

encouraged by the Russian government in order to ensure an increase in its

revenue earnings. 455

This analysis is supported by the picture shown in Figures 1 and 2 (see pp. 177 and 178)

on trade and share oftrade between 1992 and 1994. Trade grew most dramatically from a

broadly balanced position in the third quarter of 1992 with Russian exports more than

doubling in the course of one quarter. Though declining somewhat thereafter, they

continued at a level of over US$1 billion per quarter for all of 1993. China's exports, in

contrast, increased markedly only in the fourth quarter of 1992, after which they fell back

into the range ofUS$600-800 million during 1993. The widening gap between the value

of Russian exports and Chinese imports in the last quarter of 1993 may be taken as

evidence of increasing added costs to China - customs and freight in particular. The

precipitous decline in trade volume in the first quarter of 1994 was almost a mirror image

of the increase of the third quarter of 1992, with the proviso that while Russian exports

fell back to the level from which they had so radically taken off in 1992, Chinese exports

fell even further. Trade volume in 1994 was 30% down on 1993 at US$5.2 billion and

remained at around this level in 1995.

455 Jia Huaide, "Discussing and Analyzing Problems in Settling Border Trade," Guoji Shangbao, Beijing, 28 November 1992, in Joint Publications Research Service (JPRS)-CAR-93-019, pp. 7-9; Sun Tao, "Challenges, Opportunities, and Countermeasures - State, Problems and Prospects for Development of Suifenhe's Border Trade," Guoji Maoyi Wenti, Beijing, 30 July 1993, in JPRS-CAR-93-083, pp. 34-37; Liu Baorong & Zhang Chunlai, "Carry Out Joint Regulatory Efforts to Achieve Comprehensive Improvement .. .in Border Trade," Guoji Maoyi, 15 September 1993, in JPRS-CAR-93-084, pp. 44-48.

176

177

1800.0

1600.0

1400.0

1200.0 c: ~ 1000.0

·e: 800.0 Eo'}

600.0

O.OL------L------~----~~----~----~~~~~~--~~~--~----~~~--~~~~~ 1992 1 1992 II 1992 Ill 1993 I 1993 II 1993 Ill 1994 I

- •- Russia exports ~ Russia imports - •- China exports -o- China imports

Figure 1: Russo-Chinese Trade (Quarterly 1992-1994) Source: IMF Direction of Trade Quarterly, various issues: imports-c.i.f.; exports-f.o.b. Notes: Russian figures prior to fourth quarter 1993 are based on partner returns; Russian figures for first three quarters of 1992 are estimates based on share of FSU trade in fourth quarter.

16.0

I 1992 II 1992 Ill

/·~.---·-·

. ~·-·-1992 IV

---·--- -.............. ·---·---I I I

1993 I 1993 II 1993 Ill 1993 IV - •- Russia exports -o- Russia imports - a- China exports -o- China imports

~---,---1994 I 1994 II 1994 Ill

Figure 2: Share of Trade (Quarterly 1992-994) Source: IMF Direction ofTrade Quarterly, various issues: imports-c.i.f.; exports-f.o.b. Notes: Russian figures prior to fourth quarter 1993 are based on partner returns; Russian figures for first three quarters of 1992 are estimates based on share of FSU trade in fourth quarter.

178

When considering China's share of Russian exports, there are obvious differences

over the data in real terms in the periods of growth and decline. Whereas, as noted,

Russian exports declined in real terms in the last quarter of 1992, in terms of share China

continued to grow as a market, indicating that it was being used to compensate for an

even faster decline in real terms in trade with other markets; conversely, the decline in

China's share of Russian exports in the last quarter of 1993 was even more precipitous

than the decline in real terms, indicating that this decline was not general but evidence of

a shift of exports from Chinese market to other markets. The growth and decline of

China's share of Russia's imports appear more gradual but the overall effect is, if

anything, more marked - a fivefold decline in share between the first quarter of 1993 and

the last quarter of 1994.

It is possible to conclude, therefore, that these considerable fluctuations were in

no little part attributable to the relative growth and decline of barter trade, arising

from its characteristics both as a mechanism of exchange and in relation to lne structure

of commodities. This shift in trading partners had a significant impact on border regions.

Barter was conducted with all Far East trading partners but it was the

predominant mode with China, both because China was prepared to conduct this form of

trade and because geographical proximity is a more significant factor in barter than it is

in hard currency trade. Under this trade Russian Far East natural resources and semi­

processed goods were exchanged for the consumables unavailable through domestic

production and supply.

As a transitional form of economic relations, barter gave rise to countless

disputes. What Russia exported did not reflect real transport costs or international prices

and also was so limited in variety that it proved vulnerable to a change in the market of

NEC once a temporary construction boom had passed. What China exported was of

inferior quality, filling a large niche in the market only when goods from the center

179

suddenly became prohibitively expensive and foreign competitors were slow to enter the

Russian market. The trade boom of 1992-1993 had to reach a dead end, but not

necessarily with such abrupt and negative consequences.

While NEC media proudly proclaimed that border trade had become the

locomotive for economic development, announcing month-by-month advances as signs

of prosperity to come, RFE media and public opinion quickly turned sour on what was

happening. Even as border trade continued to increase through the first half of 1993 and

then remained on a high plateau (despite failing to expand during the "golden season" of

July through October), voices of exasperation and anger turned on the Chinese and

toward Moscow for relief. Charges of secret plots and infiltration warned of a conspiracy

organized in China that endangered Russia. 456

Companies could not find creditworthy partners and could not cope with

fluctuating prices and policies for goods sought in exchange. On the Russian side, people

began to believe that their country lost badly from barter; estimates ranged as high as

US$1 billion. New limits were imposed on the types of goods that could be traded in this

way. 457 Tightened control on Chinese imports came just as illegalities and economic

deterioration were reducing purchases and contract fulfillment. On the Chinese side,

tightened monetary policies in June 1993 left companies without funds even for barter

trade.

The geoeconomics of border trade drew criticism in the RFE. If in the view of

local analysts Russia was selling its natural resources for peanuts and letting its

industries slide irreversibly, the RFE was in danger of slipping from an exploited outpost

of central Russia to a true colonial-style supplier to China at the bottom of the regional

division of labour. The terms of trade brought harsh warnings.

456 "Great Brother Extends His Hand to Us: Chinese Expansion in the Primorskii Krai, Russia," Vladivostok, September 1, 1993, p. 5. 457 Xu Jingxue, "Sino-Russian Trade and Northeast Asian Regional Cooperation," Dongou Zhongya yanjiu, No.1, 1994, p. 22.

180

According to Felgengauer, whereas the barter method initially constituted about

three-fourths of Chinese payments, China's growing dollar trade surpluses have enabled

Russian negotiators to arrange for hard currency payment in recent contracts. 458

3.2.2 THE COLLAPSE OF CROSS-BORDER

COOPERATIONS: 1993-1996.

By October 1993, the RFE was in an uproar over cross-border relations with China. In

May, Yevgeniy Nazdratenko was appointed by Yeltsin, at the strong urging of the local

industrial establishment and an overwhelming vote of the Krai Soviet, as governor of

Primorskii Krai.459 Before long, he also pressured Moscow with threats of local

separatism and fanned the flames of nationalism by charging China with concealed

expansionism. Controls increased over Chinese as trade was more tightly confined in

outlying markets.

In 1994, a border-guard mentality peaked in the RFE. Operation "Foreigner" was

launched, leading to roundups of aliens in a search for Chinese who were present

illegally. Most had overstayed their visas in order to trade. If through 1993 the media

grew increasingly alarmed over a "China threat," in 1994 there was a steady drumbeat of

warnings about the danger to national security. Not relief but heightened wariness could

be seen.46° Catering to the angry mood, leaders closed Chinese joint ventures, which

were seen as pumping resources out of the RFE rather than investing in it. In some cases,

Chinese investors with serious long-term intentions were also stripped of their properties.

458 Pavel Felgengauer, "Russia Too Busy Arming China to Care About Consequences," St. Petersburg Times, July 14-20, 1997, in Johnson's Russia List, 17 July 1997. 459 In contrast with his predecessor, the more cosmopolitan Vladimir Kuznetsov, Nazdratenko presented himself as protective of local elite interests, whi<;h many observers equated with criminal interests. 460 Marina lashina, "One Chinese, Two Chinese," Vladivostok, July 8, 1994, p. 2.

181

If the most alarming danger was China colonizing the RFE through immigration, then

strict controls adding greatly to the costs and complexity of obtaining travel documents

sharply reduced movement by Chinese. It left most Russian imports in the hands of

Russians who could cross more easily and contributed to a sharp decline in trade. Nearly

completely dependent on trade with China, Amurskaya Oblast was the lone holdout

against these changes and perhaps the biggest loser in Russia.

In late April 1994, the legislative branches of the Russian Federation held joint

hearings on the topic "On Problems of Russo-Chinese Relations and Perspectives of

Their Development." A report from the Far East and Trans-Baikal regional association

warned that an uncontrolled situation had aroused anti-Chinese and anti-Russian

tendencies, which demanded a shift to regulated relations.461

By 1995, the pain of contraction was continuing to hurt the Russian side, while

the most flagrant abuses by Chinese were receding. So-called Chinatowns or Chinese

villages, if any had existed, disappeared, and few Chinese traders could be seen except in

controlled markets. China took care to inspect exports, although Russian traders aware

that only the poorest of their compatriots would still buy Chinese goods continued to

bring back goods of marginal quality.

Heilongjiang and border points in nearby provinces suffered badly from the

about-face in border trade. If a decline of 7.2 percent was indicated in the second half of

1993, the province still registered a record of US$2 billion in trade with Russia;

461 Gilbert Rozman, "Turning Fortresses into Free Trade Zones," in "Rapprochement or Rivalry?: Russia­China Relations in a Changing Asia, Sherman W. Garnett, ed., Carnegie Endowment for International Peace, Washington, D.C., 2000, p. 189.

182

however, the first half of 1994 saw a drop of 56.7 percent from the corresponding period

of 1993, which helped bring the annual total back below $1 billion.462

Two-way trade dropped from its 1993 high ofUS$7.7 billion to US$5 billion the

following year and US$5.5 billion in 1995. Primorskii Krai's trade with China fell by

78%. In Amurskaya Oblast, border commerce collapsed by 81% between the first

quarters of 1993 and 1994 (from US$100 million to US$19 million).463 The decline

continued in 1995.464 Heilongjiang saw trade drop by 45% between the first quarter of

1993 and that of 1994. New joint ventures registered in Russia fell from a peak of 56 in

1993 to only four in the first five months of 1995.465

In Heihe and other cities, stores were boarded up, streets deserted, and thousands

of firms driven out of business. The brain drain to South China from Harbin and other

intellectual and industrial centers accelerated.

In 1994, as Moscow and Beijing were strengthening their ties, Moscow's supporters of

closer relations sought to reverse the downturn in cross-border relations. While blaming

local forces in the RFE for not developing suitable new policies, they also requested

Chinese cooperation in reassuring Russians that their national interests were met. In

regard to Tumen, Mikhail Titarenko, director of the Institute of the Far East, proposed

five steps that should be considered before Jiang Zemin's visit to Moscow in September

1994 to assuage the doubts of Russians opposed to Tumen's realization: (1)

reconceptualising the division of labour so that the RFE would not be a raw-material

462 Zhao Lizhi, "Heilongjiang Province Border Trade Situation, Countermeasures and Prospects," Xiboliysayanjiu, No.3, 1995, p. 1. · 463 James Clay Moltz, "Regional Tensions in Russo-Chinese Rapprochement", Asian Survey, Vol. 35, No. 6, June 1995, p. 522. 464 Nikolay Belyy, Rossiyskiye Vesti, 18 Aprill996, translated in FB/S-SOV-96-113-S, 18 April1996. 465 !TAR-TASS, 8 August 1995, translated in FBJS-SOV-95-152, 8 August 1995.

183

base in the emerging industrial system, as the Chinese portion of the zone became the

nucleus of industry and the international economy; (2) addressing immigration concerns

so that a huge number of foreign workers would not flock into the RFE, rapidly changing

the racial mix of the population and leading to conflicts, by ensuring that a main part of

the immigration would be refugees from former Soviet republics, for example; (3)

protecting the natural environment and great economic potential of Primorskii Krai's

marine resources; (4) not allowing great investment here at the expense ofNakhodka and

Greater Vladivostok; and (5) not funneling cargo away from the Trans-Siberian and

BAM railroads. 466

Beijing's advocates of closer ties accepted much of Moscow's reasoning. When

leaders met with their Russian counterparts, they stressed what Beijing was doing to

control immigration, limit improper trade practices, and encourage cooperation between

local governments on both sides of the border. Beijing blamed local authorities in

Heilongjiang, replacing the party leader in the spring of 1994 and leaving border trade

with weak central backing. Although it continued to discuss Tumen with Moscow and

even seemingly made progress in 1995 on a scaled-down version, to the chagrin of Jilin,

466 The greatest railroad project in the world, the Baikal Amur Railroad, known aS BAM, has been a dream of Russians for most of this century. A second Trans Siberian Railroad, secure from the Chinese threat, driven into the heart of Siberian Resources, is so close to completion, and yet so far. After 60 years of heroic, wonder-of-the-world scale construction by prisoners and the best forces of Russia, it may not be completed. Five thousand of miles of track, driven through five mountain ranges and over seventeen rivers, approximately 250 miles north of the old Trans- Siberian Railroad, is only 200 feet from completion, but is stalled and facing disaster in the last tunnel near Severobaikalsk, Siberia.

The problem is mainly money, millions, perhaps billions are needed to complete the plan, which includes numerous cities along the way, and huge mines·and mills. The problem also is the extremely tough going in the last tunnel. It is flooded, has caving ground, freezing temperatures and 100 times the safe levels of radon gas due to poor ventilation deep in the mountain. The government is unable to do much for the Baminvest operated project, which could be completed in two years if help arrives. But help may not arrive because foreign investment is being discouraged by numerous factors. Funding for developing the greatest natural resources in the world are not popular with the environmentalists who have tremendous influence over international funding. Also, funding is now being focused on saving and developing Asian countries and resources. It is a problem of tremendous consequence. See http://www.utopiasprings.com/minerail.htrn; Mikhail Titarenko, "Northeast Asian Integration and Russian Interests," in Li Shaokang, ed., Dongbeiya jingji kaifa zhanlue yanjiu (Changchun: Jilin chubanshe, 1994), Vol. 3, pp. 63-70.

184

its commitment waned. And Liaoning Province, which had sought to take advantage of

Shenyang's role as the nearest consulate for now-essential visas and its larger industrial

base in the planned switch to more substantial firms and science and technology rather

than trade in simpler goods, discovered that financial institutions on both sides were

adverse to such partnership and to the rampant corruption present in the state sector of

NEC and the RFE. The so-called new regime for economic relations was long on

controls and short on modem institutions and trust.

Trade from 1994 to 1996 hovered at a much lower plateau than in 1993. For

Russia, it meant a substantial trade surplus, generated by exports of raw materials under

stricter central control and an underreported surplus from smuggling, which was more

profitable to local interests. For China, it meant a shift away from high-value-added

products such as electronics and clothing to less profitable exports of watermelons and

vegetables. What was reported as barter trade included cash payments hidden from tax

inspectors.

If in 1990-1991 regionalism in NEA was closely identified with megaprojects in

the RFE or along borders, and in 1992-1993 the greatest momentum came from Russo­

Chinese border trade, then in 1994-1995 new partnership ties between Moscow and

Beijing came to be seen as the best hope to break the logjam. But despite some attention

to border trade at summits and other high-level meetings, the centers did little to revive

commerce. Periodic showdowns still underway between Nazdratenko and Moscow

added to the unresolved tensions over decentralization in Russia. Although Nazdratenko

returned from a fall 1994 visit to Moscow with a seemingly improved attitude toward

China, his willingness to offer private assurances to Chinese officials or to cut deals for

185

coal and other products urgently needed in the RFE did not signify cooperation for

larger-scale development.

3.2.3 TRADE AND ECONOMICS: 1997-2000.

On November 10, 1997, Boris Y eltsin and Jiang Zemin held their fifth summit meeting

in Beijing. After the signing ceremony, Jiang Zemin stressed that the Commission for

Regular Meetings Between the Heads of Government ofRussia and China would play an

important role in promoting economic and trade cooperation between the two countries.

He noted that enterprises from the two countries should expand contacts in order to find

partners for cooperative ventures.

Y eltsin pointed out that the two countries had highly complementary economies.

The two countries had entered a number of economic cooperation and trade projects and

had put forward many proposals in this regard.

Russian First Deputy Prime Minister Boris Nemtsov and Chinese Vice-Premier

Li Lanqing signed a number of other documents on economic and technological

cooperation, including a memorandum of understanding on the basic principles for

laying gas pipelines and developing gas-condensate wells, an agreement on the principle

of cooperation between Russian-Chinese local governments, and a memorandum of

understanding on the basic orientation of economic and technological cooperation.

Officials from relevant Russian and Chinese departments also signed a series of

agreements on the joint economic development of individual islets in border rivers and

surrounding waters, cooperation on diamond mining, protection of tigers and supervision

over financial institutions.467

467 "Sino-Russian Summit Achieves Fruitful Results", Beijing Review, December 22-28, 1997, p. 13.

186

In 1997-1999, Russo-Chinese bilateral economic and trade relations did not

develop as anticipated, especially in 1998, when bilateral trade even slipped because of

the financial crisis arising in Russia. Russia's share in trade with China dropped from

3.5% in 1992 to 2% in 1998.468 The bilateral trade volume fell to less than US$5.48

billion in 1998. In the first ten months of 1998, bilateral trade amounted to US$4.47

billion.469 China is the third largest partner of Russia among foreign countries and

accounts for some 5% of trade.470 Suitcase traders accounted for US$3.36 billion of

bilateral trade, which added up to US$ 9.48 billion in 1997.471 Russian exports to China

were worth US$4.93 billion and Chinese imports to Russia, US$4.55 billion.472

In 1998, the largest Russo-Chinese investment cooperation projects in Russia

were Hotel Far East in Nakhodka, a joint venture producing computer microchips in

Zelenograd, and a joint venture turning out communication equipment in Ufa. The

aggregate investments in these projects top US$110 million.473

In 1999, the bilateral trade volume ascended slightly to US$5.72 billion474 and

surged to US$8 billion in 2000.475 But in this period the two countries were exploring

new cooperative forms and areas, especially making important progress· in advancing

cooperation on big projects. Russian assistance to China in building a nuclear energy

station is proceeding smoothly. Construction of a natural gas pipeline from Eastern

Siberia to China's eastern coastline is already in the stage of economic and technological

certification.

468 Yuri Savenkov, "Russian, Chinese Leaders Meet Despite Snags," Izvestia, November 24, 1998, in RIA­NOVOSTI Daily Review, Vol. XLIV, No. 225, November 24, 1998, p. 3. 469 "Moscow-Beijing: Neighbours, Partners, Friends," Rossiiskaya Gazeta, November 24, 1998, in RIA­NOVOSTI Daily Review, Vol. XLIV, No. 225, November 24, 1998, p. 2. 470 Ibid. 471 Ibid. 472 Ibid. 4731bid. 474 Sergei Tsyplakov and Evgeny Popov, "Russian-Chinese Trade and Economic Cooperation: Current Problems and Outlook," Far Eastern Affairs, No. 3, 2003, p. 65. 475 Xia Yishan, "Sino-Russian Trade Enjoys Good Prospects," Beijing Review, June 5, 2003, p. 11.

187

Table No. 3.1

Volume of Russia's trade turnover with the PRC, 1992-2002 (amounts in millions of dollars; rate of growth in %)

Years Turnover Exports Imports Balance Amount Growth Amount Growth Amount Growth (Amount)

1992 5,862 +50.2 3,526 +69.4 2,336 +28.1 +1,190

1993 7,679 +30.9 4,987 +41.4 2,692 +15.2 +2,295

1994 5,077 -33.9 3,496 -29.9 1,581 -41.3 +1,915

1995 5,463 +7.6 3,799 +8.7 1,664 +5.2 +2,135

1996 6,845 +25.3 5,153 +35.6 1,692 +1.7 +3,461

1997 6,118 -10.6 4,086 -20.6 2,032 +20.0 +2,054

1998 5,481 -10.5 3,641 -10.9 1,840 -9.7 +1,801

1999 5,720 +4.3 4,223 +15.9 1,497 -18.7 +2,726

2000 8,003 +39.9 5,770 +36.6 2,233 +49.1 +3,537

2001 10,670 +33.3 7,959 +37.9 2,711 +21.4 +5,248

2002 11,928 +11.8 8,407 +5.6 3,521 +29.9 +4,886

Total for 1992· 2002 78,846 55,047 23,799 +31,248

Sources: 1. PRC Monthly Customs Handbook, 1992-2002, Beijing, 2003, No. 12;

*

2. IMF, Directory of Trade Statistics Yearbook, various years; 3. Sergei Tsyplakov and Evgeny Popov, "Russian-Chinese Trade and Economic Cooperation:

Current Problems and Outlook," Far Eastern Affairs, No. 3, 2003, p. 66; 4. Yu Xiaosong, "A Bright Prospect for Sino-Russian Trade Cooperation", Beijing Review,

December 13, 1999, p. 14. The rates of growth for 199 2 have been calculated using the 1991 figures for trade between the former U.S.S.R. and the P.R. C.

188

3.2.4 ECONOMIC RELATIONS IN THE 21ST CENTURY

Achievements in Russo-Chinese trade play an important role in strengthening and

expanding the strategic cooperative partnership between the two nations. During the late

1990's, growth in bilateral trade was not quite satisfactory on account of economic

reform and political restructuring of Russia and China. However, the two governments

have adopted a series of effective measures to continuously expand bilateral trade.

The 2000 Russian Foreign Policy Concept admits that, for the Russo-Chinese

partnership, the main task is "as before, bringing the scale of economic interaction in

conformity with the level of political relations."476

President Vladimir Putin's July 2001 visit to China resulted in agreements on

feasibility studies on gas and oil pipelines from Siberia to China. Russia also agreed to

assist China in building a fast-neutron cycle reactor at Beijing's nuclear power

institute.477

In his address at the Shanghai summit of the Asia-Pacific Economic Cooperation

Organisation in 2001, President Putin outlined three priority spheres that can boost

Russia's economic relations with China and other East Asian countries. In his words,

Russia might soon become one of the most dynamic strategic development resources of

Asia-Pacific. The three crucial spheres are power engineering, transportation and

fundamental sciences.478

Energy bridges from Russia to East Asia, and above all China, are expected to play a

vital role in the stable and safe development of the region.

476 The Russian Federation's Foreign Policy Concept, approved by President Vladimir Putin, June 28, 2000, www.1n.mid.ru/ns-osndoc.nsf. m Sherman Garnett, "Challenges of the Sino-Russian Strategic Partnership," The Washington Quarterly, Vol. 24, No.4, Autumn 2001, p.46. 478 Ovchinnikov, Vsevolod, "Russia, China Prepare For the Tenth Post-Soviet Summit," Rossiiskaya Gazeta, No. 224, in RIA-NOVOSTI Daily Review, Vol. XLVIII, No. 226, November 26,2002, p. 5.

189

Transportation is another priority sphere of cooperation. Economic globalisation is

accompanied with the growing exchanges between the Atlantic and Pacific shores of

Eurasia. The geographic location of Russia and China predetermined their mission of a

bridge between the West and the East in the 21st century, not unlike the Great Silk Road

of the past.479 The linkup of the Trans-Siberian and Trans-Korean railways, the

modernisation of the Trans-Siberian Railway Line and the second transcontinental line

from Lianyungang to Rotterdam will boost the development of communication lines in

the region. 480

Fundamental sciences are the third guideline after power engmeenng and

transportation. Russia is not only rich in natural resources but is also favourably located.

It is a great power with a highly educated people who maintain leading positions in high-

tech fundamental sciences.481

During this summit, Russia expressed readiness to join the programme of building up

the human potential, initiated by China. It provided for cooperation in the training of

specialists who would bridge the gap between the development standards of various

regional countries. 482

In 2001, the sixth Russo-Chinese regular prime ministerial meeting was held in St.

Petersburg, furthering trade relations between the two sides. The sixth and seventh

meetings between the two heads of government defined the fields, scale and

development orientation of economic cooperation. The fields include hi-tech, energy,

natural resources, finance, transportation, aviation and spaceflight, ecology,

telecommunications and information technology. Concrete projects include:

479 Ovchhmikov, Vsevolod, "Russo-Chinese Friendship Treaty One Year Old," Rossiiskaya Gazeta, No. 128, in RIA-NOVOSTI Daily Review, Vol. XLVIII, No. 132, July 16,2002, pp. 3-4. 480 Ovchinnikov, Vsevolod, "Russia, China Prepare For the Tenth Post-Soviet Summi~" Rossiiskaya Gazeta, No. 224, in RIA-NOVOST! Daily Review, Vol. XLVIII, No. 226, November 26, 2002, p. 5. 481 Ovchinnikov, Vsevolod, "Russo-Chinese Friendship Treaty One Year Old," Rossiiskaya Gazeta, No. 128, in R!A-NOVOSTI Daily Review, Vol. XLVIII, No. 132, July 16,2002, pp. 3-4. 482 Ibid.

190

• Russo-Chinese oil pipeline construction;

• Natural gas pipeline construction;

• Establishment of a Russian-Chinese industrial park in Moscow;483

• Construction of a China-oriented aluminium plant;

• Cooperation in forestry;

• Cooperation in the fields of aviation and spaceflight, such as China purchasing

civil planes from Russia;484

• Construction of two generating units at the Tianwan Nuclear Power Station in

Lianyungang, Jiangsu Province, which are scheduled to start generating power in

2004 and 2005 respectively;

• Participation of Russian oil companies m China's west-east natural gas

transmission pipeline construction; and

Cooperation in development projects in other countries, such as construction of

an aluminium plant in Guinea. 485

In 2001, the volume of bilateral trade exceeded US$10.67 billion for the first time (25%

more than in 2000).486 In 2002, it reached a record high of US$11.93 billion,487 which

excluded the US$1 0 billion of trade carried out through chartered planes bypassing

customs, a special method between the two countries.488 Thus, Russo-Chinese trade grew

18% in 2002 on 2001 (by 20% in the first quarter of 2002, reaching US$5.5 billion by

483 Igor Ivanov (Foreign Minister of Russia), "Pine and Bamboo," International Affairs, No. I, 2003, p. 4. 484 Igor Ivanov (Foreign Minister of Russia), "Pine and Bamboo," International Affairs, No. I, 2003, p. 4. 485 Xia Yishan, "Sino-Russian Trade Enjoys Good Prospects," Beijing Review, June 5, 2003, p. II. 486 Igor Ivanov (Foreign Minister of Russia), "Pine and Bamboo," International Affairs, No. I, 2003, p. 4; "Foreign Minister on the Forthcoming Chinese Visit of Vladimir Putin," Commersant, No. 216, in RIA­NOVOSTI Daily Review, Vol. XLVIII, No. 228, November 28, 2002, p. 12; "Promotion of Moscow­Beijing Cooperation Has Its Advantages," Izvestia, No. 217, in RIA-NOVOSTI Daily Review, Vol. XLVIII, No. 228, November 28, 2002, p. 14; Konstantin Smimov, "Kasyanov Prepared to Triple Trade With China," Commersant, No. 148, in RIA-NOVOSTI Daily Review, Vol. XLVIII, No. 158, August 2i, 2002, p. 2. 487 Wang Baofu, "A Giant Friendship," Beijing Review, June 5, 2003, p. 10; "Chairman Hu Jintao About His Russian Visit," Rossiiskaya Gazeta, No. 97, in RIA-NOVOSTI Daily Review, Vol. XLIX, No. 96, May 26, 2003, p. 5; Alexander Lomanov, "Putin to Settle Comrehensive Issues in Beijing," Vremya Novostei, No. 222, in RIA-NOVOSTI Daily Review, Vol. XLVIII, No. 230, December 2, 2002, pp. 2-4; Ovchinnikov, Vsevolod, "Russia, China Prepare For the Tenth Post-Soviet Summit," Rossiiskaya Gazeta, No. 224, in RIA-NOVOSTI Daily Review, Vol. XLVIII, No. 226, November 26, 2002, p. 5; Sergei Tsyplakov and Evgeny Popov, "Russian-Chinese Trade and Economic Cooperation: Current Problems and Outlook," Far Eastern Affairs, No. 3, 2003, p. 65. 488 Xia Yishan, "Sino-Russian Trade Enjoys Good Prospects," Beijing Review, June 5, 2003, p. 11.

191

July 1, 2002).489 In the first four months of 2003, mutual trade reached US$4.5 billion,

which was 30% more than in the same period in 2002.490

The economic boom in China generated a need for a stable and increasing supply

of Russian export goods every year. Although Russia's share in China's aggregate

imports was (and remains) relatively small (around 3%), this figure is many times higher

for a number of goods. In particular, Russian imports in 2002 satisfied 61% of China's

need for industrial timber, 17% of its need for paper and cellulose, 19% of its need for

ferrous metals, 42% of its need for fertilizer, 57% of its need for fish and other seafoods,

and 4.4% of its need for crude oil. Major deliveries were made within the field of

military-technical cooperation, and especially for the Tianwan nuclear power plant, now

d . . J" p . 491 un er constructiOn m tangsu rovmce.

The volume ofRussian exports exceeds substantially the import of Chinese goods

to Russia.492 From 1999 through 2002, Russia's total positive balance in mutual trade

came to US$16.4 billion. 493

However, there has been a major uptrend in the volume of Chinese exports to

Russia in recent years. In 2002, the growth of Chinese exports to Russia was for the first

time higher than the increase in purchases in the other direction, in absolute numbers

(US$81 0 million vs. US$450 million). The changes now taking place in the export

structure must also be noted. Along with the goods traditionally delivered to the Russian

market (leather goods, textiles, shoes, clothing, and toys), deliveries of machine and

489 Olga lvanova, "Putin's Visit A Vital Event in Russo-Chinese Relations," Parlamentskaya Gazeta, No. 230, in RIA-NOVOSTI Daily Review, Vol. XLVIII, No. 231, December 3, 2002, pp. 1-3; Viktoria Abramenko and Natalia Ilyina, "Mikhail Kasyanov in Shanghai Notes Progress in Relations With China and Outlines Problems," Rossiiskaya Gazeta, No. 153, in RIA-NOVOSTI Daily Review, Vol. XLVIII, No. 159, August 22, 2002, p. 3; Konstantin Smimov, "Kasyanov Prepared to Triple Trade With China," Commersatit, No. 148, inRIA-NOVOSTI Daily Review, Vol. XLVIII, No. 158, August 21,2002, p. 2. 490 "Chairman Hu Jintao About His Russian Visit," Rossiiskaya Gazeta, No. 97, in RIA-NOVOSTI Daily Review, Vol. XLIX, No. 96, May 26, 2003, p. 5. 491 Sergei Tsyplakov and Evgeny Popov, "Russian-Chinese Trade and Economic Cooperation: Current Problems and Outlook," Far Eastern Affairs, No. 3, 2003, p. 66. 492 Konstantin Smimov, "Kasyanov Prepared to Triple Trade With China," Commersant, No. 148, in RIA­NOVOSTI Daily Review, Vol. XLVIII, No. 158, August 21,2002, p. 2. 493 Sergei Tsyplakov and Evgeny Popov, "Russian-Chinese Trade and Economic Cooperation: Current Problems and Outlook," Far Eastern Affairs, No.3, 2003, p. 67.

192

machine products, especially household electronics and certain kinds of industrial

equipment, have been growing at an increasingly rapid rate.494

Table No. 3.2

Structure of Russian imports from the PRC in 2002

No. Category Volume of Share of Changes imports imports as 2002.

(millions of a whole versus dollars) (%) 2001 (%)

1 Machinery and machine equipment 556.0 15.8 +85.7

2 Leather goods 507.3 14.4 -0.3

3 Shoes 481.4 13.7 +25.5

4 Clothing (woven fabrics) 447.0 12.7 -0.6

5 Clothing (knit fabrics) 278.7 7.9 +55.8

6 Chemical products 172.9 4.9 +26.8

7 Meat 129.3 3.7 +190

8 Toys and sporting goods 84.6 2.4 +76.2

9 Pelts, finished furs, fur products 79.6 2.3 +20.6

10 Other finished textile goods (bed linen, bedclothes, window dressings) 58.7 1.7 -24.2

11 Processed foods made from vegetables, fruits, nuts, etc. 57.4 1.6 +38.3

12 Grain and grain products 51.7 1.5 +188.8

13 Ceramic goods 42.1 1.2 +38.5

14 Fruits, nuts, berries, citrus fruits 41.7 1.2 +79.0

15 Mineral fuel, petroleum, petroleum 40.7 1.2 -22.5 products

Sources: 1. PRC Monthly Customs Handbook, 1992-2002, Beijing, 2003, No. 12; 2. Sergei Tsyp1akov and Evgeny Popov, "Russian-Chinese Trade and Economic Cooperation:

Current Problems and Outlook," Far Eastern Affairs, No.3, 2003, p. 67.

494 Ibid., pp. 67-68; Konstantin Smimov, "Kasyanov Prepared to Triple Trade With China," Commersant, No. 148, in RIA-NOVOSTI Daily Review, Vol. XLVIII, No. 158, August 21, 2002, p. 2.

193

In the last few years, Russia's exports to China have increasingly been

concentrated in several groups of goods. They are dominated by primary products and

raw materials. Thus, for example, in 2002, as much as 94.8% ofthe total value of exports

came from nine main categories of goods; of this, petroleum and petroleum products

accounted for 15.3%; timber, 12.6%; ferrous metals, 12%; fertilizer, 10.3%; and

chemical goods, 8.4% (see Table below).

Table 3.3

Structure of Russia's exports to the PRC in 2002

No. Category Volume of Share of Changes exports exports as 2002

(millions of a whole versus dollars) (%) 2001 (%)

1 Machinery and machine equipment 1,692.6 20.1 -26.0

2 Mineral fuel, petroleum, petroleum products 1,283.6 15.3 +58.9

3 Timber and timber products 1,058.8 12.6 +76.8

4 Ferrous metals 1,009.5 12.0 -16.2

5 Fertilizer 863.7 10.3 +45.9

6 Chemical goods 703.5 8.4 -1.2

7 Fish, shellfish, crustaceans 622.6 7.4 +27.6

8 Nonferrous metals 368.6 4.4 -15.3

9 Raw paper and cellulose 358.4 4.3 +2.6

Sources: 1. PRC Monthly Customs Handbook, 1992-2002, Beijing, 2003, No. 12; 2. Sergei Tsyplakov and Evgeny Popov, "Russian-Chinese Trade and Economic Cooperation:

Current Problems and Outlook," Far Eastern Affairs, No. 3, 2003, p. 69.

So far as machinery and machine equipment are concerned, even though they

were, with a 20.1% share, the largest component of Russia's export structure, deliveries

194

of civilian machine products proper (with the exception of equipment for the Tianwan

Atomic Energy Station)495 either remained insignificant or shrank. In the last few years,

no major contracts have been signed for the delivery of equipment for conventional

thermal power plants. Orders for Russian civilian aircraft, automobiles, machine tools,

and industrial equipment have been of a one-time nature. The largest of these was a

contract for the delivery of five Tu-204 aircraft, valued at US$150 million each.496

Summing up the results of his August 21-23, 2002, visit to China, Russian

Premier Mikhail Kasyanov expressed conviction that in ten years trade between Russia

and China may reach US$30 billion. 497

The implement of new Russian-Chinese projects in power engmeenng,

agriculture, and other spheres will contribute to the growth of mutual trade. Thus, a

special working group was set up to draw up a large-scale programme of the economic

development of China's western provinces. Apart from that, "the Russian government

intends to spare no effort to contribute to the promotion of Russian business in China,"

stressed Kasyanov.498

The Shanghai meeting of Kasyanov with his Chinese counterpart Zbu Rongji will

be remembered by shuttle traders. On August 22, 2002, Kasyanov and Rongji signed five

cooperation agreements. Three of them were on banking, and one was signed between

the Central Bank of Russia and the People's Band of China on settling inter-bank

accounts in border trade areas. In the Amur region of Russia the local banks have been

allowed to exchange rubles for yuans and the other way round. The dollar will no longer

495 "China Convinced of Success of Trade and Economic Relations With Russia," Krasnaya Zvezda, No. 152, in RIA-NOVOSTI Daily Review, Vol. XLVIII, No. 159, August 22, 2002, pp. 3-4. 496 Sergei Tsyplakov and Evgeny Popov, "Russian-Chinese Trade and Economic Cooperation: Current Problems and Outlook," Far Eastern Affairs, No.3, 2003, p. 69. 497 Igor Galkin, "Russian Premier Kasyanov Visits China," Parlamentskaya Gazeta, No. 160, in RIA­NO VOSTI Daily Review, Vol. XL VIII, No. 161, August 26, 2002, p. 6. 498 Igor Galkin, "Russian Premier Kasyanov Visits China," Parlamentskaya Gazeta, No. 160, in RIA­NOVOSTI Daily Review, Vol. XLVIII, No. 161, August 24,2002, p. 6.

195

be used as an intermediate currency in exchanging rubles for yuans and vice versa.499

Russian and Chinese banks will be able to open correspondent accounts in national

currencies and pay in rubles or yuans for the export and import operations of their

clients.500 As a result, Russia's import of Chinese machines and equipment will sharply

mcrease.

During President Vladimir Putin's three-day visit to China, the two countries, on

December 2, 2002, signed agreements on the joint struggle against violations of the tax

legislation and other economic crimes, as well as money laundering. They also signed

three agreements on cooperation in banking, a document on researc~ cooperation in

2003-2007, and an agreement on the creation of a joint agency on tourism.501

The two countries pointed out that stable and predictable progress of trade and

economic relations calls for taking energetic measures to increase the volume of trade

and improve its commodity structure by raising the share of high technology, machine-

building and electronic products, as well as other commodities with a high added value;

to create favourable conditions for the mutual access of commodities, services and

investments to the market of the two states; to step up technical-economic and

investment cooperation, including the creation of joint ventures, industrial cooperation,

and technology transfer; involving Russian companies in the strategy of accelerated

development of China's western regions; expanding cooperation between the two

countries' border regions; to improve the system of servicing trade transactions,

including closer cooperation in the sphere of bank settlements, crediting and insurance;

to step up efforts in the legal, administrative, managerial and other areas with the aim of

499 Viktoria Abramenko and Natalia Ilyina, "Mikhail Kasyanov in Shanghai Notes Progress in Relations With China and Outlines Problems," Rossiiskaya Gazeta, No. 153, in RIA-NOVOSTI Daily Review, Vol. XLVIII, No. 159, August 22,2002, p. 2. 500 Konstantin Smirnov, "First Results of Kasyanov's Visit to China," Commersant, No. 150, in RIA­NO VOSTI Daily Review, Vol. XL VIII, No. 160, August 23, 2002, p. 1. 501 Olga Ivanova, "Putin's Visit A Vital Event in Russo-Chinese Relations," Par/amentskaya Gazeta, No. 230, in RIA-NOVOSTI Daily Review, Vol. XL VIII, No. 231, December 3, 2002, p. 2.

196

gearing the trade regime to international norms; and to reinforce contacts between small

and medium sized businesses. 502

On May 28, 2003, after signing a joint declaration with the visiting Chinese

President Hu Jintao, Russian President Vladimir Putin noted that, the Russian-Chinese

trade turnover could be swelled to U.S.$20 billion a year within the next 4-5 years. Two-

way official trade nearly .tripled during Putin's first presidential term, from US$5.7

billion in 1999 to US$15.7 billion in 2003.503 And this is before factoring in

'unregistered trade,'504 estimated at around U.S.$ 10 billion.505 Moreover, a commercial

relationship once dependent on arms transfers and shuttle commerce has shown signs of

diversifying.506 There is growing interest in trans-Asian infrastructural and especially

energy (oil and gas) project.507

Russian Prime Minister Mikhail Kasyanov said in Beijing on September 25,

2003, that Russia's trade with China in 2003 was worth US$13 billion to US$14

billion. 508

In the meanwhile, the Russian Elektromashexport Electrical Machinery Co. has signed

an agreement on joint participation in tenders with the Fuchunjiang Factory (in Zhejiang

Province), the Dongfang Factory (in Xiechuan Province), and the Harbin Electrical

502 "Joint Declaration of the Russian Federation and the People's Republic of China," signed on December 2, 2002, in Beijing, RIA-NOVOSTI Daily Review, Vol. XLVIII, No. 230, December 2, 2002, p. 7; Sergei Tsyplakov and Evgeny Popov, "Russian-Chinese Trade and Economic Cooperation: Current Problems and Outlook," Far Eastern Affairs, No. 3, 2003, p. 68. 503 Russian foreign ministry press releases on 22 November 2002, http://www.In.mid.ru/ns-rasia.nsf; and 30 January 2004, http://www.l.mid.ru/ns-rasia.nsf. 504 The bulk of 'unregistered trade' comprises transactions by shuttle traders, so called because they criss­cross the border to sell their wares. 505 Joint press conference of Vladimir Putin and Hu Jintao in Moscow, 27 May 2003, http://www.Inlmid.ru/bl.nsf; Vadim Markushin, "Moscow, Beijing Reach Consensus on All Issues," Krasnaya Zvezda, No. 95, in RIA-NOVOSTI Daily Review, May 29, 2003, p. 1. 506 Unsurprisingly, there is considerable secrecy regarding the level of Russian arms transfers, although most estimates put this at around US$1-1.5 billion per annum- a relatively modest proportion of total bilateral trade. 507 In 2002, for example, Russia exported 3 million tonnes of oil to China: Putin 's comments at joint press conference with Hu Jintao, Moscow, 27 May 2003, http://www.In.mid.ru/bl.nsf. 508 Mikhail Margelov, "Russian-Chinese Relations: At Their Peak?" International Affairs (Moscow), Vol. 49, No. 6, 2003, p. 85.

197

Equipment Co. (in Heilongjiang Province). In 2002, its bids to build the Wangmingpo

Hydroelectrical Power Station (three units of 88 megawatts each) in Hunan Province

were successful. Russia's share of the contract was around US$3.5 million. In December

2002, together with the Dongfang Factory, the Russian company won a tender for the

Qipingpu HPS (four units of 190 megawatts each) in Xiechuan Province. The Russian

order totaled US$4.5 million.509

In 2003, Electromashexport proposed taking part, together with its Chinese

partners, in the tenders to supply equipment for the Sanbanxi HPS in Hunan Province,

the Shuibuya HPS in Xiechuan Province, and the Xiaowang HPS in Yunan Province. If

the bids are successful, the orders could run into many million dollars. Russia will supply

the main wheels for the turbines, which Chinese factories do not yet have the technology

to manufacture. 510

In the same key, such Russian firms as UralAZ trucks, KamAZ trucks, Akron,

Perm Motors, and OMZ Mining Equipment, as well as a number of others, have also

begun to look to China for business.511

During Chinese President Hu Jintao's visit to Russia (May 26-30, 2003), the two

countries signed an agreement on development and research of marine resources, a

general agreement on buyer's export credit between Russia's Bank for Foreign Trade and

the China Construction Bank on May 27, 2003.512

On the whole, in my view, the current level of development in trade and

economic collaboration shows it to have become an important component of two-way

cooperation, as well as the material foundation of strategic partnership relations.

509 Sergei Tsyplakov and Evgeny Popov, "Russian-Chinese Trade and Economic Cooperation: Current Problems and Outlook," Far Eastern Affairs, No.3, 2003, p. 70. 510 Ibid. 511 Ibid.; and Alexander Lomanov, "Putin to Settle Comprehensive Issues in Beijing," Vremya Novostei, No. 222, in RIA-NOVOSTI Daily Review, Vol. XLVIII, No. 230, December 2, 2002, pp. 2-4. 512 Joint press conference of Vladimir Putin and Hu Jintao in Moscow, 27 May 2003, http://www.Inlmid.ru/bl.nsf; Vadim Markushin, "Moscow, Beijing Reach Consensus on All Issues," Krasnaya Zvezda, No. 95, inRIA-NOVOSTI Daily Review, May 29,2003, p. 1.

198

3.2.4 (a) Energy cooperation.

Russo-Chinese energy cooperation is mainly carried out in the realms of oil, natural gas,

nuclear energy and electricity. China is experiencing an ever-growing need for raw

hydrocarbons, and is one of the world's largest importers of oil, purchases of which

came to 71.84 million tonnes in 2002.513 Three million tonnes of crude oil came from

Russia in 2002, mostly by raii.514

Possibilities for large-scale deliveries of oil and natural gas from Russia to China

were cultivated in the mid-1990's. Today, three main projects for collaboration in oil

and gas are on the drawing boards. These are the Russia-China oil pipeline, which will

have an annual capacity of up to 30 million tonnes, and two natural gas projects: a

pipeline from lrkutsk515 Region's Kovytka gas fields to Northeast China, with an outlet

to the Republic of Korea; and the shipping of Russian gas from the Chayanda field, in

the Sakha Republic (Yakutia),516 to Northeast China.517 The China National Petroleum

Company wants a licence to develop the Chayanda gas deposits in .Yakutia.518 The thing

is that China produces barely 20 billion cubic metres of gas a year, but will need 140

billion by 2020. Thejoint development of the Kovykta deposits in the Irkutsk Region

513 Since 1993, China has become a net oil importer. In 2002, its net oil import reached 71.84 million tonnes, accounting for 30 percent of its oil consumption. As China's old oil fields in its central and eastern regions begin to dry up, ensuring stable production becomes increasingly difficult and the costs have risen. Gaps between supply and demand are widening with development. According to statistics, by 2020, China's oil demand would be 350 million-400 million tonnes per year while its oil production would be only 200 million tonnes at the most (currently it is 169 million tonnes). This forces China to seek more foreign oil and fix reliable sources to ensure energy security (see Pang Changwei and Zhou Xinhua, "Diplomatic Games for Oil," Beijing Review, Vol. 46, No. 41, October 9, 2003, p. 41). 514 Sergei Tsyplakov and Evgeny Popov, "Russian-Chinese Trade and Economic Cooperation: Current Problems and Outlook," Far Eastern Affairs, No. 3, 2003, p. 72. 515 The chief city of Siberia, situated on the western shore ofLake Baikal in eastern Russia. 516 An autonomous republic in eastern Russia; capital Yakutsk. It is the coldest inhabited region of the world, with 40 per cent of its territory lying to the north of the Arctic Circle. 517 Sergei Tsyplakov and Evgeny Popov, "Russian-Chinese Trade and Economic Cooperation: Current Problems and Outlook," Far Eastern Affairs, No. 3, 2003, p. 72. 518 Yekaterina Drankina, "China Interested in Russian Hydrocarbons," Profil, No. 43, pp. 34-35, 17 November 2003, in RIA-NOVOSTI Daily Review, Vol. XLIX, No. 220, 18 November 2003, p. 8.

199

alone will allow to annually supply nearly as much gas to China as the country is

producing now.519

In the second week ofNovember 2003, Russia and China·signed an agreement to

supply China with gas from the Kovykta field, the largest in Russia. 520 According to an

international feasibility study of the project, which has already been approved, starting

from 2008 the gas field will provide 20 billion cubic metres of gas for China and the rest

for the Irkutsk region (4 billion cubic metres).521

In order to implement the project it is necessary to invest US$17 billion in the

field and construct the world's longest pipeline, as long as 4,887 km, through Irkutsk,

Manchuria, Shenyang, Dalian and Korea. China is eager to share the expenses (in order

to seize the opportunity ofbuying gas at lower prices as a shareholder), and it will if the

partner manages to buy out Interros's 25% stake in RUSIA Petroleum, the project

operator. 522

At present, the two countries focus on working together on the construction of the

Angarsk-Daqing Oil Pipeline.523 Feasibility studies have been carried out for several

years. A Russo-Chinese oil pipeline project was first proposed by Russia's private oil

producer Yukos in November 1994. During the sixth regular prime ministerial meeting

held on July 17, 2001, Russia and China signed an agreement on laying down an oil

pipeline from Russia's Angarsk and to Northeast China's Daqing, stretching about 2,400

km, with 800 km in China.524 During the seventh regular meeting held in 2002, both

519 Sergei Tsyplakov and Evgeny Popov, "Russian-Chinese Trade and Economic Cooperation: Current Problems and Outlook," Far Eastern Affairs, No. 3, 2003, p. 72. 520 Yekaterina Drankina, "China Interested in Russian Hydrocarbons," Projil, No. 43, pp. 34-35, 17 November 2003, in RIA-NOVOSTI Daily Review, Vol. XLIX, No. 220, 18 November 2003, p. 8; "RUSIA petroleum, CNPC, and KOGAS complete Kovykta international feasibility study," Insight TNK-BP, December 2003, p. 6. 521 Ibid. 5221bid. 523 Ovchinnikov, Vsevolod, "Russo-Chinese Friendship Treaty One Year Old," Rossiiskaya Gazeta, No. 128, in RIA-NOVOSTI Daily Review, Vol. XL VIII, No. 132, July 16, 2002, pp. 3-4. 524 Xiao Zhou, "Angarsk-Daqing Pipeline," Beijing Review, Vol. 46, No. 41, October 9, 2003, p. 42.

200

sides agreed to speed up the approval process so as to initiate the design of the project.525

According to the agreement, the project was scheduled to start construction in 2003 and

begin supplying oil to China in 2005.526 On May 28, 2003, a general agreement was

signed by Yukos Company of Russia and China National Petroleum Corporation on

basic principles and understandings about a long-term contract of oil supply to China via

Angarsk-Daqing oil pipeline.527 Upon construction, the pipeline will supply 20 million

tonnes of oil each year from 2005 to 2010,528 and 30 million tonnes each year after.529

Under the contract, Russia-China pipeline would provide 700 million tonnes of oil worth

US$150 billion to China in 25 years after the completion of Angarsk-Daqing pipeline.

The Russian side estimated that after the completion of the project, bilateral trade

volume would increase by US$10 billion annually.530

525 Large-scale energy and infrastructural projects represent the 'future', the most promising avenue for diversifying and enriching the bilateral relationship; yet they also enhance the potential for serious disagreements. Differences arising from concrete decisions will not be issue-specific, but will be extrapolated to highlight the limitations and structural weaknesses of the strategic partnership as a whole. 526 Yekaterina Drankina, "China Interested in Russian Hydrocarbons," Projil, No. 43, pp. 34-35, 17 November 2003, in RIA-NOVOSTI Daily Review, Vol. XLIX, No. 220, 18 November 2003, p. 8; "RUSIA petroleum,.CNPC, and KOGAS complete Kovykta international feasibility study," Insight TNK-BP, December 2003, p. 6. 527 Zan Jifang, "Economic Ties Need to be Expanded," Beijing Review, June 5, 2003, p. 13. 528 Yekaterina Drankina, "China Interested in Russian Hydrocarbons," Profil, No. 43, pp. 34-35, 17 November 2003, in RIA-NOVOSTI Daily Review, Vol. XLIX, No. 220, 18 November 2003, p. 8; "RUSIA petroleum, CNPC, and KOGAS complete Kovykta international feasibility study," Insight TNK-BP, December 2003, p. 6. 529 Kuang Ji, "China and Russia: Good Neighbours," Beijing Review, p. 9; Xia Yishan, "Sino-Russian Trade Enjoys Good Prospects," Beijing Review, June 5, 2003, p. 12; Lyudrnila Romanova, "China to Get Russian Oil Soon," Rossiiskaya Gazeta, No. 94, in RIA-NOVOSTI Daily Review, May 29, 2003, p. 4. 530 Xiao Zhou, "Angarsk-Daqing Pipeline," Beijing Review, Vol. 46, No. 41, October 9, 2003, p. 43.

201

Proposed F:1r East PipeU nes (U)

Source: http://www.eia.doe.gov/emeu/cabs/russia.html

At the end of 2002, a dispute unfolded in Russia regarding which pipeline to

build531 -the Angarsk-Daqing line or the longer Angarsk-Nakhodka line proposed by

Japan that would bypass China and stretch to Russia's Far East port of Nakhodka.532

Russia is still wavering between the two lines. To maintain and enhance bilateral

strategic relations, Russia wants to keep energy cooperation with China. At the same

time, it cannot overlook the offer of its economically and technologically powerful

neighbour Japan533 and the opportunity to carry out cooperation with the United

States.534

531 Russian pipeline monopoly Transneft, which was entrusted to undertake fmancial and technological feasibility study of the Angarsk-Daqing project, proposed another option, the Angarsk-Nakhodka pipeline, arousing dispute over the Daqing route. Transneft's proposal was partly the result of hard lobbying by Japan for a rival pipeline that would bypass China (see Xiao Zhou, "Angarsk-Daqing Pipeline," Beijing Review, Vol. 46, No. 41, October 9, 2003, p. 42). 532 Bobo Lo, "The long sunset of strategic partnership: Russia's evolving China policy," International Affairs, Vol. 80, No.2, March 2004, pp. 302-303. In important respects, the Daquing route is economically more viable: as well as being cheaper and logistically easier, its planned capacity is better suited to the estimated volume of oil to be carried from the east Siberian oilfields (John Helmer, "Japan misdirects lobbying for Russian oil," Russia Journal, 8 July 2003, http://www.russiajoumal.com/news/cnews­article.shtml). But such considerations are counterbalanced by concern that Russia could be held hostage by a China exploiting its position as monopoly customer - as Turkey did over Blue Stream gas (Under the Blue Stream project, Moscow and Ankara agreed to transport Russian natural gas to Turkey via the Black Sea. Although it was originally envisaged (in 1997) that the pipeline would eventually deliver 16 billion cubic metres per annum, the Turkish government subsequently used its position as sole customer to pressure the Russians to agree to considerably reduced levels. See http://www.strana.ru/print/181997.html, dated 26 May 2003.).

The Nakhodka option, by contrast, opens up the entire Asia-Pacific market to Russian oil exports - not only China, but also Japan, South Korea, and the South-East Asian 'tigers'. In this schema, the development of transnational energy (and infrastructural) projects would become the main conduit through which Russia could establish itself as an influential player in the region, rather than as a mere raw materials appendage (See Mikhail Margelov, "Russian-Chinese Relations: At Their Peak?" International A/[airs (Moscow), Vol. 49, No.6, 2003, pp. 87, 90.). 5 Japanese prime minister, foreign minister and energy minister have recently visited Russia one after another, selling the Angarsk-Nakhodka line. At the same time, Japan has offered a large-scale economic and technological cooperative plan to Russia. It even pledged US$7.5 billion for Russia's development of new oil fields in Siberia, encouraging the Russian Government to change the Angarsk-Daqing programme that it had agreed to with China. Moreover, Japan also increased its financial aid to Russian regions where the proposed Angarsk-Nakhodka pipeline would pass, gathering support for the plan from local governments (see Pang Changwei and Zhou Xinhua, "Diplomatic Games for Oil," Beijing Review, Vol. 46, No. 41, October 9, 2003, pp. 41-42).

On January 9-12, 2003, Japanese Prime Minister Junichiro Koizurni visited Moscow and Russia's Faar East port city of Khabarovsk. During the visit, Koizurni and Russian President Vladimir Putin signed the Joint Statement on the Adoption of the Plan of the Action for Developing Russian-Japanese Relations, which defined the cooperative orientation of the two countries. The two leaders also studied the "Pacific pipeline" project (see Xiao Zhou, "Angarsk-Daqing Pipeline," Beijing Review, Vol. 46, No. 41, October 9, 2003, pp. 42-43).

On May 30, 2003, President Putin met with visiting Japanese Prime Minister Koizurni in St. Petersburg, during which both sides talked about energy cooperation. Koizurni said that construction of a pipeline from Siberia to Nakhodka instead of to the Chinese border could not only provide oil for China but also to other countries. In June, former Japanese Prime Minister Yoshiro Mori and Foreign Minister

203

In March 2003, Russian Prime Minister Mikhail Kasyanov proposed a

programme to combine the two pipeline projects into one, with Angarsk-Daqing pipeline

as a branch of Angarsk-Nakhodka project. He stressed that the Angarsk-Daqing pipeline

should be the first in operation. On April 29, 2003, Kasyanov declared that the region's

verified oil reserve were only able to provide for Daqing, Russia would first construct the

Angarsk-Daqing pipeline and postpone the construction of Angarsk-Nakhodka pipeline

until it was capable of guaranteeing oil provision for the project.535

On June 30, 2003, Vladimir Putin held a cabinet meeting with the Far East oil

transportation pipeline as its major topic. The result of the meeting showed that Russia

was inclined to construct a "dual pipeline," first constructing a branch to China and then

the main line to Nakhodka.536

At the end of July 2003, Russian Ministry of Natural Resources suddenly cited

some environmental problems against the Angarsk-Daqing pipeline, which is supposed

to pass Russia's Siberia natural reserve and traditional cemetery preservation zone,

showing the vacillation of Russia's attitude toward its Far East pipeline project.537

China is a strategic partner of Russia, so cooperation between the two is logical. But

facing Japan's charming offer of funds and technologies, Russia hesitated on the

Yoriko Kawaguchi went to Russia, persuading Russia to give priority to the Angarsk-Nakhodka pipeline (see Xiao Zhou, "Angarsk-Daqing Pipeline," Beijing Review, Vol. 46, No. 41, October 9, 2003, p. 43). 534 On May 24, 2002, Russia and the United States signed a joint declaration on new Russian-U.S. strategic relations, strengthening bilateral cooperation in the fields of oil and gas exploration and development. Moreover, the two countries also signed a joint statement regarding new Russian-U.S. energy dialogue. On June 1, 2003, Russian President Vladimir Putin and the U.S. President George W. Bush held their seventh meeting since June 2001 in St. Petersburg. After the meeting, bush said that the United States and Russia would strengthen cooperation in economy and energy. The meeting showed that the two countries had ended the strife on Iraq issue.

So far, a memorandum on the construction of the Siberia-Murmansk pipeline has· been signed between Russia and the United States, prescribing Russia's oil export to North America (see Pang Changwei and Zhou Xinhua, "Diplomatic Games for Oil," Beijing Review, Vol. 46, No. 41, October 9, 2003, pp. 42-43). 535 Xiao Zhou, "Angarsk-Daqing Pipeline," Beijing Review, Vol. 46, No. 41, October 9, 2003, p. 43. 536 Ibid. 537 Ibid.

204

Angarsk-Daqing pipeline it has promised to China. Then the United States began to play

a role in the game for oil and Russia suddenly found its oil extremely popular.

In fact, this can be seen a signal of increasingly intensified oil diplomacy in

Northeast Asia, involving Russia, China, Japan and the United States.538

Collaboration in oil and gas meets the economic needs of both Russia and China.

Russian companies are eager to conquer a new market, and to get an outlet through

China to the nations of the Asia-Pacific Region. China, in turn, is largely oriented toward

getting a stable and long-term channel for supplies of strategically important crude oil.

Aware of Russia's rich oil reserves and its strategy of expanding oil exports, China has

placed hope on its northern neighbour. The proposed Angarsk-Daqing pipeline is now

testing the strategic cooperative relations between Russia and China. Both countries

cannot afford to come to a disagreement over energy.

Implementing such massive, long-term projects demands not only the

mobilisation of massive financial and other resources, but the scrupulous consideration

of a multitude of factors as well, including the economic efficiency of exports, the

domestic needs of the region of Siberia and the Far East, the ecological problems, and so

forth.

So far as bilateral trade and economic cooperation is concerned, the growing

share of such components as oil and gas could result - given the obvious increase in the

volume of trade turnover - in Russia's export structure acquiring a clearly expressed

monocultural character.

538 Oil means different things to these countries. To Russia, which has not emerged from the shadow of "Shock Therapy" practiced in the early 1990's, its rich oil reserve could be used to get capital that it is now in urgent need of and to enhance its strategic standing as well. China has taken its oil-rich strategic partner as its hope to ensure its energy security. Japan, always thirsty for energy, won't lose any chance to acquire oil, even if it is very narrow. And to the United States, oil is something it always wants to control so as to dominate the lifeline of the world economy.

205

On July 4, 2002, managers of the Russian Gazprom concern, the Royal Dutch

Shell Group and Exxon Mobil met in Beijing within the framework of a ceremony of

starting the construction of the West-East trans-Chinese gas pipeline. Following the

meeting, the sides signed a document under which all the three companies got a 15%

stake in the gas pipeline construction project.539

During President Vladimir Putin's visit to China on December 1-3, 2002, the two

countries deemed it necessary to ensure the timely implementation of available

agreements concerning the Russo-Chinese oil and gas pipelines, as well as to coordinate

the implementation of promising power engineering projects with the aim of ensuring

lasting and stable deliveries of oil and gas. 540

While visiting China on September 22-25, 2003, Russian Prime Minister Mikhail

Kasyanov promised to increase crude oil supplies to China by rail up to 5.5 million

tonnes in 2005.541

With these projects, the Russo-Chinese trade volume is expected to reach US$40-

50 billion in 10-15 years.

Yevgeny Verlin put forward a different analysis when he says that the current

stage is unique in that Russia has a rather limited choice of possibilities in developing

economic relations with China. It could have been quite different if the Russian economy

were different, if it did not depend so heavily on the export of weapons, raw materials

and energy resources to China. As it is, Russia is becoming increasingly dependent on

Ch. . II 542 ma economtca y.

539 Irina Rybalchenko, "Gazprom Will Take Part in Building West-East Pipeline in China," Commersant, No. 114, in RIA-NOVOSTI Daily Review, Vol. XLVIII, No. 124, July 4, 2002, pp. 11-12. 540 "Joint Declaration of the Russian Federation and the People's Republic of China," signed on December 2, 2002, in Beijing, RIA-NOVOSTI Daily Review, Vol. XLVIII, No. 230, December 2, 2002, p. 7. 541 Mikhail Margelov, "Russian-Chinese Relations: At Their Peak?" International Affairs, No. 6, 2003, p. 87. 542 Yevgeny Verlin, "On the Future of Russia-China Relations," Nezavisimaya, No. 44, in RIA-NOVOSTI Daily Review, Vol. XLIX, No. 45, March 11, 2003, p. 20.

206

3.2.4 (b) Investment cooperation.

In the near future, one can expect investment cooperation to become a new and

promising form of trade and economic collaboration. The objective prerequisites for this

are already on hand.

Thus far its volume is not very large. At present there are 1,100 enterprises with a

share of Russian capital in China, with a total investment volume of US$250 million.543

In 2002, China's investments in Russian economy totaled merely US$280 million, and

the activity of 450 Chinese enterprises was limited to public catering. 544

3.2.5 SIGNS OF FAILURE IN ECONOMIC RELATIONS.

Russia and China have consistently sought to boost their sales to each other. Although

for a time they seemed to be succeeding,545 the results have been disappointing. Total

trade in 1994 dropped 30 percent in comparison with the year before. Annual trade

statistics from 1994 through 1997 have fluctuated between 5 and 7 billion dollars; the

total has yet to climb back to the peak of more than 7.5 billion dollars in 1993, and the

drop in 1997 means that there is no upward trend.

Surprisingly, the trade balance strongly favours Russia. A country that can find

little but energy to sell to most of the world runs a large surplus without energy exports

to China, which in tum cannot find a market for its consumer goods that have flooded

other markets around the world. Incapable of supplying itself with quality clothes,

543 Igor Ivanov (Foreign Minister of Russia), "Pine and Bamboo," International Affairs, No. 1, 2003, p. 4. 544 Viktoria Abramenko and Natalia Ilyina, "Mikhail Kasyanov in Shanghai Notes Progress in Relations With China and Outlines Problems," Rossiiskaya Gazeta, No. 153, in RIA-NOVOSTI Daily Review, Vol. XLVIII, No. 159, August 22, 2002, pp. 2-3; "Foreign Minister on the Forthcoming Chinese Visit of Vladimir Putin," Commersant, No. 216, in RIA-NOVOSTI Daily Review, Vol. XL VIII, No. 228, November 28,2002, p. 12. 545 James Clay Moltz, "From Military Adversaries to Economic Partners: Russia and China in the New Asia", The Journal of East Asian Affairs, Winter/Spring 1995, Vol. 9, No. 1, pp. 157-182.

207

appliances, canned goods, and virtually all other consumer goods, Russia turns elsewhere

rather than purchasing much in China. A common explanation is that Chinese brands are

so closely identified with shoddiness, counterfeit labels, and even dangers to one's health

that Russian customers will avoid them even if they carry low price-tags. But the fact

that even efforts to showcase high-quality Chinese products are rejected suggests that a

deeper adverse reaction has set in, with potential to limit friendship in other areas. Since

Chinese leaders have been keen to solidify their strategic partnership with Russia with

closer economic ties, it seems unlikely that they have not offered Russia favourable

terms. The cause of trouble must be a combination of structural difficulties in finding

common ground for capitalist commerce between two countries rooted in socialist

planning and Russian fears and lack of confidence in the face of Chinese entrepreneurs

and state enterprises alike.

Concerned about the sharp drop in trade in 1994 and the difficulty in selling its

goods in Russia, China has stressed economic ties in meetings of top leaders. It has

offered a vision of economic partnership to bolster the strategic partnership. In 1996,

leaders agreed to a crash programme to raise bilateral trade to 20 billion dollars by the

year 2000.546 Yet at subsequent meetings the substantive proposals of the Chinese have

not won Russia's backing, while the big projects on which Russian industry counted

have slipped away despite agreements in principle.

546 FB/S-SOV-97-106, April16, 1997; also see Shi Ze, "Sino-Russian ties thrive in new era", China Daily, 10 May 1996, p. 4; Xiao Fan, "Sino-Soviet relations on the occasion of General Secretary Jiang Zernin's visit to the Soviet Union", Foreign Affairs Journal, No. 21, September 1991, p. 3; Brig. (Retd.) M. Abdul Haflz, "Russia in Search of a Strategic Partnership", The Daily Star (Internet Edition), 24 November 1997.

208

Apart from projects linking the Russian Far East and Northeast China, at least

four prominent targets have captivated economic planners on one side or the other. On

the Russian side, the keystone in 1996-1997 was China's declared intent to purchase at

least several turbo generators for the mammoth Three Gorges hydroelectric dam.547 This

sale would furnish proof that Russian heavy industry could compete for global contracts.

It would offer evidence that the new partnership with China provides revenue for

Russian enterprises and jobs for Russian workers. Then, suddenly, in September 1997 -

the year of the diversion of the Yangtze River and advance of China's "project of the

century" into a new stage - the Chinese decided to tum elsewhere for all of the huge

generators to be ordered. 548 Whether this was because Russian generators failed the test

of competition or because Russia refused to open its market sufficiently to Chinese

exports, it revealed one more sign of failure in economic relations. Ironically, the BAM

railroad line north of the Trans-Siberian- Russia's final "project of the century"549 and a

fiasco built largely in response to the Chinese threat - had symbolized the wasteful

economy that doomed the old system, and now the Three Gorges project, however

wasteful it may prove for the Chinese economy, symbolizes the inability of Russian

industry to adapt to a new system.

547 If completed, the Three Gorges Dam on the Yangtze will be the largest hydroelectric dam in the world. It would stretch nearly a mile across and tower 575 feet above the world's third longest river. Its reservoir would stretch over 350 miles upstream and force the displacement of close to 1.9 million people. Construction began in 1994 and is scheduled to take 20 years and over $24 billion. In March of 1989, strong citizen opposition to the project in China forced the People's Congress to suspend plans for the dam, but the project was swiftly resurrected by Premier Li Peng in the aftermath of Tiananmen Square.

In its campaigns against the dam, International Rivers Network has been calling attention to the environmental and social impacts of the project along with the international companies and banks necessary for construction. See http://www.irn.org/programs/threeg/index.shtrnl. 548 Gilbert Rozman, "Sino-Russian Relations in the 1990s: A Balance Sheet," Post-Soviet Affairs, Vol. 14, No. 2, 1998, p. 107; Jennifer Anderson, The Limits of Sino-Russian Strategic Partnership, Adelphi Paper 315, The International Institute of Strategic Studies, New York, 1997, p. 36. 549 James Clay Moltz, "From Military Adversaries to Economic Partners: Russia and China in the New Asia", TheJournalofEastAsianAffairs, Winter/Spring 1995, Vol. 9,No.1,pp.157-182.

209

CHINA

-

-th·rae·· · -l·.~~~!R~f•.s~!P.[g:,:.s;ch;J: ~~;;:"::Consf

Source: http://www.im.org/programs/threeg/map.shtml

- --- --------- - - ----

5o'Jr --~ "( · ·.; \(, .. ~-~

·~-- .. -. ~ . -~.r~

'}:0.'

.'Q': . ~

-----------

·YELL:OW s··B·A

6oo km

CHINA

--Three· · -~---

~~;;; rconsf

Source: http://www.im.org/programs/threeg/map.shtml

5 .,. -~-- ~ . ·..:'11"~~~

:f4>.- -- ~ • •-q;-.:;-~

'(:0 . ·

.·o:: . ~ ~ ..

·YEL.L~OW s··B-A

600 krl'l

On the Chinese side, one of the highest priorities was to recover China's good

name for clothing and other exports that in 1993-1994 were disparaged across Russia as

products of the lowest quality. To that end, the Chinese proposed the establishment of

showcases for their goods in major Russian cities. They would fill shopping plazas with

displays of the quality items exported to middle-class consumers around the world, and

resolutely put to rest the sorry reputation of Chinese goods in Russia. But the Russians

did not agree to anything that smacked of Chinese shopping centres. Chinese exports to

Russia (excluding those disguised with labels of other countries) fell to approximately

one-thirtieth of those to the U.S., and continued to attract only impoverished shoppers

with few alternatives.

Another idea floated in bilateral negotiations was the establishment of joint

ventures for development and production in selected fields of high technology. China

wanted Russia to share some of its most advanced technology, offering to assist in

putting it into production and marketing it. Apparently, Russia was wary of sharing such

assets for fear that once the technology was transferred to China, the profits would flow

overwhelmingly to that side. As had happened in the Far East in 1992-1994, joint

ventures failed to bring the two counties together.

A fourth theme at high-level meetings in 1996-1997 had been cooperation on

energy development in Eastern Siberia and pipelines to transport the oil to Chinese and

South Korean consumers.550 But whereas in 1996 the mood was rather upbeat for

proceeding on a project linking Irkutsk Oblast551 to Shandong province552 via Mongolia,

the prospects had faded by early 1998. Not only had China (perhaps having tired of

Russian delay) signed an agreement with Kazakhstan for a project resulting in a pipeline

through western China, but the investment climate in Asia and especially associated with

55° FB/S-SOV-97-107, Aprill997. 551 The chief city of Siberia, situated on the western shore of Lake Baikal in eastern Russia. 552 Also SHANTUNG. A coastal province of eastern China; capital, Jinan. It occupies the Shandong Peninsula, separating southern Bo Hai from the Yellow Sea.

211

South Korea had deteriorated badly. The only hope for the Irkutsk pipeline was an

agreement between Japan and Russia as part of a new spirit of cooperation proclaimed at

the Krasnoyarsk553 summit. 554

On January 2004, China began to charge anti-dumping duties on Russian cold-

rolled steel imports. The government of Russia was quite surprised and disappointed in

connection with this decision. The National Economic Development and Trade Ministry

believes that Magnitogorsk metallurgical factory and other enterprises, which deliver

steel to the Chinese market, might suffer losses to the tune of US$80 million. These new

restrictive steel-import duties are effective for a period of five years, that is, starting with

September 23, 2003. China's actions against steel exporters is explained by additional

demands during talks concerning Russia's projected World Trade Organisation {WTO)

membership, as well as by attempts to pressure the Russian Cabinet on the Angarsk oil-

pipeline issue. That oil-pipeline's route still remains to be chosen, with either Daqing or

Nakhodka serving as the pipeline's final destination. Today, this seems to be one of the

main problems in Russia's relations with China and Japan.555

Economically, Russia and China have turned out to be a poor match for each

other, and even worse, cooperation between them may be seen as a breeding ground for

trouble.

3.2.6 MANAGED TRADE, DIVERGENT INTERESTS.

During the September 1994 Moscow summit, Jiang Zemin addressed the trade crisis at

lengths. He explained that, as long as the overall goal of developing stable relations was

553 A port on the Yenisei River; capital of Krasnoyarsk Krai in central Siberian Russia. 554 Kimura in The Japan Times Weekly International Edition, January 12-18, 1998, p. 8. 555 Yelena Korop and Yekaterina Kravchenko, "China to Import Less Russian Steel," Izvestia, No. 005, p. 5, 15 January 2004, in RIA-NOVOSTI Daily Review, No. 255, 15 January 2004, p. 6; Yevgeny Verlin, "Chinese Present Igor Ivanov With Prohibitive Tariffs," Nezavisimaya Gazeta, Nos. 5-6, p. 6, 16 January 2004, in RIA-NOVOSTI Daily Review, No. 256, 16 January 2004, p. 4.

212

borne in mind, ''these problems accompanying our advancement and development are

not difficult to solve".556 Russian studies were cited to the effect that payment problems

and limited transport infrastructure were the greatest hurdles to the smooth expansion of

trade. 557 As a result, a series of Russo-Chinese government talks focused on developing

better-regulated ties, with both Yeltsin and Jiang emphasizing the need to confine border.

trade to 'normal' levels.

China intends to convince Russia by controlling Chinese behaviour that has

bothered them - shoddy goods, illegal immigration, and so on. 558

The majority of Chinese scholars recognize that economic relations do not

correspond with bilateral political relations; as bilateral trade develops from lower to

higher volume and from irregular to regular trade, this discrepancy is an unavoidable

phenomenon.

Partly in response, leaders of the two countries stressed trade and expanded

cooperation in science and technology. In May 1994, when Russian Prime Minister

VictorS. Chemomyrdin visited China, he focused on these exact issues. In the economic

area, the two sides discussed strengthening macroeconomic management, raising the

quality of goods, expanding areas of economic cooperation, and completing the

infrastructure and legal foundation, and they managed to reach a broad consensus.

During the visit, the two sides then signed agreements on the border management

system, avoidance of double taxation, overall agricultural and industrial cooperation, sea

transport cooperation, environmental protection, preservation of maritime resources in

border waterways, and other issues.

556 Speech by Jiang Zemin at the Institute of International Relations, Moscow, 3 September 1994, in Joint Publications Research Service (JPRS)-TAC-94-012-L, 3 September 1994. 557 Vladimir Kuznechevskiy, "Together into the Twenty-First Century: On the Results of the Russian­Chinese Talks", Rossiyskaya Gazeta, 30 June 1995, 1st ed., pp. 1, 7, translated in FB/S-SOV-95-126, 30 June 1995. 558 Numerous Chinese articles on cross-border trade and relations point to steps China has taken since 1994 to control the chaos along the border.

213

By 1996, these efforts had met with some success. In October, China reported the

completion of its 81-km section of railway which will eventually link Jilin with

Zarubino; a long-delayed bridge project with Amurskaya Oblast was approved; and, in

1997, a fibre-optic cable link was established between Harbin and Khabarovsk.559 As a

result, border trade picked up significantly for the first time since 1993, aided by Chinese

tariff exemptions and quality checks.560 Moscow curbed Far Eastern opposition to

greater trade with China. Primakov expressed his impatience with opposition to the

Tumen River Project and, in June 1997, a memorandum establishing a Russian-Chinese

Committee on Regional Border Trade and Economic Cooperation was signed during the

second session ofthe Prime Ministerial Commission561 (established in December 1996 to

initial bilateral trade and cooperation agreements).

Despite these moves, the Yeltsin government's general trade strategy towards

China shifted since 1993 from encouraging cross-border links to a more managed,

centralized relationship focusing on key industries such as energy, nuclear power, heavy

machinery and defence. Russian companies undertook to build a nuclear-power plant in

Jiangsu562 province and a uranium-enrichment plant in Shanxi.563 The Yeltsin

government promoted the projects of this kind as examples of the benefits of strategic

partnership, claiming that they will create thousands of Russian jobs and significantly

increase two-way trade. Russia and China have announced a joint venture to explore gas

reserves in Irkutskaya Oblast and to build a gas pipeline to South Korea via Mongolia

and China. A framework agreement governing the pipeline project - expected to cost

559 "Progress in Constructing Rail Link Between Tumen River Region and Russia", in BBC Summary of World Broadcast (London) I FE 0460 WG I 11 I 45, 6 November 1996; "Siemens Provides Equipment for Sino-Russian Optical Cable", Xinhua, 22 February 1997, in FBIS-CH/-97-036, 25 February 1997. 560 "Border Fair Trade With Russia Increases", Xinhua, 11 March 1997, in FB/S-CH/-97-070, 13 March 1997. 561 Y. Paniyev, "Moscow and Beijing Have Determined New Priorities of Future Cooperation", Delovoi Mir, 1 July 1997, translated in Russian Information Agency (RIA), Daily Review, 1 July 1997, www.ria­novosti.com/ria main.html. 562 A province of eastern China; capital, Nanjing. It includes much ofthe Yangtze delta. 563 A province of north central China, to the south oflnner Mongolia; capital, Taiyuan.

214

US$12 billion- was signed in November 1997.564 Gazprom announced in 1996 that it

would sign a contract with the Chinese Oil and Gas Corporation to develop fields in

China.565 A high-voltage power line is also being planned from Eastern Siberia to China.

3.2.7 MIGRATION DYNAMICS IN THE RFE.

Since the normalization of Soviet-Chinese relations in 1988-89, border trade and

contacts between the two countries have increased tremendously. Traders crossing the

Russo-Chinese border at the two cities of Heihe and Suifenhe numbered 2,000 a day in

1993, and some 10,000 single, male Chinese workers were legally employed in the

Russian Far East in 1994, while a few thousand Russians were working in China.566

The normalization of relations and the growing prospects of economic

cooperation were met at first in the Russian border regions with great enthusiasm. Both

local elites and the population in general hoped to take advantage of their closeness to

China and gain from the development of the border trade and direct contacts with the

authorities of and businesses in the neighbouring Chinese provinces. These contacts were

able to flourish during the last years of the Soviet Union as a result of the elimination of

visa requirements for business trips and other measures that, in effect, opened a border

that had been closed for decades. As Gilbert Rozman pointed out, the virtual emptiness

of the internal market in the late 1980's led Russian consumers in the border regions to

turn to China for obvious reasons:

564 Oleg Shchedrov, "Russia, China to Bury Past during Yeltsin visit," Reuters, 9 November 1997. 565 Shih Chun-yu, ''New Type of Sino-Russian Partnership", Ta Kung Pao, 25 April1996, p. A4, translated in FB/S-CH/-96-081, 25 April 1996; Sophie Quin-Judge, "Common Cause: Russia and China Join Hands for Mutual Benefit", Far Eastern Economic Review, 8 May 1997, pp. 15-16. 566Andrei Admidin, "Utilisation of Foreign Labour Force in the Russian Far East: Problems and Prospects," mimeograph, Economic Research Institute, Khabarovsk, 1993.

215

The Chinese were closest, arrived first, offered the

cheapest goods, bought items of marginal quality, and

did not require hard currency. . The Chinese had

no compunctions about trade and seemed to know how to

cut deals with minimal formality and paperwork. As

government contracts declined rapidly in 1990-92 while

local and border trade flourished, the role of these

unregulated traders became decisive. The model of

bilateral economic relations was abruptly changing

without forethought and oversight into the possible

consequences. 567

Beginning in 1992, after a relevant bilateral agreement was signed between Russia and

China, companies in the Russian Far East (RFE), with the approval of the local

authorities, began to hire Chinese contract workers. According to the Law of the Russian

Federation on Employment, local authorities are granted the right to define the number

of foreign workers in their territories to balance labour supply and demand.568 The result

is that China is now the largest trading partner with the RFE, mostly through border

trade.569

The RFE,s volume of trade with China was modest in 1985, accounting for only

10% of the total, but it has grown substantially and in 1992 constituted almost 34% of

the total, second only to trade with Japan.570 Although China is the third largest investor

in the RFE, its investments are not very well received because of their heavy

concentration in trading and consumer goods manufacturing. Local officials prefer

567 Gilbert Rozman, Sino-Russian Cross-Border Relations: Turning Fortresses into Trade Zones, Princeton, N.J., 1997, p. 7. 568 Economic Research Institute, Russian Far Eastern Yearbook, 1991, flrst issue (Khabarovsk: Economic Research Institute, 1993). 569 Admidin, "Utilization of Foreign Labour Force," op. cit. 570 Japan External Trade Organization, Present Foreign Trade Situation in the Russian Far East, 1993, pp. 41-42.

216

foreign investment to take the form of joint ventures in natural resource development,

processing industries, and basic infrastructure development, the approach taken mostly

by investors from Japan and the United States. According to polls taken in early 1993,

local leaders in the southern Primorskii Krai prefer to work with American (64%),

Japanese (44%), South Koreans (16%), and Chinese (4%).571

In contrast to its cool reception by Russians, China considers economic

cooperation with Russia to be inevitable because of global economic reordering and the

differences between Russia and China in the sequencing of their economic reforms.

Chinese scholars attribute the rapid rise in Russian-Chinese trade and Chinese

investment in the RFE to two cases: (1) the severely weakened economic linkages

between the RFE and Russia, other former Soviet republics, and East European countries

due to the collapse of the Council for Mutual Economic Assistance; and (2) the strong

complementarity between the RFE and Northeast China. China exports food and

consumer goods to the RFE, and imports form it steel, chemical fertilizers, machinery,

and timber. Moreover, gaps created by the change from a command economy to a market

economy in the RFE have provided opportunities for traders and small private producers.

These traders and investors are typically looking for short-term gains since long-term

investments in resource development and processing industries are hampered by Russia's

political and economic instability. But the Chinese believe they can help Russia, and the

RFE in particular, to develop its resources and resource-processing, and even to export

finished goods. Further, they believe that political stability in both China and Russia

would promote increased trade and economic cooperation between the two countries in

the future. 572

571 Gilbert Rozman, "Prospects for a Regional Community Linking the Russian Far East and the Chinese Northeast," The American Association for Advancement of Slavic Studies, November 1993, Honolulu. 572 Ding Sibao and Wang Li, A Study on Regional Models for External Opening in Inland Border Areas (Changchun: Dongbei Shifan Daxue Chubanshi), 1994, pp. 51-54.

217

3.2.8 THE QUESTION OF "DEMOGRAPHIC

EXPANSION".

One of the most important consequences of this period of flourishing border economic

cooperation was the growth of demographic pressure from the Chinese side and the

demographic vacuum in the Russian Far East. As a result of the economic crisis in the

Far East and the end of state-supported immigration, the population of the Far East had

been in decline since 1991, when emigration overtook natural increase.573 The decline

since 1992 may constitute in excess of a quarter of a million people. 574 Whilst this would

represent a fall of only 3.3% of the Far East population, it is clearly unsustainable in the

long term and gives rise to the impression that the Russian settlement of the Far East is

being eroded. 575 Against this background, the dramatic rise in the number of border

crossings from China took on a threatening aspect.

Chinese figures for border crossings, in both directions, were 1.38 million for

1992 and 1.76 million for 1993.576 There were four types of Chinese crossing the border:

long-term contract workers, particularly those engaged in agriculture; seasonal workers,

notably in the construction and timber industries; 'businessmen', including those

engaged in joint-ventures and trade operations; lastly, those in transit to the United States

of America and to Western Europe. 577

573 Pavel A. Minakir & Gregory L. Freeze, eds., The Russian Far East, An Economic Handbook, Armonk, New York: M.E. Sharpe, 1994, p. 27. 574 Far East Population figures for 1992 are in Pavel A. Minakir & Gregory L. Freeze, eds., The Russian Far East, An Economic Handbook, Armonk, New·York: M.E. Sharpe, 1994, p. 29; and for 1994 in Russian Business Monitor, 1995, No.2, p. 6. 575 Possible remedies, such as incentives to encourage migration from European Russia and from ethnic Russians in the Baltic states and Central Asia, have not been seriously attempted. In the meantime, local inhabitants are leaving in droves in response to living conditions miserable even by Russian standards. See Dmitri Trenin, The End of Eurasia: Russia on the Border Between Geopolitics and Globalization (Moscow: Carnegie Moscow Center, 2001), p. 218. 576 Figures given by Wang Zhongzhang, Deputy Governor of Heilongjiang, "Rethink border trade strategy," Bohai Shangbao, Shenyang, 19 July 1994, in JPRS-CAR-94-046, p. 41. 577 David Kerr, "Opening and Closing the Sino-Russian Border: Trade, Regional Development and Political Interest in Northeast Asia," Europe-Asia Studies, Vol. 48, No.6, September 1996, p. 949.

218

For the Russians, however, the central issue regarding these categories was not

how many were crossing but how many were staying. Estimates in the Russian press at

the end of 1993 and beginning of 1994 ran as high as 1 million in the Far East and 2

million nationally.578 However, careful governmental and academic efforts have found

only tens ofthousands.579

Nevertheless, this Chinese presence in the RFE has resulted in rising fears of a

Chinese "demographic expansion" among the local population. A recent Russian survey

found that almost half of the respondents feared that the Chinese population in the region

could grow to 20-40 percent of the total within the next decade. Another 20 percent

believed the figure could become as high as 40-60 percent. 580 Local newspapers and even

academic journals began publishing articles devoted to the alleged "yellow peril",581

arguing that China, under the guise of economic cooperation, pursued a deliberate policy

of resettling their surplus population in the northeastern provinces of the RFE and

Siberia.582 This policy is alleged to have been aimed at solving the problems of

unemployment and overpopulation583 at the expense of Russian labourers. It was also

578 Izvestia, 7 December 1993, p. 3; Segodnya, 28 January 1994, p. 3. 579 Russian regional politicians and press considerably exaggerate the scope of Chinese migration to the area. Work by the Carnegie Endowment's International Migration Policy Programme, which has representatives conducting surveys in the Russian Far East, estimate the number of Chinese in Primorskii and Khabarovskii krais and Amur Oblast to be between 30,000 and 70,000 in each region. This number includes shuttle traders. A special commission of the Russian Duma also investigated Chinese migration in the mid-1990's and came to similar conclusions. Cited in Sherman Garnett, "Challenges of the Sino­Russian Strategic Partnership," The Washington Quarterly, Vol. 24, No.4, Autumn 2001, p.49. 580 Mikhail Alexseev, "The Chinese Are Coming: Public Opinion and Threat Perception in the Russian Far East," Program on New Approaches to Russian Security: Policy Memo 184 (Washington, D.C.: Council on Foreign Relations, January 2001). 581 For many in the RFE, the geocultural implications of cross-border relations proved bothersome. Believing that they represented European civilization, they found the Chinese with whom they came into contact to be uncouth standard-bearers of a threatening way of life. In particular, the intelligentsia of Vladivostok and Khabarovsk conceived of themselves as cosmopolitans. While acknowledging the hardworking character of the Chinese, they accused them of deception and criminality and of threatening the moral climate of an area already degenerating from within. Cossacks, who are important factors in the Jewish Autonomous Oblast, Primorskii Krai, and so on, have been in the forefront of a xenophobic reassertion of Slavic civilization. Battles over turf between Russian and Chinese criminal groups, and increasingly among the Chinese themselves, aggravated the impression that uncontrolled migration was bringing a "yellow peril" into the RFE cities. 582 Newspapers and journals of central Russia, the Far East, and Siberia had published roughly 100 articles since 1992 criticizing China's "expansion" into the Russian Far East. 583 Every year the population of China is growing by 12 to 13 million people. China has about 100 million hectares of ploughland, which means that one-fifth of the world population obtains food from 7% of the world's cultivable land. As regards woodland, an average Chinese is over 83% poorer than an average man

219

held that this policy was laying the groundwork for future Chinese efforts to claim those

Russian territories that Beijing held as previously belonging to China.584 To realize this

goal, the Chinese supposedly used false tourist trips (after which participants did not

return to China but rather settled in Russia). There were fake invitations from Russian

universities to make research visits and sham marriages used to get residence permits.

Between 200,000 and two million illegal Chinese immigrants were estimated to be in the

Russian Federation in 1993-94.585 Yevgeni Nazdratenko, governor of Primorskii

(Maritime) Krai, claimed that 150,000 Chinese 'overstayers' were present in Primorskii

Krai alone. Chinese traders were blamed for rising crime rates in border cities and

accused of profiteering from privatizations, creating housing shortages and fuelling

in the world, and he is 50% poorer in regard to pastures and mineral resources. As to per capita provision with various types of natural and mineral resources, the figure indicating China's lagging behind Russia would be increased manifold.

Meanwhile, in the opinion of a group of competent authors from China's Academy of Social Sciences, "since the emergence of private property and states the resources that initially belonged to the whole of mankind were unequally divided among countries and regions, as a result of which the countries and regions with poor resources have to make up for the shortage of resources by way of trade or using other methods ... " Such statements obviously have a message that China does not have vital enough space, which is a result of "unequal" division of territories among states. There is no doubt that such arguments, originating from China's supreme academic institution, if popularized in the masses, may be quite dangerous. Hitler, it would be appropriate to recall here, began by expressing similar ideas in his "Mein Kampf."

Such an obvious coincidence is twice as dangerous against the background of "frozen," but not discarded finally, China's territorial claims to its neighbour states, including Russia. Though such arguments appear mainly in scientific literature, the very fact that they appear is alarming.

In the context of relations between Russia and China, a considerable part of the "resources that initially belonged to the whole mankind" are to the north of the Amur and Ussuri rivers, that is, in the areas that are still regarded in Beijing as "territories seized from China by Tsarist Russia." This matter is locked up in the old oak chest, but there is not a single official document signed by a Chinese leader that would state unambiguously that China has no "historical" territorial claims to Russia. And one will find it hard to meet in China a person who would say that these claims are unreasonable (see Yevgeny Volin, "Beijing Throws Down A Strategic Gage to Moscow," Nezavisimaya Gazeta, No.8, p. 11, 20 January 2004, in RIA­NOVOSTI Daily Review, No. 258,20 January 2004, pp. 2-3). 584 In a 1997 article in the Far Eastern Affairs, Vassily Likhachev, Vice-Chairman of the Federation Council of Russia's Federal Assembly, takes a more hard-headed and less romanticized view of Russia's relations with China and comes out with a solution in keeping with undiluted realpolitik. He emphasizes that the Chinese demographic factor on the Russian border is an objective factor and that China is the only country among Russia's neighbours which possesses an appropriate military capability to pose a military threat to Russia. China is seeking to move the border northward. In view of the rising power of China and the declining power of Russia, the weaker strategic partner becomes the ''underdog." According to him, Russia's objective interests would be served by trying to "channel China's expansion toward Taiwan, Singapore, and all of southeast Asia and in having a permanent U.S.-China and Japan-China standoff, with Russia acting as a "good neighbour" or a "third party taking the sweepstakes." (see Vassily Likhachev, "Russia-China Strategic Partnership," Far Eastern Affairs, No.2, 1997, pp. 39-41; Dmitri V. Trenin, The End of Eurasia: Russia on the Border Between Geopolitics and Globalization, Moscow: Carnegie Moscow Center, 2001, p. 220). 585 Rajan Menon, "The. Strategic Convergence Between Russia and China," Survival, Vol. 39, No. 2, Summer 1997, p. 105.

220

unemployment rates. 586 It was claimed that the Chinese authorities at either the

provincial or ministerial level adopted a programme of establishing Chinese villages and

communities on Russian territory. In Vladivostok, one analyst suggested that a Chinese

autonomous province would be established in the region within 30 years. 587

Furthermore, Chinese joint ventures were alleged to be controlled by Chinese

intelligence agencies and mafia-style groupings (which were also thought to serve

Chinese national interests) and supposedly used dummy Russian companies to buy lip

Russian businesses, real estate, and land.

Both the central government of Russia and the residents of the RFE feel

increasingly uneasy about the region's growing dependence on China and in particular

on Northeast China. With its small and decreasing population, the growing presence of

Chinese labourers and traders and Chinese enterprises is perceived as a threat to the

autonomy and sovereignty of the RFE, especially given Northeast China's potential for

further labour inflows from its population base of more than 100 million. The

uncontrolled flow of Chinese traders and labourers, some of whom stayed in Russia for a

long time or even settled there, revived old fears in the under-populated Far Eastern

regions that the territories might become populated predominantly by the Chinese.

Security concerns about Chinese border crossings loom large and these concerns will

affect future cross-border movements oflabour.

Despite Moscow's friendly gestures to China, economic integration of the RFE

with neighbouring economies, in particular China's Northeast, is not well thought of in

the RFE. There, Moscow is perceived as siphoning off regional wealth, stunting regional

development, and circumscribing regional contacts with the RFE's Asian neighbours.588

586 Vladimir Portyakov, "Are the Chinese Coming? Migration Processes in Russia's Far East," International Affairs (Moscow), Vol. 42, No. 1, January-February 1996, h~:/ /home.eastview.com/ialindex.html. 58James Clay Moltz, "Core and Periphery in the Evolving Russian Economy: Integration or Isolation of the Far East", Post-Soviet Geography and Economics, Vol. 37, No.3, March 1996, p. 185.

221

Nazdratenko and his fellow Far Eastern governors (Y evgeni Krasnoyarov of

Sakhalinskaya Oblast, Vladimir Polevanov of Amurskaya Oblast, and Viktor Ishaev of

.Khabarovskii Krai) have also opposed joint infrastructure development and accused

China of seeking to exploit Russian resources through 'economic colonisation'.

The most obvious victim of these tensions is the Tumen River Project promoted

by China's Jilin province under the auspices of the United Nations Development

Programme (UNDP). Launched in 1991, the project sought to bring China, Mongolia,

North and South Korea and Russia together to develop a trade and development zone at

the mouth of the Tumen River Delta. China, along with the two Koreas and Mongolia,

pushed the project forward; politicians in the Russian Far East, however, vigorously

opposed it. China was accused of seeking to use the project to gain access to the Sea of

Japan, thereby bypassing Russian transport and processing facilities and enabling further

illegal immigration.589 The local (Primorskii Krai) view was that its implementation

would "significantly change the ethnic composition of the population of the krai,"

jeopardize Russian economic and political interests, and "unavoidably lead to chaos and

a loss by the Primorskii Krai of its Russian appearance."590 Russia's top admiral warmed

in 1997 that this project was something far more than an issue of navigation rights,

suggesting that the Chinese were intent on deepening the river and building up a fleet

that would alter the balance of naval power in the Sea of Japan.591. The Russian

scepticism contrasts with the enthusiastic Chinese support for the project at both the

central and local levels.

588 John Stephen, "The Russian Far East," Current History, October 1993, pp. 331-36. 589 Icksoo Kim, ''Tumen River Development and Economic Cooperation", Asian Perspective, Vol. 19, No. 2, Autumn/Winter 1995, p. 88. 590 Ludmila Zabrovskaya, "The Tumanggang Project: A View from Primorie," Far Eastern Affairs, no. 1, 1995, pp. 34-38. 591 As long as Russians view their country as losing out even from joint projects with abundant Chinese labour, an inferiority complex will make any signs of rising Chinese national strength suspect.

222

In the Far East local business leaders used ethnic mistrust to force regional

governments, who were themselves not reluctant to play the anti-Chinese card, to limit

Chinese economic activity. Besides the competition in the purchase of business and

property, the primary problem the new business elites in the Far East had with foreign

economic relations with China was that Chinese goods were priced too low. These

undercut more expensive, and more profitable, hard currency imports from the European

and Pacific economies. Central government was similarly influenced by powerful trading

and finance interesrs in Moscow who wished to protect their markets from Chinese

penetration. The pressure of public opinion, and especially from regional

administrations, led to a unilateral Russian decision to close the border. In January 1994

the visa system was reintroduced. 592 Later that year, several regional authorities adopted

measures against illegal Chinese emigrants. The number of Chinese declined

thereafter. 593 Border crossings at Heihe in early 1995 were about 100 Chinese per day

entering Russia and 500 Russians entering China. The Chinese estimate the number of

illegals in the Far East at 1000-2000.594 Tourist companies were made responsible for

bringing all tourists back, tourists not bearing proper paperwork were not allowed to

enter Russia, and foreigners could be assigned only to approved hotels and trade only in

the approved places. In the Maritime K.rai, the local government several times launched

Operation Inostranets (Foreigner) aimed at arresting and repatriating illegal immigrants

(mainly Chinese). All these measures significantly decreased the number of both Chinese

592 Alexander Lukin, "The Image of China In Russian Border Regions," Asian Survey, Vol. XXXVIII, No. 8, August 1998, p. 826. . 593 David Kerr, "Opening and Closing the Sino-Russian Border: Trade, Regional Development and Political Interest in Northeast Asia," Europe-Asia Studies, Vol. 48, No. 6, September 1996, p. 950. 594 David Kerr, "Opening and Closing the Sino-Russian Border: Trade, Regional Development and Political Interest in Northeast Asia," Europe-Asia Studies, Vol. 48, No.6, September 1996, p. 950.

223

going to Russia595 and Chinese residents in the RFE, and consequently led to a sharp

decline in cross-border trade and cooperation. 596

3.2.9 THE SEARCH FOR A NEW PATH.

It was comforting that the Russian and Chinese governments adopted an understanding,

calm, and realistic attitude toward this situation. Chairman Jiang Zemin clearly expressed

the Chinese government's position on this question when speaking to the Russian mass

media-during his visit to Moscow in September 1994:

In recent years, under circumstances of rapid

increases in mutual exchanges on both sides, mainly in

border trade and personnel exchanges, some disorderly

phenomena appeared. First, no matter which side gave

rise to the problems, the cause was always individual

behaviour, not the policies of the two governments.

Second, these are problems that arise in the context

of progress and development [of the relationship],

problems that have appeared in the rapid transition

from the closed borders of the past to openness and

exchange. .They have not and ought not to

influence the whole situation of the development of

bilateral relations. Third, the principled standpoint

595 Today's figures for the number of Chinese in the RFE are relatively modest, particularly compared to estimates in the 1990's, some of which went as high as 2 million. 'Based on all the available data, the Chinese population in the Far Eastern district cannot exceed 100,000 people .... One could not fmd any villages or settlements in the region with a predominant Chinese population.' See Vilya Gelbras, "Chinese migration to the Russian Far East: a view from Moscow," in Tsuneo Akaha, ed., Human Flows Across Borders in Northeast Asia, proceedings of a seminar held at United Nations University, Tokyo, 20-21 November 2002 (Monterey Institute of International Studies, http://www.miis.edu/rcenters-ceas-pub-html),

~· 143. 96 Alexander Lukin, "The Image of China In Russian Border Regions," Asian Survey, Vol. XXXVIII, No.

8, August 1998, p. 826.

224

of the Chinese government is to support and maintain

orderly and legitimate trade activities

consistently opposing illegal migrants, and resolutely

attacking criminal elements engaged in illegal

migration activities. It does not permit Chinese

citizens to do things harmful to bilateral good-

neighbour relations. 5~

In 1993-1994, Russian and Chinese law enforcement organs cooperated closely,

attacking criminal elements and organized groups violating Russia's borders. In order to

develop bilateral personnel exchanges of a healthy and orderly nature, in January 1994

both Russia and China began implementing a visa system and made efforts to strengthen

the legal and physical infrastructure of the border area. Under these circumstances the

"yellow peril" theory dissipated. Through it all, Chinese scholars did not pay "yellow

peril" writings a great deal of attention, dismissing them - when they were discussed at

all- as a "nationalistic manifestation."

Chinese authorities, on their part, repeatedly explain that no central plan to

Sinicize Russian territories has ever existed and show their readiness to cooperate with

the Russian authorities in preventing illegal immigration. During his February 1998 visit

to Moscow, Chinese Premier Li Peng made official statements confirming this position

and called on Chinese citizens staying in Russia to adhere to Russian rules and

emigration laws.

During President Vladimir Putin's visit to China on December 1-3, 2002, the two

countries declared their intention to develop cooperation in the struggle against illegal

• • 598 mtgratlOn.

597 People's Daily, Beijing, September 4, 1994, p. 6. 598 "Joint Declaration of the Russian Federation and the People's Republic of China," signed on December 2, 2002, in Beijing, RIA-NOVOSTI Daily Review, Vol. XLVIII, No. 230, December 2, 2002, p. 8.

225

The Russo-Chinese strategic partnership is premised on geopolitical priorities.

Forces behind planning for economic development show little sign of sharing those

priorities. Local areas along the border also have a different set of priorities, which in the

RFE lead away from China and in NEC continue to focus on Russia.

The crux of the Russo-Chinese strategic partnership is an equal relationship

intended to balance great-power relations in the region and the world. Cross-border

relations are problematic because they reflect an asymmetry in power and potential. The

RFE regards China as seeking geopolitical dominance, beginning with the demarcation;

as bound to achieve geoeconomic superiority, initially through labour migration and

commerce; and as a foreign civilization that surrounds its European outpost. Integration

with NEC threatens to bring inequality and a loss of great-power status, not any kinds of

balance to the environment they know best.

Champions of economic development in both countries also look at cross-border

relations differently from great-power strategists. In Beijing the focus is now on all­

round trade, not border trade. Motivated by the goal of boosting the strategic partnership,

some analysts accuse China's economic ministries of exerting a negative influence

through their one-sided conceptions of the Russian economy as burdened by old

equipment, backward technology, and coarse goods that cannot be delivered on time. In

place of this thinking, they propose that Russia is a big market, has a huge influence on

other CIS (Commonwealth of Independent States) markets, and, most important, is a

science and technology great power. If Russia has failed to find a way to apply its

technological inventions in production, China can do so. Working together, the two

governments can also establish a united bank, offering guarantees for commerce;

improve transport infrastructure; and strengthen order and inspections on the border.

226

While noting that the 1996 summit adds momentum to these efforts, one article warned

that China faces fierce competition for the Russian market and may be left behind. 599

Perhaps a midway option, such as "managed" cooperation, would be more

acceptable to Russians in the medium term, as it would steer the process of spontaneous

development now occurring from below into a more organized relationship and

institutionalizing of these economic interactions. In this scenario, increasing the

' compatibility of the RFE's economic system with the systems of neighbouring

economies would become important. The government would play a role as facilitator and

mediator for its people rather than as obstructor. Broader opportunities with a reasonable

degree of security could be achieved in the RFE through cooperation and collaboration

with other governments.

There are also some of the ultimate reasons why attempts to pursue an anti-

Chinese agenda at regional level in the Far East have failed to influence the progress of

Russo-Chinese rapprochement at state level. With Russian leadership proposing a

constructive partnership and their Chinese counterparts acknowledging the special

significance of Russia-China relation, 600 there still exists the political will for an open

region, assuming the commercial, legal and overall economic framework can be brought

into accordance with both the particular circumstances of the region and up to proper

international standards.

599 Wen Huan, "Sino-Russian Trade," Guoji maoyi, No.7, 1996, p. 19. 600 Jiang Zemin's speech in Moscow, 3 September 1994, as reported in Beijing Review, 19-25 September 1994, pp. 7-13.

227