Tuesday, April 16, 2024

Russian Firms Thrive as Trade with China Soars After Ukraine War

HomeWARRussian Firms Thrive as Trade with China Soars After Ukraine War

VLADIVOSTOK, Russia — The gritty Pacific port city of Vladivostok has become an unlikely boomtown, with a bustling flow of ships bringing in a surge of Chinese goods after Western companies fled Russia over the Ukraine war.

At the city’s sprawling commercial docks, a steady stream of new Chinese cars made by brands like Geely and Chery roll off massive auto transport vessels. They are quickly whisked away to dealerships across Russia, helping fill the void left by the exodus of automakers like Volkswagen, Renault and Stellantis.

“There’s simply no alternative for Russian buyers right now,” said Vladislav Vershinin, head of sales at a Changan dealership outside Moscow. “The Chinese carmakers are adapting extremely quickly to meet the demand.”

In just two years, China’s share of the Russian car market has skyrocketed from less than 10% to over 50%, according to industry data. Eight of the 10 top-selling automotive brands in Russia are now Chinese.

Thecar trade explosion is just one facet of the rapidly tightening economic ties between Moscow and Beijing since the Kremlin’s invasion of Ukraine in February 2022 provoked a fierce Western backlash. As the U.S., Europe and allies leveled punishing sanctions, Russian companies have been forced to pivot en masse to new suppliers and trade partners in China and elsewhere.

Overall Russian-Chinese trade has surged 64% in the past two years to $240 billion, according to official data — a lifeline for the Putin regime as it seeks to keep the economy afloat despite being largely shut out of Western markets.

“The sanctions are losing quite a bit of their bite over time as non-participating countries opportunistically step in to seize the economic advantages,” said Zach Meyers, an expert on Russia-China relations at the Center for European Reform think tank. “Russia is becoming dangerously dependent on China as a result.”

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Booming Business on the Chinese Border

One major beneficiary of the trade boom has been the Russian city of Blagoveshchensk, separated from China only by the Amur River along their border. Nikita Minenkov’s logistics company Eurasia Logistics Group is located here, and business has been doubling year after year since 2022.

“At first there was just staggering demand from Russian buyers panicking that China might suddenly cut off supplies,” Minenkov said. “Our revenue keeps climbing as that panic cements into longer-term buying patterns.”

Eurasia Logistics specializes in importing industrial machinery, construction equipment and other goods from China that have become vital for many Russian firms with Western suppliers no longer an option. According to data from SPARK Interfax, the group’s two main companies saw revenues increase by 290% in 2022 as trade activity went into overdrive.

With no immediate end in sight to Russia’s estrangement from Europe and North America, the Kremlin is doubling down on economic integration with powers like China, India and Turkey to reduce isolation. Top officials routinely tout Moscow’s “no limits” partnership with Beijing.

Major rail and port infrastructure projects are underway to facilitate growing commercial ties with Asian nations. Russia plans to boost spending on increasing rail cargo capacity to the Far East by about 40% this year to over $4 billion. It aims to raise annual rail freight volumes by over 20% to 210 million tons by 2030.

“Economic and political rapprochement with China appears to be a strategic inevitability for Putin’s government in the current climate,” noted Meyers. “But Moscow is also deeply distrustful of Chinese ambitions and doesn’t want to become excessively beholden to Beijing.”

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Thriving Auto Trade a Double-Edged Sword

The booming automotive trade serves as a microcosm of this double-edged dynamic. For Chinese brands like Chery, Geely and Great Wall, Russia has rapidly become a prized export market thanks to a dearth of competition from traditional heavyweights like Toyota, Volkswagen and General Motors.

Chinese car exports to Russia were nearly 7 times higher in 2023 than the prior year, soaring by around $10 billion in value as sales volumes exploded. Top sellers include affordable sedan models like the Geely Coolray and Haval Jolion SUV.

“The attitude of buyers towards Chinese brands is definitely changing — people are viewing them very differently and trusting them now,” said Vershinin.

After an initial 58% plunge in 2022, Russian passenger vehicle sales recovered to 1.06 million units in 2023 — still below the 1.52 million level in 2021 before the war, but showing a market on the mend thanks to the Chinese product pipeline.

But there are also signs the dependence on Chinese autos could turn into a vulnerability in the long run, illustrating the risks of Russia’s deepening economic reliance on Beijing.

Chinese brands still suffer from lingering quality and prestige perception issues in the minds of many Russian buyers. It remains to be seen if they can maintain market dominance once the European and American giants potentially re-enter the market when the dust settles.

“Prospects for European brands returning are still very hazy, so we have to live on Chinese models for now,” said Vershinin. “But I think most Russians would prefer to own a German or Japanese car if they could.”

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Growing Russia-China Economic Closeness: Asset or Liability?

Broader questions also loom about the strategic downsides of Russia growing too economically intertwined with China, a vastly stronger power that could ultimately look to extract significant concessions from a weaker Moscow.

“Let’s be clear — Russia is not on equal footing as a tiny market compared to the powerhouse Chinese economy,” said Katrina Blakeley, a fellow at the Atlantic Council think tank. “There are risks for Russia of becoming an overly dependent client state of Beijing’s as opposed to an equal partner.”

Already, shifts are emerging that could further boost China’s leverage. While Russia remains a key source of oil, gas and other energy resources for Beijing, China is capitalizing on Moscow’s desperation by negotiating steeply discounted prices that deprive Russia of income.

Yevgeny Gudkov, head of sales at Moscow-based Chinese equipment importer KST, expressed ambivalence about the double-edged economic reality: “We didn’t create this Chinese market – it created itself out of necessity once Western partners left.”

Ultimately, though he acknowledged few in Russia likely want to become excessively reliant on Beijing long-term, the commercial ties born of isolation show little sign of reversing course soon.

With Putin pushing “years of geopolitical confrontation” against the West, as the Kremlin spokesperson put it, Russia will likely have little choice but to deepen its embrace of China’s economic largesse — even as it eyes Beijing’s strategic ambitions warily over the horizon.

“We don’t see threats from boosting trade ties with China,” said the spokesperson. “Coordination is a strategic necessity for both Putin and Xi.”

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Mezhar Alee
Mezhar Alee
Mezhar Alee is a prolific author who provides commentary and analysis on business, finance, politics, sports, and current events on his website Opportuneist. With over a decade of experience in journalism and blogging, Mezhar aims to deliver well-researched insights and thought-provoking perspectives on important local and global issues in society.

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