The China Analyst

While bilateral trade between China and Russia maintained steady growth in the first quarter of 2011, the two countries are still locked in long-running negotiations on gas prices and oil supplies. With the highly anticipated natural gas 'super deal' put on hold, the major event of the year in the China-Russia space could be in the banking sector where China Investment Corporation is set to participate in the SPO of Russia's largest bank.

China-Russia Briefing: Hu Jintao state visit to Russia; Direct currency trading; Open door for investment from Hong Kong in Eastern Siberia

• On 15-18 June, Chinese President Hu Jintao undertook a state visit to Russia. Included in a package of other political and economic deals signed during the visit was a power generation deal and an investment cooperation deal between China Eximbank and Russia's En+ Group. A main topic for discussion during the state visit was the terms of pending natural gas supplies from Russia to China, although agreement has still not been reached due to differing price expectations on the two sides
• In June, the central Bank of Russia and the People's Bank of China signed an agreement on foreign trade payments using their national currencies. In accordance with this agreement, Russian and Chinese companies will be able to settle accounts using both freely convertible and national currencies. Trade partners will have the right to choose the currency independently, by mutual consent
• On 17 April, Russian President Medvedev paid his first visit to Hong Kong and met with Donald Tsang, Chief Executive and President of the Executive Council of the Government of Hong Kong. The main topic of the meeting was to highlight opportunities for investment from Hong Kong in Eastern Siberia and Russia's Far East, following the cross-border cooperation programme for these regions and China's North-East, which was announced two years ago

China-Russia Trade

Total Trade

• Bilateral trade between China and Russia increased substantially in H1 2011, reaching USD 35.8 bn, an increase of 40% y-o-y (see chart below)

China Imports from Russia

• China's imports from Russia in June 2011 amounted to USD 3.17 bn, up 39.6% y-o-y
• China's imports from Russia for H1 2011 amounted to USD 18.6 bn, an increase of 33.7% y-o-y

China Exports to Russia

• China's exports to Russia in June 2011 amounted to USD 3.54 bn, an increase of 42.7% y-o-y
• China's exports to Russia for H1 2011 amounted to USD 17.2 bn, an increase of 45.7% y-o-y

China-Russia Investment

Major Recent Deals

• In March, DST Global, a Russian investment group focusing on internet projects, joined a group of investors (including US retailer Walmart) putting 'hundreds of millions' of US dollars into China's internet retailer 360buy.com. The exact amount of the investment was not disclosed
• In May, Israeli businessman Lev Levaev sold 18% of the Russian-Angolan mining company Katoka to China Sonangol, a joint venture between China International Fund (CIF) and Sonangol, an Angolan oil and gas parastatal. As a result, control of one of Africa's largest diamond fields was transferred to a China-Angolan alliance. Lev Levaev had bought Katoka's stock of shares from ALROSA, Russia's largest diamond producer, for USD 20 mn in the late 1990s, when ALROSA was suffering financially due to the absence of export quotas
• In June, Chinese car glass producer Fuyao Glass signed an agreement with the local government of the Kaluga region in Russia to build a plant with capacity to manufacture three million car glass sets annually. According to the agreement, Fuyao Glass will invest USD 200 million in the project, and the region will provide utility networks and other infrastructure. The launch of the first phase of the plant is scheduled for 1 December 2012, and the plant is expected to reach full capacity in February 2013
• In June, during the St. Petersburg International Economic Forum, Russia's largest private power generation company, Eurosibenergo, and China's largest public hydropower corporation, China Yangtze Power, signed an agreement for the construction of three power stations in Eastern Siberia. These stations include Lenskaya a thermal power plant in the Irkutsk region (capacity of 1200 MW), Nizhne-Angarskaya hydro power plant in the Krasnoyarsk region (capacity of 600-1200 MW) and the Transsiberian hydro power plant in the Zabaikalsk region (capacity of 400-900 MW). A joint venture, YES Energo, will be set up to implement these projects
• In June, China Investment Corporation (CIC) received an offer to participate in the second public offering (SPO) of Russia's largest bank, Sberbank. The offer came from one of the investments banks that will organise Sberbank's SPO, planned for the autumn of 2011. The Russian government plans to sell 7.6% of Sberbank's shares, and CIC may purchase 5%. Considering the market capitalisation of Sberbank, 5% may amount to about USD 3.5 bn, which will automatically make this deal the largest ever Chinese investment in the Russian finance sector. CIC's strong interest in Sberbank follows CIC's participation in February's SPO of Russia's second-largest bank, VTB, when it purchased 1% of VTB's shares for USD 100 mn

China-Russia Resources Watch

More Russian iron ore exports to China; Protracted gas price negotiations; CNPC's debt repayments; Biogas construction joint venture in Russia

• 2011 saw a sharp y-o-y increase in Russia's iron ore supplies to China through one of the main routes, the railway crossing point Zabaikalsk-Manzhouli. During the first six months of 2011, China imported 8,789 wagons of iron ore (with total weight exceeding 500,000 tons). For the same period last year, China's imports through this route totalled only 4,497 wagons (with a total weight of 200,000)
• In April, Russia's Biogas EnergoStroy and China National Bioenergy Company (the largest bioenergy enterprise in China, affiliated with State Grid) signed a memorandum of understanding (MOU) on the establishment of a network of biogas facilities in Russia based on waste products of the local crop, livestock and utility sectors. Russian and Chinese collaborative technologies will be used for complex processing of raw materials. A joint venture (JV) will be set up to handle the construction of these facilities in different regions of Russia by the autumn of 2011. The facilities will produce heat, electricity and biogas. At some point in the future these companies plan to build Russia's first large biotech plant producing wood fuel pellets from the waste of wood harvesting and wood processing in the Samara region in the southeastern part of European Russia
• By the end of May, China's oil giant China National Petroleum Corporation (CNPC) paid debts to the Russian companies Transneft and Rosneft for oil supplies. CNPC transferred USD 78 million to Transneft and USD 118 million to Rosneft. According to Transneft representative Igor Demin, taking into account the amount received from China, CNPC's debt to Transneft declined to about USD 20 million. The amount of outstanding CNPC debt to Rosneft has not been disclosed. Disputes between the companies arose from the fact that the parties could not agree on the tariff for pumping oil through Russia via the Eastern Siberia-Pacific Ocean (ESPO) pipeline. According to a contract signed between the parties in February 2009, the pumping tariff covered the whole length of the ESPO. However, the Chinese side concluded that the tariff for pumping to Skovorodino in the Amur region (the starting point of the branch to China) would be 7% less. From the beginning of 2011, CNPC had unilaterally commenced with payment reductions
• The price of natural gas supplies from Russia to China was the main topic of discussion between President Hu Jintao and his Russian counterpart Dmitry Medvedev during the St. Petersburg International Economic Forum (SPIEF) on 16 June. Gas will be supplied via the Altai pipeline from Western Siberia through the western section of the Russian-Chinese border. It is planned that gas deliveries of about 30 billion cubic metres a year will begin in 2015. However, China and Russia have yet to reach agreement on pricing, and there was little progress at the SPIEF on this issue. The Chinese side wants to pay USD 235 per 1,000 cubic meters, although the average forecast for export prices of Gazprom to Europe in 2011 is USD 352 per 1,000 cubic meters. As for Russia's initial plans to export 38 billion cubic meters of gas to China along the eastern route (driving gas supplies to 68 billion cubic metres a year and making China the largest importer of Russian gas by far), negotiations for this route are currently inactive. According to Gazprom's CEO, Alexey Miller, Russia's gas monopoly currently only pursues the western route project