Russia's Pivot to China Is Real

Jun 25, 2015 11:51 AM EDT
By Leonid Bershidsky



The search for alternative investors and markets has been a political priority for President Vladimir Putin and his government since Western countries imposed economic sanctions on Russia last year. The resulting pivot to China may seem merely cosmetic, but it is happening.

Admittedly, most of the vague and extremely long-term mega-deals signed by the two countries' governments over the last year will have no immediate effect. Even so, China has become one of the two biggest sources of funding and investment for the Russian economy. The other is the money Russian businesses have stashed in tax havens and bring home as needed. The Chinese share of Russian trade is growing, too.

Russia received only $21 billion in net foreign direct investment last year, compared with $69.2 billion in 2013. Most of the money came from offshore havens such as Cyprus, the Bahamas and the British Virgin Islands. Among non-offshore source countries, China, with its $1.3 billion in direct investment, was second only to France. That's a tiny amount, but a sign of change: In previous years, Chinese investment never exceeded $450 million.

At the same time, Chinese loans became by far the biggest source of foreign financing for the Russian economy last year. According to Central Bank data, Russia's non-financial sector and households received $11.6 billion in net new loans from China. Cyprus -- or rather Russian businesses operating in Cyprus -- was the second-biggest lender, with $3.4 billion.

This presents a radically different picture compared with just two years ago. In 2013, the U.K. dominated lending to Russia with $23 billion in net new loans; China contributed $7.5 billion. But the increase from China wasn't sufficient: last year, those funds failed to cover the net outflow of money to European countries and in aggregate, net loans fell by $6.3 billion. Still, without the boost from China, that outflow would have been 65 percent higher.

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http://www.bloombergview.com/articles/2015-06-25/russia-s-pivot-to-china-is-real