УДК 339

Challenges and prospects of agricultural FDI from China to Russia in the context of the “one belt, one road” initiative

Янкова Александра Дмитриевна – магистрант факультета Мировой экономики и международных отношений, научный сотрудник Центра комплексных европейских и международных исследований Национального исследовательского университета "Высшая школа экономики".

Ленчук Владислав Юрьевич – студент магистратуры Гуманитарного факультета Национального исследовательского университета "Высшая школа экономики".

Abstract: In the context of anti-Russian sanctions, trade tensions between China and the United States and the COVID-19 pandemic, agricultural investments are becoming an important component of improving the overall welfare of Russia and China. They can contribute to the modernization of the Russian economy and increase the efficiency of its agricultural sector through the intensification of production processes, as well as provide an opportunity to move more confidently in foreign markets and integrate into the space of the Chinese “One Belt, One Road” initiative. For the PRC, they can become an important means of bypassing trade barriers, ensuring a diversified market for agricultural imports, and increasing the “entry” level of Chinese agriculture into foreign markets. Thus, agricultural investments are potentially beneficial to both countries. However, a number of fundamental problems on Russian and Chinese sides make it difficult to intensify investment cooperation and increase the efficiency of joint ventures. This article presents an analysis of such problems with special attention being paid to the difficulties that Chinese experts highlight.

Аннотация: В условиях антироссийских санкций, торговой напряженности между Китаем и Соединенными Штатами и пандемии COVID-19 инвестиции в сельское хозяйство становятся важным компонентом повышения общего благосостояния России и Китая. Они могут способствовать модернизации российской экономики и повышению эффективности ее аграрного сектора за счет интенсификации производственных процессов, а также предоставить возможность более уверенно продвигаться на внешних рынках и интегрироваться в пространство китайской инициативы “Один пояс, один путь”. Для КНР они могут стать важным средством обхода торговых барьеров, обеспечения диверсифицированного рынка для импорта сельскохозяйственной продукции и повышения уровня “выхода” китайского сельского хозяйства на внешние рынки. Таким образом, инвестиции в сельское хозяйство потенциально выгодны обеим странам. Однако ряд фундаментальных проблем с российской и китайской сторон затрудняет активизацию инвестиционного сотрудничества и повышение эффективности совместных предприятий. В данной статье представлен анализ таких проблем, при этом особое внимание уделяется трудностям, которые выделяют китайские эксперты.

Keywords: Russia, China, FDI, agriculture, agricultural investments.

Ключевые слова: Россия, Китай, ПИИ, сельское хозяйство, сельскохозяйственные инвестиции.

China has achieved significant results in the field of capital exports. Since 2012, China has been consistently among the top three global FDI donor countries, and since 2015 it has become a net exporter of FDI. Thus, the increasing role of China as a global investor is obvious. In this regard, a logical question arises as to what place Russia occupies in the large-scale flow of Chinese investments and in which areas investment cooperation seems to be the most promising. China is among the largest investors in the Russian economy and is Russia's largest foreign trade partner. However, as a pragmatic country, it aims to get the maximum benefit from its own investments. Chinese entrepreneurs see some benefit in investing in the Russian economy, as it offers unique opportunities for the development of regions, besides, the Russian Chinese comprehensive partnership and strategic cooperation is currently quite mature and stable, which adds confidence in the prospects for investment. Nevertheless, this type of interaction between countries is hardly ideal. The results look impressive only within the framework of political rhetoric, while official data show a weak level of cooperation.

In 2014, there was a sharp decline in the annual inflow of FDI from China to Russia, due to geo-economic factors, in particular, the Ukrainian crisis. Since 2015, the Chinese FDI flow to Russia has remained small but stable, and the situation changed only in 2019-2020, when incoming FDI flows took a negative value for the first time in the history of cooperation. As for the FDI stock, over the past six years, its reduction amounted to $1.8 billion. If in 2014 it was $ 4.5 billion, by 2019 it had dropped to $3.4 billion, even though all this time China has been increasing its potential as a global investor. Thus, the negative trends of Russian Chinese investment cooperation manifested themselves even before the pandemic, and the increasing role of China as a global investor bypassed Russia.

As for the sectoral distribution of FDI from China, they are mainly directed to areas characterized by low added value. The leading positions are traditionally occupied by the energy sector, extractive industries, agriculture, and large infrastructure projects, but the percentage ratio periodically changes. According to the National Bureau of Statistics of China, in 2018, agriculture, forestry, animal husbandry and fishing were the leaders in terms of investments in Russia; energy and manufacturing took second place; resource extraction took third place; construction took fourth place, etc. In 2019, the indicators of agricultural investment and investment in production almost equaled.

Agriculture is a traditional and popular direction for Chinese FDI, besides having prospects for development in the Russian direction. In the current situation of trade friction between China and the United States, it is still unclear how to ensure a diversified market for agricultural imports. This has become a serious problem concerning the food security of the People’s Republic of China. In recent years, China has been actively involved in food investments, some of which come from commercial companies, and the other part is humanitarian projects in developing countries. However, regardless of the source of financing, all of them are closely related to food security and are due to the growing dependence of the PRC on food imports. As a key area of implementation of the “One Belt, One Road” initiative, agricultural investments in Russia can become an important means of circumventing trade barriers and increasing the level of “entry” of Chinese agriculture to foreign markets. The active involvement of Chinese enterprises in investing in agriculture in Russia, as well as the study of trends in this area will play a key role to increase the level of bilateral cooperation.

Studying trends in attracting foreign direct investment from China to Russia is an important component of understanding the drivers and determinants of FDI, as well as the motives of Chinese investors. Foreign investments can become the basis for the modernization of the Russian economy in the face of sanctions. The focus on FDI in agriculture in Russia is primarily related to changes in global trends and priority sectors for investment due to the pandemic and the general downturn of the global economy. Previously, FDI in extractive industries was popular, justified by the motive of searching for resources, then the emphasis changed to energy and technology. According to the UNCTAD 2020 report, after the pandemic, it has become promising to invest in industries that meet the Sustainable Development Goals. Of the SDGs, agriculture and food production, traditional industries for FDI from China to Russia, seem to be the most suitable for Russia. Examples of successfully implemented projects, such as the yeast plant of Angel Yeast Rus, prove that Chinese investments in the agricultural sector can become a mutually beneficial case, bringing substantial profits, corresponding to the SDGs, and contributing to an increase in the level of mutual trust. To attract FDI from China to agriculture in Russia, it is necessary to understand the motives of Chinese investors. Analysis of secondary Chinese sources can help with this.

Since the start of the implementation of the “One Belt, One Road” initiative, the inflow of investments from Chinese enterprises into Russian agriculture has shown a general growth trend, but at the same time their share in the volume of agricultural investments in Europe and in the total volume of Chinese FDI has significantly decreased – this is the first feature of agricultural investments from China to Russia. Until 2017 Russia was the largest destination for Chinese investments in European agriculture. In 2018 Investments of Chinese enterprises in European agriculture increased significantly compared to 2017, but the flow and volume of FDI in agriculture in Russia decreased. The trend continued in 2019. Enterprises that previously sought to invest in Russian agriculture have changed their investment goals, and investments in agriculture in other European countries have increased (for example, in Switzerland).

Secondly, according to the “Analytical Report on China’s Foreign Investment and Cooperation in Agriculture”, the construction of the investment industry chain is becoming more and more perfect. This means that an increasing number of Chinese enterprises are choosing investments not only in planting and plantations, but also in processing and storage of products, logistics, agricultural technologies, services, etc. Thirdly, private enterprises are gradually becoming the main subject of investment. Statistics from the Analytical Report show that the number of Chinese state-owned enterprises investing in Russian agriculture has decreased by 50% in recent years. While the number of private enterprises has grown by about 10 times. The enthusiasm of private investors is limited by political risks, the uncertainty of the investment legislation of the Russian Federation, the lack of incentive measures since in Russia investment cooperation with China occurs mainly only at the state level.

Fourth, the share of brownfield investments is gradually increasing. This relates to the events of 2017, when, because of negative trends in the foreign trade environment, Russia amended the Federal Law “On the Turnover of Agricultural Land”, the Land Code and the Food Security Doctrine. The changes led to several restrictions, the purpose of which was to deter Western investors. The products produced by foreign investors and their exports were henceforth under the management and control of the United Grain Company (OZK), controlled by the Government of the Russian Federation. The changes have reduced the income of investors and their desire to invest “from scratch” in new projects.

As for the problems that Chinese experts highlight, in relation to Russia, this is, firstly, a bad investment environment, in general: serious political restrictions, lack of tax benefits, problems with the import of workers, high political and currency risks, low economic indicators, high level of corruption, etc. Secondly, a low level of investment intensification associated with the fact that a large territory is difficult to provide adequate support for the development of investments in new industries. For example, even if Chinese investors are willing to invest in the intensification of their projects, the lack of appropriate equipment, as well as leasing, service and other services servicing it, makes it difficult to try to increase production efficiency.

As for the PRC, firstly, there are difficulties with decision-making and strategy development among Chinese enterprises. Companies, especially private ones investing in agriculture in Russia, rarely have clear investment plans – most often this process is carried out in the format of “own initiative”, “acquaintance”, “advice”. Secondly, there is insufficient political leadership. Even though the Chinese government encourages and supports FDI in Russian agriculture, it does not provide any benefits for them, not to mention the accompanying recommendations and guidance, as a result of which enterprises are forced to invest blindly. The risks to which these leads can be analyzed by an example. Let us take a Chinese private company that plans to invest in growing corn in Russia to produce compound feeds to then export some of the products to their homeland. At the same time, since there are no relevant tips and guidelines from the government, it is not clear whether the quality of corn will be recognized in the domestic market of China, and how this will affect the production of feed corn in China. The problem is again connected with the fact that Russian Chinese cooperation is limited by intergovernmental agreements, and even the Chinese side finds it difficult to move to active support, including informational, of private investors.

Nevertheless, positive changes in the situation in the long term seem possible. First, Russia needs to direct efforts to improve the investment climate and smooth out differences in the investment environment of the subjects. It is important to work on uncertainties in legislation and business etiquette. So that, when acquiring large plots of land, some subjects of the Russian Federation do not adhere to the culture of compliance with contractual obligations: after the new leadership comes to power, it may refuse to recognize the contract signed by its predecessors. Chinese enterprises can also contribute to improving the situation. They should conduct a number of field or laboratory marketing studies, analyze the agricultural investment environment in various regions of Russia and create a mechanism for assessing investment risks.

Secondly, there is a need to strengthen political support for FDI. The PRC government should identify the leading industries for investment, thereby creating an identification system for key areas of agricultural investment in Russia. It is also necessary to strengthen political support for receiving payments in foreign currency, investor insurance, and the development of cluster approaches to FDI for private enterprises. China should pay more attention to optimizing the service sector in the field of agricultural investment and creating a model of “digitalization” for this industry, since the efficiency of services (primarily logistics) is insufficient. The goal for China in this matter is to build an international logistics chain, expand rail transportation in the direction of China-Europe, increase the influence of the brand of the Chinese-European Railway Express. To do this, it is necessary to coordinate the rational placement of transport hubs in Xinjiang and to the west, as well as to strengthen the work of the assembly center of the Chinese-European Railway Express in Urumqi, to contribute to improving the quality and efficiency of the China-Europe high-speed railway.

Thus, it is obvious that investments in agriculture in Russia can be beneficial to both sides. At a minimum, Russia is required not to hinder the activities of private investors and conduct field marketing research, as well as strive to combat the fear of the “Chinese threat”, especially in border areas, and gradually increase the level of favorable attitude towards Chinese investments in society. In Russia, FDI from China is often treated with caution, fearing that the PRC will begin to dictate its terms and seize resources. Sometimes the presence of Chinese capital is even perceived as a threat to national security. A more detailed study of the motives, drivers, and determinants of Chinese FDI can help reduce the level of tension, as it is often associated with a lack of relevant knowledge. Foreign investments provide opportunities for economic recovery, which is especially important in connection with the consequences of the pandemic, because active work on attracting FDI from China should be carried out now.

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