China and EU’s competition in the Russian market: Much stronger for trade than for investment

Alicia García-Herrero,
Bruegel Senior Fellow,

Natixis Chief Economist, APAC,

Adjunct Professor,
HKUST Institute for Emerging Market Studies (IEMS),
Hong Kong University of Science & Technology (HKUST),

Jianwei Xu,
Bruegel Non-Resident Fellow,

Natixis Senior Economist, Greater China,

Russia doesn’t just look West, it looks East – and increasingly so. China has risen very rapidly in economic terms over the past two decades since its accession to the World Trade Organization. In particular, it has become the largest exporter in the world from a very low base, surpassing Europe. In that context, it is unsurprising that Chinese goods have flooded Russia, eating into the EU’s and the US’s export shares to Russia. Beyond China’s increasing economic weight, the changing global environment, including the sanctions and counter-sanctions between the West and Russia, the US-China trade war and the US-led Indo-Pacific Strategy, have helped re-orient Russia’s economic relationships towards the East, with China being the largest player.

This raises the question of the extent to which China might be able to displace the EU in Russia, in terms of trade, investment and lending. In this article, we assessed the deepening of Russia’s economic ties with China and what this might mean for the EU based on our paper for Russian Journal of Economics (Garcia-Herrero and Xu, 2019).

In terms of trade, the data sheds light on some key issues EU policymakers should pay attention to. Since 2002, the EU’s share of Russia’s imports has dropped from 53% to about 40%, while China’s share has risen from less than 3% to 21%. Also, while the EU still dominates, what China exports is changing – and that should also give cause for concern. The share of domestic content in the goods China sells to the world has been increasing, and Chinese exports are increasingly substituting EU exports on the Russian market, especially in capital-intensive sectors. Notable overlaps are vehicles, industrial machinery, electronics and metal components.

What’s more, although China’s export growth over the past two decades is concentrated on the processing trade, or the business activity of importing parts and components from abroad for processing or assembly, with the finished goods re-exported to the rest of the world, it has been moving up the ladder by incorporating a larger share of domestic production in the final goods its exports. This is also true for China’s exports to Russia. On the contrary, the domestic value added of EU exports to Russia, although still higher than that of China, has remained stagnant. This also confirms that an increase in China-Russia economic cooperation could have a negative impact on European exports, as suggested by the simulation exercise carried out by Garcia-Herrero and Xu (2016).

In investment, however, China’s encroachment on the EU’s position in Russia is less evident. While Chinese investment worldwide has surged, China’s exposure in Russia is limited and remains much less than the EU’s. In fact, Chinese investment in Russia even dropped into negative territory, to -$13 million, in 2018 while the EU28’s total investment into Russia reached $15 billion in 2018, accounting for 11.6 percent of Russia’s GDP.

In addition, the industry focus of Chinese investment has also been very different to the EU’s. In 2018, the biggest target of Chinese direct investment in Russia was the real-estate sector. On the other hand, EU companies have much broader interests in manufacturing and several service sectors, including wholesale and retail. Nevertheless, the 2019 acquisition by Chinese oil companies of stakes in one of Russia’s most strategic companies, the natural gas producer Novotek, seems to indicate that Russia is becoming a major strategic partner for China.

Apart from trade and investment, financial competition between China and EU in Russia is already on the rise. Following the annexation of Crimea by Russia, the financial role the EU played in Russia was taken over by China because of the enforcement of sanctions by Western countries. In contrast of the declining EU lending into Russia, China has continued to support projects developed in Russia with steady increase in project finance. Nevertheless, the EU still has much greater financial exposure than China in Russia. EU portfolio investment in Russia is clearly larger than Chinese portfolio investment. As for bank lending, while there are no official statistics on the role of Chinese banks as cross-border lenders, the signs are that Chinese project finance, while increasing, still does not equal even one-third of the EU’s lending flows into Russia.

In conclusion, while Europe remains Russia’s largest trading partner, lender and investor, China is catching up quickly, especially on trade and project finance. It is in the trade data that competition between the EU and China on the Russian market shows up most clearly, with the EU losing market share and China ramping up the value-added of its exports to Russia. While it is hard to draw any causality from our descriptive analysis, previous empirical work we conducted on this topic using sectoral data does show that China has taken market share from European exports in key sectors where the EU has long kept a comparative advantage.


Herrero, A. G., & Xu, J. (2016). The China-Russia trade relationship and its impact on Europe. Bruegel.
Garcia-Herrero, A., & Xu, J. (2019). How does China fare on the Russian market? Implications for the European Union. Russian Journal of Economics5(4), 385-399.

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