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David Caploe PhD

David Caploe PhD

David is a writer for the popular economic news site Economywatch.

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Resource Starved China Looking to Capital Starved Russia

The Kimkan open pit mine in Siberia is a muddy square mile surrounded by birch and cedar forests so vast they seem to stretch to the ends of the earth.

As with many places in Siberia, it is nearly impossible to drive here. Yet just under the surface, Russian geologists say, lies enough iron ore to build hundreds of millions of cars.

That is why Chinese government officials and business executives are interested, despite a decades-old legacy of bilateral distrust along this stretch of Russia-China borderland.

This year, a delegation from the Industrial and Commercial Bank of China made its way to Kimkan by helicopter to gaze at the bulldozers peeling back topsoil and to chat with the mine foreman, Viktor M. Ryabov, who explained the scale of the underground riches.

“I’m standing on a billion tons of iron ore,” Mr. Ryabov said he told the Chinese visitors.

They were impressed, he recalled. “They said, ‘Hurry up; we’re ready.”

The encounter was emblematic of a business frenzy in this foreboding region, as Russian companies clamor to sign deals over Siberian resources — including iron, coal and timber - to sell into the insatiable Chinese market.

Russian oil, too, is an increasingly sought-after commodity passing through Siberia to China.

For resource-starved China, overland supply of Russian metals and oil is an important diversification away from seaborne shipments.

The transborder commerce in this region helped China surpass Germany to become Russia’s largest trading partner early last year, with $39.5 billion in goods and services passing between the two countries in 2009.

Last year the Russian Far East was the only region in Russia for which investment grew, rather than contracting.

As a further sign of Russia-China interdependence, the two nations’ presidents, Dmitri A. Medvedev and Hu Jintao, met in Tashkent, Uzbekistan, for a conference of their regional security alliance, the Shanghai Cooperation Organization.

All this has been shaking up the grim reputation of places whose names — Siberia and Manchuria — in the past were synonymous with exiles, prisoners and interminable swamps, according to this article in the New York Times.

“Russia and China make a perfect couple,” Kingsmill Bond, the chief strategist at the Moscow investment bank Troika Dialog, wrote in a research report.

“Russia has resources that China needs, while Russia needs capital and China has excess savings.”

The Chinese bank whose delegation stood on the lip of the Kimkan pit is in advanced negotiations for a $400 million loan to enable the developer, the Petropavlovsk mining company, to begin excavating ore.

The reserves Mr. Ryabov spoke of are in Kimkan and a sister mine to the north, and would require 100 years or so to extract.

Petropavlovsk, whose shares trade on the London Stock Exchange, plans to transport ore directly south from the Kimkan mine by train to Chinese steel mills that now import iron ore from as far away as Brazil.

Mine managers say they will have no trouble beating the Brazilians on price - although pricing of commodities may prove one of the sticking points in this emerging transborder trade, some analysts predict.

Skeptics of further economic development between the countries also point to deep mistrust dating to border skirmishes fought on Damansky Island in the Ussuri River in 1969 that put the Soviet Union in a defensive crouch along the border and froze all development for decades.

It was not until 1987 that Aleksandr A. Vinnikov, then the local communist party chief and now the governor of the Jewish Autonomous Region, a province in Siberia with a peculiar history, persuaded Moscow to allow a ferry crossing at a riverside village on the Amur.

Mr. Vinnikov has today become a staunch supporter of the biggest modern trade venture across the Amur — a planned railway bridge at Nizhneleninskoye village that is intended primarily to carry Kimkan iron ore to Chinese mills.

The bridge, whose construction is to be paid for by Petropavlovsk and the two governments, is another emblem of the new prospects in the region, as well as the deep freeze that came before.

It would become the lone year-round border crossing along a 2,038-mile stretch of the Russian-Chinese frontier — stretching from Grodekovo, near Vladivostok, and Zabaikalsk, near Lake Baikal.

For comparison, the United States’ border with Mexico spans 1,969 miles and has 42 border crossings.

The bigger cross-border event now planned, though, could be the trans-Siberian oil pipeline, which is being laid through the region’s dense forest, or taiga, and is scheduled to reach China in 2012 and begin carrying a million barrels a day.

By then, about a quarter of Russia’s crude will be exported to Asia, including fuel from Exxon Mobil and Royal Dutch Shell developments on Sakhalin Island.

Completion of the pipeline would free up Siberian railroad capacity now used by tanker wagons carrying 400,000 barrels of oil a day to China, enabling more goods of other types to be shipped.

Already, the Russian government is floating a grand plan for an overland freight service along the trans-Siberian railway from China to Europe.

For China, oil now transported overland from Central Asia today, via a pipeline from Kazakhstan, and planned to flow from Russia in two years, is meant to further a policy goal: diversifying petroleum supplies now heavily dependent on the Middle East and shipments through the Malacca Straits chokepoint between the Malay Peninsula and Indonesia.

Chinese companies, meanwhile, are renting vast swaths of agricultural land in the Russian Far East left fallow by the shrinking population of ethnic Russians, and are encouraging Chinese migrants to work there as seasonal laborers.

Chinese companies have rented 850,000 acres so far.

Still, mining and petroleum will form the backbone of the trade, as long as China’s economy remains strong in the face of softening demand in Europe - and as long as the trading partners can strike mutually satisfying deals on pricing of oil, natural gas and iron ore.

The Chinese are pressing for discounts from world prices because of the remoteness of the border region.

They argue that the Russian commodities should be cheap because of their abundance
and because without China as a near and ready buyer, the vast reserves in eastern Siberia would be far less valuable.


The Russians, on the other hand, argue that without their commodities, buyers in northeast China would have to pay much higher prices to suppliers from farther away.

Indeed, pricing disputes have for a year delayed a natural gas pipeline deal between China and the Russian company Gazprom.
And price haggling could slow down deals even for highly fungible commodities like iron ore.

Steel mills in Manchuria now pay about $170 a ton for iron, according to the Petropavlosk company, while the Kimkan mine will be able to produce at about $80 a ton.

“They’re not going to give us the whole difference,” Martin Smith, a mining engineer with Petropavlovsk, acknowledged in an interview.

Still, on the Russian side, the China trade holds the promise of a new era of prosperity, compared with the modest incomes of fishing, agriculture and the military industry that came before.

The autonomous region was controversially created by Stalin in 1934 as a Jewish homeland in Siberia. By the mid-1980s it was clear that the area’s economic base as Jewish agrarian communes had no future. Many of the area’s Jews emigrated to Israel. Of the estimated population of about 185,000 people, only about 4,300 now identify themselves as Jewish on census forms.

There are nearly as many migrant Chinese laborers — about 3,500 — working on leased soybean fields.

Petropavlovsk is cooperating with the Russian government on a program to attract ethnic Russians from former Soviet countries, including mining engineers from Kazakhstan, and has filled 14 vacancies this way already.

The Russians have long harbored fears that broadening economic contact with China would lead to a wave of Chinese immigrants taking over the sparsely populated Far East.

But for mining companies the benefits of border trade typically outweigh concerns about who might end up living on these vast, largely empty lands.

Aleksey Y. Karskanov, who directs a Petropavlovsk-operated gold mine near the border, bounced along a red dirt road in a jeep giving a tour of the gigantic rock pit he oversees, which yields four tons of gold a year.

He buys Chinese mining machinery and uses Chinese truck drivers under contract.

“China is our neighbor,” he said. “If we have something our neighbor wants, why not sell it to our neighbor?”

David Caploe PhD
Chief Political Economist
Economy Watch

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