Putin Going After Chinese Money to Sustain Sagging Russian Economy

Photographer: Alexander Nemenova-Pool

Russia's President Vladimir Putin, right, speaks with China's President Xi Jinping during a bilateral meeting at the G-20 summit in St. Petersburg, Russia, on Sept. 5, 2013. Close

Russia's President Vladimir Putin, right, speaks with China's President Xi Jinping... Read More

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Photographer: Alexander Nemenova-Pool

Russia's President Vladimir Putin, right, speaks with China's President Xi Jinping during a bilateral meeting at the G-20 summit in St. Petersburg, Russia, on Sept. 5, 2013.

Russian President Vladimir Putin plans to open the door to Chinese money as U.S. and European sanctions over Ukraine threaten to tip the economy into recession, according to two senior government officials.

The move would roll back informal limits on Chinese investment as Russia seeks to stimulate growth, said the officials, who have direct knowledge of talks and asked not to be identified as the information isn’t public. The government wants to lure cash from the world’s second-biggest economy into industries from housing and infrastructure construction to natural resources, they said.

The Chinese won’t be welcome in all areas: Russia plans to set “red lines” around significant gold, platinum-group metals, diamond mining and high-technology projects, the officials said.

Putin is turning to Asia as financing from the U.S. and EU tightens and capital outflows surge amid the worst standoff since the fall of the Iron Curtain. The U.S. and the EU have accused Putin of fomenting unrest in Ukraine’s easternmost regions after annexing the Crimean peninsula in March, threatening to widen the sanctions to target the economy unless Russia helps ease tensions.

Putin oversaw nationwide military drills in the run-up to today’s World War II Victory Day celebrations after saying May 7 that Russia had pulled troops from the border with Ukraine, a claim that the U.S., the U.K. and the government in Kiev challenge.

Autonomy Votes

Pro-Russian separatists in Ukraine’s Donetsk and Luhansk regions vowed to press ahead with autonomy votes on May 11 after the Russian leader urged them to postpone the plebiscites.

The International Monetary Fund said last month that Russia’s economy is already in a technical recession and cut its growth forecast to 0.2 percent this year. Russia’s exports of gas and raw materials are so far holding up, even in the face of international condemnation over the incursion into Ukraine.

The world’s largest energy producer shipped 2 percent more gas to Europe in the first three months of 2014 than a year earlier, government data show. Diesel production for export increased, while cargoes of grains, palladium and nickel either climbed or were at similar levels.

Russia has been building trade ties with China, including long-term oil deals worth hundreds of billions of dollars, to tap Asia’s biggest energy consumer as the European economy slowed. China is Russia’s largest trading partner with $95.6 billion of business in 2012, followed by Germany, according to data compiled by Bloomberg.

‘Clinical Fact’

“It’s a clinical fact” that China is heading to become the No. 1 state in the global economy, Putin said during his annual televised call-in show on April 17. Russia will develop ties with China and the two countries’ union will be a “significant factor” affecting the architecture of modern international relations, Putin said.

Still, the Asian country has relatively few major projects in Russia, evidence of informal restrictions on its investments, according to one of the officials. At least two government discussions are scheduled this month to set guidelines for how Chinese investors will be allowed to work in Russia, the officials said.

In addition to limiting access to precious metals and diamonds, Russia is likely to restrict China’s investments in high-technology projects, the people said. The government will also look at how to bar large settlements of Chinese citizens on its territory to avoid ethnic tensions, they said.

China’s Opportunity

Putin’s decision, coming as competition from U.S. and European financing slows, may offer China a good opportunity to gain access to Russia’s economy. Joining existing resource projects will probably be more appealing than starting from scratch, Moscow-based George Buzhenitsa, a Deutsche Bank AG analyst, said by phone on May 7.

Projects such as OAO Mechel (MTLR)’s Elga coal deposit in Yakutia or Evraz Plc (EVR) and OAO Alrosa’s Timir iron ore asset may be interesting to Chinese investors, Buzhenitsa said.

“Given that China has a shortage of raw materials from iron ore to coal to copper, it may be extremely interested in gaining access to such projects in Russia,” Buzhenitsa said.

Evraz’s press service and Mechel spokesman Arseniy Palagin declined to comment.

Sakhalin Project

Russia invited China to join the Elga development, the government said on April 10 after Deputy Prime Minster Arkady Dvorkovich visited the country. Chinese cooperation on the Sakhalin-3 oil and gas project is also under consideration, the government said at the time.

China is already one of the largest investors in OAO Uralkali, the Russian potash producer, with a 12.5 percent stake. China North Industries Corp. had plans to jointly develop nickel and copper fields in Russia with billionaire Oleg Deripaska’s companies, according to an initial agreement signed in 2012.

Russia is also seeking China’s help to build a bridge to the annexed Crimean peninsula, Kommersant reported on May 5, citing unidentified people with knowledge of the government’s plans.

Russia’s relations with China are developing steadily, regardless of any other issues, and no “special” government meetings are being planned on China, Putin spokesman Dmitry Peskov said by phone on May 7.

The government will announce a tender to build a bridge across the Strait of Kerch to Crimea, with all international investors welcome to participate, Peskov said. The cost of construction is estimated to be at least 50 billion rubles ($1.4 billion), which may rise should it be decided to link the bridge to a railroad.

To contact the reporters on this story: Evgenia Pismennaya in Moscow at epismennaya@bloomberg.net; Yuliya Fedorinova in Moscow at yfedorinova@bloomberg.net; Ilya Arkhipov in Moscow at iarkhipov@bloomberg.net

To contact the editors responsible for this story: Hellmuth Tromm at htromm@bloomberg.net John Viljoen, Randall Hackley

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