Chapter 1 Introduction
1.1 Research background and purpose
Russia and China are destined by geography and development to be linked. Forits part, China needs to import large quantities of oil (and gas). Oil production in thecountry grew faster than consumption through 1986 and net production remainedpositive through 1992. In 1993, however, China became a net importer of oil. In2009, it passed Japan to become the world’s second-largest importer, trailing onlythe United States. Russia, meanwhile, is endowed with large oil reserves (andenormous gas reserves) and seeks to export much of what it produces to foreigncountries, including China.No matter how much officials talk about the need to persify Russia’seconomy, and no matter how much progress is actually made in that endeavor,energy will continue to serve as Russia’s principal export for a long time. China isthe fastest-growing importer in the world, and it would be foolish not to pursue thatmarket. Given these potentially complementary interests and the countries’proximity to one another, it is unsurprising that Russia and China have had ongoingnegotiations over oil shipments, the construction of pipelines, pricing arrangements,and so on. The negotiations, however, have not been easy as each side has sought toobtain the best deal possible. This memo examines the negotiations over petroleumbetween the two countries and considers their political and economic implications.
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1.2 Current research at home and abroad
Since the World’s high dependence on oil products, therelation between oil prices and economic growth has received agreat deal of attention from economist over the years, and thereis a large technical literature on various aspects of the subject.But whether the oil price can be seen as an economic indicator onGDP growth is however not as clear.The economic importance of oil price shocks has beenexamined utilizing the neoclassical theory in attributing themacroeconomic significance to such events. The related empiricalstudies started by finding a linear negative relationship between oilprices and real activity in oil importing countries. Those studies 3include Rasche and Tatom (1981), Darby (1982), Hamilton (1983), Burbidge andHarrison (1984), and Gisser and Goodwin (1986). Hamilton’s (1983)study identified a robust relationship between oil price increases and subsequenteconomic downturns for majority of the post-World War Two recessions in the United States (US) economy.Subsequently, a large literature has considered the oil price-economic growthnexus for a number of developed countries based on various theoretical linkages.Studies linking oil prices to the macro-economy through the channels oflabor market dispersion (Loungani, 1986; Finn, 2000; Davis and Haltiwanger, 2001),investment uncertainty (Bernanke, 1983; Dixit and Pindyck, 1994;International Monetary Fund, 2005), consumption smoothing in durablegoods (Hamilton 1988a, 2003; Lee and Ni, 2002) and theconsequences for inflation (Pierce and Enzler, 1974; Mork, 1981;Bruno and Sachs, 1982) suggest that indirect transmission mechanismsmay be the crucial means by which oil price shocks havemacroeconomic consequences.Since the World’s high dependence on oil products, therelation between oil prices and economic growth has received agreat deal of attention from economist over the years, and thereis a large technical literature on various aspects of the subject.But whether the oil price can be seen as an economic indicator onGDP growth is however not as clear.
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Chapter 2: Current status of Russian oil exports to Chinaand Russian economy
2.1 Current status of Russian oil exports to China
Russia’s relationship with China has a long and complex history, catalysed bythe lengthy border between the two countries, the complementarity of theireconomies and the ambitions of both to be seen as key global geo-political actors.Following periods of tension and friendship in the Soviet era, when the twocommunist states often struggled to find a mutual understanding, the post-Soviet erahas seen a more complicated relationship develop based as much on economicreality as political ideology.Russia’s economy has suffered collapse and recovery, often driven by oil pricevolatility, and has yet to achieve much-craved stability and consistent growth. China,meanwhile, has genuinely become an economic superpower, having enjoyed growthrates in the 7-15% per annum range since the mid-1990s1 and has now become thesecond largest economy in the world in terms of nominal GDP.China’s rapid economic growth, which has largely been based on industrialexpansion, has also seen it become, since 2009, the world’s largest energy consumer,with total primary energy demand in 2015 of just over 3 billion tonnes of oilequivalent (by comparison the USA consumed 2.3 billion tonnes and the whole ofEurope and Eurasia 2.8 billion tonnes).2 The geographical accident that China isalso located next to the world’s largest owner of fossil fuel reserves means that acommercial relationship based on energy was bound to emerge, and thedevelopment of ties between the two countries based on oil, gas and coal trade hasgenerated significant interest and discussion. In particular over the past decade, asChinese energy imports have increased rapidly while Russia has sought newmarkets for its key commodities, the issues of inter-dependency, reliance andsecurity have been at the forefront of the debate.The disparity in the size of the Russian and Chinese economies is clearlyshown in Figure 2-3 below.
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2.2 Current status of Russian economy
Following the collapse of the Soviet Union, the first decade of transition froma centrally-planned economy to market economy was disastrous for Russia: nominalgross domestic product (GDP) fell from USD 516 billion in 1990 to USD 196billion in 1999, which represented a plunge of over 60%. In an attempt to addressthe economic turmoil and follow the recommendations from the IMF, the Sovietgovernment began to privatize many Russian industries during the 1990s. Importantexceptions were, however the energy and defense sectors.The devaluation of the Russian ruble in 1998—after the financial crisis knownas the ruble crisis—together with the uninterrupted upward trend that oil pricesexperienced in the period from1999 to 2008 propelled the Russianeconomy—heavily reliant on its energy sector exports—to grow at an annualaverage rate of 7%. Russia was among the hardest-hit economies by the 2008-2009global economic crisis: the economy plunged 7.8% in 2009 as oil prices plummetedand foreign credit dried up. The economic contraction was the sharpest since 1994,but no long-term damage was caused due to the government and Central Bank’s proactive and timely response to ring fence key sectors of the economy, in particularthe banking sector, from the effects of the crisis. As a result, Russia’s economybegan to grow again and increased 4.5%, 4.3% and 3.4% in 2010, 2011 and 2012,respectively, before slowing to 1.3% in 2013 and 0.6% in 2014.The Russian economy experienced two major shocks in 2014, narrowlyavoiding recession with moderate growth of 0.6%. The first shock was the sharpdecline in oil prices during the third and fourth quarter of 2014, exposing Russia’sextreme dependence on global commodity cycles. After fluctuating within a tightband near USD 105 per barrel from 2011-2013, crude oil prices ended 2014 at lessthan USD 60 per barrel. The second shock was the economic sanctions resultingfrom geopolitical tensions, which negatively affected investor appetite for Russianinvestments. Capital flights and high inflation compound Russia’s economic woesas the economy registered the steepest contraction since 2009 contracting 3.7% inthe full year 2015. Forecasts are pointing to an end to the recession coming soon in2017.
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Chapter 3: Theoretical research on the influence of Russian ......... 26
3.1 The influencing of Russian oil exports to China on Russian economy ......... 26
3.2 Research hypothesis .... 29
3.2.1 Research hypotheses ..... 29
3.2.2 Construction of conceptual framework ..... 30
3.3 Summary of this chapter ...... 33
Сhapter 4: Empirical reaserch on the influence of Russian oil............ 35
4.1 Data and economic models ........... 35
4.2 Research results .......... 37
4.2.1 Stationarity test .... 37
4.2.2 Granger causality test .... 40
4.3 The results of the research analysis ........ 42
4.4 Summary of this chapter ...... 42
Сhapter 4: Empirical reaserch on the influence of Russianoil exports to China on Russian economy
4.1 Data and economic models
As noted earlier, the hypothesis of the dependence of the external sector andthe growth rate of the economy is quite common in the literature. The influence ofthe export of goods, especially the countries dependent on the countries canmanifest themselves in different ways. The work based on the Granger causalityanalysis allows us to assess the direction of the relationship between the indicatorsand the degree of their influence.Granger's test is to test the cause-effect relationship ("Granger causality")between time series. The idea of the test is that the changes in one time series,which is the cause of changes in another time series, must precede the changes inthis time series, and in addition, make a significant contribution to the forecast of itsvalues.On the basis of the test, it was shown in the works for the USA that theeconomic simple leads to an increase in exports (Ghartley, 1993, Dutt, Ghosh,1996), although a weak reverse effect was also found in Zestos, Tao (2002). Theinterdependence of exports and GDP growth is shown for Canada (Zestos, Tao,2002), for Japan (Ghartley, 1993). Studies for developing countries showmultidirectional results: for the South Asian countries (Indonesia, Malaysia,Philippines, Singapore), the hypothesis of causality from GDP to export issupported, i.e. The traditional approach that explains the growth of Asian economiesthrough export growth has not been confirmed (Ahmad, Hrnhirun, 1996). Theresults of the tests for Argentina and Mexico showed a reciprocal dependence ofexports and GDP growth, for Brazil the causality from exports to GDP(Maneschiold, 2008), for Turkey a one-way link from GDP to exports is shown(Akbay, 2011). In addition to export values for testing the role of foreign trade, theauthors also include imports into the model (Zestos, Tao, 2002, Akbay, 2011), termsof trade, prices of the main traded goods, industrial production index (Awokuse,2004).
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Conclusion
The purpose of this is work an empirical test of the assumption of a positivedependence of Russia's economic growth on oil exports to China.Discussions on the prospects for the domestic economy and methods economicgrowth has always been of great interest among the public, the media and scientificliterature. Russia has large reserves of natural resources, the main engine of tradeand economic development of the country are the resource sectors. The paperpresents statistical data on the dynamics of the external trade and its conditions inthe last decade, which describes the main trends in this sector of the economy.The task was to assess the contribution of Russian oil exports to China in thegrowth of the Russian economy. The degree and sign of the contribution of theexternal sector to economic growth is estimated by different authors ambiguously,in this paper we draw conclusions based on the analysis of time series in the vectormodel of error correction. Also of interest is the direction of this influence orcausality between the variables. The analysis showed that in Russia there is acausality from GDP to oil exports to China, which assumes the primary role ofproductivity growth within the country. Reverse causality from exports to GDPgrowth is consistent with the idea of export growth. The evaluation of therelationship between the factors was performed within the framework of twomodels: according to quarterly and annual data. As a result of testing the hypothesisof the dependence of GDP growth on other factors, a positive short-term andlong-term dependence of the indicator on exports was revealed. The testing showedthat the external demand for Russian oil exports to China was an important factor ofGDP growth and had a decisive importance during the previous decade. Importanceof exports in development it is difficult to overestimate the Russian economy. Thedependence of GDP growth and the exchange rate on oil and trade terms was alsoconfirmed. For the variable exchange rate index, both long-term and short-termbonds are received, for exchange rate conditions and a long-term relationship isconfirmed. One can make the assumption that short-term influence isdistinguishable only in a smaller time period. The export of oil to China as a whole,according to estimates, depends on the short-term period from the exchange rate foroil, it was not possible to show in my view, this is primarily due to the use of annualdata for analysis. Causes from GDP to other variables have not been identified, i.e.The hypothesis of the primary role is confirmed.
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References (abbreviated)