contributor perspectives

In Russia's Pivot to Asia, Economic Attraction Lags Hard Power

Artyom Lukin
Board of Contributors
10 MINS READSep 12, 2019 | 09:00 GMT
This June 29, 2015, file image shows the start of construction of the China-Russia east-route natural gas pipeline near Heihe, China.
(Xinhua/Song Fulai via Getty Images)

Construction began on the 3,968-kilometer (2,465-mile) China-Russia east-route natural gas pipeline in June 2015. The huge pipeline project is expected to be completed next year. The 2014 Ukraine crisis and the imposition of Western sanctions dramatically raised Russia's stakes in Asia.

Contributor Perspectives offer insight, analysis and commentary from Stratfor’s Board of Contributors and guest contributors who are distinguished leaders in their fields of expertise.
  • For more than a decade, Russia has taken a number of steps to develop trade and investment in its Far East and establish closer economic ties with Asia.
  • Despite dramatically higher stakes in Asia for Moscow, Russia so far has largely failed to turn its Far East into a magnet for foreign businesses and the region remains dependent on Moscow and state-affiliated companies.
  • India has long been interested in Russia's Far East, despite its geographic distance from the region, where it could counterbalance China.

Russia held the fifth Eastern Economic Forum (EEF) in Vladivostok, its main Far Eastern city on its Pacific coast, on Sept. 4-6. The forum has been held annually since 2015 to showcase Moscow's commitment to the development of its vast Far Eastern areas and closer economic links with Asia. Apart from the forum's host, President Vladimir Putin, this year's EEF was attended by Indian Prime Minister Narendra Modi, Japanese Prime Minister Shinzo Abe, Malaysian Prime Minister Mahathir Mohamad and Mongolian President Battulga Khaltmaa. China, South Korea and North Korea were represented by deputy prime ministers, while Indonesia and Singapore sent minister-led delegations.

How the East Became Moscow's Priority

Russia's "turn to the East" began more than a decade ago. In December 2006, Putin convened a meeting of the Kremlin's Security Council, where it was decided to prioritize the development of the Russian Far East, a huge landmass stretching from the Trans-Baikal region to the Pacific Ocean. At this meeting, Putin invoked Russia's perennial fear of losing its Asian periphery, stressing that the underdevelopment of the country's sparsely populated but resource-rich Far East posed "a grave threat to our political and economic positions in Asia and the Pacific, and to the national security of Russia as a whole." The 2008 global financial crisis helped convince the Kremlin that the center of economic gravity was shifting to Asia, which made Russia's eastern development agenda even more important. Then the Ukraine crisis of 2014 alienated Russia from the United States and the European Union, dramatically raising the stakes for Moscow in Asia as the main alternative to Western markets, finance and technology.

Since the late 2000s, Russia has taken a number of steps to boost the development of the Far East, as well as increase trade and investment with Asian countries. In 2012, Russia launched the Eastern Siberia-Pacific Ocean oil pipeline; in December, the Power of Siberia pipeline will come online to supply natural gas to China. Moscow has spent significant funds on upgrading the infrastructure of Vladivostok, Russia's main gateway to the Asia-Pacific. Putin created a dedicated ministry for Far Eastern development and a deputy prime minister position responsible for the Far East. Yuri Trutnev, one of the most capable and energetic managers from Putin's entourage, was appointed in 2013 as the Kremlin's man in charge of the Far East. On Trutnev's watch, special laws and new regulations have been adopted to improve the business climate in the Russian Far East and make it attractive for Russian and foreign investors. The centerpiece of this policy has been the creation of special economic zones, modeled on Asia's best practices, to lure greenfield investors to the Far East.

Global Investors Are Still Cautious About the Russian Far East

Despite Moscow's best efforts, the Far East has so far failed to become a magnet for foreign businesses and remains heavily dependent on capital infusions from the government and state-affiliated companies. Foreigners currently account for just 7 percent of the total investments into the Far East's economy. There are few major projects with foreign investor involvement that have been completed in recent years or are being implemented. The bulk of the Russian Far East's foreign direct investment was accumulated in the late 1990s and the 2000s thanks to the Sakhalin-1 and Sakhalin-2 offshore oil and gas projects. Since then, no new substantial foreign direct investment has come to the Far East.

After 2014, Russia lifted informal and tacit restrictions on investments from China into the Russian Far East that had been in place, in the hope of attracting Chinese money for the region's development. However, as of now, there are just four relatively significant projects in the Far East with the involvement of Chinese capital, whose total worth probably does not exceed $1 billion. These include a casino resort near Vladivostok, an iron ore mining company, a gold mine and a coal mine.

Chinese money is not rushing to the Russian Far East partly because Russia is not a developing country, like Angola or Laos, where Chinese companies can exploit natural resources with relatively little oversight and few regulations, often bringing their own workers. Another factor discouraging Chinese investment into Russia, and its Far East, is Moscow's reluctance to cede control to foreign entities over assets deemed strategic, such as ports. Russia is not Greece, which sold a majority stake in its main port, Piraeus, to China's Cosco. Unlike Greece, Putin's Russia has never been financially desperate enough to pawn off critical assets in exchange for foreign money. And the Chinese know that even big investments into Russia will not buy them any significant leverage over Moscow's foreign policy because Russia has a strong great-power identity that values political sovereignty over economic profit. This differentiates Russia from some other countries, such as in Southeast Asia or Central and Eastern Europe, that are often willing to adjust their foreign policies to suit Beijing's wishes for the sake of Chinese money.

All of that helps explain why China has so far refrained from investing in the Russian Far East's transport and energy infrastructure. It does not help that the Far East borders China's northeastern provinces (the Dongbei), which form China's own "rust belt" and which have suffered from a prolonged economic stagnation and depopulation.

Chinese money is not rushing to the Russian Far East partly because Russia is not a developing country where Chinese companies can exploit natural resources with relatively little oversight and few regulations.

Other Asian investors also demonstrate a wait-and-see approach. Foreign businesses tend to see the risks of entering the region as high, whereas profit margins are not sexy enough to offset the risks. To international businesses, the Russian Far East has always been of interest mainly as a supplier of natural resources such as minerals, hydrocarbons, timber and fish. However, most of these resources, perhaps except for Yakutia's diamonds, are not unique and can easily be found elsewhere. The Russian Far East's freezing winter temperatures, difficult terrain and the lack of transport and energy infrastructure often result in higher costs to extract and deliver its natural riches, compared to competitors in Africa, South America or Southeast Asia.

Structural trends in the industrialized Asian economies do not look particularly promising for the Russian Far East, at least if it continues with its traditional paradigm of resource-based development. Japan, which historically has been a major consumer of the Russian Far East's natural riches, has passed the peak of resource consumption due to its declining population and increasingly energy-efficient technologies. With their imports of energy and raw materials steadily decreasing, the Japanese are now much less interested in the Russian Far East than they were a few decades ago when Japan's industrial production was rapidly expanding. South Korea, another major importer of the Russian Far East's staples, will soon be following the same path of declining demand for natural resources.

The U.S.-led Western sanctions against Russia also deter many potential investors. According to well-informed South Korean sources, sanctions concerns led the Export-Import Bank of Korea to withdraw from a project to finance the construction of a large fertilizer plant near the Russian Pacific port of Nakhodka. As another example, Gazprom has been struggling to develop a large gas field, Yuzhno-Kirinskoye, located off Sakhalin. Potential partners have been put off by U.S. sanctions, whereas Gazprom itself does not currently possess the technology necessary for deep-water operation.

The agricultural potential of the Russian Far East is one area that has recently attracted a lot of attention, especially given China's voracious appetite for soybeans and other foodstuffs. Yet, the Russian Far East is not Argentina or the United States. In the east of Russia, there is not much available land suitable for growing high-margin crops such as soybeans.

Could India Counterbalance China in the Russian Far East?

While the Eastern Economic Forum featured Chinese President Xi Jinping as the main guest in 2018, this year Putin feted Narendra Modi of India as the guest of honor in Vladivostok. Though India is quite remote from the Russian Far East, it has had a long-time interest in the region. After Vladivostok was officially opened to foreigners in 1992, India was the first to establish its consulate there. In the 1990s, India's state-owned Oil and Natural Gas Corp. (ONGC) acquired a 20 percent stake in the Sakhalin-1 oil and gas project, which became India's first major investment in the energy sector overseas. Unsurprisingly, what the Indian business community covets from the Russian Far East is mainly its natural resources, in particular, coal, hydrocarbons, gold, timber and diamonds. During Modi's visit to Vladivostok, Russia's leading private gas company Novatek signed a memorandum of understanding to provide long-term liquefied natural gas (LNG) supplies to India. The Indian Tata Group will develop coal deposits in the Kamchatka Peninsula. It was also announced that a major LNG plant will be built in the Russian Far East, in which India's ONGC will be one of the partners and co-investors, along with Russia's Rosneft, ExxonMobil and Japan's Sakhalin Oil and Gas Development Co. There is also some talk of bringing Indian workers to the labor-deficient region.

India plays the geopolitical game of Go, aiming to increase its presence in countries and regions around China. Of course, China plays the same game by building up its presence in South Asian and Indian Ocean countries.

Apart from seeking commercial opportunities in Russia, Modi's visit to the Russian Far East had a pronounced geopolitical context. It was intended to demonstrate New Delhi's commitment to maintaining a strategic friendship with the Kremlin, as Modi is aware that the Russian Far East's development is an important priority for Putin. Modi's visit was also a message to Beijing, with New Delhi signaling that it can raise Indian geo-economic presence in the areas close to and sensitive to China. The highlight of Modi's visit to Vladivostok was his pledge to extend a $1 billion credit line for the development of the Russian Far East. Modi previously offered similar $1 billion and $500 million loans to Mongolia, the Association of Southeast Asian Nations and Vietnam. New Delhi plays the geopolitical game of Go, aiming to increase India's presence in countries and regions around China. Of course, Beijing plays the same game with India, by keeping strong ties with Pakistan and building up China's geo-economic presence in other South Asian and Indian Ocean countries.

It remains to be seen whether Modi's newly launched "Act Far East" policy will be able to serve as a counterbalance to Russia's growing dependence on China. In 2018, India's trade with Russia stood at a mere $11 billion, while Russia-China trade was $107 billion. And, unlike Russia and China, India and Russia are geographically separated, which complicates trade logistics. Also, India's strategic credit lines to counterbalance China, similar to the one Modi pledged for the Russian Far East, are a complex and slow process, especially given the well-known unhurriedness of Indian bureaucracy.

India's desire to counterbalance China aligns its interests in the Russian Far East with those of Japan. This could lead to joint Indian-Japanese undertakings in Russia and its Far East, though none have been announced so far.

Geopolitics Trumps Economics in Vladivostok

Although the Eastern Economic Forum's official agenda is primarily about trade and investment, it was not the pursuit of business opportunities that brought Modi, Abe and other foreign leaders to Vladivostok. Russia, whose stagnating economy teeters on the verge of recession and is under Western sanctions, is not a particularly attractive business partner right now. It is geopolitics, rather than economics, that makes Asian leaders seek meetings with Putin. Albeit lacking in economic weight, Russia's political-military power makes it a crucial player in Eurasia and it will remain so well into the future.

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