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6 October 2016

Putin’s Far-Eastern plan

How Russia counterbalances Chinese, Japanese and South Korean interests in its Far East

Russia’s Far East remains a depressed region with a waning population. This constitutes a painful problem against the backdrop of Moscow’s foreign policy ambitions. Can Russia aspire to a meaningful global position given that it is incapable of ensuring the development of its own territories in the Pacific? The issue is exacerbated by Russia’s proximity to immense China. However, in contrast to its aggressive behavior in relations with the West, Russia is limited to maintaining a conservative strategy at its Pacific borders. Therefore, it relies on the formation of a classical balance of powers with its own territories at the center.

There is a definitive end game here: should Moscow prove incapable of engaging in Pacific affairs, may the neighbors – China, Japan and South Korea – involve Russia. These three neighbors will therefore balance each other out in their relationship with the superpower which is becoming feeble.

Chinese investors are just around the corner

Since 2014, when the notorious events occurred, Moscow has been eager to show urbi et orbi that it does not really need the West when it has the East, and China in particular. Past experience of cooperation has included territorial concessions on the Amur River, loans for oil and gas pipelines from Eastern Siberia, Russian arms supplies etc. However, investment statistics show that hopes surrounding the Russo-Sino alliance are perhaps, somewhat misguided.

Table 1. Direct investment by China and Russia in their respective economies from 2010-2016: idle balances at the beginning of each year, $ million (according to CBR data)

 

2010

2011

2012

2013

2014

2015

2016

China

1251

1985

1385

1987

4547

2843

1693

Russia

78

108

114

249

186

191

174

Chinese investment activity peaked in 2013 while Russia’s (far more modest) investment activity in China peaked in 2012. Therefore, despite all the declarations regarding strategic cooperation, Chinese investors have been inclined to reduce their investment in Russia whereas Russian investors have simply been presented with fewer opportunities to invest in China.

In this regard, Russia has made significant changes to its political approach. So far, Chinese investment has had very little impact on Russia’s Far East, prompting the Kremlin to adopt measures aimed at attracting Chinese companies to the region. Mention is made of forestry, agriculture and “advanced development territories” including the Free Port of Vladivostok which offers attractive tariffs to foreign businesses.

Russia’s readiness to lease 115 thousand hectares of farmland in the Zabaykalsky Krai to the Chinese company “Huae Sinban” for 49 years is evidence of the new approach, as is the recent proposal to relocate a number of Chinese enterprises in Russia’s Far East. And although investors from the People’s Republic of China (PRC) are in no hurry to accept such offers, the vector of the Russian advances is obvious.

Old partners become more important

Japan and South Korea are on opposite sides of the Far-Eastern scales. Investment by these countries in Russia combined is comparable to Chinese investment alone (see Tables 2 and 3), although the activity of Russian investors in these two countries seems low even given their relatively modest presence in China.

Table 2. Direct investment by Japan and Russia in their respective economies from 2010-2016: idle balances at the beginning of each year, $ million (according to CBR data)

 

2010

2011

2012

2013

2014

2015

2016

Japan

1236

2006

1880

1452

1676

1274

1320

Russia

23

23

20

21

21

29

36

 

Table 3. Direct investment by the Republic of Korea and Russia in their respective economies from 2010-2016: idle balances at the beginning of each year, $ million (according to CBR data)

 

2010

2011

2012

2013

2014

2015

2016

Republic of Korea

1147

1945

1001

2472

1892

1700

1323

Russia

7

17

12

31

32

54

60

The difference is that, unlike Chinese investors, Japanese and Korean investors have always been given the green light to work in Russia’s Far East. Here, I refer to the participation of Japanese companies in gas extraction in Sakhalin and Japanese and Korean enterprises operating in the Primorsky Krai etc.

The problem is that Japanese and Korean investment in Russia is also in decline. Moscow is trying to reverse this negative trend through the same mechanism of “advanced development territories” as well as through Asian partners’ involvement in its own Far-Eastern projects. Moscow also wants Japanese companies to use the Power of Siberia gas pipeline to supply Siberian gas to China via the Far East. It is clear that, in the best-case scenario, Japanese investment should counterbalance Chinese investment in this economically and politically demanding project.

Generally, so far, new investment projects involving Japanese or South Korean investors do not proceed beyond the stages of ideas, declarations and memoranda. All of this creates not only economic, but also political problems. One of which – the Russian concept of “turning to the East” – cannot be reconciled with reality against the backdrop of the confrontation with the US and Europe. However, the main problem lies in the fact that declining investment by Eastern neighbors means that Russia will remain a deep periphery in the Asia-Pacific.

Trade depression balance

If one looks at the statistics of Russian foreign trade, the picture becomes even clearer (see Table 4). Russia’s trade turnover with China, South Korea and Japan has experienced a downturn since 2014, and although trade relations with the PRC are undoubtedly predominant across Russia, it is precisely Japan which has long been the main trade partner of the regions of Russia’s Far East. It is also noteworthy that Russia has a trade surplus with Japan and South Korea whereas imports prevail in trade relations with the PRC.

Table 4. Russia’s trade turnover with China, South Korea and Japan from 2010-2015 and the 1st half of 2016, $ million (according to data from the Ministry of Economic Development, Federal State Statistics Service and Federal Customs Service).

 

2010

2011

2012

2013

2014

2015

2016

(1st half)

China

59361

83232

87571

88798,5

88389,1

63552,2

28292

The Republic of Korea

17708

24942

24868

25172,5

27311,2

18060,6

6568

Japan

23136

29660

31266

33228

30797,2

21312

7334

Moreover, Russia’s current volumes of trade with its key neighbors at its Pacific borders are comparable to those of 2010 and could have dropped even lower by the end of 2016.

The negative trend in trade exacerbates the necessity to lure investors to Russia’s Far East to build enterprises oriented towards the outside markets by any means. Apparently, the Kremlin believes that this task is simpler than major internal transformations; from wholesale tax and customs duty cuts to development of infrastructure.

The Kurils as the key

The slumps in investment and foreign trade have led many to question whether Russia will literally become a forever backward country in the Asia Pacific region. However, the Kremlin sees an opportunity to change the situation without having to alter its ineffective political-and-economic order and this opportunity involves reaching a solution regarding the problem of the peace treaty with Japan and, of course, the Kuril Islands dispute.

Vladimir Putin has met the Japanese Prime Minister Shinzo Abe on no less than three occasions since spring 2016. The latter is also interested in signing the peace treaty and understands that the Kremlin is ready to bargain. What Russia stands to get from the treaty is obvious:

  1. higher loyalty of Japanese investors;
  2. improvement of the Kremlin’s international image and its diplomatic capacity to forge ties in the region;
  3. the opportunity to drive a wedge between Japan and the rest of the G7 members (primarily the US) on the issue of sanctions;
  4. strengthening the counterweight in relations with China.

Although Russia earlier insisted that none of the disputed islands would be returned, its recent actions have set a different tone. On the one hand, it bolsters its military presence in the Kuril Islands (only on the islands of Iturup and Kunashir and not Shikotan or the Habomai Islands). On the other hand, the Russian Minister of Foreign Affairs stated that Russia was inclined to consider the issue of ceding the Shikotan and Habomai Islands to Japan as a gesture of goodwill following the ratification of the peace treaty. Putin himself asserted that the islands’ cessation would not necessarily be tantamount to a change in their sovereignty.

And so we arrive at the likely result of the Russian-Japanese peace treaty: the long-term concession or lease of the islands to Japan. In fact, Russia is prepared to offer to Japan in the Kurils, what it offered China in the Zabaykalsky Krai in exchange for the peace treaty and investment. If Japan plays ball, the Kremlin wins the hand. If not, Moscow will look for other ways of seducing the Japanese.

It is important to understand that Moscow simply does not have any means by which to join the Asia-Pacific region except for on the backs of China, Japan and Korea via Russia’s Far East. In the event of its failure to join, Russia’s decay becomes all too apparent and exacerbates the already unpleasant issue of power. 

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