The Russian Pivot: The Economic Dimension
In a recent post, we reviewed a number of recent Russian initiatives vis-à-vis North Korea. Some, such as investment in the Rason rail link, are of longer standing. Others, such as promises to ramp up trade and investment, may constitute post-Crimean signaling.
But there is a broader Russian effort afoot to gain a meaningful entre into East Asia. How real are these moves?
Exhibit 1 below shows the share of the four Northeast Asian countries in Russia’s total trade (exports plus imports) over the last decade. China is playing an increasingly important role, rising from about 6 percent to nearly 10 percent of Russia’s total trade. But Japan and South Korea have seen much more modest gains and the DPRK barely registers, accounting for only $69 million of Russia’s $840 billion world trade in 2012. The recent announcement of a goal of $1 billion in two way trade with the DPRK by 2020 seems fanciful to us; it would require more than a tenfold increase. The overall message: Russia’s economic presence in the Northeast Asia remains limited compared to its European and Central Asian ties.
Exhibit 2 shows recent developments in two-way foreign direct investment with the four Northeast Asian countries; the numbers are year-end stock positions reported by the Bank of Russia. In 2009, Japan, China and South Korea had roughly equal investment positions in Russia; by 2013, Japan’s position had increased, while South Korea’s had fallen somewhat. But also noteworthy is that, taking these numbers at face value, Russia would appear to have virtually no foreign direct investment in Northeast Asia; indeed, it has almost as much in North Korea as it does in China. Russia’s outward FDI stock was about $406 billion by year-end 2012, so China’s and North Korea’s share in combination barely total one-tenth of a percent of the country’s total. Of course, we must point out one caveat: roughly half of Russia's total outward investment is parked in offshore holding centers Cyprus and the British Virgin Islands alone; where the investments go after that is a difficult question. And it may be that joint government projects between Russia and China and North Korea fall outside of this data as well. However, the investment data corroborates anecdotal observation: Russia's does not have the type of firms that drive global production networks in the Asian region. Investment in its Asian neighbors is far less extensive than its investments in Europe, or even North America, and much of those appear to operate through opaque offshore tax havens.
At a conference last week at the University of Washington, I had the chance to meet Gregory Shtraks, a PhD student who has been watching trends in the Russian Far East. It turns out that that since the collapse of the Soviet Union there have been a succession of efforts to develop the nine provinces of the Russian Far East. The first, launched in 1996 rested on 60 Japan–Russia projects that for the most part never got off the ground. The second program, launched in 2002, scaled down the 1996 plan but also appears to have accomplished little.
The most recent effort—formally just concluded—is the “Federal Program on Economic and Social Development of the Far East and Zabaikal to 2013.” The one difference with this effort was to place more emphasis on opening trade and investment relations with the Northeast of China. These efforts were enshrined in a 2009 bilateral agreement called “Program for Cooperation between the Regions of the Far East and Eastern Siberia and the Northeast of the People’s Republic of China, 2009-2018”; Rens Lee provides an overview for the Foreign Policy Research Institute. According to Shtraks, progress was slowed by the global financial crisis, “but in October 2012 the Russian Ministry of Development of the Far East and China’s State Development Bank signed a cooperation agreement under which the Chinese Bank would provide up to $5 billion to finance projects within the scope of the 2009 agreement.” Expect similar commitments during the Putin visit.
Whether these projects will materialize or not remains to be seen. But the overall relationship could change if China and Russia sign a long-delayed gas agreement, which they are expected to do during Putin’s visit. Negotiations on the construction of a pipeline from Siberian fields have been going on since 2004, and have failed to reach a conclusion because China has held firm on issues of pricing. With the changed geostrategic context, Putin and Gazprom appear more intent on finalizing the deal, giving rise to the standard geostrategic hand-wringing on a new Eurasion great power condominium; Gal Luft at the National Interest provides an example.
Gazprom is expected to commit to a 30-year contract to supply CNPC with roughly 3.5 billion cubic feet of natural gas per day, eventually rising to six billion cubic feet per day or about half the gas Russia sells to Europe. The interesting issue to watch will be price. The intelligence is that the deal will come in between $10 and $11 per million British thermal units (MmBtu), which is well below prices in Japan (above the $14.50 per MmBtu).
Does all of this add up to a major realignment of forces on the Eurasian land mass? The Wall Street Journal online offers a balanced take. We are skeptical; it looks more like a marriage of convenience to us, and if anything the gas deal shows China’s skill at putting commercial interests first. Long-run trends in energy markets do not look favorable for a Russia that has risen over the last two decades largely on the back of commodity prices. We speculated that Russia might be signaling its ability to play a spoiler role with respect to both Iran and North Korea. But no such role is needed with respect to North Korea—where the Six Party Talks process is stalled out--and Russian interests in Northeast Asia will need to balance the much larger prizes of reaching the South Korean and Japanese energy markets.