In Asia Moscow Trusts? Russia’s Pivot to the East

In 2017, Russia will issue a new banknote symbolizing the Asian dimension of national development. As a result of online voting carried out by the Bank of Russia, freshly-built Vostochny Spaceport in the Far Eastern Amur region and the bridge to Russky Island off the city of Vladivostok were chosen as images for the new rouble bills. Banknotes with a Far Eastern touch; frequent appearances by Asia in Russian foreign policy discussions; an exchange of unusual souvenirs between President Vladimir Putin and the leaders of Japan and South Korea; and billboards in Chinese in Moscow boutiques and international airports are all neat symbols of Russia's “pivot to the East.” It is much more difficult to describe this policy in neat figures. Two years after the introduction of U.S. and EU sanctions against Russia in the wake of the Ukraine crisis, Moscow’s hopes that developing business contacts with Asia would compensate losses from the rift with the West have not fully materialized.

To Pivot Or Not To Pivot

“There is no pivot to Asia,” Russia’s First Deputy Prime Minister Igor Shuvalov asserted at the St. Petersburg International Economic Forum (SPIEF) in June 2015. The official, who had been tasked by Putin with overseeing economic diplomacy in the Asia-Pacific region, meant that Russia began to develop ties with Asia a lot earlier, before the West introduced sanctions against Russia.

Depending on the Russian interlocutor, one may hear different dates for when Moscow’s eastward turn started. Some would trace it back to the last Soviet leader, USSR President Mikhail Gorbachev, who normalized relations with China decades after the Sino-Soviet split and mended ties with Seoul after the tragic incident on September 1, 1983 when a Soviet fighter jet shot down a Korean Air Boeing. Others would say that Russia launched its “pivot to Asia” when Boris Yeltsin, the first leader of post-Soviet Russia, was intensifying talks on border settlement with China and Japan. Even during the long presidency of Vladimir Putin alone, including 2008-2012 when the country was formally run by a tandem of Prime Minister Putin and Dmitry Medvedev, Russia witnessed at least four “Asian pivots.”

The Kremlin tried to play the Asian card back in 2006, after falling out with the EU over gas conflicts with Ukraine and Belarus. Back then, Gazprom, the Russian natural gas monopoly, signed two memorandums of understanding with China National Petroleum Corporation (CNPC) regarding two gas pipelines running from Siberia and pumping up to 68 billion cubic meters (bcm) of natural gas to China. But soon after European customers reengaged Gazprom, the Chinese option was abandoned and the talks stalled for nearly a decade.

Another attempt to connect to Asian markets was launched in 2008-2009, after the global financial crisis. It yielded modest results, with just one Russian IPO on the Hong Kong Stock Exchange and an oil pipeline deal between Russia and China, in which Moscow received a $25 billion loan from China Development Bank. Most recently, after the 2012 APEC summit in Vladivostok, Russia pronounced that it wants to be both a European and Asia-Pacific country, since two-thirds of Russian territory is in Asia. Moscow has spent an astonishing $22 billion on refurbishing Vladivostok, Russia’s major outpost in Asia (its name is translated as “Rule the Orient”), and established a Ministry for Far Eastern Development – a government agency tasked with attracting investment to the vast area covering one-third of Russia and populated by just 6.2 million people.

Still, it was only after the Ukrainian crisis that the Russian leadership started to take Asia seriously. The Kremlin has invested enormous effort (by Russian standards, of course) to reorient the entire economy towards the East.

“Asia Will Save Us!”

Nights in March and April 2014 were very nervous and busy on Krasnopresnenskaya Embankment, 12, where the Russian government compound is located, just about a mile from Putin’s main official residence in the Kremlin. When the Ukraine crisis erupted in 2014, no one in Moscow was expecting a prolonged confrontation. But as soon as the word “sanctions” was used for the first time by the West, the powerful First Deputy Prime Minister Igor Shuvalov, who is regarded by Putin as a clutch economic troubleshooter, was tasked with organizing a series of brainstorming sessions. The aim was to analyze how different sanctions scenarios might hurt the Russian economy. After several weeks of deliberations, Shuvalov’s conclusion, according to his aides and advisors, was clear: Russia’s Achilles heel was its near-total dependency on Western markets for its hydrocarbon exports, capital, and technology.

The historical cases of sanctions regimes presented by Russian analysts at these discussions, using examples from North Korea to Iran, suggested that in order to withstand Western pressure the country needed a strong external partner. The Kremlin’s eyes turned to Asia. With its growing population, soaring demand for commodities, vast amount of capital and advanced technology, the dynamic region looked to be a natural replacement for weakening links with the West. This is the context in which the phrase “pivot to Asia” became popular among the Russian elite. Many were confident that Asian investors would flock to take advantage of Russia’s rift with the West by buying up assets, issuing loans, and sharing technology. Russians counted on the Shanghai, Hong Kong, and Singapore exchanges to supplant those in London, New York, and Frankfurt.

However, a closer look brought about a more sober analysis. Japan and South Korea, two of Russia’s economically advanced Asian neighbors, were both U.S. treaty allies. Washington made no secret that it had persuaded its Asian allies not to violate the sanctions regime against Russia and to restrain trade and investment activities. The only obvious candidate which fit the bill was China. Ranking as the world’s second largest economy, after the United States, sharing a 4,200 km border with Russia, and being Russia’s largest trading partner (if the EU is not considered as a whole unituntil), China was naturally positioned to provide an economic lifeline. But before making a “pivot to China” happen, Moscow had to improve its bureaucratic setup for working with Asian countries.

Who Is in Charge of Asia Policy?

With the Russian decision-making process so centralized around Putin and his closest associates, succeeding in any major policy requires a high official that has direct access to the president and power to coordinate various bureaucratic and corporate interests. Several of Putin’s close friends were dealing with various European countries and the United States. Even Latin America had a tsar – the powerful CEO of Rosneft Igor Sechin, a long-time Putin aide who trained as a KGB officer. But before 2014, Asia was an orphan in this sense – no Russian bigwig was entrusted to coordinate efforts in the region. The Ministry of Foreign Affairs was a political lightweight, and senior figures in the government didn’t have much experience with various Asian countries.

What Putin tried to do in 2014 was put forward people he trusted most to lead Russian efforts on the Asian front. And it was Igor Shuvalov again who received the lion’s share of the responsibilities. Before 2014 he had already chaired intergovernmental commissions with Japan, Singapore, and Vietnam – several key trading partners for Russia in East Asia.

In May 2014, Putin came up with an idea to establish a new commission with China headed by Shuvalov. In addition to the intergovernmental commission for preparing prime ministers’ meetings (co-chaired by Russian Deputy Prime Minister Dmitry Rogozin and Chinese Deputy Prime Minister Wang Yang), a Strategic Dialogue on Energy Issues (co-chaired by Deputy Prime Ministers Arkady Dvorkovich and Zhang Gaoli), and a Commission on Humanitarian and Social Issues (co-chaired by Vice Premiers Olga Golodets and Liu Yandong), there was now a new mechanism – an Intergovernmental Commission for Priority Investment Projects. Shuvalov’s partner in the commission is Zhang Gaoli, who is also one of the seven members of the Communist Party of China’s powerful Politburo Standing Committee. The Shuvalov-Zhang commission has become the key institution for negotiating large-scale bilateral projects. Soon after that Shuvalov brought in Stanislav Voskressensky, a capable bureaucrat who had worked with him in the Kremlin, to become deputy minister of the economy in charge of Asia.

In addition to this, Putin appointed Gennady Timchenko, a long-time friend and No. 5 on the Russian Forbes list in 2015 (with the more dubious distinction of being on the U.S. Office of Foreign Assets Control sanctions list as well), to chair the Russia-China Business Council. Having put in place a capable bureaucrat and a personal friend with direct access to himself, Putin has moved the bilateral business agenda with China up to a new level.

However, these high-level placements have brought additional problems. First of all came the problem of duplication. On China, Russia now had four commissions headed by four deputy prime ministers with very complicated relationships between them. In addition, these four had to accommodate the fifth vice -premier, Yuri Trutnev, who had been in charge of Far Eastern development since 2013. What made things worse was that the staff of all the vice premiers failed to talk to each other, and Russian companies were struggling to figure out which commission supported which project.

Another problem was Igor Shuvalov’s indispensability. Being the main interlocutor for China and Japan; China and Vietnam; and Singapore and Hong Kong, Shuvalov had to talk to partners with conflicting interests. Any final decision meant a preference for one partner over the other, meaning that relationships could be worsened. Sometimes the inability to choose resulted in painful delays. The other side of Shuvalov’s indispensability was the limited amount of time he was able to spend thinking through Russian economic outreach to the Asia-Pacific or engaging in negotiations himself – he was too busy with more pressing tasks of fighting local fires in the domestic economy. But it wasn’t only the messy bureaucratic setup that made the Russian pivot to Asia less efficient than it could have been if the bureaucratic processes in Russia were more structured. There were numerous other factors, a combination of which created a perfect storm at the very time that Russia started its outreach to the region. Relations with China are a good example.

Russia’s China Problem

Putin’s triumphant visit to Shanghai in May 2014, right after the annexation of Crimea and the introduction of the first Western sanctions, was arguably the happiest moment in bilateral relations in decades. Half of Russia’s ministers and quite a few Forbes list regulars came back from the trip with memoranda of understanding, friendship, and cooperation – if not actual agreements or contracts (many members of the delegation had penned documents just in time for the trip and then frantically searched for Chinese partners). The poster child of Sino-Russian friendship was Gazprom CEO Alexey Miller, who scored a $400 billion contract (oil was at cushy prices of almost $110 per barrel at the time). By September 2014, Miller was saying at the Sochi investment forum that one can’t apply European standards to doing business in the Asian gas market and that “just in one day, our esteemed Chinese partners came close to Germany, our major gas consumer.”

Another landmark came in 2015, when Chinese President Xi Jinping came to Moscow for the May 9 Victory Day parade boycotted by Western leaders, and Putin was Xi’s guest of honor during China’s September 3 commemorations of victory over Japan. With military vehicles rolling through Red Square in Moscow and Tiananmen Square in Beijing, and both leaders standing shoulder to shoulder, Russian and Chinese spin doctors were proclaiming the emergence of an alliance-like relationship. On top of that came plans to link the Eurasian Economic Union, an EU-modeled integration format that brings together Russia, Kazakhstan, Belarus, Armenia and Kyrgyzstan with China’s “One Belt One Road” – a massive initiative unveiled by Xi in 2013, which aims to link China to its neighbors in Eurasia and along the “21st Century Maritime Silk Road” all the way down to Europe.

However, in 2015 the countries experienced a sharp decline in trade. Trade shrunk by roughly 30 percent – from $94 billion to $64 billion, according to Chinese Customs Statistics. Data on investment is as illustrative. For example, China’s direct investment in Russia in 2014 equaled $794 million, while China’s total foreign investment exceeded $116 billion that year. In 2015 Chinese investment in Russia totaled $560 million: less than 0.5 percent of China’s foreign investments that year.

According to private conversations with officials and investment bankers on both sides, these figures may be misleading and underestimate the real volume of cooperation. For example, the $560 million figure doesn’t include known deals like the acquisition of a stake in the Yamal LNG project from Novatek by China’s Silk Road Fund and Sinopec’s purchase of 10 percent in Sibur, a petrochemical company. This underestimation may be explained by widespread use of offshore companies in structuring the transactions. An informal count on both sides provides a figure of $33 billion net investment into Russia since 1992, with the flow of investment accelerating dramatically over the last two years – nearly four times higher than the official figure, but still far too little to meet Moscow’s expectations and offset the effect of Western sanctions. What went wrong?

The difficulties impacting the volume of trade and investment flows, as well as having a negative effect on negotiating new mega-deals, can be attributed to the collapse of commodity prices, sanctions against Russia, the devaluation and volatility of the ruble, as well as the Russian government’s continued unpredictability and failed attempts to launch structural reforms. On the Chinese side, there has been fallout from the anti-corruption campaign, which made the decision-making process among Chinese officials and managers of state-owned enterprises far more complicated and time-consuming. Also, the economy has slowed down, decreasing China’s appetite for imported commodities. Russia’s attempts to attract Chinese loans and investment have been largely unsuccessful due to the reverberations from Western sanctions, as the growing market in the West has been more important for Chinese financial institutions than the far smaller (and shrinking) Russian market.

It turns out that even the “Big Four” Chinese banks have been complying with Western sanctions, although Beijing officially condemns the sanctions policy. Given the choice between an opportunity to increase their presence in Russia’s high-risk market and the potential to strengthen their positions in the huge and stable markets of the United States and the EU, Chinese banks are opting for the latter. The relevant significance of the markets can be seen through trade figures. In 2016, China’s trade with the United States was close to hitting the $600 billion mark, nearly equal to its trade with Europe ($593.4 billion). The only Chinese financial institutions that have been signing agreements with Russian partners are China’s two “political” development banks (China Development Bank and the Export-Import Bank of China) and the Silk Road Fund, established in 2014. All these institutions are specially designed political banks that are less connected to the global financial system (and thus less vulnerable to Western pressure).

Despite these setbacks, the Sino-Russian relationship over the last two years has grown stronger. At the same time, it has become more asymmetrical. Russia, isolated from the West and hit by low oil prices, needs China much more than China needs Russia.

There are other important developments as well. Russia’s military-industrial complex is opening up more to the Chinese market. As a result of the Ukraine conflict, Moscow has reformulated its policy on selling weapons to Beijing and is ready to supply the People’s Liberation Army with more sophisticated Russian systems such as advanced surface-to-air S-400 missile systems and Su-35 fighter jets. This shift may affect the strategic balance in places like Taiwan, the East China Sea, and the South China Sea, as the Chinese military gets access to advanced equipment. At the same time, reverse sales are also taking place. For example, after Germany declined to sell Russia diesel engines for its new Project 21631 Buyan-M corvettes, Moscow turned to Beijing to purchase Chinese engines.

Then there are areas of civil cooperation, which also have strategic dimensions. For example, the electric cable that enabled Moscow to withstand Ukrainian efforts to cut off Crimea from electricity was purchased in China.

Yet overall, Beijing elites and the Chinese population have adopted a more supercilious attitude toward Russia, which, in their view, is declining and has nowhere else to go. This attitude, however, is carefully camouflaged in official rhetoric about the strategic partnership. Chinese leaders are very skillful in showing Russian rulers formal respect and treating them as leaders of an equal great power (even if that sentiment is not so firmly held). Without viable alternatives, the Russian leadership may be willing to accept this model of asymmetrical dependence.

“Russian foreign policy is so fixated on the idea of equal partnership that it has lost sight of the pragmatic tasks of how to benefit from the partnership with China most effectively and with minimal risks,” remarks Alexander Gabuev, senior associate and chair of the Russia in the Asia-Pacific Program at the Carnegie Moscow Center. This tendency has caused a lot of concern in other Asian capitals, most notably Tokyo. Moscow was also happy to exploit the opportunities to avoid an overreliance on China.

An Alternative to China?

After the U.S. imposed sanctions against Russia, most U.S. allies in Asia didn’t follow the Western example completely but have nonetheless decreased their level of interaction with Moscow. The notable exception is Japan, which did impose sanctions, but more of a symbolic nature. More importantly, that downturn in Russian-U.S. and Russia-EU relations has not brought about a freezing of the Russia-Japan high-level political dialogue. Not only have contacts between the leaders been maintained, but they seem to have become warmer. During a meeting on the sidelines of the Eastern Economic Forum (EEF) in Vladivostok, Japanese Prime Minister Shinzo Abe presented Putin with a samurai helmet, and the Russian leader offered Abe a unique token of appreciation – a Japanese katana, one of the 12 swords used during Emperor Hirohito's enthronement ceremony back in 1928.

President of the Republic of Korea Park Geun-hye also received a special gift – a calligraphy scroll by her father with his New Year's wish for 1979, the last year of his life. New features of the Kremlin's diplomatic protocol reflect a strong desire by Moscow to upgrade relations with Tokyo and Seoul to a new level. Moscow is especially keen on new economic projects with the participation of Japanese and South Korean businesses.

A breakthrough in Japanese-Russian relations is also important for Abe, as it will help save face and counteract failures in other areas of diplomacy, especially in relations with China. One of the objectives of Japan’s current policy toward Russia it not to allow Moscow’s transformation into China's little brother. Economic cooperation is seen as the main weapon on this battlefield.

An eight-point economic plan was put forward by Abe in May at a meeting with Putin in Sochi. According to Japanese economists, this plan is estimated to be worth 1 trillion yen ($10 billion) and includes building liquefied natural gas plants, ports, airports, hospitals, and other infrastructure, mainly in the Russian Far East. Russia, in turn, transferred to Japan a list of 49 joint investment projects, among them the expansion of Sakhalin-2 capacities and the Amur gas processing plant. Still, Japanese companies are rather slow in expanding their presence in the sanctions-stricken Russian market.

South Korea has also pursued cooperation with Russia, especially with regard to liquefied natural gas. However, Moscow’s ability to exert influence on North Korea is rather limited, according to Russian experts. Further, Russia and China alike have voiced strong criticism of plans to deploy the U.S. Terminal High Altitude Area Defense (THAAD) system in South Korea. Under these circumstances, Seoul-Moscow dialogue on security issues on the Korean peninsula has limited chances for success.

The Russia-ASEAN summit in Sochi in May 2016 was praised by Russian media as one of Moscow’s achievements on the ASEAN track and in the pivot to Asia in general. The event was devoted to the 20th anniversary of the dialogue partnership of the Russian Federation with the 10-nation Southeast Asian bloc. The Sochi Declaration and the Comprehensive Action Plan for development of cooperation of the Russian Federation and ASEAN for 2016-2020 were the main documents adopted during the summit. But as Singapore's Ambassador-at-Large Bilahari Kausikan put it, “Both documents were primarily intended to give a semblance of substance to an event whose significance was mainly symbolic.” Lack of substance is still the main problem in the Russian economic pivot to Southeast Asia.

The evolution of Moscow's position on the South China Sea has been closely monitored in the region. Moscow tries to balance between China and other regional actors, emphasizing that it is not a party in the disputes and does not intend to be involved in them. Meanwhile, the recent Russian-Chinese naval exercises in the South China Sea were seen by many observers as Russia tilting toward China. Moscow tried its best to reduce the political effect of the exercises, in spite of the fact that Beijing was ready to interpret Russia participation as unequivocal support. Exercises were held far from the conflict area; moreover, the flagship of Russia's Pacific Fleet, the cruiser Varyag, did not participate in the maneuvers. It was a kind of consolation to other Russian partners in the region, especially to Vietnam, one of China’s rival claimants in the disputes.

But soon after the exercises an official from the Russian Ministry of Defense made a hasty statement that Moscow was considering plans to restore a military base in Vietnam. It was a big surprise not only for China, which views every sign of Russia-Vietnam military cooperation with jealousy, but also for the Vietnamese. Hanoi even issued a special statement that its national policy does not admit the presence of any foreign military bases in its territory.

All this means that the Russian policy in Asia requires more fine-tuning, thorough expert analysis, careful interdepartmental coordination, more pragmatism, and accurate articulation of policy priorities. Leading Russian experts on the Asia-Pacific believe that the game is not over and a more active role by Moscow could be welcomed by regional actors.

“Since the current balance of power in the region can be best described as ‘China against everyone else,’ the appearance of a player that is close to China but not its ally may actually become a safe way of softening China’s outlook of being a ‘besieged fortress,’” argues Anton Tsvetov, an expert on Asian affairs at the Center for Strategic Research.

However, general and vague schemes like "the Great Eurasia" are not enough for Asian countries to believe that Russia really intends to be present in Asia as an active player with meaningful economic and security agendas.

The views expressed here are the author's own.