Why Russia’s Infrastructure is Holding Back its Pivot to Asia
Research paper
Published 27 July 2020
Updated 11 December 2020
ISBN: 978 1 78413 416 7
Russia is attempting to position its Far Eastern region as a logistics hub that will facilitate closer links to Asia and Europe. For this agenda to succeed, an efficient transport infrastructure must be in place. However, as this paper will show, there are serious inadequacies in Russia’s existing infrastructure in the Russian Far East (RFE) and eastern parts of Siberia.
Russia’s diplomatic overtures to countries such as China and Japan are underpinned by both political and economic concerns. Russia’s foreign policy strategy, updated in 2016, highlighted the importance of developing the RFE’s economy, and of cooperating with Asia-Pacific countries to this end.12 The government’s previous strategy, in 2012, had paid scant reference to Asian partners, and had mainly mentioned deepening engagement with them through existing formats such as the BRICS13 grouping or the Shanghai Cooperation Organisation (SCO).14 The 2016 strategy indicated a more serious intent from the Kremlin to foster closer economic and diplomatic ties with Asian states, particularly as relations with the West were deteriorating.
The RFE plays a vital role in linking Russia with the economies of the Asia-Pacific region. An overwhelmingly large proportion of Russian trade with the region is with China. Trade with China has grown at a much faster rate than has trade with the wider Asia-Pacific or other parts of the world, such as Europe or the Middle East. In 2018, the volume of annual trade between Russia and China exceeded the politically important $100 billion level for the first time. By 2019, China was the destination for 10 per cent of Russia’s exports and the source of 22 per cent of its imports, making it Russia’s single largest trade partner. The rest of Asia – including economies such as Japan, India and South Korea – accounted for around 10 per cent of Russia’s exports and 13 per cent of its imports in the same period.15
The economic shift towards the Asia-Pacific region – and towards China in particular – reflects a long-standing desire among the Russian political elite to cultivate closer political relations with the region. In 2012, President Vladimir Putin expressed the hope that Russia would ‘catch some of China’s wind in the sails of our economy’, which, he hoped, might in turn generate an acceleration of mutual investment and technology transfer.16 Other policymakers at the time indicated that closer integration with the Asia-Pacific region would foster the development of Russia’s domestic economy in Siberia and the RFE. An elaborate institutional framework aimed at stimulating activity by overseas businesses was put in place to support this.17 Yet progress on the economic development of these regions has been slow.
An added complication is that the West’s response to Russia’s 2014 annexation of Crimea and the subsequent conflict in eastern Ukraine has restricted Russian access to Western capital markets.18 From a political perspective, Russia has been forced to broker closer ties with Asian partners to avoid greater diplomatic isolation. Yet the Kremlin has been acutely aware of an accompanying financial imperative: to afford many of the planned upgrades to infrastructure in the RFE and eastern Siberia, Russia also needs to improve economic ties with Asia.19
Upgrading infrastructure and deepening ties with Asia both present multiple challenges, however. The Russian economy has performed relatively poorly since 2013, with much of this weak performance driven by a low rate of investment. The combination of an exhausted growth model, the collapse in the global price of oil in late 2014 and the almost simultaneous imposition of Western sanctions caused a prolonged and painful recession, from which Russia emerged only slowly.20 Although by 2019 the federal government was running a budget surplus,21 the World Bank was still forecasting only modest economic growth in Russia, averaging less than 2 per cent a year over 2020–21.22 And this was before COVID-19 plunged the world into a deep recession. Unsurprisingly, the overall economic picture has been unconducive to the development of infrastructure in the RFE. With domestic sources of investment proving difficult to unlock, the need for foreign investment has grown.
The Kremlin has made various attempts to stimulate investment in the RFE, although such initiatives have rarely addressed the many structural and systemic problems in the region. Since 2015, for example, Russia has hosted the Eastern Economic Forum (EEF) in the city of Vladivostok. While the EEF started out as a small-scale trade event, it has snowballed into one of the region’s most important economic meetings, routinely attended by high-level delegations from China, Japan and South Korea. The EEF usually offers a window into the Kremlin’s strategy towards both the RFE and Asian trade/investment partners. The 2019 forum featured an entire roundtable devoted to the oil giant Rosneft’s meetings with Japanese businesses. The largest contingents of participants were from Japan, China, South Korea and India, with only a scattering of representatives from Western countries.23 The EEF often results in the signing of numerous agreements, memoranda of understanding (MoUs) and declarations of intent on improving economic cooperation. In 2019, for instance, several Indian delegations expressed interest in importing coking coal from the RFE; talks are ongoing among Russia’s railway, ports and logistics companies on how best to approach this.24 Russia is also in discussion with South Korea on the establishment of a joint investment fund to develop industrial materials and equipment, with talks planned on the development of bilateral trade agreements in specific sectors.25
However, investment initiatives are often complicated by political considerations. Russia is extremely cautious of being relegated to the role of junior partner and raw materials supplier to China – a prospect that is the source of much discomfort within the Russian leadership, especially as China’s own economy, population and global influence are all growing. Russia is also wary of China emerging as a competitor on the global arms market, and of China’s intentions towards countries within what Russia considers its sphere of influence. These include the Central Asian republics, where China is renting land and investing in infrastructure projects (in particular, buying up stakes in the oil and gas sector in Kazakhstan).26 More ominously for Russia, China’s BRI plans include investment projects in Belarus and Ukraine, countries where Russia has serious and historically rooted political and strategic interests.27
Russia’s diplomatic relationship with countries such as Japan is also marred by political disagreements. Putin has met the Japanese prime minister, Shinzo Abe, numerous times over recent years to discuss joint investment projects, but the two leaders remain at an impasse over the status of the disputed Kuril Island chain (known in Japan as the Northern Territories). Most prospective economic agreements hinge on some form of compromise over the status of the islands, which remain a serious sticking point in any negotiations about future Japanese investment in Russia. The relationship has been further complicated by Japan’s own economic sanctions against Russia, introduced somewhat reluctantly in 2014 in order to respect the West’s line on Russia’s annexation of Crimea and involvement in the conflict in Ukraine.28 Russia’s relationship with other regional partners such as South Korea are in principle positive – South Korea’s president, Moon Jae-in, announced the Nine Bridges economic initiative at the EEF in 2017 as a means of promoting deeper trade ties. While the project’s eponymous ‘bridges’ are metaphorical, South Korea has expressed interest in investing in Russia’s port infrastructure, as well as in constructing rail connections to link the Trans-Siberian Railway to the Trans-Korean Railway.29 But this enormous project has stalled many times, chiefly due to Moscow’s concerns that significant foreign investment in critical infrastructure might make Russia beholden to a foreign power, with little control over its own actions. This appears at odds with Russia’s stated agenda to attract foreign investment, and is likely to present difficulties in the future unless Russia is able to reconcile the contradiction.
Russian citizens in the RFE occasionally object to the Kremlin’s attempts to attract investment from Asian countries. For instance, northern Chinese businesses have been engaged for decades in small-scale trade with their Russian counterparts in the Amur and Primorskiy regions, but there are only a handful of more substantive business agreements between Russia and China, all of which are heavily dependent on government support.30 Citizens in the RFE are protective of their territory, and despite long-standing Russian legislation that prevents foreigners from owning land outright, local concerns are growing about China’s intentions to expand its presence in the region.
The contrast between China’s growing population and the sparsely populated RFE exacerbates this tension. Several inflammatory films have been made about China’s supposed ‘takeover’ of the RFE and parts of Siberia, and there have been occasional commentary articles in the press about the threat of Chinese mass immigration to the RFE.31 It is also noteworthy that the development programmes of border areas such as Khabarovsk and the Jewish Autonomous Republic of Birobidzhan make reference to the word ‘security’ and the risk of ‘aggressive’ migration vis-à-vis trade with China.32 While mass immigration to the RFE is unlikely to pose a real risk to local livelihoods or security, these media pieces are reflective of locals’ concerns and attitudes to Asian partners.
This local resentment, alongside systemic corruption and seemingly intractable political differences between Russia and other Asian countries, makes investing in the RFE a high-risk venture for foreign investors. There are few indications that the Russian authorities are willing to dismantle patronage networks, even though this would make investing in Russia a more practical option for foreign businesses. Yet without foreign investment, Russia will be unable to complete the large infrastructure projects that it has set in motion for the RFE, including new bridges, roads, railways and ports. Given the importance of these projects to facilitating connectivity with Asia, this is a serious problem for Russian policymakers.
