COMMENT: Russian pivot to the east gets stuck

COMMENT: Russian pivot to the east gets stuck
By Christopher Miller of Yale University February 23, 2016

On a visit to Hong Kong in late January, Russian Deputy Prime Minister Arkady Dvorkovich declared that Russia wanted to start negotiations for a free trade zone between the Russian-led Eurasian Union and Hong Kong. New evidence of Russia's growing economic ties with Asia? The opposite, in fact. Despite many declarations, there is little substance behind Russia's talk of developing new Asian partners and markets. Many potentially useful initiatives remain at the planning stage.

Since the West levied sanctions against Russia in response to the Kremlin's invasion of Ukraine, Moscow has trumpeted plans to strengthen ties with partners to its east, and with China above all. These calls were partially intended to show the West that Russia has other partners with which it can work. Given Asia's tremendous economic growth, it makes sense for Russia to explore opportunities for trade and investment. Yet although nearly two years have passed since the Kremlin began its "eastward pivot", there is little to show for the effort.

For Russia's eastern regions, trade with China is not a choice, it is a matter of survival. Cities such as Vladivostok and Khabarovsk are not far from the Chinese border but a very long way indeed from European Russia where 80% of the country's population live. The Far Eastern provinces have had longstanding economic connections with their southern neighbour.

But talk of Russia's eastward pivot envisioned an expansion of economic ties that would undergird the two countries' increasing interest in working together on the international stage. That has not materialised. In fact, the total dollar-denominated trade turnover between Russia and China fell by over a quarter in 2015, dragged down by Russia's economic crisis.

The majority of Russia's exports to China are commodities - not only petroleum, but also significant quantities of coal, iron ore, lead, nickel, platinum, and wood. The global slump in commodity prices has sharply driven down the dollar value of these exports. At the same time, as the growth of China's industrial economy slows, so too will growth in its demand for the Russian commodities that fuelled factories across China. The combination of these two factors caused Russian exports to China to fall by 20% to $31.4bn.

The commodity price slump had an even sharper effect on Russian imports from China. As oil prices fell, so too did the value of the Russian ruble, which today is worth less than half of what it was worth two years ago. As the ruble fell, Chinese goods became far more expensive for Russian consumers, and their purchases plummeted. Imports from China - goods such as electronics, clothes, and vehicle parts - were down by a third in 2015, at $32.9bn.

The greatest victim of lower energy prices was the flagship project that was intended to signal Russia's eastward pivot. The Power of Siberia pipeline is intended to bring gas from Russian fields to China, unlocking gas that is far from Russia's European markets, and helping to supply China's growing domestic demand. The pipeline negotiations have been underway for years, but a contract was signed in May 2014, immediately after the annexation of Crimea, and was hailed as a cornerstone of Russia's new eastward orientation.

A year and a half later, the deal looks far from done. For one thing, crucial details about the pipeline - above all, information about how gas would be priced - was never released to the public. That led to speculation that the question of pricing had not actually been settled. Gazprom says that the pipeline will be built by 2019, but reports of postponements and delays abound.

The pipeline faces two challenges. First, as a gas consumer, China faces a far more appealing market today than two years ago. Even as prices continue to fall, China's gas supply options - from Central Asian pipelines, to Australian and Qatari liquefied natural gas - continue to grow. Beijing can be even more demanding on price than before. The Russian side, therefore, is feeling squeezed. Most analysts believe that oil prices would need to be more than double their current level for the pipeline to break even, something that does not look likely in the near term. Unless energy prices increase, the energy leg of Russia's Asian pivot looks wobbly.

Even if the oil price crash has ruined the economics of Russia's turn towards the east, are the politics working better? Here, too, Russia's attempts to improve ties with its Asian neighbours other than China have run into a series of difficulties. For example, despite speculation, a deal to resolve the territorial dispute with Japan - a legacy of World War II - looks unlikely. That continues to impede relations between the two countries, and is one reason why Tokyo continues to participate in Western sanctions on Russia.

Russia's move closer to China, meanwhile, risks angering other Asian countries who fear China's rise. For example, Russia's agreement to sell S-400 anti-aircraft missiles to China would increase Beijing's firepower in the Taiwan Straits and South China Sea, angering Japan, Taiwan, and others. In politics and economics, Russia has discovered that it is one thing to declare a pivot to Asia. The process of building new partnerships with Asian countries has proven far more difficult in practice.

Chris Miller is Associate Director of the Program in Grand Strategy at Yale University. Follow him on twitter @crmiller1