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Is Russia’s Asia Outreach Bearing Fruit?

 
 

In functional terms, Russia’s own “pivot to Asia” has not delivered on its promise. The strategically vulnerable Far East has not received a flood of investment. Aside from drawing targeted Chinese involvement since the annexation of Crimea, the biggest success Russia can show for its efforts is a now-operational free trade agreement (FTA) between Vietnam and the Eurasian Economic Union (EEU). The agreement is seen by some as a roadmap for either bilateral or multilateral agreements with ASEAN countries, but the goal of reaching a trade turnover of $10 billion — a small fraction of the hoped-for $200 billion with China — is subject to many unpredictable market forces, least of which are fluctuations in commodities prices.

Past the bombast aimed at European audiences, the “pivot to Asia” is stumbling into reality. Russia’s Far East aims seem increasingly linked to its goals in the Indian Ocean and Southeast Asia. Consideration of scale and the challenges involved in building up the Far East are necessary to temper a rush to either write the policy off completely or take it too seriously.

The Far East’s Economy

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The Far East Federal District accounted for about 5.7 percent of Russia’s GDP in 2015, a figure largely dependent on extractive industries: oil and gas, timber, and fishing, among others. But the Far East accounts for 30 percent of Russia’s container traffic because of its access to the Pacific. This imbalance between its role as an export outlet, its local economy, and its immense size require infrastructure investments beyond what the regional market can sustain. To date, Russian officials are stuck dancing around the unfortunate fact that the vast majority of registered foreign investment into Far Eastern projects comes from offshore hubs popular with Russian firms, evidence that Russian oligarchs are largely responsible for fostering the illusion that foreign investors aren’t incredibly hesitant.

The fact that incomes in the Far East are falling faster than the rest of the Russian Federation despite rising investment supports the assumption that oligarchs are raiding the region’s wealth without spreading it. Newer industries and businesses are sorely needed, particularly since the March 26 protests spread through the Far East’s cities. Any and every project can help when considered locally. A single factory in Vladivostok, a city of 600,000, merits news. But these projects can’t provide enough of a financial base for the region’s urgent infrastructure needs after years of neglect and lack of capital. Assessing Russia’s prospects in Asia requires a simultaneous adjustment for the scale of what will aid the Far East against the rhetoric of somehow achieving parity with Russia’s European trade.

Russia has created Special Economic Zones (SEZs) in the Far East to lure investment by offering tax breaks and other incentives with an emphasis on Vladivostok. Tourists and foreign businessmen can now apply for an eight-day visa to Vladivostok electronically and without consular fees, critical to the plan to make Vladivostok a gambling and tourism hub in Northeast Asia. Gamblers and tourists would visit an “integrated entertainment zone,” a microregion roughly 30 kilometers from Vladivostok where the Kremlin has decided to permit the construction of casinos. In addition, the free port of Vladivostok is meant to attract industrial investments and help build up the port’s role, currently dominated by oil exports and reefer boats carrying frozen fish and seafood. There’s some positive news for both initiatives.

Hong Kong businessman Lawrence Ho and his Summit Ascent holdings have opened the Tigre de Cristal in the entertainment zone, thus far the only operating casino in the entertainment zone. Nagacorp — Cambodia’s largest gaming operator — now complements Summit Ascent’s presence. Nagacorp just opened a representative office in Vladivostok to aid oversight of the construction of a casino in the entertainment zone, currently expected to be complete in 2019. Naga is gambling on Vladivostok as a frontier market and other firms seeking cheaper operating environments that can lure traffic from saturated markets. Though Japan is going to allow the construction of “integrated resorts,” market saturation and the relative benefits of Vladivostok are unlikely to much affect investment decisions there.

Daiwa Securities Group reports that northern China accounted for 21 percent of China’s high net worth population but only 6 percent of recorded visits to gambling center Macau in 2014. The new visa rules, lower costs in Vladivostok compared to competing Asian gambling hubs, and Vladivostok’s proximity by air led Daiwa to project growth from $150 million in gambling revenues in 2017 to $1.3 billion by 2020.

Casino operators expect that Chinese tourists from the north will account for roughly 80 percent of their revenue stream. Naga’s expansion will likely encourage other firms targeting frontier markets and may improve personal ties with businessmen in Southeast Asia. Tax revenues should grow as northern China’s gamblers grow more accustomed to the trip.

However, Tigre de Cristal has recently had to shut down poker tables, complaining that illegal clubs around Vladivostok were negatively affecting their ability to direct gamblers to their main floor. Though local authorities in Vladivostok arrested a senior policeman for covering up gambling activities last week, news reports state that these illegal poker clubs are advertised online. It’s fairly clear that the city government wanted to appease Ho, whose business is investing a planned $900 million and has started producing tax revenue for the regional government, but there’s no sign that systemic issues will be addressed.

Courting India and Vietnam

Russia has a particular interest in courting two of its traditional Asian partners: India and Vietnam. Both countries, like Russia, fear encroaching Chinese influence in either their own territory or their peripheries. Russia is trying to use that as a bargaining chip to increase ties.

In mid-March, Yuri Trutnev, the Kremlin’s envoy to the Far East, visited India and met with External Affairs Minister Sushma Swaraj. Afterward, India’s Tata Power closed a deal to invest as much as $560 million into a coal-mining venture on the Kamchatka peninsula with financing from Sberbank. This coincides with talks between the Bharat Diamonds Bourse and Russia’s diamond giant Alrosa to help develop India’s largest diamond mine. Though the proposed $500 million invested in the joint venture would affect India’s market, Alrosa opened a diamond-trading hub in Vladivostok last September around the same time as the Eastern Economic Forum. By joining up with Bharat Diamonds, Alrosa will gain a partner to claim greater market share in Hong Kong and China. Indian diamond firm KGK has also committed to investing $50 million into a facility in Vladivostok’s free port that should employ 500 people in partnership with Alrosa. The facility will include a training center for staff.

These deals don’t significantly alter the general arc of Russian-Indian trade relations, but work is ongoing on several larger projects: Russia’s interest in the development of Chabahar port in Iran, ongoing FTA talks between EEU representatives and India, and the newly minted Russian-Indian development fund. The fund is capitalized at $1 billion and aimed primarily at projects in India, still an important step to creating business ties and mutual trust. But Russia will needs other enticements to increase contacts with Indian businessmen.

The relatively small investment stream from India puts more pressure on Russia’s Vietnam vector. Vietnam’s FTA with the EEU is an important test case for Russia to draw in other ASEAN states, most notably Singapore, with whom Russia’s bilateral trade grew at an estimated 10.36 percent annually between 2011 and 2015. Singapore is also India’s largest trade partner in ASEAN and a conduit for much Russian investment into India. The success of the FTA with Vietnam, in an ideal world, would ease negotiations with Singapore and allow for greater investment into India. By that token, India would also see the potential benefits of new supply chains running through Vietnam and Singapore with Russian partners.

Vietnam has shown some interest in the Far East’s agricultural sector. Vietnam’s TH True Milk is investing up to $1.7 billion into a Far Eastern dairy venture that aims to supply the Chinese and Japanese markets. Russian representatives have signaled that the free trade agreement will open up the Russian market for Vietnamese seafood and agricultural products as well as pledging further support for Vietnamese oil and gas ventures in the South China Sea. It seems that Russia wants to lease large tracts of land, as it does with China, to Vietnamese firms.

Vietnamese firms are also facing declining access to timber from Cambodia and Laos due to crackdowns on illegal practices and a significant amount of domestic supplies are exported to foreign markets. Trutnev has approached Indian and Vietnamese businessmen to develop the Far East’s timber industry. The greatest issue remains rampant corruption, hindering the regional government’s ability to collect taxes and provide services. Though these deals are small and generally target extractive industries, they allow for the creation of business relationships between Vietnam and the EEU. Kazakhstan is already shipping grain to Vietnam by rail and promoting itself as a gateway for Southeast Asian economies to Europe. That gateway runs through Russia’s most densely populated regions and its industrial base, of great use for diversifying trade.

China Still Dominates the Picture

Despite efforts to reach out to partners like India and Vietnam, China continues to dominate Russia’s eastward turn. Tracking Chinese investment in the Far East can be an absurd proposition. Very little information is made publicly available and the mutual investment platforms are often pawns between oligarchs as they fight over contracts. Most recently, China Paper Corporation announced it would invest up to $1.1 billion into a paper mill in the Khabarovsk oblast and there’s been movement between the Russian Sodruzhestvo Group and Chinese firms to jointly build a soybean harvesting and crushing venture within the free port of Vladivostok. Chinese gambling firm Guo Wei announced it would build a casino in the entertainment zone in December, but there’s been little information since. More informally, a sweep of projects of interest for China in Russia suggests that investment is accelerating as China pushes forward with key infrastructure initiatives in the Arctic and advancing overland rail connectivity. Given the high costs and low returns of these projects, the region’s development still hangs on China’s appetite for construction.

Russia’s latest pivot toward ASEAN and India is still young, ill-formed, and largely reactive. In place of a strategy, Russia is grasping at whatever straws present themselves. Yet even a $50 million factory in Vladivostok will make a difference for local employment, particularly if firms train locals to work in value-added industries. If one thinks of these ventures as confidence building measures, Russia’s shift toward Asian markets is not necessarily an abject failure. Privately held Russian companies have already done so. The challenge lies mostly with the Kremlin and what level of control it’s willing to relinquish regarding state firms and their trade. If Moscow trusts its partners in Vietnam and India, it may do just that.

Nicholas Trickett currently works at a think tank in Washington D.C. He is finishing an M.A. in Eurasian studies through the European University at St. Petersburg with a focus on energy security and Russian foreign policy.

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