Crossroads Asia

Energy and Trade in Russia’s Far East Realignment

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Crossroads Asia

Energy and Trade in Russia’s Far East Realignment

With increasing focus on energy and trade ties, Russia is looking to bolster its position in the wider Asia-Pacific.

Energy and Trade in Russia’s Far East Realignment
Credit: Flickr/thomasclaveirole

In 2015, Russia has aimed to revive its expansive Far Eastern Federal District through unprecedented levels of cooperation with the Asia-Pacific region. In this three part series, we’ll explore those efforts. Part 1 looked at domestic initiatives and here, in part 2, we investigate expansion in the energy sector and the role of national currency trade in the development of Asia-Pacific links.

The wide-ranging domestic policies brought into force in 2015 have been accompanied by the growth of international economic ties and projects in spheres such as energy and security. The introduction of the Eastern Economic Forum gave Russia a platform to display the potential of the region and encourage opportunities for foreign investment in business, technology, infrastructure, and energy. This has initiated closer links between the Far East and the Asia-Pacific, and ensures a diversification of trade and energy export following the rift with the West.

Harnessing the Power of Siberia

Minister for Russian Far East Development Alexander Galushko stated in March 2015 that despite the size of the domestic market in the region, “there is a huge foreign market, closer than Moscow. The world’s number one economy — China, number three — Japan, and the most dynamically growing economy — Indonesia.” Increased integration with these countries in the economic and diplomatic spheres can aid Russia’s eastern regions, which trail those closer to the capital.

Arguably the most vital piece of Russia’s eastern development is in the energy sphere — in particular, the Power of Siberia natural gas pipeline. Starting in the northern Sakha Republic, the pipeline will be unified with Irkutsk on the shores of Lake Baikal and channeled to the southeast, via Khabarovsk, Blagoveschensk, and Vladivostok, spanning approximately 4,000 kilometers. The China National Petroleum Corporation expects the volume of cross-border gas supply to reach 100 billion cubic meters annually. In contrast, Russian gas export to the entire European continent (excluding countries of the former Soviet Union) reached 146 bcm in 2014.

The new agreement signed in September 2015 with China is worth $400 billion over a 30-year term and will see the contribution in gas specifically from the Far East rise from 25 to 38 billion cubic meters per year. This will work in addition to the development of Far Eastern coalfields, Arctic gas projects, and nuclear energy cooperation with China. Construction of two purpose built coal export centers at Cape Petrovsky and Sukhodol Bay in Primorsky region — with a combined cost of over 54 billion rubles ($768 million) — have already commenced this year.

The extension of the East Siberia-Pacific Ocean (ESPO) oil pipeline also marks a crucial step toward increased energy exports. The connection of the first refinery in Khabarovsk to the main pipeline in late August 2015 increased capacity and reduced supply costs. Other facilities at Komsomolsk and Nakhodka are scheduled for integration by 2020. By routing and running the Power of Siberia gas pipeline and the ESPO oil network alongside each other, Russia can significantly lower maintenance costs in such an expansive territory. China has already agreed to double crude imports to 30 million mt/year by 2017, with Russia overtaking Saudi Arabia as their number one supplier for the first time in ten years.

The “strategic energy alliance’” praised by Russian President Vladimir Putin does not only extend to China. In late October, a new 10-year liquefied natural gas agreement was signed with Singapore’s state-owned Pavilion Gas, while a month earlier the Russian state nuclear group Rosatom reported a deal for the construction of high-power, floating nuclear power plants in Indonesia. This policy would be extended to other countries with nuclear energy aspirations, such as Thailand, Vietnam, and Malaysia, according to Rosatom director Kirill Komarov. Japanese investment has seen the first wind energy project successfully brought into force in Kamchatka in 2015, while other key projects such as Sakhalin-1 and Sakhalin-2, involving exploration and utilization of oil and gas fields, each have significant investment from Japan. Oil exports to the island nation are set for record highs in 2015, with the close transit distance and taxation benefits coming to the fore.

Channeling Asia’s Economic Dynamism

In addition to the energy sphere, Russia has been enhancing trade through a series of special economic zones, national currency agreements, and diplomatic ties as a stimulus to the local economies of the Far East. Following the Association of South East Asian Nations (ASEAN) forum in August 2015, Russia announced that a five-year strategic plan for cooperation in all areas was to be drafted.

Additional agreements between the Eurasian Economic Union (EEU or EAEU) — comprising Kazakhstan, Kyrgyzstan, Armenia, and Belarus alongside Russia — and countries of the region have already began to take shape. The creation of a free-trade agreement with Vietnam in May 2015 was the first act of its kind, covering 90 percent of all goods traded between the countries, and could act as a “pilot project for the general liberalization between the EAEU and ASEAN,” according to Russian Foreign Minister Sergei Lavrov.

Russia’s aim to double trade with Thailand, Indonesia, and Vietnam by 2020 includes not only energy initiatives, but also defense technology, agriculture, and infrastructure projects, for example, the expansion of Indonesian and Thai rail networks. However, agreements to trade in national currencies — giving credit to exporters rather than settling payments in dollars — will arguably have the most crucial impact on the way these countries move forward. Russian officials met with their Indonesian counterparts at the World Economic Forum on East Asia in April 2015 to establish a rupiah-ruble alliance, while Russia’s Sberbank and China’s Harbin bank agreed in September to expand their trade settlements directly in yuan and rubles. The October upgrading of the yuan to IMF reserve currency status will also have a positive impact Russia’s foreign exchange reserves.

Similarly, the sanctions imposed on Russia over the last two years have seen Japan push for direct yen-ruble trade, increasing stability and transparency while decreasing exchange risks and high conversion charges. Agreements in switching to baht-ruble transactions with Thailand, Vietnamese dong-ruble trade, and a rupee-ruble shift with India, have all been discussed for the first time in 2015. Russian First Deputy Minister of Economic Development Alexei Likhachev recently described the shift of trade with India to national currencies as a “burning issue” and Sputnik News quoted Putin in urging the abandonment of the perceived “dollar dictatorship” of world economics. These national currency mechanisms will begin to be implemented in early 2016.

In the case of North Korea, using the ruble to settle payments removes the need for third parties in the supply chain. The Russian-North Korean “Asian trading house” aims to be fully functioning before the end of 2015, and will streamline business between the two countries. According to TASS, Russian goods form a third of Chinese exports to North Korea, with a potential value of $900 million. “Minimizing the mediation” of other countries in Russian-North Korean trade has become a high priority for Development Minister Galushko — who also heads the intergovernmental commission between the two nations — as ties between the countries increase.

The establishment of special economic zones within the Russian Far East has also garnered attention from the wider Asia-Pacific. A joint Russian-Chinese initiative in the eastern Siberian city of Irkutsk in October 2015 set a precedent for those further east, and up to 20 different regions within Russia are reported to have expressed an interest in hosting similar sites. Between 10-12 billion rubles from the federal budget will be allocated for the development of these zones, which aim to attract foreign companies and investment partners from the Asian continent. In turn, this will create job opportunities, training programs, and attract new specialists to the regions.

North Korea is set to participate in some of these advanced economic zones, crafting a model which they can then implement on their own territories. A protocol signed in March 2015 will see Russia, North Korea, and South Korea working on “extraterritorial models with trilateral cooperation.” This includes, for example, electric power supply and the Khasan-Rajin rail link which can be extended to South Korea. Relations with North Korea have reached their highest level ever, with Far East Development Minister Galushko overseeing the designated “Year of Friendship” between the two countries in 2015.

Similarly, a symbolic state visit by South Korea’s National Assembly speaker Chung Eui-hwa to Moscow in late September — timed to coincide with the 25th anniversary of diplomatic relations between the countries — prompted his Russian counterpart Sergei Naryshkin to describe South Korea as a key partner in the Asia-Pacific region. Trade between Russia and South Korea reached an all time high in 2015 while the annual personnel exchange also grew by 30 percent. By engaging both the northern and southern capitals of the Korean peninsula, Russia could seemingly become a catalyst for the tentative revival of economic cooperation between Seoul and Pyongyang.

However, the case of North-South Korea relations is not the only source of tension in the wider region. Strained relations in the Taiwan Strait have been simmering since the summer, while the South China Sea dispute continues to escalate. As Russian relations with the West falter due to the Ukraine crisis and NATO expansion on its borders, Russia has seen its influence growing across the Pacific region in 2015.

Duncan Brown is a freelance writer based in Moscow, Russia. Follow him on Twitter @dncnbrwn.