Moscow's pivot to China falls short in the Russian Far East

Russian President Vladimir Putin has repeatedly called promoting economic development in the country's Far East the "national priority of the entire 21st century". And for much of the past decade, he has sought to enlist China's help in that task.

Yet experts say that the Kremlin's efforts to attract greater Chinese trade and investment to the far-flung region have fallen short. They note that many promised Chinese investment projects in the Far East are never actually implemented. Meanwhile, the coronavirus pandemic has disrupted business ties between the region and China by indefinitely closing their common border.

Russia's Far East was meant to become one of the biggest beneficiaries of the burgeoning partnership between Moscow and Beijing. The vast region shares a 4,000km border with China and is awash with natural resources such as natural gas, coal, gold, diamonds, timber and seafood. Since the construction of the Trans-Siberian Railway at the end of the 19th century, the Far East has also served as a major transit hub for goods travelling between Europe and Asia.

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Despite these assets, however, in the decades following the collapse of the Soviet Union the region experienced a population exodus due to economic stagnation. Putin has vowed to revive the Far East's fortunes, partially with the help of greater trade and investment from China. In an article written ahead of his return to the Russian presidency in 2012, Putin declared that the region must catch the "Chinese wind" in the sails of its economy.

Since then, the Kremlin has established more than a dozen "priority development areas" in the Far East. These zones seek to entice foreign investors to set up production facilities in the region by offering them lower taxes and utility costs.

Additionally, in 2018, during Chinese President Xi Jinping's visit to the Far Eastern port of Vladivostok, Russia and China signed a six-year cooperation road map in the Far East. The document provided China with a list of recommended investment projects in areas such as agriculture, tourism, and transport infrastructure.

The Kremlin has also pursued a series of energy mega projects with China in the Far East. In December 2019, Russia launched the US$55 billion Power of Siberia natural gas pipeline to China. The project represents the first gas pipeline between the two countries and is part of a US$400 billion contract signed in 2014 to provide China with Russian gas for 30 years.

Meanwhile, in the former gulag town of Svobodny, Russian energy giants have begun construction on the world's largest polymer production complex and recently opened one of the world's largest gas processing plants. The facilities are aimed at supplying the Chinese market with plastic components and refined natural gas.

Another priority has been to improve infrastructure on their shared border. In 2019, Russia and China completed construction of a 1,080 metre automobile bridge over the Amur River that would connect the cities of Blagoveshchensk and Heihe. Last week, the countries finished building another major project on the Amur River: a 2,200 metre rail bridge between Nizhneleninskoye and Tongjiang.

Although the opening of the two bridges has been delayed due to the coronavirus pandemic, they are expected to enable an additional 25 millions tons of goods to cross the Russian-Chinese border each year.

Nearly one decade after Putin called upon the Far East to look to China, however, there are few signs of a breakthrough in the region. Although China has inched ahead of South Korea and Japan in recent years to become the Russian Far East's largest trading partner, actual trade levels between the two neighbours remain modest.

Far Eastern Customs Department data shows that the region's trade with China rose to US$10.8 billion in 2020 from US$10 billion in 2012, an 8 per cent increase. By contrast, trade between Russia as a whole and China grew by over 23 per cent during that same time period, reaching US$107.8 billion in 2020. Additionally, despite its geographic proximity to China, the Russian Far East accounted for a little over 10 per cent of Moscow and Beijing's trade in 2020.

Official Russian statistics offer a more encouraging picture about Chinese investments in the Far East. Last month, the Ministry for the Development of the Russian Far East and Arctic reported that Chinese investors were funding 58 regional projects worth US$11.6 billion. The ministry had previously stated that China accounted for 73 per cent of all foreign investments in the Far East.

But many experts argue that China's actual financial support for the region is much lower. Denis Suslov, an economist at the Far Eastern Branch of the Russian Academy of Sciences, said most Chinese investment projects in the region existed only on paper. "If you look at these announced deals, less than 10 per cent of them reach the pre-investment stage and only 1 to 2 per cent of them get actually implemented," he said.

Suslov explained that many Chinese companies were reluctant to invest in the Far East due to the region's poor transport infrastructure and difficult climate conditions, all of which added significant costs to any project. Additionally, the Far East's small population size meant that it was unprofitable to establish factories that would produce goods for the local market.

"Businesspeople need to have a strong reason to invest their money - they need to see projects that align with their companies' priorities," Suslov said. "What incentive is there for Chinese firms to invest in the Russian Far East, an unfamiliar region and economy, when they already have good opportunities at home or in countries where they have pre-existing business ties?"

The Kremlin's efforts to create a friendlier business climate in the Far East have done little to shift that calculus. Vadim Zausaev, an independent Khabarovsk-based economist, said that despite the various benefits offered by Far Eastern priority development areas, they only cut the costs of setting up production by 10 to 15 per cent. As a result, the main players who took advantages of the priority development areas were companies already operating in the region.

Further complicating matters is that under Russian legislation, regional authorities do not have the legal authority or the finances to pursue joint projects with foreign companies without having the proposal first approved by Moscow. Anatoli Buryi, chairman of the Far Eastern Chamber of Commerce and Industry, a regional business alliance, said this limitation was a source of major frustration for Chinese investors.

"The Chinese often complain to me that our governors come over for talks, everyone has a good conversation at the negotiating table, but then they return to Russia and nothing gets done," he said. "The fact of the matter is that regardless of how well-intentioned a governor may be, he doesn't have the resources necessary to develop ties with China."

A 2017 report by the Far Eastern Branch of the Russian Academy of Sciences concluded that many joint infrastructure projects between Russia and China in the region experienced significant delays because of funding issues. Large Russian state enterprises showed little interest in financing such projects because they did not bring direct economic benefits, while Moscow was reluctant to allow Chinese investors to participate in constructing transport infrastructure. Consequently, responsibility for overseeing the project was often handed over to Russian-state investment funds, which repeatedly pushed back deadlines.

The coronavirus pandemic has raised new barriers between the Far East and China. Ever since Russia shut its border with China in late January 2020, the flow of businesspeople and tourists between the two neighbours has come to a grinding halt. At the same time, Far Eastern companies have been forced to deliver all their cargo to China through closed containers to comply with Beijing's epidemiological restrictions.

The requirement has created significant logistical hurdles for firms in the region. Vasily Chervenetsky, the head of logistics at Soya ANK, a Far Eastern soy exporter, said the Trans-Siberian railroad had become so overloaded with coal, oil, and gas shipments that earlier this year his company had to wait an entire week before they could get their goods on a train to China. "Such delays increase costs and create the risk that you won't be able to fulfil the terms of your contract," he said.

It's not clear when the two neighbours will be able to return to business as usual. Although Russia became the first country in the world to register a coronavirus vaccine last year - Sputnik V - its vaccination campaign has gotten off to a slow start. Over the past several months, the country has experienced a record surge in Covid-19 cases and deaths due to a third wave of infections caused by the highly transmissible Delta variant.

Boris Beloborodov, the business ombudsman for the Amur region, near the Chinese border, admitted that it would probably take at least another year or two before the Far East and China could return to their pre-pandemic level of interaction.

"As a result of our desire not to limit the peoples' rights, we were not able to convince them to take the proper precautions during the pandemic period," he said. "Unfortunately, infections are continuing to rise and it is difficult to say when we will be able to restore people-to-people contacts with China - but it probably won't be this year."

But overcoming the epidemiological obstacles may prove easier than the political ones. Artyom Lukin, a professor of international relations at the Far Eastern Federal University, said that unlike many of Beijing's partners in the Belt and Road Initiative, Russia was not willing to sacrifice its sovereignty in exchange for greater Chinese investment in the Far East.

"So far, Moscow has been reluctant to allow foreign investors, including Chinese, to gain controlling ownership of certain strategic resources or infrastructure like ports, due to national security concerns and the desire to reserve the ownership of Russia's most valuable assets for Russian companies," he said. "But that might change if Russia's economic situation were to take a serious hit."

This article originally appeared on the South China Morning Post (SCMP).

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