September 12, 2012 7:40 pm

Russia begins its slow pivot to Asia

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Moscow is looking to the east but has a lot of catching up to do, writes David Pilling

Suddenly everyone is pivoting to Asia. Last year, it was the turn of the US, which made a big show of reasserting its presence in the region. In December, Samoa in the South Pacific jumped the dateline just so it could be closer to Asian time zones. Now it’s the turn of Russia to look east.

“The global economic landscape is changing literally as we speak,” Vladimir Putin, Russia’s president, told Asian businessmen who had last week ventured to Vladivostok, where Russia was hosting the Asia-Pacific Economic Cooperation forum for the first time. Vladivostok means “Ruler of the East”, a bit of a stretch for an isolated city of 600,000. But Mr Putin, whose government invested more than $20bn in tarting it up for the summit, wants to turn Vladivostok into a trans-Eurasian hub.

Until now, Russia has virtually ignored the east. Its trade with Asia is a rounding error in more than $16tn of intra-Apec trade. Though two-thirds of Russia’s landmass is Asian, less than a quarter of its trade is with the region, against more than half with Europe.

Vladivostok only became a formal part of Russia in 1860 after China was defeated in the opium wars. When Chekhov visited Sakhalin in 1890 it was a penal colony. It was not until 1903 that the Far East came a little closer with the completion of the trans-Siberian railway. Even during Soviet times, Vladivostok was more of a fortress than a gateway. As home of the Soviet Pacific fleet, it was a closed city.

Now the incentives to make Russia a Eurasian Janus that looks both ways are compelling. Asia offers a hedge against a stagnant Europe. Though its economies are slowing too, their performance is a world away. According to the Asian Development Bank, growth in developing Asia this year will be 6.6 per cent, against a 0.7 per cent decline in Europe.

Russia is straining to catch up. Its fast-expanding trade with China, at $80bn last year, is already higher than its trade with Germany, at $50bn, or the US, at $34bn. It aims to reach $200bn by 2020. Trade with South Korea tripled to nearly $18bn in the five years to 2010, and doubled with Japan to $23bn over the same period. Exports with the latter are likely to accelerate further because of Japan’s need for oil and gas to replace lost nuclear power. Even before the Fukushima disaster, oil imports from Russia rose from 0.7 per cent of Japan’s total in 2006 to 6.4 per cent in 2010. Russia is nearing completion of a trans-Siberian oil pipeline that will terminate in the far-eastern port of Kozmino near Japan, making it easier to export higher volumes still.

“Without Russia there is no sustainable growth in Asia,” says Oleg Deripaska, chief executive of Rusal, an aluminium producer listed in Hong Kong. There’s more than a touch of bravado there. But you can see what he means. Asia is resource poor. Russia is the world’s biggest gas exporter and its second-biggest exporter of oil. It has timber galore and, according to Mr Putin, stands ready to double and treble its export of grains to Asia.

Diplomatically too, Russia has been looking east, though, aside from trade negotiations with the likes of Vietnam and New Zealand, its efforts have been focused on Beijing. Russian and Chinese leaders can’t seem to stay out of each other’s capitals these days. Moscow and Beijing are co-ordinating their stance more closely over foreign policy issues, including Syria. Russia is also a member of the China-hosted six-party talks, which aim, so far without success, to negotiate an end to North Korea’s nuclear programme. “Russian-Chinese relations are at an unprecedentedly high level,” Mr Putin gushed at Apec.

Still, there’s a gap as wide as the Volga between Russian ambition and reality. One obstacle is logistics. Lavish expenditure on bridges, roads and a new airport cannot hide the fact that Russia’s far east is decades behind much of Asia. Shanghai’s port alone handles nearly 10 times the tonnage of all Russia’s far-eastern ports combined. Andrei Kostin, chief executive of VTB Bank, talks of the frustration of Russian exporters, who say roads, railways and ports cannot cope with the push east. Nor is Russia entirely at home with the idea of opening up to Asia. For decades Moscow has fretted that populous China could mount a “peaceful invasion” of sparsely populated Siberia. Asian businessmen at the Apec summit complained of excruciating visa procedures. Many didn’t bother to come to Vladivostok for that reason.

Nor, despite the warm words, are diplomatic relations always cordial. Russia is officially still at war with Japan over disputed islands. That doesn’t mean Japan won’t buy oil and gas. But it does mean it will be reluctant to sink big investments into Russia’s far east.

In any case, Russia doesn’t inspire investor confidence. Mitsui and Mitsubishi are still smarting from Gazprom’s forcible takeover of a Sakhalin oil and gas venture they used to run with Shell. Even China, whose hunt for resources has taken it to frontier markets in Africa and Latin America, is wary. One senior Chinese official said Russia’s investment climate was neither mature nor understood by Beijing.

One way or another, Moscow has a lot of catching up to do. When VTB became the first bank to open an office in Shanghai, it couldn’t find a single Russian banker who spoke Chinese. Russia’s future may look east. But its history all flows in the opposite direction.

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