Russia Looks To Connect Its Far East With China’s Belt & Road – And Beyond

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Vladivostok Moving Towards Asia As Demand Increases And FTA Start to Kick In Multilateral Trade

Op/Ed by Chris Devonshire-Ellis

The Far Eastern Economic Forum has just concluded in Vladivostok, with Russian President Vladimir Putin hosting guests Narendra Modi, the Prime Minister of India, Shinzo Abe, the Prime Minister of Japan, Battulga Khaltmaa, the President of Mongolia, and Dr, Mohammed Matahir, the Prime Minister of Malaysia. Significant Government trade ministerial and business delegations were also present from China, South Korea, the Eurasian Economic Union as well as several ASEAN nations.

The main theme of the conference was The Far East – Development Horizons and as such concentrated on both the Russian Far East, as well as North and South-East Asia. Russia’s Far East attracts 32% of all FDI into Russia, and is closely linked with North-East Asia, and especially Northern China, Japan and South Korea where rail, air and shipping facilities are all well established, and being further developed. The region has extensive resources in minerals, forestry, agriculture, manufacturing and maritime in addition to having a huge logistics centre in the form of Vladivostok Port. It is also closely linked to the Russian Arctic, which is developing LNG gas fields, and is about to become an important source of energy for the entire North-East Asian market.

Japan, South Korea and China are the largest consumers of electricity in North-East Asia, while Far East Russia also has significant coal reserves. Accordingly, numerous Asian nations are looking to exploit Russia’s oil, gas and coal, which is happening, and will be enhanced in the Arctic LNG gas fields. Russia is already supplying countries such as India with LNG, where local demand is expected to sky rocket in coming years. Just 3% of Indian households are connected to gas, while the Indian government wishes to increase this figure. With the Indian economy expected to nearly double to US$5 trillion in the next five years, Indian energy demands will soar. This also increases the demand for coal, which is needed both as an energy source in addition to steel manufacturing. India is looking to Russia to supply demands in both – as well as jointly develop some of the logistics operations needed to service that demand. An overview of India’s stance towards this, including Prime Minster Modi’s remarks on Russian-Indian trade development can be seen in the article India-Russia Business Ties Developing In Energy, Shipping, Agriculture and Jewelry Fields. It is quite apparent that the Russian-Indian trade corridor is now open and will continue to develop. Both countries have pledged to increase bilateral trade to US$30 billion within the next five years. The alignment of Russian supply capabilities and Indian demand looks likely to see this come to fruition. Prime Minister Modi also stated that India was committing a US$1 billion loan to Russia’s Far East to assist with regional and Russia-Indian trade development.

In terms of China, many see Russia as purely an energy play. However, China and Russia are also developing science and industry applications within this field, which are leading to new business developments of the future. This includes new technologies both in oil and gas drilling and extraction, and especially in the Arctic, where Russia is very keen to maintain an eco friendly approach to development. It shares the Arctic basin with Canada and the United States in addition to Northern Europe and does not wish to create political or environmental problems with its neighbors in this regard. The key for Russia to develop the China market in other areas is to better match Russian production with Chinese actual demand. This has been getting a boost though from the US-China trade war, with China increasingly looking to Russia for grain supplies as well as other agricultural produce. The Russian Far East has a significant agricultural industry, including fruit, vegetables, dairy, animal farming and aquaculture in addition to fertilizers. These are all areas of increasing bilateral trade with Russia, and can be supplied both by the Chinese Eastern Railway from Vladivostok, which reaches down to Harbin, just 550km south-west, but also by ship, where Shanghai is just five days away.

Furthermore, the Sino-Russia Joint Venture Aliexpress Russia is now coming into play and is expected to significantly boost the SME business in bilateral trade between the two countries with an initial target of US$2 billion per annum in Russian ecommerce sales to Chinese consumers. That also needs upgrades in logistics – Chinese consumers want to buy and receive goods within the shortest possible time and are amongst the most globally demanding for effective delivery. Russian SME’s and marketing companies also need to develop China market sensibilities to allow this to happen.

ASEAN is also getting into the Russian Far East, and drawing cities such as Vladivostok further into the Asian sphere of influence. Vietnam has had particular success with its Free Trade Agreement with the Eurasian Economic Union, of which Russia is a component partner. Bilateral trade between Russia and Vietnam is about to hit US$10 billion per annum from practically zero three years ago. Singapore is poised to sign a similar FTA next month while other countries such as Indonesia and Thailand have all expressed interest in the same. An overview of where ASEAN sits with developments with Russian Free Trade and business opportunities in the Russian Far East can be read in the article ASEAN Nations Want Free Trade Agreements To Develop Russian Trade.

However, it’s not all plain sailing for the region. While Sapporo lies just 750km from Vladivostok, and trade ties with Japan are increasing, there remains unfinished business in terms of the future of the Kuril Islands. It is an emotive subject for many Russians, with thousands of Russian war graves there. Yet the terms of the 1956 Peace Treaty between the then USSR and Japan, which todays Russian Federation has agreed to follow, calls for the restoration of the islands to Japan. That has not yet been successfully concluded. This gets in the way of further economic and trade development between the two countries. The Japanese Prime Minister Shinzo Abe, while giving an entertaining speech at the Forum, rubbed this home to Russian President Putin by showing a video which showed Japanese technology assisting elderly Russians to walk unaided. “My favorite part of the video” he proclaimed before getting into a debate about the Kurils. It was a crafty way to illustrate that Japanese assistance to Russia could be enhanced should the islands be returned, and the point was not lost on President Putin, who agreed to hold talks using the 1956 treaty as a base. Abe looked happy, Putin less so. Regardless, it remains a highly complex historical problem that needs to be solved in order for the potential of Japanese trade with the Russian Far East to reach its full potential.

The Mongolian President had the opportunity to meet with President Putin two days prior to the Vladivostok event in Ulaan Baatar, where several bilateral trade deals were signed, including the upgrading of the Trans-Mongolian Railway and the launch of a US$1 billion Russia-Mongolia Investment Fund. However, President Khaltmaa also expressed Mongolia’s willingness to join up with the proposed North-East Asia Energy Super Grid which includes China and Russia. China, Japan and South Korea are the largest consumers of electricity in North-East Asia, with demand still growing. President Khaltmaa stated that if a solution to the “stability and economic problems” in North Korea could be found, Mongolia would be in a position to provide cheap electricity to North-East Asia by transporting it through transit lines. Mongolian electricity was capable of being harvested through the use of wind and solar farms and could become a major supplier to the region, he stated. Mongolia is also negotiating a Free Trade deal with the Eurasian Economic Union, which includes Russia and extends all the way West to the borders of the European Union. China, just to the south of Mongolia, is also negotiating products to be included in their own FTA with the Eurasian Economic Union, which when arrives will mean Mongolia is a component part of a major China-EU trade route with free trade to the borders of Poland, Latvia, and Lithuania.

All in all the event was a good showcase for the potential of Russia’s Far East, which is beginning to develop far stronger ties to North-East Asia and Asia in general than has been the case until recently. With infrastructure and connectivity improving, and Russia itself committing to improve the capabilities of cities such as Vladivostok, the region will beyond doubt become far more important as a component part of North-East Asia and the Asia-Pacific region as opposed to purely being a solely Russian play with limited external ties. I have discussed these planned developments, which include a proposed Far Eastern Russian VC Fund, and the fact the regional GDP growth rate is three times higher than the Russian average, in the article Vladivostok And The Russian Far East Developing Into A Significant North-East Asian Resource & Trade Hub.

While Russia and China have already established numerous projects in the Russian Far East, and have instigated several funds and are co-developing banking platforms to further develop the links between the region, Northern China and China’s Belt & Road Initiative, Vladivostok in particular will become synonymous with North-East and Asia trade as the go-to Port. It is time for Asian focused businesses across the region to be taking note of what is going on and rearranging their geographical brains and atlases to reposition this Far North-Eastern Russian city as dynamic, increasingly interconnected, rich in resources, and mostly definitely part of Asia.

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Silk Road Briefing is written by Dezan Shira & Associates. The firm assists foreign investors and advises Governments throughout Asia in facilitating trade and investment into the region, and maintains 28 offices throughout China, India, ASEAN and Russia. We also provide Belt & Road advisory and intelligence services. Please email us at silkroad@dezshira.com for enquiries or visit us at www.dezshira.com

 

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