Negative Scenario I

For a quarter century after the collapse of the Soviet Union, the Russian Far East (RFE) has been caught between Moscow’s failed promises, bureaucratic barriers of a local nature, and unrealized appeals for investment from neighboring countries. The response at every turn has been that, despite earlier problems, things are changing. At the beginning of 2016, the optimistic case for the RFE is again being advanced. In this negative scenario, I concentrate on four reasons why optimism is unwarranted. They are: 1) commodity prices; 2) China’s actions and Sino-Russian relations; 3) the relations of Russia with Japan, South Korea, and the United States; and 4) policies of the Russian government and local governments in the RFE.

Commodity Prices

After falling to about USD 30 a barrel, oil, as the bellwether of commodities for export, is casting a dark shadow on the RFE. Low prices mean that global energy companies will have no funds and no incentives to invest. At the same time, the government in Moscow will continue to cut funding for infrastructure and other projects, letting its “priority” programs in the RFE wither, as in the past. If prices over USD 100 a barrel did not suffice to generate foreign investment, why would much lower prices and great uncertainty about future economic prospects give investors a reason to proceed?

There is now a glut of many of the commodities that the RFE wants to develop and export. Start-up costs in a region with difficult climatic conditions, vast distances, and a lack of infrastructure remain a formidable obstacle. Moreover, the sharp drop in the value of the ruble and frequent adjustments in policies and personnel do not give investors confidence in the stability of Russia and the RFE. Russia has missed its chance to take advantage of China’s boom and high prices. This could be seen in the dashed hopes of the 2012 Asia-Pacific Economic Cooperation (APEC) summit in Vladivostok and in the paltry results of the September 2015 Eastern Economic Forum in that same city, where China’s presence proved disappointing and Japan’s presence was given prominence by Putin in the outside hope that Abe’s political calculations might trump new realities.

China’s Actions and China-Russia Relations

Optimism generated in 2014 by the Putin-Xi summits coupled with grandiose claims about joining the Eurasian Economic Union (EEU) and “Silk Road Economic Belt” has given way to frustration that Sino-Russian trade declined by 30 percent in 2015 and Chinese investments in Russia did not materialize. Analyses in Russian sources place much of the blame on the economic forces buffeting China, while also faulting the flawed environment for investment in Russia. In any case, the high hopes generated of late for an infusion of Chinese cash have completely collapsed. This applies to the RFE, where a casino in Vladivostok is now thought to be the main magnet for drawing funds from China.

Since the “turn to the East” had become the “turn to China,” and Siberia and the Far East of Russia had been prioritized as the test case for success in this turn, failure of China to meet expectations generated when Russia “put all of its eggs in one basket” is a tremendous blow. While some local residents were preoccupied with the fear of Chinese expansionism (the “yellow peril”), the real problem proved to be Chinese “indifference.” As the ruble lost value, Russia lost its financial pull even for small-scale Chinese businessmen. Andrei Ivanov, as noted in “Country Report: Russia,” sees “friendship without trade.” Some talk of the model, which brought 15 years of rising bilateral trade, as exhausted, speculating about some new model appearing without any reckoning of what China would hope to gain from Russia, especially from its Far East. Alexander Gabuev is particularly skeptical of the ideas being raised in Russia after examining misconceptions about China held by those doing business with it. Viktor Tarusin, who directs the Russia-ASEAN Business Council, expects a rough year in 2016 for bilateral economic ties with China, pointing even to Chinese banks that are observing the sanctions imposed by the West even thought that is not the policy.

Relations of Russia with Japan, South Korea, and the United States

A December 23, 2015 article in Yomiuri Shimbun was headlined, “‘Development of the Far East’ Is the Key to Negotiations.” It found Putin’s preference for Japan at the Eastern Economic Forum to be not only a message to Japanese firms but also a sign of his interest in intensifying talks with Abe with economic cooperation in Russia’s Far East in the forefront. When Putin and Abe met two months later in Turkey, the linkage between more Japanese investment and progress toward a peace treaty and resolution of the territorial issue was reinforced. According to the newspaper, this is a good time for Japan to proceed with talks, since Russia’s economy is reeling and the country is isolated internationally over the Ukraine question. Russia seeks a big increase in Japanese imports of its natural gas but also an automobile factory to give jobs to Russians, who otherwise might join the migration away from this region. The article concludes, however, that Japanese companies have little interest in an area with such a small market, high transport costs to other markets, and a lack of any transparency in commercial regulations. Any economic agreement would appear to be a concession that the Japanese government would have to press on business in return for benefits it seeks in negotiations, not a sign of the Far East’s real appeal.

South Korea under Park Geun-hye has showcased its Eurasian initiative with scant results. It has not imposed sanctions on Russia, seeking cooperation in managing the North Korean threat and in preparing for possible reunification. Despite talk that Park and Putin had a good relationship, there has been little mention of late of how the South might contribute to development in the Russian Far East. Indeed, failure to take seriously North Korea’s fourth nuclear test is harming Russia’s image there.

At one time, Russian leaders sought US cooperation in developing its Asiatic flank. Now it is assumed that turning to the East is linked to a “Cold War” atmosphere with the West. Indeed, Russian policy appears to be aimed at splitting Tokyo and Seoul from Washington, e.g., on sanctions and on missile defense. This is not the ideal way to develop the Russian Far East, given the interconnected business interests in these countries and the need for a welcoming tone to the international community. Acting as if West and East are two separate spheres is unlikely to work with close US allies.

Policies of the Russian Government and Local Governments in the RFE

Amazingly, recent Russian articles have eschewed the old quest for “who is guilty,” targeting various foreign entities, in concentrating on self-criticism of Russia’s own shortcomings for the troubles in the Russian Far East. True, there have recently been a series of changes aimed at addressing some of these, but writings about the lack of investment from China and others are insistent—not that they are ignoring the changes, but that the environment has not changed nearly enough. Generalized analysis of Russia’s economy is no less insistent that reforms were overlooked in favor of just raking in the money from high commodity prices. There is no sense of a vigorous reform program in Russia today to reassure investors at a time of massive capital flight. Under these circumstances, we can expect depressed conditions in the Russian Far East and more depopulation. Opportunities have been squandered with undue optimism about how things were about to change. Instead of more optimism, realism about ongoing troubles would provide a better foundation for real change.