The New Potemkin Village: Russia in the Far East

Moscow’s vaunted “pivot to the East” did not begin when Vladimir Putin returned to the presidency in 2012. Instead, it dates back to late 2006, when he ordered the development of the Russian Far East and Siberia. Others may prefer to believe it began with then-president Dmitry Medvedev’s inaugural tour to Kazakhstan and China in 2008. Regardless, this ostensible shift has since become a cornerstone of Russian policy; and the Eastern Economic Forum, which takes place annually in Vladivostok, in early September, has become a gala event for showcasing the “pivot’s” progress (Kremlin.ru, December 20, 2006).

As a result, every year, in late summer, Russian media fills up with analysts lauding the great successes of this pivot, the country’s growing ties to China, alleged economic deals, grandiose plans, and so forth. But in reality, a decade after it began, the pivot eastward has relatively little to show for itself. Instead, as Alexander Gabuev (Kommersant, September 9, 2019) and others have observed, the Eastern Economic Forum has become a great spectacle, but one that produces few concrete results. The Russian Far East is, as Russia expert Pavel Baev put it, actually “in the throes of a great depression” (see EDM, September 9). Although there has been a fair amount of Russian investment in the region, foreign investment outside of the energy sphere has been minimal. And until and unless Russian investment opportunities improve and sanctions disappear, this will not change regardless of what showy summits Putin mounts or directives he issues (Forumvostok.ru, September 23).

A decade of experience has shown that foreign investors, not least ones from Asia, remain wary of pouring their capital into Russia. The one sectoral exception is energy; but even there, such foreign interest is relatively limited. Thus, it appears that, to date, Putin has only successfully attracted one major energy deal in the Far East: Mitsui and Japan Oil, Gas and Metals (JOGMEC) signed a contract earlier this summer with Novatek to obtain 10 percent of the Russian energy firm’s Arctic LNG 2 liquefied natural gas project, whose total development costs are projected to reach $21–23 billion (The Barents Observer, July 1; The Moscow Times, September 5).

It bears pointing out, however, that Tokyo is presently pursuing a peace treaty with Moscow to formally end World War II and has offered a relatively modest economic package for that purpose. Like other Asian states, Japan needs energy and has a growing interest in the Arctic. Even so, it did not invest in any of the projects offered at Vladivostok during this year’s (September 4–6) Eastern Economic Forum (Forumvostok.ru, accessed September 29). That disappointing outcome left Moscow with no alternative than to solicit loans from its Asian partners—an inferior financial vehicle compared to direct investment. Hence, India, also very much in need of energy and showing increasing interest in accessing natural resources in the Arctic, offered Russia a $1 billion loan to develop the Far East (The Hindu, September 5). This line of credit actually represents a rather modest sum, given the Far East’s needs; and it is by no means clear that New Delhi will ultimately obtain what it is hoping for.

That said, the fact that India is now lending Russia money or offering it a line of credit to develop the energy industry in the Far East is a telling indicator of the power equivalencies that are coming to the fore in Asia. A decade of economic failure is putting Moscow in a position of dependence on regional creditors, much as the developing world and Eastern Europe fell into these kinds of dependencies on Soviet loans two to three generations ago (Gu Guan-Fu, “Soviet Aid to the Third World: An Analysis of Its Strategy,” Soviet Studies, vol. 35, no. 1, 1983, pp. 71–89). One can also see similar trends with regard to foreign direct investments coming from China (see EDM, November 7, 2018 and March 5, 2019).

Russia’s mounting political and economic dependence on China is well known, as is the fact that China has been relatively stingy in its investments in Russia. Like others, it is wary of Russian business practices and of running afoul of United States sanctions (see EDM, December 12, 2018). Still, its economic largesse has made possible the Yamal Arctic LNG project. Indeed, between 2000 and 2017, China has lent Russia $36.6 billion for oil and gas infrastructure development, and it may lend it more in the coming years (Foreign Policy, October 11, 2017).

What all this confirms is the utter failure of the pivot to Asia to elicit sizable Asian investments on Russia’s terms. Even without the sanctions, it is debatable whether or not Asian financial centers would look seriously at investing there—particularly, given the inherent costs and Russia’s dubious business practices. In other words, the sanctions are ultimately not the main obstacle here. Rather it is the inherent difficulties connected to the Russian Far East’s harsh nature and climate as well as decades of failures to reform or build acceptable infrastructure, both physical and institutional, that would allow investors to feel secure about making big bets on this region. Therefore, even if the sanctions are lifted, many Russian scholars will continue to write dubious paeans to this latest Potemkin village. But the reality will be one of Russia slipping further behind relative to the dynamic economies of its Asian creditors.