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We are changing our philosophy of Eurasian States partnership

Timofei Bordachev discusses Russia's foreign policy engagement and relations with Asia

Timofei Bordachev (Programme Academic Advisor for Eurasia, Valdai Discussion Club, Director of the Center for Comprehensive European and International Studies, Faculty of World Economy and International Affairs, HSE) discusses Russia's foreign policy engagement and relations with Asia since Moscow launched its “turn to the East” policy.

We are changing our philosophy of Eurasian States partnership
“Turn to the East" is a Russian large-scale project aimed at diversification of external economic ties toward the growing economies of Asia to become more actively involved in political and economic processes in the Asia-Pacific region in order to strengthen the country's role in the regional organizations. "We are now changing our philosophy of relations with the key regional partners in the East», - says Mr Bordachev.

One of Russia's crucial national objectives is to sustain a course for boosting the economic and political importance of Siberia and the Russian Far East. A number of new international financial institutions have been launched by China, Russia and their regional partners (the Asian Infrastructure Investment Bank (AIIB), New Development Bank with its “BRICS” partners and Silk Road Development Fund). Relations between China and Russia have acquired a fundamentally new quality within the recent 2-3 years. Their distinguishing features are mutual trust, consideration for each other’s interests, and increasing economic openness.

Apparently, the project implications are gradually redefining the nature of relations with all the regional partners that can now be characterized by a much closer inter-relationship. The Republic Of Korea has increased its efforts to support the process of regional integration although it does not possess such strong capabilities as its great-power neighbor, China. Seoul hosted the 2nd Plenary Meeting on “International Cooperation for the Development of Siberia and Russia’s Far East” at the end of last year. The initiative is a part of a multi-year collaborative research project undertaken by a consortium of Eurasian countries’ top think tanks and research institutes. The objective of the 2nd Plenary Meeting was to bring together top experts and policy makers from Russia, Singapore, China, South Korea and Norway to discuss multilateral international cooperation in the development of Russia’s Siberia and Far East. The discussions focused on key developmental areas: cooperation between Russia and Asian countries; international investment projects and business interests on Russia’s Siberia and Far East. In addition to development issues, the policy dialogue also addressed the geopolitical contexts of Russia’s relations with the West. By the end of the Plenary Meeting, the participants summarized their views and confirmed their interest in enhancing the diplomatic dimension of Russia’s turn to Asia and intensifying Russia's presence in the Asia-Pacific region, and also expressed their willingness to continue discussions at expert level to progress in joint work in that context.

With respect to the future of international development in Asia, many experts notice the negative prospective of demographic changes of the major countries within the Asia-Pacific region (China, Japan, South Korea). Impending changes such as population ageing and their relative decline in population compared to the expected growth in the US population will negatively affect the ability of these states to augment power and extend influence internationally. It should further be noted that market economies within the Asia-Pacific Region rely more heavily on different forms of interaction with respect to the amount and forms of the state's intervention in the economy (in China, each significant economic sector is supervised and controlled by the government, though in smaller countries within the Asia-Pacific Region the local governments interfere less into the process of coordination their market mechanisms) and also coordination of their relationships with other countries. It can lead to the growth of intra-regional disparities in the level of socio-economic development across the region.

The South Korean representatives refer to the authorities of the Democratic People's Republic of Korea (DPRK) as being the main obstacle to implementation of the major joint projects primarily in such areas as transportation and energy, the country’s cooperation with the Eurasian Economic Union (EEMA) and also the country’s involvement in the Silk Road Economic Belt development strategy initiatives. South Korea suspends any trilateral logistics project involving North Korea, but it is a kind of taboo topic for discussion. Chinese experts often draw attention to a number of problems associated with integration of Silk Road Economic Belt (SREB) policy with the Eurasian Economic Union (EEMA). In particular, their comments and suggestions range from increasing China’s involvement in the dialog of Eurasian Economic Union (EEU) and Eurasian Economic Commission (EEC), to creating a joint regulatory body of China and EEMA (Joint Commission) along with some other joint institutions.

Governmental structures at the local, national, regional, and supranational levels consider the fact that coordination between the Eurasian Economic Union (EEU) and Silk Road Economic Belt (SREB) lacks cohesion. The main cause of that problem lies in China's economic slowdown accompanied by the economic crisis in Russia. With reference to the Chinese experts, they have previously agreed with the Russian concept of promoting bilateral interaction between the Eurasian Economic Union (EEU) and Silk Road Economic Belt (SREB), as well as the idea to bring three neighbouring projects, such as the EEU, SCO and SREB from the perspective of Russian-Chinese coordination of interests in Eurasia. Furthermore, they have approved the role of SCO as the driving force of Eurasia’s security, stability and development. On the other hand, some Chinese experts are still apprehensive that the SCO is able to become a dominating force in facing growing challenges and regional threats. However, South Korea would like to apply for membership to SCO as they see the SCO as the main elements for making balance of power in the region and, in the face of expanding Chinese power, equilibrate it by Russia, India and Iran.



The most important matters to be continuously discussed are the regional financial institutions (such as Asian Infrastructure Investment Bank, Asian Development Bank, the Silk Road Fund, the New Development Bank established by the BRICS) and regional cooperation in energy sector. The Chinese experts emphasize that all these regional institutions are aimed at enhancing the resilience of the system of global economic governance and they should be rigorous in adopting the best practices of such long-standing organizations as the World Bank, International Monetary Fund and World Trade Organization. Besides, they stress out that the World Bank and IMF should reform the organizations’ quota distribution to reflect the growing presence of developing countries. The Chinese experts also drew attention to the fact that the Asian market has become more enduring and independent and it is now less affected and less reactive to possible global shocks.

However, the United States are concerned about the economic viability of such global institutions as the WTO, so they support the idea of establishing new regional associations (e.g. the Trans-Pacific Partnership (TPP)) which would substitute the existing organizations and become the policymakers. The US officials have already widely announced their TPP accord initiative.

With respect to the regional cooperation in energy sector, implementation of Asian-oriented Russian gas export projects can promote competition and thus radically change the whole cost structure of the entire industry. In particular, as well as triggering price reduction, Russian’s initiative will further reduce the attractiveness of any other LNG suppliers at Asian Pacific Market. A wide range of experts in the field of energy have outlined a shift in the regional energy balance, marked by the strengthening of Russian positions at the market. Over the past ten years, the share of APR countries in Russian gas export has risen 15 times, and reached 24% of total shipments. Russia’s energy exports to the APR include crude oil (64%) and petroleum products (21%).
Eastern Siberia and the Far East are the key regions to encourage and promote Russia’s large-scale energy export projects. These two regions account for more than 13% of the country’s oil reserves (approximately 4 billion tonnes) and 16.2% of natural gas reserves (42 trillion cubic meters). (According to The Ministry of Energy (Minenergo), geological and geophysical exploration in these regions is 8% inland and 6% offshore. In this context, the expected production from both the existing and new fields by the year 2035 will be 118 million tonnes of oil and 135 billion cubic metres of natural gas).
So far, however, Russia has been a small-time player in the booming Asian market for both oil and gas compared to Middle East suppliers. The Middle East portion in China’s oil imports is 46%, in India’s oil imports – 58%, Japan’s – 83%, South Korea’s – more than 80%. With respect to natural gas supplies, Turkmenistan accounts 46% in China’s gas imports and Qatar accounts 85% in India’s one. Japan and the Republic of Korea, which are the world's largest gas importers, have diversified their sources of imported oil and natural gas.



There are several factors which contribute to a gradual increase of Russia's strategic presence at the APR energy market, e.g. stagnation in the European economy; the European energy action plan to diversify the EU's oil and natural gas supply sources; and also oil demand growth is Asia. Given a favourable political environment, Japan is willing to invest in oil and gas mining and development activities in Eastern Siberia and the Far East. Japan is gradually increasing its’ coal imports from Russia. In 2014, it grew by 20% and reached 9.66 million tonnes. At present, Japan is primarily dependent on Australia for its coal imports (Australia accounts for 74% of Japan's total coal imports), so the country would like to diversify its sources of energy supply. On the contrary, Russian coal export to China fell by more than 40%. The reason is China’s decision to prohibit coal imports with more than 40% ash and 3% sulfur and also lignite with more than 30% ash and 1,5% sulfur.

As far as the future role of LNG, EU natural gas demand is unlikely to rise in the next decades and the centre of gravity for global LNG demand will further shift towards Asia, especially China. Prospects for expanding the use of this energy source to serve its economic growth are particularly good in China. Specifically, its imports of natural gas will be promoted by the country’s desire to find a relatively clean-burning alternative to coal. China will further encourage imported gas supply expansion and promote efficient gas use as it does not seem to have the investment appetite to develop its’ own shale gas assets.

A troubling sign is that North America's LNG boom is now so big that the industry and its supporters believe it should be shared with hungry markets in Asia. The country has already started building six LNG plants on the West coast and three more will be launched in 2017-2018. They are all focused on the Asian market and they are planned to start delivering gas in the year 2016. However, the country has not made any significant progress in pursuing the opening of the European direction facilities.

To win the industry competition, Russia gives one of the top priorities to attracting investment from APR counties to the Siberia and Far East regions. So how much of a threat are these sanctions, imposed by the United States and its European allies, to the Russian economy? With Western-imposed sanctions hitting Russia's economy, Russia turns to Asia in an effort to attract investors and boost capital inflow to the regions. Lots of Asian businesses will find appropriate ways to avoid being tracked by American “big brother’s radars” and invest in both regions, provided that the Russian government supports the development of small and medium enterprises (SMEs) that are real drivers of economy change. Regional business communities can also promote local investment decisions to support economic development of Siberia and the Far East of Russia and thus show some very positive signs of business dynamics which will consequentially attract more APR investors.

It is widely acknowledged by the experts that the aim of the US policy of sanctions against Russia is to harm the strategic perspectives of Russian energy companies and, as such, put a drastic pressure on the Russian economy, which is still very dependent on energy exports. Consider the sanctions leveled against the Russian energy sector: among other things, they have been aimed at reducing financing options for Russian energy companies and preventing them from entering the regional energy markets to develop complicated projects and to compete there with the US. In the long term, and if sanctions escalate, oil production in Russia may fall.

Nevertheless, the worst effects from continuation of sanctions policy involve both direct and indirect consequences and affect the structural characteristics of economic development of small and medium-sized enterprises which, in case they are unable to raise money in international financial markets, will gradually scale down their presence and activities in sanctioned countries. They will have to do it even if they are fully aware that in the future they will have to spend heavily to regain their businesses and market share and the spending will far overlook the possible benefit. Moreover, the sanctions will negatively affect cross-border investment flows from Asian countries and reduce the investment opportunities of small and medium-sized enterprises founded by APR investors.
As for the Northern Sea Route’s commercial potential and economic importance, it gets guardedly optimistic assessment from the expert. On the one hand, many experts positively assess the sea route’s commercial potential and economic importance. According to them, Russia stands to enjoy considerable economic gains from the development and exploitation of the shortest shipping route between Europe and East Asia. On the other hand, it should be noted that the Northern Sea Route cannot exist without the major energy projects that have been temporarily suspended because of the US sanctions against Russia. Nevertheless, many companies, both local and international, feel positive about the future of the project and possess ambitious strategic plans aimed at the comprehensive development of the Russian Arctic Zone.

To sum up, it should be noted that the idea, which is expressed with the help of such terms such as “pivot to Asia” and “turn to the East” have been actively used by a large number of experts as well as journalists since it was originally announced. Nowadays, this should be viewed as an opportunity to mobilize all resources of both Russia and its’ regional partners to further pursue an active and constructive policy targeting crisis resolution both in Asia and in the world.