Russia's eastern u-turn

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Russia's eastern u-turn
When, in January 2010, the Russian aluminium tycoon Oleg Deripaska listed his company, Rusal, in Hong Kong rather than in London (as he had originally intended), his reason may have partially been tactical.  He may have correctly calculated that wealthy local investors (a retail offering was banned by the Hong Kong regulators) would not be as concerned as North American and European investors about Mikhail Chernoy’s 20% ownership claim or the US government’s view of the apparent undesirability of Deripaska’s travel to their country.  They turned out to not even be bearish on Rusal’s multi-billion dollar debt once they saw the Russian government’s willingness to give the company cash to pay its foreign creditors.  They believed Rusal to have a bright future in the vast market just north of Hong Kong – the People’s Republic of China. Rusal’s largest smelters are located in the Siberian cities of Krasnoyarsk, Bratsk, Irkutsk, Novokuznetsk and Sayanogorsk, in strategic proximity to the Chinese market where 80% of the output is sold.  Deripaska has become a big enthusiast of Siberia and advocate of strengthening commercial and other ties with the Asia-Pacific region.  Last year, he called on the Russian government to ‘make a U-turn to the East’.  He stated that, although over 70% of the country’s mineral wealth is in Siberia and the Far East, the region’s contribution to the GDP is just about 16%.  He may have also hinted at Russia’s obsession with its place and role in Europe which, together with the US, is the main focus of its foreign policy, in spite of Vladimir Putin’s occasional fondness for a bout of anti-western rhetoric.  The EU is Russia’s largest trading partner, the largest consumer of its hydrocarbons and the largest provider of FDI. Ahead of the 2012 APEC summit in Vladivostok, the government now seems to be listening.  On 22 March, Vedomosti, Russia’s leading business daily, wrote about a government document that had come into its hands: the Ministry for Economic Development has prepared a draft law envisaging the establishment of a state corporation to invest in Siberian infrastructure.  An unnamed government official was quoted: ‘[The] business [community] is interested in the region but its development is handicapped by infrastructure shortages’.  The new state corporation will be exempt from the bankruptcy law and enjoy monopoly access to all revenues of the Russian National Wealth Fund for ten years.  It will support the private sector’s project as a co-investor and these projects might be granted hefty tax breaks. The government is also planning to reimburse local residents’ mortgage interest, subsidise their university studies and increase their ‘mother capital’ (one-off payments to mothers giving birth to their second and every subsequent child).  Legal labour migrants to the region could claim Russian citizenship in three years rather than in five as elsewhere in the country. A quick look on the world map and some simple Wikipedia research may help explain the Russian government’s sense of urgency in its attention to Siberia.  Only 26 million people (18% of Russia’s total population) live east of the Urals and north of South Siberia’s mountain ridges and the River Amur, and their number is shrinking.  There are over 1.3 billion people south of the ridges and the Amur and their number is expected to grow by a further 100-150 million in the next 20 years. At the same time, the resources that one of the world’s largest and fastest growing economies may want are in the north – and we already know about a small fraction of their reserves.  Gazprom’s website states: ‘the initial total resources of natural gas comprise 52.4 tcm on Eastern Russia’s dry land and 14.9 tcm on the shelf; however, the geological knowledge of the region’s natural gas potential remains extremely low and equals 7.3% for the dry land and 6% for the shelf’.  Anyone who flew from Vladivostok to Moscow under a clear sky and had a window seat can confirm – you can fly for hours and hours and not see a single town amid the vast taiga underneath. If Russia cannot dig its riches out of the ground, and if it is unable to keep a sufficient Russian-speaking population around them, then her southern neighbours may decide to try it themselves. The Western media audience who read about Russia and China voting in solidarity in the UN Security Council against the West’s initiatives in Syria and Iran might think of the two countries as allies but this is far from the case.  Sino-Russian relations are stable (all border disputes were settled in 2005) but not very close.  China considers the price at which Russia is willing to sell its oil to be too high. PetroChina has recently announced it will not buy extra crude oil from Rosneft via the Russia-China pipeline although the price dispute over the originally agreed 300,000 bpd supplies was resolved.  The two countries continue to differ on the price of natural gas and Russia’s plans to sell 68 bcm to China under a 30-year deal remain on paper only.  Russian producers complain about cheap Chinese imports: last August Severstal, Novolipetsk and Magnitogorsk steel mills called on the Russian government to impose an anti-dumping duty on Chinese organic coating steel.  Russia, which has suffered from an unprecedented rate of space launch failures in the past several months, is cautiously watching China’s advances in the sector. China is gradually overtaking Russia in Central Asia’s former Soviet Republics, despite the local elites’ cultural proximity to the former ‘elder brother’ (Russian remains the lingua franca of the wealthy and educated classes in the ‘Stans’).  It achieves this by offering what the local elites want – cash, and the only concessions it requires in return are economic ones. Central Asian countries carefully evaluate and assess the powers competing for influence in the region.  Russia is trying hard to pull Central Asian countries into a common security arrangement while the local regimes have strong doubts about whether Russia will be willing – and able – to protect them from any serious regional security threat, having watched too closely the Soviet fiasco in Afghanistan in the 1980s and knowing that the unreformed Russian military is no stronger than the Soviet Army was then. The West is demanding democracy and transparency of governance which would undermine the regimes.  Radical Islam which is gaining power in the South would overthrow them.  China is demanding nothing but access to resources which Turkmenistan and Uzbekistan are happy to sell cheaper than Russia would. The only country in the region that has firmly allied itself with Russia both economically and politically is Kazakhstan and it has done so because its strategic concerns are very similar to those of Russia.  It is a vast and very resource-rich country with many under-populated areas.  Its population is even smaller than Siberia’s – 16 million people and, like Russia, it has a long border with China. However, whether China in Russia’s perception is a situational ally, a competitor, a strategic threat or a hard-bargaining customer, Moscow is probably right to begin to pay attention to Siberia.  Suddenly, it is facing an internal challenge – Siberian separatism, unheard of since 1918.  The sense that Siberia has been abandoned by the federal centre and that the locals might consider taking responsibility for their own prosperity is growing stronger in internet media and blogs.  The government may despise it as something that a few intelligentsia eccentrics entertain themselves with but, should the sentiment grow, it would almost certainly be the greatest threat to Russia’s integrity – much greater than any regional separatism, including the one of the North Caucasus. For businessmen like Deripaska, however, an eastern U-turn is on the agenda not so much due to any threat, be it from China’s demand for resources or from potential separatism.  It is the golden opportunity that Siberia presents for business that would be missed for them, and for the country, unless it is fully explored. Oleg Babinov  Head of Russia, Eastern Europe and Eurasia, Moscow
Published: 13th April 2012