THE EASTERN PERSPECTIVE
Russia’s Pivot to the East and Comprehensive Eurasian Partnership
© RIA Novosti
In addition to its economic component, the Eastern Economic Forum to be held in Vladivostok in early September is a good occasion to talk about the political aspects of Russia's new role in Asia and Eurasia, and the country's participation in regional integration and cooperation processes. In the run-up to the forum, it makes sense to assess the key achievements and challenges of "Russia’s pivot to the East," as a complex process, including the development of eastern Russia, the formation of a new system of trade and economic relations with the countries of Asia and Eurasia, and the formation of institutions and cooperation forums within a broad Eurasian space.
Russia’s pivot to the East turned four this year. Much has been achieved during this time, but much remains a work in progress and certain projects haven’t even taken off. It has proven very difficult to overcome the colossal inertia associated with the "secondary nature" of the Eastern focus of Russia’s foreign and foreign economic policy relative to other geographical areas.
Perhaps we should start by defining the terms. First of all, it hardly makes sense to talk about "Russia’s pivot to the East." Russia, as was repeatedly noted by experts and officials of all levels, is not making any pivots. Of course, the term “pivot” itself is a bit deceptive. Perhaps it makes sense to qualify that it is not a "pivot away” but a "pivot toward." i.e., a comprehensive restructuring and diversification of the entire system of Russia's foreign policy and foreign economic relations toward Asia, with Siberia and the Far East playing the key role in this process. The progress made in this area is obvious, and the purpose of this article is not simply to tout the successes of Russian policy in Asia and Eurasia. Both at the national and international level, the "pivot to the East" has two key dimensions – economic and institutional. Let's begin with the latter.
From an economic perspective, there’s no need, in the summer of 2016, to prove that Russia is, in fact, pivoting to the East. It is there for everyone to see. Here are some figures. By 2016, gross Chinese investment in Russia reached $32 to $33 billion. If the Chinese experts calculated correctly, this means that China is already one of the world’s largest foreign investors in Russia, and the issue is about increasing Chinese investments, according to Valdai experts, not figuring out why China is not investing in Russia. As is known, China is the second largest trading partner of Russia, after the EU, with $68 billion in bilateral trade in 2015. The EU's share in Russian trade is falling, while China’s share is rising.
In 2015, China overtook Germany as Russia’s largest foreign trade partner. Exports from Russia to China, excluding oil and gas, have increased over the past 12 to 18 months. Trade in agricultural products, which Russian experts have been calling to expand for a long time now, is of particular importance. According to the Ministry of Economic Development, Russia’s supplies of dairy products to China grew by 62.4 percent in 2015, and bread by 162 percent, so it’s unlikely that the increase in trade was caused by the ruble’s depreciation.
Less spectacular but also revealing are the numbers on trade and economic relations with Russia’s other regional partners. In 2015, Russia’s exports to Vietnam increased by 28 percent in nominal terms compared with the previous year, while falling by 27% with Japan and Korea. In terms of volume, exports with all these countries increased – by 7 percent with Japan, by 20 percent with Korea, and by 28 percent with Vietnam. According to the Ministry for the Development of the Far East, the amount of investment attracted to the Priority Development Areas in the Far East amounted to 1.137 trillion rubles, or $17.5 billion, as of August 1, 2016. Most of these investments come from Russia, which proves the growing confidence of the private sector that the government mean business when they make plans to develop that region. The decision of Russian investors must serve as an example and an incentive for foreign companies, which can invest in the associated manufacturing facilities and services of Russia’s Far East.
The sheer number of human and scientific contacts, as well as business and political contacts, is another measure of the pivot’s effectiveness. In recent years, the situation on this front has changed dramatically. The number of meetings, visits and conferences increased many times over. As little as 10 to 15 years ago, it was impossible to imagine that Russia would participate in as many Asian events at all levels as European events. The Eastern Economic Forum has brought together dozens of regional and extra-regional participants in its second year of existence, clearly demonstrating that the pivot is real. Russia’s representation at forums like the East Asia Summit (EAS) and less official expert conferences has reached an entirely new level.
This is despite the fact that the pivot began several years before the unprecedented deterioration of Russia’s relations with the United States and Europe. The pivot, as a strategic development program, was officially announced in the first address of the newly elected President Vladimir Putin in the spring of 2012, when he stated that "Russia’s development trajectory is directed eastward in the 21st century (...) It’s our chance to take our rightful place in Asia Pacific – the world’s most rapidly and dynamically growing region."
The major difficulties involved in the pivot to the East include the enormous inertia that persists in Russia, a kind of "European curse" – a habit of measuring itself against how things are in the West. This often prevents the Russian government and businesses from seeing themselves as genuine partners in Asia and Eurasia. Certain Russian media outlets, as well as segments of society and the business community with a traditional focus on the West, put up fairly strong resistance to Russia pursuing greater cooperation with the East. Among other things, this leads to uncertainty in Asia, especially China, with regard to Russia being serious about its choice of long-term partners. There is also a popular Russian narrative about the need to clarify the relative status of the parties in Russia’s relationship with China, even though such debates have no practical significance. Russia is likened to China’s “big sister,” which is enough to turn people against establishing a deep relationship with the East. No less strange are the ideas about the need for a "division of labor" between Russia and China in Central Asia, with Russia providing security and China driving economic growth. This approach ignores the fact that Russia has long been a major contributor to the economic stability of Central Asian nations. Money transfers by labor migrants working in Russia form a major share of their home countries’ GDP. A significant portion of young and working age people from these countries are employed in Russia, which relieves social pressure. China, in turn, is already providing assistance to the Tajik and Afghan militaries in the form of weapons and military training. Therefore, attempting to define separate roles for Russia and China in their cooperation with the Central Asian countries would oversimplify the complex reality of regional cooperation.
Eurasian economic integration is one of the critical institutional components of the pivot to the East. The focus here is on achieving deep integration and lifting non-tariff barriers. Harmonizing Eurasian integration, which is the core of the broader international cooperation in Asia and Eurasia, with the Silk Road Economic Belt will not only mitigate the risk of competitive industries emerging within the open market of the Eurasian Economic Union (EAEU), but will also make this market complementary to other regional markets.
Therefore, the most important area of cooperation to consider in Asia and Eurasia is harmonizing not only these two major initiatives – the Eurasian economic integration and the Silk Road Economic Belt – but other regional projects as well. It is important to study the experience of alternative and parallel agreements in order to learn and use best practices in building a comprehensive Eurasian partnership.
The Trans-Pacific Trade Partnership (TTP) is the most developed of such initiatives. This agreement, which has yet to be ratified, represents an innovative hybrid type of international treaty. On the one hand, it is officially a trade agreement designed to compensate for the shortcomings of universal mechanisms of global governance in trade, such as the WTO. Therefore, the agreement covers carefully and in detail the issues of tariff regulation and the gradual elimination of tariffs for members. The schedule for phasing out or minimizing tariffs is fairly flexible, lasting up to 30 years in some cases. On the other hand, the TTP agreement focuses on issues beyond trade, such as relations between investors and governments, removing industry-specific technical barriers, and intellectual property. Clearly, the TTP rules were written by the United States for US companies. But this does not mean that Russia, China or other Eurasian and Asian partners cannot put these ideas to creative use as they build a comprehensive Eurasian partnership.
Trade liberalization across Eurasia will be of particular importance in the coming years. As we begin to discuss it, bear in mind that free trade areas as such, whether between Russia and China or between the EAEU and China, are of little value today. Historically, they have never contributed to peace or prosperity. For example, in the early 20th century, trade between the UK and Germany was actually free. These two countries were major trade and economic partners, but that did not prevent the tragic events of 1914-1918. Now, there is a free trade area between the United States and Mexico, which does not erase the physical dividing line in the form of walls and barbed wire between these two states. It is unlikely that Eurasia needs such free trade arrangements. As we know from history, free trade areas rarely lead to integration. On the contrary, more often than not, prematurely entering into free trade agreements keeps countries confined to their respective industrial niches, reduces labor mobility and eventually leads to stagnation.
We could create a free trade area overnight, but the number of exemptions from free trade arrangements could theoretically be so great that it would completely defeat the purpose of liberalizing trade in Eurasia. It is no coincidence that during the efforts to deepen European integration, which has remained the most successful example of lifting both tariff and non-tariff barriers, the focus was on standardizing and regulating investments and anti-monopoly policy. The issue of full trade liberalization was postponed until the Common Market was fully formed in the early 1990s.
Russia, China, the EAEU and other regional players in Eurasia must do much more than build a rudimentary free trade area. We must focus primarily on investment regulation and cooperation in the spheres of finance, standardization, environmental regulation and labor market regulation. We should also focus on increasing investment appeal and on the geographic distribution of investment. Cooperation is important in the transport and logistics sector, which everyone had high hopes for just a couple of years ago but which has continued treading water. There’s nothing to brag about yet. The Silk Road Foundation, whose capital stands at $40 billion, has implemented only four investment projects so far – including the $1.65 billion Karot dam in Pakistan, and the acquisition of a 9.9 percent stake in Yamal LNG from Russia’s Novatek. However, the creation of trans-Eurasian transport and logistics systems can attract investments in associated manufacturing and service industries. It can become a field of broad cooperation between development institutions such as the AIIB, EDB, BRICS Bank and others. Industrial cooperation is critical, especially given that Western countries will continue to ratchet up the sanctions pressure. Russia and China have already developed certain approaches to dealing with this situation.
With its flexible national currency, Russia has good chances of expanding its exports, and is not concerned by the liberalization of trade with China. We have all the necessary prerequisites to do so. But perhaps we should set our sights farther afield and start out with a long-range goal. In this sense, the prospective free trade area between the EAEU and China is only part of a comprehensive Eurasian partnership. There may be no partnership without a free trade area. Likewise, there may be no free trade area without a partnership. Any free trade area is part of a larger harmonization package.
The pivot to the East and the harmonization of various economic projects in Eurasia should bolster the EAEU and expand trade and economic relations among its participants. So far, the low level of trade within the EAEU is one of the most frequent criticisms of Eurasian integration.
New production facilities built within the comprehensive Eurasian partnership and expanded transport and logistics systems should focus on promoting trade and communication between the EAEU countries and regions. Unfortunately, companies and individual industries in member states are often plagued by inertia and are unable to clearly articulate their interests. The efforts to advance European integration come to mind. They included the improvement of market transparency and balanced state support in the form of "dirigisme” – the government would create favorable conditions for companies to pursue their economic activities, which would contribute to achieving the development goals of the countries participating in the integration effort.
The comprehensive Eurasian partnership, integration within the Eurasian Economic Union, the SCO, the Russia-ASEAN and ASEAN-EAEU talks, national efforts to develop Siberia and the Far East – these are all important political components of "Russia’s pivot to the East." Thus, the partnership’s institutional framework within the country and in its relations with external partners has effectively taken shape. The future agreement between the EAEU and China will be the critical piece of the international legal framework for relations in Eurasia and Asia. It will also probably be necessary to develop a set of bilateral and multilateral international legal instruments governing trade and investment relations between the countries of the region. The process of creating such a legal framework has been launched, which is another major achievement of "Russia’s pivot to the East."
Russia’s pivot to the East turned four this year. Much has been achieved during this time, but much remains a work in progress and certain projects haven’t even taken off. It has proven very difficult to overcome the colossal inertia associated with the "secondary nature" of the Eastern focus of Russia’s foreign and foreign economic policy relative to other geographical areas.
Perhaps we should start by defining the terms. First of all, it hardly makes sense to talk about "Russia’s pivot to the East." Russia, as was repeatedly noted by experts and officials of all levels, is not making any pivots. Of course, the term “pivot” itself is a bit deceptive. Perhaps it makes sense to qualify that it is not a "pivot away” but a "pivot toward." i.e., a comprehensive restructuring and diversification of the entire system of Russia's foreign policy and foreign economic relations toward Asia, with Siberia and the Far East playing the key role in this process. The progress made in this area is obvious, and the purpose of this article is not simply to tout the successes of Russian policy in Asia and Eurasia. Both at the national and international level, the "pivot to the East" has two key dimensions – economic and institutional. Let's begin with the latter.
From an economic perspective, there’s no need, in the summer of 2016, to prove that Russia is, in fact, pivoting to the East. It is there for everyone to see. Here are some figures. By 2016, gross Chinese investment in Russia reached $32 to $33 billion. If the Chinese experts calculated correctly, this means that China is already one of the world’s largest foreign investors in Russia, and the issue is about increasing Chinese investments, according to Valdai experts, not figuring out why China is not investing in Russia. As is known, China is the second largest trading partner of Russia, after the EU, with $68 billion in bilateral trade in 2015. The EU's share in Russian trade is falling, while China’s share is rising.
In 2015, China overtook Germany as Russia’s largest foreign trade partner. Exports from Russia to China, excluding oil and gas, have increased over the past 12 to 18 months. Trade in agricultural products, which Russian experts have been calling to expand for a long time now, is of particular importance. According to the Ministry of Economic Development, Russia’s supplies of dairy products to China grew by 62.4 percent in 2015, and bread by 162 percent, so it’s unlikely that the increase in trade was caused by the ruble’s depreciation.
Less spectacular but also revealing are the numbers on trade and economic relations with Russia’s other regional partners. In 2015, Russia’s exports to Vietnam increased by 28 percent in nominal terms compared with the previous year, while falling by 27% with Japan and Korea. In terms of volume, exports with all these countries increased – by 7 percent with Japan, by 20 percent with Korea, and by 28 percent with Vietnam. According to the Ministry for the Development of the Far East, the amount of investment attracted to the Priority Development Areas in the Far East amounted to 1.137 trillion rubles, or $17.5 billion, as of August 1, 2016. Most of these investments come from Russia, which proves the growing confidence of the private sector that the government mean business when they make plans to develop that region. The decision of Russian investors must serve as an example and an incentive for foreign companies, which can invest in the associated manufacturing facilities and services of Russia’s Far East.
The sheer number of human and scientific contacts, as well as business and political contacts, is another measure of the pivot’s effectiveness. In recent years, the situation on this front has changed dramatically. The number of meetings, visits and conferences increased many times over. As little as 10 to 15 years ago, it was impossible to imagine that Russia would participate in as many Asian events at all levels as European events. The Eastern Economic Forum has brought together dozens of regional and extra-regional participants in its second year of existence, clearly demonstrating that the pivot is real. Russia’s representation at forums like the East Asia Summit (EAS) and less official expert conferences has reached an entirely new level.
This is despite the fact that the pivot began several years before the unprecedented deterioration of Russia’s relations with the United States and Europe. The pivot, as a strategic development program, was officially announced in the first address of the newly elected President Vladimir Putin in the spring of 2012, when he stated that "Russia’s development trajectory is directed eastward in the 21st century (...) It’s our chance to take our rightful place in Asia Pacific – the world’s most rapidly and dynamically growing region."
The major difficulties involved in the pivot to the East include the enormous inertia that persists in Russia, a kind of "European curse" – a habit of measuring itself against how things are in the West. This often prevents the Russian government and businesses from seeing themselves as genuine partners in Asia and Eurasia. Certain Russian media outlets, as well as segments of society and the business community with a traditional focus on the West, put up fairly strong resistance to Russia pursuing greater cooperation with the East. Among other things, this leads to uncertainty in Asia, especially China, with regard to Russia being serious about its choice of long-term partners. There is also a popular Russian narrative about the need to clarify the relative status of the parties in Russia’s relationship with China, even though such debates have no practical significance. Russia is likened to China’s “big sister,” which is enough to turn people against establishing a deep relationship with the East. No less strange are the ideas about the need for a "division of labor" between Russia and China in Central Asia, with Russia providing security and China driving economic growth. This approach ignores the fact that Russia has long been a major contributor to the economic stability of Central Asian nations. Money transfers by labor migrants working in Russia form a major share of their home countries’ GDP. A significant portion of young and working age people from these countries are employed in Russia, which relieves social pressure. China, in turn, is already providing assistance to the Tajik and Afghan militaries in the form of weapons and military training. Therefore, attempting to define separate roles for Russia and China in their cooperation with the Central Asian countries would oversimplify the complex reality of regional cooperation.
Eurasian economic integration is one of the critical institutional components of the pivot to the East. The focus here is on achieving deep integration and lifting non-tariff barriers. Harmonizing Eurasian integration, which is the core of the broader international cooperation in Asia and Eurasia, with the Silk Road Economic Belt will not only mitigate the risk of competitive industries emerging within the open market of the Eurasian Economic Union (EAEU), but will also make this market complementary to other regional markets.
Therefore, the most important area of cooperation to consider in Asia and Eurasia is harmonizing not only these two major initiatives – the Eurasian economic integration and the Silk Road Economic Belt – but other regional projects as well. It is important to study the experience of alternative and parallel agreements in order to learn and use best practices in building a comprehensive Eurasian partnership.
The Trans-Pacific Trade Partnership (TTP) is the most developed of such initiatives. This agreement, which has yet to be ratified, represents an innovative hybrid type of international treaty. On the one hand, it is officially a trade agreement designed to compensate for the shortcomings of universal mechanisms of global governance in trade, such as the WTO. Therefore, the agreement covers carefully and in detail the issues of tariff regulation and the gradual elimination of tariffs for members. The schedule for phasing out or minimizing tariffs is fairly flexible, lasting up to 30 years in some cases. On the other hand, the TTP agreement focuses on issues beyond trade, such as relations between investors and governments, removing industry-specific technical barriers, and intellectual property. Clearly, the TTP rules were written by the United States for US companies. But this does not mean that Russia, China or other Eurasian and Asian partners cannot put these ideas to creative use as they build a comprehensive Eurasian partnership.
Trade liberalization across Eurasia will be of particular importance in the coming years. As we begin to discuss it, bear in mind that free trade areas as such, whether between Russia and China or between the EAEU and China, are of little value today. Historically, they have never contributed to peace or prosperity. For example, in the early 20th century, trade between the UK and Germany was actually free. These two countries were major trade and economic partners, but that did not prevent the tragic events of 1914-1918. Now, there is a free trade area between the United States and Mexico, which does not erase the physical dividing line in the form of walls and barbed wire between these two states. It is unlikely that Eurasia needs such free trade arrangements. As we know from history, free trade areas rarely lead to integration. On the contrary, more often than not, prematurely entering into free trade agreements keeps countries confined to their respective industrial niches, reduces labor mobility and eventually leads to stagnation.
We could create a free trade area overnight, but the number of exemptions from free trade arrangements could theoretically be so great that it would completely defeat the purpose of liberalizing trade in Eurasia. It is no coincidence that during the efforts to deepen European integration, which has remained the most successful example of lifting both tariff and non-tariff barriers, the focus was on standardizing and regulating investments and anti-monopoly policy. The issue of full trade liberalization was postponed until the Common Market was fully formed in the early 1990s.
Russia, China, the EAEU and other regional players in Eurasia must do much more than build a rudimentary free trade area. We must focus primarily on investment regulation and cooperation in the spheres of finance, standardization, environmental regulation and labor market regulation. We should also focus on increasing investment appeal and on the geographic distribution of investment. Cooperation is important in the transport and logistics sector, which everyone had high hopes for just a couple of years ago but which has continued treading water. There’s nothing to brag about yet. The Silk Road Foundation, whose capital stands at $40 billion, has implemented only four investment projects so far – including the $1.65 billion Karot dam in Pakistan, and the acquisition of a 9.9 percent stake in Yamal LNG from Russia’s Novatek. However, the creation of trans-Eurasian transport and logistics systems can attract investments in associated manufacturing and service industries. It can become a field of broad cooperation between development institutions such as the AIIB, EDB, BRICS Bank and others. Industrial cooperation is critical, especially given that Western countries will continue to ratchet up the sanctions pressure. Russia and China have already developed certain approaches to dealing with this situation.
With its flexible national currency, Russia has good chances of expanding its exports, and is not concerned by the liberalization of trade with China. We have all the necessary prerequisites to do so. But perhaps we should set our sights farther afield and start out with a long-range goal. In this sense, the prospective free trade area between the EAEU and China is only part of a comprehensive Eurasian partnership. There may be no partnership without a free trade area. Likewise, there may be no free trade area without a partnership. Any free trade area is part of a larger harmonization package.
The pivot to the East and the harmonization of various economic projects in Eurasia should bolster the EAEU and expand trade and economic relations among its participants. So far, the low level of trade within the EAEU is one of the most frequent criticisms of Eurasian integration.
New production facilities built within the comprehensive Eurasian partnership and expanded transport and logistics systems should focus on promoting trade and communication between the EAEU countries and regions. Unfortunately, companies and individual industries in member states are often plagued by inertia and are unable to clearly articulate their interests. The efforts to advance European integration come to mind. They included the improvement of market transparency and balanced state support in the form of "dirigisme” – the government would create favorable conditions for companies to pursue their economic activities, which would contribute to achieving the development goals of the countries participating in the integration effort.
The comprehensive Eurasian partnership, integration within the Eurasian Economic Union, the SCO, the Russia-ASEAN and ASEAN-EAEU talks, national efforts to develop Siberia and the Far East – these are all important political components of "Russia’s pivot to the East." Thus, the partnership’s institutional framework within the country and in its relations with external partners has effectively taken shape. The future agreement between the EAEU and China will be the critical piece of the international legal framework for relations in Eurasia and Asia. It will also probably be necessary to develop a set of bilateral and multilateral international legal instruments governing trade and investment relations between the countries of the region. The process of creating such a legal framework has been launched, which is another major achievement of "Russia’s pivot to the East."
Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.
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