Global Governance
Renewed Twist for a New East

The tactical tasks of adapting Russia to the new situation are directly related to the current crisis: a “turn to the East” is necessary for the transition from economic recession to growth. In this regard, the most important task is to restore and increase the volume of Russian-Asian trade. However, these tactical issues have little to do with macro trends and their solution will not ensure the long-term and successful involvement of Russia in the new Asia, writes Anastasia Likhacheva, Director of the Centre for Comprehensive European and International Studies (CCEIS) of the Higher School of Economics, who participated in the 11th Valdai Club Asian Conference.

Just as old phone models are sometimes unable to run new software, so Russia’s Turn to the East policy, which has been in place for a decade and achieved a number of successes, must either dramatically increase capacity for the new demands of Asia, or start to “freeze”. The participants of the 3rd session of the 11th Valdai Club Asian Conference spoke about the reserve capacities of Russian politics and new trends in the development of Asia.

East Vol.2.0.2.0

The pandemic and the countries’ response to it have sharply accelerated trends that have been developing exponentially in Asia for several years. Asia’s increasingly inward focus in consumption, lending, institutions, accelerated digitalisation and the growth of intraregional connectivity, is sometimes merely symbolic, such as the signing of an agreement on RCEP, but at other times is quite active, through trade, investment, and person-to-person contacts. The closed borders of other countries and regions have only activated these trends. This is aside from the obvious success of the Asian countries, both in the fight against the pandemic, and in economic development against its background — this ‘victory of the East’ was stressed by all of the participants of the session, without exception.

The new configuration presupposes the ambitious tasks that the region sets for itself today. According to one of the speakers, Anton Tsvetov, Deputy Director of the Department of Multilateral Economic Cooperation and Special Projects of the Ministry of Economic Development of the Russian Federation, the troika can be defined as follows:

1. Digital leadership: At the industry level, this means an increasingly significant superstructure of technology over the resource-intensive economy of Asia and, more rapidly than in the West, over the economy of traditional services. According to Professor Wang Wen, Executive Dean of the Chongyang Institute for Financial Studies at Renmin University of China, humanity will finally move into the digital era by 2025, when 90% of the population will use digital technologies — online shopping, online education, telemedicine etc., but the digital divide between countries is likely to widen; The East is more inclined to introduce fundamentally new systems and approaches. Already more than 40% of online purchases are made in Asia, and by 2030 more than 50% of Internet users will be concentrated there. These are colossal opportunities for the industries of the digital economy.

Digital Economy Development
Progress in digital technology has created tremendous wealth concentrated in a small group of individuals, companies and countries.
Infographics


2. From quantity to quality: Asian countries are faced with the task of transitioning to intensive growth, improving its quality, and the mitigation of existing imbalances (urban versus rural, economic inequality, economy versus environment). The demand for a high-quality digital contactless infrastructure, resistant to emergencies, for green technologies and the development of social environment (healthcare, education) will increase. Against the backdrop of the damage from the pandemic, which the countries of the West have already faced, the East has gained at least a few years for development, while elsewhere, nations are engaged in compensating for their failures.

3. Regionalisation: By 2040, more than half of Asia’s trade and investment will be intraregional. This cannot but lead to profound changes in the global financial system, created after World War II, which does not reflect the role of new leaders.

The locomotive of these changes in Asia has already become China, the first country to face the coronavirus and so far the most dynamic country in the year 2020. This success is already influencing its vision of the future. So, the policy of dual circulation — the priority of domestic production and domestic consumption, will be strengthened: in May, Xi Jinping spoke about the need to gradually create a new development situation, but a month later he already emphasised that the process needs to be accelerated, to which Professor Alexander Lomanov, Deputy Director for Scientific Work at the Primakov Institute of World Economy and International Relations (IMEMO), drew the attention of the session participants.

Nevertheless, the effects of dual circulation are still ambiguous, and diametrically opposed expert opinions were voiced at the session. The first stressed the preservation of openness, which presupposes that the Chinese economy will remain as open as it has been or become even more open, which will presuppose, in particular, the preservation of the philosophy of the Belt and Road project and the strengthening of regional integration with the participation of China. This point of view was supported by the Chinese participants in the session, and official PRC sources share it. The alternate view can be described as sceptical and wary: the doors of the Chinese economy will not be closed, but the priority of domestic production will inevitably lead to a reduction in imports of foreign goods. The latter is important for Russia and Eurasia as a whole, since such a prospect portends the formation of two economic and technological poles, the centre of one will be China. As a result, according to Alexander Lomanov, “Russia will have to think over to which of the two Easts to turn to.”

At the same time, the second-largest economy of the region, Japan, is trying not to remain in the position of a passive observer. Taisuke Abiru, Senior Research Fellow at the Sasakawa Peace Foundation, repeatedly noted in his speech Japan’s desire to balance the strengthening of China in the region, which implies both more active involvement of the United States in Asian affairs (and this approach, of course, separates Russia and Japan), and the search for a third force for those countries that do not want to choose between the United States and China, first of all — the ASEAN countries. Such a request is fully correlated with the role that Russia can play in Asia, and which Japan welcomes.

Turn Vol 2.0.2.0.

The tactical tasks of adapting Russia to the new situation are directly related to the current crisis: a “turn” is necessary for the transition from economic recession to growth. In this regard, the most important task is to restore and increase the volume of Russian-Asian trade, first of all, trade with China. However, these tactical issues have little to do with macro trends and their solution will not ensure the long-term and successful involvement of Russia in the new Asia.

Global Governance
A New Round of Global Competition Proves Necessity of Russia’s “Pivot” to the East
Feng Shaolei
Globally, we are witnessing four trends. First, through the diplomatic intercession of the United States, the United Arab Emirates has established diplomatic relations with Israel, Serbia and Kosovo have agreed upon economic cooperation, and under heavy American pressure, Germany has become tougher in its approach to the alleged poisoning of the Russian opposition leader and the crisis in Belarus, even indicating the possibility that it may abandon the Nord Stream 2 pipeline.
Expert Opinions


Two strategic difficulties that will require a significantly greater intensity of Russia’s activity in the region are the new sectoral content of cooperation and adaptation to new models of regional integration in Asia.

1. The new sectoral content of economic cooperation is closely related to the adaptation to the new development strategy of China. The dual circulation policy means that although the export of raw materials will continue to be relevant, it is necessary to think about other areas. The leaders of Russia and China, in their talks on July 8, 2020, identified four issues: supplies of hydrocarbons; the ‘peaceful atom’; civil aircraft construction; and scientific, technical and innovative cooperation. However, these are also issues which will affect cooperation with other Asian countries — for them, China as a “thing in itself” may even be a greater challenge.

2. Adaptation to regional integration models. It can be expected that the signed RCEP agreement will accelerate economic rapprochement between the economic giants of northeast Asia (China, Japan, South Korea). With its relatively modest trade effects, which many of the session participants spoke about, RCEP will help redirect investment from China, Japan and South Korea to the ASEAN countries. However, the priorities of China, Russia’s main trading partner in the region, are not limited to RCEP. According to Xi Jinping’s statements, there are plans to speed up negotiations on an investment treaty between China and the EU, speed up negotiations on an FTA between China and Japan, and to consider China’s entry into the updated TPP. These are the directions that China will develop, and as it accumulates economic power, the standards that were unaffordable for it 5-10 years ago will become quite simple for China in 5-10 years. None of China’s priorities include Russia, so the institutionalisation of Russia’s turn to the East is becoming an increasingly urgent problem.

Moreover, even more traditional questions regarding the development of value chains remain ambiguous; this was emphasised by Anton Tsvetov in his speech. It is not completely clear how, amid a combination of trends (regional integration and technological changes), value chains will develop: they can be shortened (production can move closer to the consumer), replicated, (i.e. copies of the VAC will appear in different parts of the world), or just diversify. Each of the scenarios assumes a different role for Russia in these processes: whether it is the creation of industrial clusters in the Far East, on which Han Hongyul, Professor of the Department of Economics at Hanyang University, insisted, or the development of joint IT solutions and scientific research ventures.

However, the pivot to the East also has a deep internal Russian dimension. Now it is at a fork in the road: it faces either the inertia generated by export successes or new complications which threaten to derail the entire policy. To remain attractive, both within Russia and in Asia, the Pivot’s policies must become more multidimensional. This suggests that it may be more difficult for Russia and Asian countries to agree on certain issues, and that Russia will become a more complex partner.

However, unlike Western countries, a strong Russian economy is not perceived in Asia as a threat, and the absence of this fear is a valuable asset. Russia can play the role of a balancer, a third power in Asia, but this role should not be limited to the supply of oil or wheat. Of course, the initial prerequisites for the Turn to the East, the demand for resources and water-intensive products, are justifying themselves now: even during a crisis, Russian agro-industrial complex exports to the region are posting double-digit growth. However, the goal of turning to the East has never been simply to make more money for a narrow number of beneficiary companies.

To overcome inertia and achieve more ambitious goals, the following problems need to be solved:

— lack of home effects: the localisation of the production of equipment for export-oriented projects is needed, especially including especially including joint scientific research ventures, and the attraction of regional contractors as well as small and medium-sized businesses.

— non-added value: this requires trade liberalisation, since goods with high added value are more dependent on various kinds of barriers: importers usually do not engage in restrictions on the supply of resources being demanded. But to participate in the distribution of higher sections of the “chain”, more advanced FTZs are needed, including the elimination of tariff barriers, easier access for Russian IT-developments in Asia, more Russian companies operating in Asia, and Russian-Asian intermediary companies, as well as Russia’s active participation in the establishment of new rules of the game in the digital sphere.

— exceptional elitism: due to the absence of Asian diasporas, Russia needs to make “advanced” efforts to create an extensive network of guides to the region. Support for the pivot at the highest level has played a decisive role in its success: the heads of state and diplomats have done successful work to bring Russia and the Asian countries closer together, and have created or renewed an extensive network of institutions and platforms for interaction. But these networks should be filled not only by the mega-projects of large corporations, but also by small and medium-sized enterprises, personal contacts, micro-business, tourism, joint scientific developments, and an active dialogue not only between governments, but also between regions — especially those located in Asia and able to work with it — the Far East and Siberia.

However, unlike new digital trends or demand for certain resources, the impetus for solving the indicated internal Russian problems will not come from Asia. However, without solving these problems, apparently, it will be extremely difficult for Russia to effectively integrate into the Asian region as a significant economic and technological player, and the barriers around Asia will increase — simply due to the increased self-sufficiency and development of Asia itself.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.