Valdai Club

Now, when the contours of the sanctions restrictions of the collective West in relation to Russia have taken their almost-complete shape, the need for a revision of the system of Russian foreign economic relations is becoming obvious. In the context of the forced break and undocking of many previously seemingly unshakable economic ties with the EU countries, Russian state and business structures have much more actively than before begun to pay attention to the geographically more distant, but so far politically relatively neutral nations of Southeast Asia, united as the ASEAN trade bloc. However, are there any real grounds that amid the new geo-economic and geopolitical conditions, Russia and the ASEAN countries will be able to build up economic cooperation, and perhaps even elevate it to a qualitatively new level?

In order to answer this question, let us turn to a retrospective of economic relations between Russia and ASEAN. Despite dynamic economic growth and the prospects of emerging markets (according to estimates, more than 670 million people live in ASEAN, and the total GDP of all members of the Association in 2021 amounted to $3 trillion, the countries of Southeast Asia, even in geopolitically calmer times, were not among the leading economic partners of the Russian Federation. In turn, Russia has traditionally found itself at the very bottom of dozens of key ASEAN trade and economic counterparties, significantly inferior in terms of trade turnover and investment to China, the United States, Japan, South Korea and even India.

During the 2000s and 2010s two models of economic relations between Russia and ASEAN have successively replaced each other. Until 2014, there was moderate but steady growth in trade. The main drivers of socio-economic interaction were the massive flows of Russian tourists to the countries of the region, the careful interaction of small and medium-sized businesses, the use of the economic legacy of the Soviet era (one of the examples is the work of Vietsovpetro in Vietnam and Petro-Vietnam in Russia) and the search for new economic initiatives. Some interesting projects were among them, such as, for example, the plan to build a nuclear power plant in Vietnam or the construction of a railway on the island of Kalimantan (Indonesia), but they have not yet been implemented by Rosatom and Russian Railways, respectively.

After 2014, when limited sanctions were imposed on Russia, the trade and economic interaction between Russia and ASEAN sank noticeably. If in 2014 the trade turnover showed the most successful indicator for the entire period of relations between Russia and ASEAN at $22.5 billion, then the next year it amounted to only $13.9 billion. Nevertheless, the search for acceptable formats for economic cooperation continued.

The period from 2014 to 2021 saw the emergence of the second model of economic relations between Russia and ASEAN. It was characterised by the fact that through trial and error in the highly competitive market of the countries of Southeast Asia, certain niches were found to promote a more comprehensive economic partnership between Russia and ASEAN. These include military-technical cooperation, energy, cooperation in the field of agriculture, information technology, medicine, and the tourist flow recovering after the decline in 2015. In 2016, the FTA of the Eurasian Economic Union with Vietnam began to operate — the first such agreement between the EAEU and one of the ASEAN countries.

By 2018, according to the Stockholm International Peace Research Institute (SIPRI), Russia came out on top in arms supplies to the region.

The data was calculated using the TIV (Trend indicator value) evaluation indicator, which does not provide an idea of ​​the real financial cost of weapons, but demonstrates the main trends associated with the dynamics of changes in the main suppliers. The positive dynamics of military-technical cooperation was accompanied by the active development of defence diplomacy, joint emergency response programmes, and cooperation in the field of counterterrorism.

Trade again showed a high degree of dependence on the geopolitical situation, demonstrating moderate growth under favourble external conditions and a fall in the years of geopolitical cataclysms. By 2021, according to ASEAN data, the trade turnover of the Association countries with Russia had reached 19.2 billion US dollars, having practically returned to the level of 2013-2014. Investment cooperation was still limited and, paradoxically, the ASEAN countries were much more active in this regard than Russia. Investment projects implemented by Thailand’s largest diversified conglomerate CP Group in the Kaluga region (pig breeding, feed production) and Vietnam"s TH True Milk in the Moscow region (dairy farming) have become real success stories.

Nevertheless, during this period, the influence of Western sanctions became more and more noticeable, which created obstacles to the implementation of a number of projects, both in terms of limiting the possibilities of financial transfers and in terms of the threat of secondary sanctions.

The American law CAATSA (Countering America’s Adversaries Through Sanctions Act), adopted in August 2017, first led to the stalling and then the cancellation in December 2021 of agreements for the supply of 11 Russian SU-35 fighters to Indonesia. In July 2022, the Philippines refused to purchase 16 Russian Mi-17 military transport helicopters.
   
Everything transformed radically when, after February 2022, Russia was forced to re-build its foreign economic policy, which clearly highlighted a number of so far remaining problems in the economic relations between Russia and ASEAN. It seems that it is precisely the degree of success and, most importantly, the promptness of their resolution that will show whether Russia and ASEAN are able to at least maintain and, at the maximum, increase their economic cooperation.

The disconnection of most Russian banks from the SWIFT system and the refusal of the Visa and Mastercard payment systems to work in Russia articulated the need for the countries to create their own infrastructure for financial and economic relations between Russia and ASEAN. Until 2022, among all the countries of the Association, only with Vietnam was an agreement reached on connecting this country to the Mir payment system. However, even in this case, as it was stated at the official level, only 40% of Vietnam’s banking infrastructure could accept payments using Mir cards.

Unofficial estimates, on the other hand, testified to significant difficulties in using Mir cards by Russian citizens in Vietnam.

Negotiations on using the Mir payment system and connecting to the financial messaging system of the Bank of Russia began with Myanmar during a visit to that country by Russian Foreign Minister Sergey Lavrov in August 2022. Similar plans were announced for Thailand and Indonesia. Establishing an appropriate infrastructure for using cards of the Russian payment system could significantly facilitate the organisation of tourist flows and increase the segment of trade in services in the total volume of bilateral trade between Russia and the ASEAN countries. However, to fully conduct business in each other's markets, an extensive system of correspondent relations between the banks of our countries is required, independently of the use of the dollar and the US banking infrastructure. The first steps in this direction were taken in July 2022, when VTB opened the possibility of dong-denominated money transfers to Vietnam.

No less significant is the accelerated development of transport infrastructure, which could link Russia and Southeast Asia via direct air and sea routes. Before the pandemic, direct flights from Russia were only to Singapore, Thailand and Vietnam. In early June 2022, FESCO launched a direct container shipping line on the  Vladivostok-Haiphong (Vietnam)-Ho Chi Minh City (Vietnam)-Ningbo (China)-Vladivostok route. In any event, a much denser infrastructure network is required.

Significant hopes were previously pinned on cooperation in the high-tech sphere, especially with Singapore, a regional technological, financial and transport hub. In 2017, the Russian Corporation Rostec opened the Centre for Foreign Promotion of Russian High-Tech Companies in that country. However, given the fact that Singapore has joined the anti-Russian sanctions, it is likely that many previously-established channels of interaction in the field of high technology will undergo a reconfiguration. In addition, one should take into account the fact that most of the large high-tech industries that Southeast Asia is now proud of are brought to the region by Japanese and Western TNCs and, more recently, by some Chinese companies. Their activities in the countries of Southeast Asia made it possible to involve a significant volume of local labor in industrial production, but have by no means always contributed to the formation of national innovation systems.

This situation was once aptly described by the well-known foreign publicist Joe Studwell as “un-technological development”. One of the current examples is the production of semiconductors. It is actively developing in Malaysia, Thailand, the Philippines and Vietnam, however, its driving forces are by no means local players, but the main world high-tech giants — American companies Intel, Micron, Texas Instruments, Amcor Technology, German Infineon Technologies, China’s Tongfu Microelectronics and others. Therefore, cooperation in this area requires extremely painstaking and lengthy work to find local partners — those who would have their own technological base and would not be afraid of secondary sanctions, or those for whom the Russian partners themselves would act as technology donors.

Amid the new conditions for Russia and the countries of the region, the imperative of maintaining mutually beneficial energy cooperation becomes fundamentally important. This applies both to the previously mentioned Russian-Vietnamese interaction and to relations with the main regional consumers of Russian energy resources. Despite pressure from the United States and its G7 partners to mobilise broad international support for the idea of ​​capping Russian oil prices, Indonesia has consistently viewed these proposals as unrealistic. Moreover, following the visit of Indonesian President Joko Widodo to Moscow in June 2022, the continuation of the joint project of Rosneft and the Indonesian state-owned company Pertamina to build an oil refinery in East Java was confirmed. 

A number of relatively new areas of economic cooperation appear to be mutually beneficial for Russia and Southeast Asia in the foreseeable future. These include cooperation in the fight against the COVID-10 pandemic and the achievement of sustainable development goals. The joint response to the challenges of the pandemic contributed to the expansion of cooperation in the biotechnology field (in 2021, the Vietnamese company Vabiotech launched the production of Russia’s Sputnik V vaccine). Renewable energy has become another area of ​​significant mutual interest (in July 2022, an agreement was reached between Russia and Vietnam to build a wind farm in the northwest of Vietnam).

As for traditional spheres of interaction like military-technical cooperation, in the new conditions Russia and the countries of Southeast Asia have yet to determine its future configuration. It is obvious that American pressure in this area will only increase. However, the US refusal to supply the latest types of weapons even to NATO allies (particularly indicative is Turkey’s exclusion from the F-35 fighter project) and the desire to destroy the already established cooperation of politically and ideologically close countries for the sake of the US interests (as happened in the case of Australia breaking the contract for the supply of French submarines in order to join the AUKUS military-technological association jointly with the United States and Great Britain), will give the ASEAN countries rich food for thought.