The Bear and the Panda Waltz

Putin wants Russia to look east, where countries like China have a huge appetite for resources, but problems such as corruption and government interference stand in the way.

China and Russia should be natural economic partners. Russia has vast natural resources, including some of the world’s largest deposits of oil, natural gas, coal, iron ore, gold and diamonds. Its little-populated areas bordering China contain large untapped hydroelectric resources that could provide the electricity China craves.

A quick train shipment across the Russian border should have a clear advantage over shipments of coal or iron ore from Australia or Brazil, which take weeks by ship. With Asian economies now consuming about half of globally produced aluminum and coal, around 60 percent of iron ore, and 40 percent of copper, nickel and zinc, according to Russian estimates, ramping up trade seems like a no-brainer.

Russia and China pledged to double trade from US$ 83 billion last year to US$ 200 billion in 2020 at a summit between President Hu Jintao and Russian President Vladimir Putin in June. Yet  Sino-U.S. trade already exceeds US$ 500 billion.

How to accelerate Asian trade and investment in Russia was on the minds of many Russians at the annual St. Petersburg International  Economic Forum at the end of June. St. Petersburg was built by Peter the Great in 1705 as a new capital to open Russia to the outside world. But where Peter looked west, Putin looks east. Putin, who in May was sworn into his third term in office, has set a target of US$ 100 billion in annual trade with China by 2015. In April, Vice Premier Li Keqiang signed 27 agreements totaling US$ 15 billion during a visit to Russia.

Oleg Deripaska, one of Russia’s most prominent businessmen and probably the most influential voice in the business community calling for closer economic ties with China, thinks trade and investment can grow much faster. Deripaska’s EN+ Group has set up a joint venture with China Yangtze Power to build up to 10 gigawatts of new hydropower plants in Siberia with a view to exporting electricity to China, much as Quebec does to New York and New England across the U.S.-Canada border. In June, Rusal signed a preliminary agreement for up to US$ 850 million in financing from the China Export-Import Bank for an aluminum-related factory in Siberia.

Russia’s challenge is clear: most Russian resources are in the eastern two-thirds of the country –Siberia and the Far East are home to 70 percent of the country’s natural resources. But most Russians live in the west – more than 80 percent are in the European part. Siberia and the Far East together are 36 percent bigger in size than China, yet the 38 million people who live there don’t even equal the combined populations of Beijing and Shanghai.

Although Russian policy-makers know Chinese investment and labor could help tap these resources, many worry that China might end up with too much influence – or perhaps, in a worst-case scenario, even make a grab for Russian territory.

In his May inauguration speech, Putin stressed Russia’s “determination in developing its vast expanses from the Baltic to the Pacific.”  Putin set up a new Ministry for Far East Development . There’s discussion on a super-regional authority, something like the Tennessee Valley Authority in the United States. Russia’s aspirations are large, and under the new Putin administration it’s clear that serious attention is being given to the region.

But there are challenges aplenty. There is a lack of trust by many foreigners. Russia’s endemic corruption is not unique. Neither is its creaky bureaucracy and shambolic legal system. But all these are a big deterrent to foreign businesses, who often aren’t sure whether they’re truly welcome.

South Korea’s  Hyundai group has been investing in the Russian Far East and Siberia for over 20 years, in everything from forestry and agriculture to hotels to manufacturing. Yang Bong-jin, CEO of South Korea’s Hyundai Energy and Resources, laments that it took over two months for the company to get an Internet connection after it recently moved offices. He notes that government permission is needed for normal business activities. Hyundai has long had ambitions to build a natural gas pipeline to Korea. But Russian prices can be nearly ten times the price in the United States, one of many issues that have stalled a natural gas pipeline to China as well. Still, Hyundai is interested in the region. It is investing US$ 40 million in a manufacturing plant and trying to double the 20,000 hectares of farmland it has in the Far East, where it grows corn and soybeans.

Peter the Great founded St. Petersburg because he wanted to open up trade with Europe. Some people suggest that if he were ruling Russia today he would move the capital to Vladivostok as a way of forcing Russians to look to the fast-growing Asian-Pacific economies. Sure enough, billions of dollars are going in to infrastructure development ahead of this autumn’s Asia Pacific Economic Cooperation meeting in Vladivostok. There’s a beautiful new bridge being built to Russky Island, where the summit will be held. Russia’s neighbors hope that is bridge symbolizes newfound links with its Pacific neighbors.

This article was originally published in Caixin