Russia runs from its own shadow

26.11.2013 — Analysis

To the Far East, which is quite a hard nut to crack.

Russian President Vladimir Putin offered South Korea to join the Customs Union. Experts think that this offhand proposal is aimed at retention and development of the eastern regions of the country with the help of Korean technologies. In the meantime, the economic integration of the countries is not going to take place in the near future: the remote regions of our country can hardly be seen as appealing to investors. Therefore, the elimination of the customs barriers will just speed up the further flight of capital and technology from Russia to Korea, and not the other way around.

As the columnist of RusBusinessNews has found it out, the Far East and Eastern Siberia will have a strategic investor, if the country is able to prove its soundness in the confrontation with the industrialized countries interested in weakening and alienation of eastern territories of the Russian Federation. However, soundness cannot be proved if Russian people do not trust their own government.

In the recent years, the Russian and Korean trade relations have been steadily improving. According to the data from Galina Kovaleva, the head of the sector of the Institute of Economics and Organization of Industrial Production at the Siberian Department of the Russian Academy of Sciences, from 2008 to 2011 the exports grew by 170%. Russian companies exported coal, aluminum alloys, oil, petroleum products, pulp, urea, timber, furniture boards, prefabricated structural timberwork, etc. The product portfolio also includes high-tech items: an electron accelerator, plasma equipment, electrode boilers, diode pumps, various measuring instruments, electrical equipment, etc.

The growth rate of imports from Korea was more moderate: in 2011 the imports totaled 109% as compared to 2008. Contrary to the established opinion, consumer goods accounted for a modest share of the total imports. The preference was given to industrial products. However, the volume of supply was not high, and in 2011 Russia had a surplus of 1.7 billion dollars in the trade with the Koreans.

Despite the obvious upward trend, the economic links between Russia and South Korea are still weak. Alexander Zhebin, the director of the Center for Korean Studies at the Institute of the Far East of the Russian Academy of Sciences, estimated that the Korean investment in Russia had totaled only 3 billion dollars over 23 years – the amount equal to Korea’s annual investment in China. The Russian and Korean foreign trade turnover in absolute terms is also not impressive: In 2012 it was less than 25 billion dollars, while the sales between China and Korea amounted to 250 billion dollars. In terms of the bilateral trade turnover Celestial China outperformed Japan and the United States, which are strategic allies of South Korea. This pronounced dependence on the particular economic partner worries the Korean government that started to cast glances at Russia.

Both parties demonstrate interest in each other. The Russians invite partners to cooperate in outer space, to build railroad infrastructure, to create shipbuilding centers, to develop nano and bio-technology. The Koreans are interested in diversification of supplies to the country of energy resources, which is impossible without Russia’s participation. For several years the parties have been negotiating construction of a gas pipeline, a power transmission line and reconstruction of the Trans-Korean Railroad; however, the projects remain at a standstill. A number of experts have some lingering hope that the development of economic relations with Russia will help settle differences between North and South Korea, thus revitalizing the projects essential for South Korea. However, the question remains open whether these hopes are viable.

Igor Yushkov, an analyst of the National Energy Security Fund, thinks that the gas pipeline will not be built either across land (through the Democratic People’s Republic of Korea) or across the sea. Only supplies of liquefied natural gas look feasible, but there is no need to invite Korea to join the Customs Union: LNG is duty-free. On the other hand, to start supplies there must be an LNG plant constructed, but Gazprom has a tough time with the investment in the Vladivostok-LNG project. The Japanese who were lured into the project put the negotiation on hold. President Putin may have decided to give them a nudge with his impromptu invitation of the Korean to cooperation.

The expert tends to take a dim view of the Customs Union: Russia gains no economic benefits as it has to back up Belarus. In the meantime, Belarusian President Alexander Lukashenko announces in mass media that the Belarusian budget shrank by 8 billion dollars due to Belarus’ joining the Customs Union and presses for refunding of customs duties and excise taxes on light petroleum products. I. Yushkov hopes that the intricate relationships will caution Russia against hasty elimination of the customs barriers. The duty-free importation of goods will seriously damage a number of industries: Goods will start coming in a continuous flow from South Korea, but investment in our country will remain low.

G. Kovaleva pointed out a curious fact: After the Customs Union had been organized, Russian businessmen started opening enterprises in Kazakhstan. They were not expected and obstacles were thrown in their way, however the business climate was so beneficial that entrepreneurs began to get customs clearance for their goods intended for Russia. As a result, the Russian investment in the Kazakh economy outweighed the expected benefits. The expert thinks that that same situation can be expected from the relationship with Korea: Instead of creating conditions for attracting investors, join projects can be simply talked round.

The past experience of Russian and Korean cooperation is a convincing example that the above scenario is quite realistic. The Far East Shipbuilding and Ship Repair Center, a subsidiary of the United Shipbuilding Corporation, a state-owned holding company, set up a joint venture with Daewoo Shipbuilding & Marine Engineering Co., Ltd to build the Zvezda shipyard. In 2012, the joint venture was wound up due to the schedule slippage, while tankers and liquefied gas carriers required by Russian companies were promptly and properly manufactured by the Koreans at their own shipyards.

Today, new attempts are being made to start manufacturing LNG carriers at Far-Eastern Zvezda. It is highly questionable whether the Koreans will have enough patience this time. The experts point out the fact that the Russians have forgotten not only how to build ships, but also how to develop deposits, produce electric power and even catch fish.

For example, the Basic Element Industrial Group owned by Oleg Deripaska invited POSCO, a South Korean company, to take part in the construction of a steel-making plant and the Lenskaya Power Plant as well as to explore and develop the gas field, the gas from which will be used in production of electricity.

In their turn, the Russian government announced that it would not grant permits to the fishing companies that are illegally controlled by foreign capital. According to the data from the RF Federal Antimonopoly Service, foreigners are present almost in all fishing companies in the Far East. In fact, the seafood harvesting in the Russian waters is controlled by the Chinese, Koreans, Japanese and Americans.

In this connection, the experts note that the attempts of the government to impose control over the Far Eastern economy can stumble across the resistance of the forces that spare no effort in trying to squeeze Russia out of the European space and make it turn east and south-east. Stepan Sulakshin, the General Director of the Center of Scientific Political Thought and Ideology, states that this turn is speeded up along the Russia – West line in the political, military, economic and humanitarian areas. However, the paradox is that the main geopolitical dictator in the south-east remains the same: the military and political alliance headed by the USA.

Having dominance in South-East Asia, the United States is driven by mercenary motives: weakening and alienation of the eastern regions of Russia rather than their strategic development. That is why the opportunity of having South Korea as a strategic investor should not be overestimated. That country is unlikely to move further than expanding of the market for finished high-tech products.

If Russia intends to retain the Far East, it should restore its influence in the region, which is impossible without winning the economic war with the "potential enemy". "Russia cannot run away from its own shadow formed as a Russia – USA confrontation axis and political temperature in its surroundings," S. Sulakshin has no doubt.

Vladimir Terletsky