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Why Asia Is Russia's Best Insurance Against Sanctions

Fishing on the Chinese side of the Heixiazi Island, a border island that links China and Russia.
Fishing on the Chinese side of the Heixiazi Island, a border island that links China and Russia.
Aleksandr Gabuev

MOSCOW — The Kremlin is already busy looking for ways to compensate for the economic hit that could come if sanctions get worse or Western businesses start to shy away from working in Russia. And the direction Moscow is looking is decidely to the east.

Actively developing relationships with East Asia was on Moscow’s mind even before the crisis in Ukraine and impending sanctions imbued the issue with more urgency. Last September, the process of developing Russia’s own Far East was radically overhauled in an effort to stimulate growth. Now developing connections with Asia looks like one of the best insurance policies in the event that the West imposes paralyzing sanctions, a source in the Russian government told Kommersant.

According to Sergei Men, a managing partner at the Hong Kong investment boutique Eurasia Capital Partners, Asia is the best alternative to the current over-reliance on the European market.

The countries of East and Southeast Asia are some of the fastest-growing markets for a number of key Russian exports: fossil fuels, metals, chemicals and manufacturing. Although China doesn’t do as much trade with Russia as it does with the European Union, it has been Russia’s most important single trade partner since 2009.

For a long time the biggest obstacle for Russia in developing trade with China was the lack of infrastructure. The first and only oil pipeline from Russia to China was completed in 2010, and while talks have been held since 2006 regarding the construction of a gas pipeline, it has not yet resulted in any concrete construction plans.

Yuri Trutnev, the new vice premier in charge of the Far East, is asking for $4.7 billion over the next five years. Given that pipelines, railroads and gas liquefaction factories take at least five years to build, Trutnev warns that Russia might already be too late to truly diversify. But Russia doesn’t currently have that kind of public funding for infrastructure projects in the Far East.

Still, Men says that money is certainly not the main obstacle to doing business with Asia, noting that China has the largest gold reserves in the world, followed by Japan. Men says that the Chinese would be happy to give Russia large loans based on future deliveries of fossil fuels.

Tokyo and Seoul strategy

Energy giant Rosneft has already accepted this kind of financing — in 2013, Rosneft president Igor Sechin agreed to an $80 billion loan from Chinese oil companies based on future oil deliveries. “This is a model that 10 to 20 large fossil fuel companies could follow. If that happens, the budget can survive any sanction,” saysa government source.

[rebelmouse-image 27087905 alt="""" original_size="640x425" expand=1] Train from Russia to Manzhouli, China — Photo: Jack No1

Beijing wants to help its Russian partners, says a source from one of China’s state banks. Although China’s political reaction to the crisis in Crimea has been reserved, it is actively ready to help Moscow survive economic sanctions.

It seems like Russia is also willing to accept the offer. On March 20, the day U.S. President Barack Obama met with European leaders, there was a massive Russian-Japanese investment summit in Tokyo led by Igor Sechin, who called on Japanese corporations to invest in all of Rosneft’s projects.

The Chinese island of Hainan will host next month’s Boao forum, which is hailed as the “Asian Davos,” and this year will feature a large Russian delegation, including many leaders of Russian corporations that are now on U.S. and European blacklists.

For China, developing connections with Russia is a strategic way to increase its energy security. Beijing is trying to get access to Russian fossil fuels in order to decrease its reliance on shipping routes that the U.S. could close.

China isn’t the only Asia country interested in developing ties with Russia, and both Japan and South Korea could be part of Russia’s “insurance” policy.

“Tokyo has had great hopes of a partnership with Russia — not only to develop Japanese business in the Russian Far East, but also to prevent Russia from becoming a Chinese raw-materials colony,” explained a well-placed Japanese government official.

In an effort to improve relations with Russia, Prime Minister Shinzo Abe was the only foreign leader of a G8 country who personally visited the Olympics in Sochi. But now both Japanese and South Korean diplomats say the pressure from the West has increased.

“The U.S. is putting heavy pressure on us to join the sanctions against Russia, but we don’t want to,” says a source close to the South Korean government.

The United States has to make a serious geopolitical choice, Sergei Men says. Either Washington continues to pressure Tokyo and Seoul in order to strengthen Moscow’s isolation, or it allows its Asian allies to stop at symbolic sanctions. If Japan and South Korea don’t do business with Russia, Moscow will have no choice but to run to the embrace of its Chinese comrades.

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