China Is Moving Into The Russian Far East And Central Asia

August 7, 2009

Martin McCauley writes: Back in the heady days when petrodollars were coming out of Russia’s ears, Moscow boasted about using the money to develop the Russian Far East. The dollars would also keep China out of Central Asia. All these hopes have turned to dust. Moscow has now accepted that without Chinese money the Far East will not be developed. Likewise, Chinese resources are needed to develop the riches of Central Asia because Russia has no money to do so. So what went wrong?Russia earned a mind-boggling $1.3 trillion from oil during the years 2001-08. About $700 billion found its way into various accounts in the Central Bank of Russia, the Stabilisation Fund and so on. That leaves $600 billion. This money was to be the seed corn which would renovate and expand Russia’s infrastructure. The road and railway networks were to become the envy of the world. The vast reserves of oil and gas in Siberia and the Russian Far East were to be exploited in order to make Russia a leading world economy. Russia would again join the big hitters’ league of world states.

Instead of a network of new motorways to rival that of China, Russia has only managed to expand its road network by 0.1 per cent over the last decade. The railways have still to be modernised. Investment in the Russian Far East has been paltry. Its main port, Vladivostok, should be one of the hubs of Asian commerce. So where did all the money go?

Russia is ruled by an oligarchy of officials and businessmen who treat the economy as a source of rent. They work on the short term principle because they are afraid that their source of wealth will disappear very quickly. Hence there is no such thing as long term planning. Much of the money which should have been invested in Russia has found its way to western banks and offshore accounts. The rule is to transfer any money one acquires offshore as quickly as possible. No oligarch in his right mind deposits his money in a Russian bank. It could easily be confiscated by the state if he falls out with those who run the country.

Russia is now reduced to asking China to invest in its Far East. If Beijing does not do so, the potentially rich region will remain undeveloped. Needless to say the Chinese can spot a good deal when they see one. Russia is in no position to play hardball about terms and conditions. The same applies to Central Asia.

Hitherto Russia had kept Chinese direct investment at arms’ length in both regions. Now it has accepted that the development of these strategically important regions will depend on Chinese policy. If China invests heavily, it will also assume responsibility for the security of these regions. Hence the writ of the People’s Liberation Army will gradually expand outside the contours of the Middle Kingdom.

In soliciting Chinese investment in Eastern Siberia and the Russian Far East, Moscow has had to abandon its goal of becoming a major East Asian power. It had hoped to use petrodollars to develop these regions and thereby become a major player in East Asia. The aim was to integrate Russia in a network of states comprising Japan, South Korea and China.

China plans to develop the industrial potential of Heilongjiang province which borders on the Russian Far East. It is home to heavy industry and its expansion can be planned with that of Maritime krai across the border. Vladivostok could serve as an export outlet for Chinese goods. Beijing may have in mind something similar to its agreement with Vietnam. Northern Vietnam is being economically developed in conjunction with the Chinese provinces which border it. The goal is to specialise and avoid competing enterprises. Gradually northern Vietnam and contiguous Chinese provinces will become one economic zone.

Vneshekonombank, Russia’s bank for foreign trade, has had to ask China for loans. Chinese companies are major holders of Lukoil stock, a major Russian oil company. Previously Moscow excluded foreign firms from bidding for the vast Udokan copper mine in south east Siberia. It has now been forced to solicit bids from Chinese, South Korean and Kazakh firms.

President Dmitry Medvedev signed various deals in Beijing in June worth, he estimated, $100 billion. One of these deals permits Russian firms to prospect for oil and gas in China (they have no capital at present to do this) and Chinese firms (replete with cash) to do the same in Russia but also become involved in gas liquefaction plants.

Russian companies in the Far East are known to keep their deposits in Chinese banks. The ruble and renminbi will become the trade currencies of the region. Russia’s squandering of its petrodollar riches means that the future is bright: for China.

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