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28.01.2014. Turning East?

For more than five years, we, together with some colleagues from the Russian expert community, have been actively advocating a turn of the Russian economy towards the Pacific. Our calls are based on two facts, of which one is obvious and the other not so. The obvious fact is that since the 1990s the center of the world economy has been rapidly shifting to the Pacific region. The less obvious fact, which is still not fully realized, is that Russia has several competitive advantages that provides for its successful use of Asia’s growth.
In the past few years, many in Russia have realized that the rise of Asia is serious and for the long haul. Simultaneously, fears have grown in this country that without a clear strategy for the development of its eastern regions they may fall under the domination of fast-developing China. The recent time has seen active expert discussions and some moves by the government in this field. However, neither has brought about tangible results yet.
At the expert level, attitudes to Russia’s turn towards the East remain mixed. The Eurocentrism of the Russian mindset is very strong. The public mind in this country is still dominated by a ridiculously inadequate idea of a Chinese demographic threat to Russia’s eastern regions. (Actually, there are now much fewer Chinese in the Russian Far East than there were in the times of the Russian Empire).
A myth is also being boosted that Russia is ready to yield to the Chinese giant. One should give credit to Moscow, though, for its effort (quite successful, although without much publicity) to balance its friendly and warm relations with Beijing by preserving and modernizing its nuclear arsenal, as well as by harmonizing relations with China’s neighbors.
The issue of an economic turn towards the East has been more pronounced in statements by Russia’s leaders. Vladimir Putin, in one of his pre-election articles, proposed “catching the Chinese wind in the sails of the Russian economy.” In his latest address to the Federal Assembly he described the development of Siberia and the Russian Far East as a “national priority for the entire 21st century.” It is important, however, that the implementation of this slogan is not postponed until the second half of it.
Huge funds were allocated for preparations for an APEC summit in Vladivostok in 2012. An extensive infrastructure was built, which, however, has had little effect on the region’s development so far.
Two years ago, there emerged an idea to establish a corporation for the development of Siberia and the Russian Far East, to be led by Sergei Shoigu. Soon, however, he was offered a different position, and instead of a corporation the government established a Ministry for the Development of the Russian Far East. The ministry worked ignominiously for a couple of years, giving Russia’s Asian partners the feeling that the country was still undecided as to what to do in its east. The ministerial program for the region’s development was so unfeasible and detached from real market requirements that it evoked sadly touching memories of Soviet programs and similar documents of post-Soviet Russia in the 1990s. Finally, this program was scrapped. The president appointed a new envoy to the Far Eastern Federal District with the rank of  Deputy Prime Minister – Yuri Trutnev. Alexander Galushka was appointed Minister for the Development of the Russian Far East.
But it is still unclear who and how will manage the region’s growth. Various proposals name (sometimes even simultaneously) a ministry, a corporation, a state agency, and a Vnesheconombank division for developing the East.
There is no clarity yet not only about a strategy or philosophy of the region’s development but even about its geographical boundaries. There is persistent talk of the Far East, sometimes in conjunction with the Baikal region. Meanwhile, for the needs of development, the macro-region that would be oriented towards the new Asian growth and that would drive the entire Russian economy must also include Siberia, which is linked with the Russian Far East historically and infrastructurally. Siberia can ensure growth of the eastern territories with high-quality human capital. It has a huge production potential; the main problem is to overcome the main curse of the region – its continentality, the strongest in the world, which makes it isolated from world markets.
Importantly, there is no clear understanding that the Russian Far East, Siberia, the Northern Sea Route and the Arctic riches cannot be developed without large-scale foreign investment from the entire Pacific region, and also from Europe, under Russia’s sovereign control.
Some programs for the region’s development contain ritual calls to rely on high-tech manufacturing, which cannot but evoke a sad smile. Of course, high-tech manufacturing should be developed where it is possible – but bearing in mind that nearby there are Japan, Korea, China, and Southeast Asia, the world’s major high-tech production centers with cheaper, abundant and well-organized labor.
It would be silly not to notice that the markets of nearby countries require high value added products and energy-intensive services (for example, data storage and processing centers that consume as much energy as aluminum producers), and water-intensive goods, especially food, paper, man-made fiber.
Not far away are Australia and Canada, which have joined the ranks of the most developed states due to their effective production and high-level processing of raw materials and high-tech agriculture.
Some propose turning Russia into a land transport corridor between Europe and Asia. Advantages of this proposal are not obvious. Railroads are required to overcome the continentality of Western and Eastern Siberia and give the region access to foreign markets. However, the transit potential the Trans-Siberian Railroad is no match for Chinese variants of the New Silk Road. The Northern Sea Route has a higher transit capacity, which can be used along with the development (jointly with partners) of natural resources in the Arctic shelf.
Unfortunately, it is customary in Russia to say no to any opportunity. There is a persistent hand-wringing about the low population density, adverse climate and labor shortages. All these obstacles should be taken into account, but none of them is insurmountable. Canada and Australia have similar population density figures, and Australia spends as much on home cooling in the summer as Siberia does on heating in the winter. Most of labor problems can be solved if the local good-quality human capital is used wisely and if conditions are created for preventing its flight to central Russia and abroad, in particular to neighboring Asian countries. As a temporary measure, migrant workers can be invited from Central Asia, India, Vietnam and, in the future, from North Korea.
To be more specific, a new philosophy is needed for the development of eastern Russia. There will be no more enough money for expensive mega-projects. One should husband the opportunities and competitive advantages provided by history and Nature. The development of human capital and the removal of barriers to growth, primarily institutional and infrastructural ones, should replace the quasi-colonial combination of subsidization or/and resource exploitation. A philosophy for integrating the region into the Pacific should replace the philosophy of using it as a gear or a front in a hypothetical war with an external enemy.
Of course, the new philosophy should not be used “generally” but should rest on a careful calculation of the cost and effectiveness of specific projects. It is obvious already now that the region’s development can be achieved through regional projects with special (preferential) customs, investment and tax regimes. The history of the exploration of Siberia in the 17th-19th centuries proves that emphasis on the development of private initiative has the best effect. At the same time, the state will have to fit the wild capitalism that has been established in the region in the last two decades into a reasonable framework.
Russia’s economic and partly political turn towards the Pacific region, vitally needed for the country’s development, is slowing down not only due to the lack of funds, bureaucratic inertia and often exaggerated objective difficulties of development, but also due to the latent and sometimes obvious presence of two more competing development projects – European and Eurasian – and the inability or unpreparedness of the Russian elites to make a choice or combine the three projects.
The European vector dominated the Russian mindset at least since the times of Peter the Great and, especially, during the first fifteen years after the latest Russian revolution of the early 1990s. However, Russia has again failed to make its way into Europe – due to differences in the cultural and historical realities, due to the inability and unpreparedness of Western Europe to make a bold attempt at integration when Russia sought it, and later due to the systemic crisis of the European Union.
There is one more project that increasingly obviously competes with an economic turn towards the East and that is key for the influential part of the Russian elite – this is the creation of a Eurasian Union. One of its goals is obvious and useful, namely, the creation of an economic and political center that would be advantageous to all in conditions when globalization is gradually giving way to the emergence of groups of regional blocs.
But, apparently, there is another, unspoken goal – the restoration of the Russian Empire. This may be a noble idea which, however, gives rise to tough questions. Does the Russian leadership really want to repeat the way of tsars and commissars who annexed Central Asian territories to Russia so that they did not pass into the possession of Britain in the long-forgotten Great Game of the 19th century, and to integrate the forever backward Central Asia into Russia again in the name of communist messianism?
Ukraine is a separate issue. It is undoubtedly part of the Russian historical and geopolitical space. But it is already obvious that attempts to integrate Ukraine will cost dearly due to the dysfunctional elite, which will endlessly waver and beg for handouts from all the sides. Things may even come to a division of Ukraine. A more rational choice would be an agreement with Berlin and Brussels (now only barely discernible) to make Ukraine a state that would not be torn apart by neighbors but jointly supported. For now, the tough response to attempts to involve Ukraine into a meaningless association with the EU, which looked like a challenge to Moscow, leaves room for maneuver.
All the three projects – European (temporarily put aside), Eurasian (given priority) and Siberian/Far Eastern – compete with each other in some aspects. But they are not mutually exclusive if, of course, they are not made so deliberately or thoughtlessly. Russia’s transformation into a strong power due to a Pacific strategy will make it a more attractive partner for Europe. A proposed by Russia Union of Europe stretching from Brest, France to Russia’s Vladivostok will give it a new breath of life. Belarusians, Kazakhs, Ukrainians and the citizens of other neighboring countries cannot but benefit from the expansion of Russia’s capabilities east of the Urals.
We deliberately do not analyze in detail in this article possible development projects, industries and sub-regions where this development will be most beneficial. Such projects exist and they can be specified.
The important thing now is to form a philosophy and a strategy for Russia’s turn towards new Asia through the development of Siberia and the Russian Far East, and move towards the Great Ocean – not out of military-political or geopolitical but economic interests, using the opportunities opened by international cooperation and channeling the energy of the nation into this project. “Towards the Great Ocean” was the slogan of the builders of the Trans-Siberian Railroad, one of the great projects – along with the construction of St. Petersburg – in old great Russia. This slogan is even more relevant today. “Towards the Great Ocean” is also the title of a series of Valdai Club reports, co-authored by us. The first report was published two years ago. The second one will be out in a month and will be presented at the Krasnoyarsk Economic Forum.

Co-author: Igor Makarov, PhD in Economics, research fellow at the Center for Comprehensive European and International Studies, National Research University–Higher School of Economics

//Originally published in Russian in Vedomosti №12(3516) 28.01.14.