Policy Memos

Is the Russian Economy Finally Tilting East?

Policy Memo:

376

Publication Date:

08-2015

Author(s):

Description:

In 2012, Russia exported 550,000 barrels of oil per day (bpd) to tiny Netherlands, but less than 500,000 bpd to China (Figure 1). According to the “gravity model” of trade, the volume of trade is proportional to the size of two countries’ GDPs and inversely related to the distance from each other, so Russian exports to China should greatly exceed exports to the Netherlands. China’s GDP is at least an order of magnitude larger than that of the Netherlands, while the distance from the main Russian oil fields in western Siberia is approximately the same to both states. Not only the oil trade, but all Russian trade and investment flows are very much skewed westward.

The Ukraine conflict and the Western economic sanctions that followed have provided a major push for the geographic reorientation of Russia’s foreign economic trade and investment. A Eurocentric pattern of foreign trade and investment is gradually being replaced by a more balanced one, in which Asia and especially China will play a more prominent role. It is likely that Europe and Asia will be evenly represented in Russia’s future economic relations. But if Russia’s confrontation with Europe continues, China (and all Asia) may well replace Europe as Russia’s center of economic gravity.

Russia’s Energy Trade Imbalance

In 2014, over 50 percent of Russia’s overall oil exports went to Europe and the post-Soviet states, while only 24 percent went to East Asia (China, South Korea, Japan) (Figure 1). Up until 2009, Russian natural gas was not at all exported to East Asia. Even now, all Russian non-liquefied gas goes to Europe, the post-Soviet states, and Turkey (Figure 2).

Russia started to export liquefied natural gas (LNG) with the operation of the Sakhalin Energy LNG plant, which can export up to 22 million cubic meters of LNG per year. Unlike its traditional oil and gas exports, Russian LNG is totally Asia-oriented. Nearly all Russian LNG goes to Japan (76 percent in 2012) and South Korea (20 percent) under long-term supply agreements; the rest goes to China and Taiwan. However, revenue from LNG exports in 2014 totaled only $5.2 billion, less than 10 percent of the revenue from natural gas exports (without LNG) of $55.2 billion.

Russia has also finally begun to send more piped oil to Asia as well. In 2011, the Skovorodino-Daqing segment of the Eastern Siberia–Pacific Ocean (ESPO) oil pipeline, intended to export 15 million tons of oil every year over the next 20 years, was launched. Before, oil was exported to China only by railroad. In December 2012, the pipeline was extended to Kozmino, near Russia’s far eastern Nakhodka port. In December 2013, Russia signed an agreement with China to sell up to 31 million tons of oil.

An agreement on a new gas pipeline (the “Power of Siberia”) between Russia and China was also finalized in 2014, with construction scheduled for completion in 2018. This line is to provide annual deliveries of up to 38 billion cubic meters over 30 years. A second proposed pipeline, the Altai route, crossing the Russian–Chinese border between Kazakhstan and Mongolia, would deliver another 30 billion cubic meters of gas per year. Nonetheless, even with these new projects, gas and oil export from Russia to East Asia will still be less than to Europe today. Total Russian gas exports in 2014, including LNG, amounted to about 195 billion cubic meters, with only 20.5 billion cubic meters of LNG going to East Asia.

The Same Goes for All Russian Foreign Trade and Investment

In 2013, the geographic structure of all Russian trade was similar to its oil and gas trade. Only 13 percent of Russian exports and 25 percent of imports went to or came from China, Japan, and South Korea, while over 50 percent of Russian trade was with Europe (Figure 3). In 2012, China’s trade with Brazil, a country with a GDP (ppp) similar to Russia’s, was nearly as large as its trade with Russia ($83.3 and $87.5 billion respectively), even though Brazil is thousands of kilometers away.

Foreign investment flows have a similar geographical structure. Over half of all foreign investment in Russia is from European states, whereas only 11 percent is from China and Japan. For foreign direct investment (FDI), the share of Japan and China is only 1% each, whereas over two-thirds comes from European states. Of outward Russian FDI, Japan, China, and South Korea account for less than 1% each (Figure 4).

East Asia’s economic potential surpasses that of Europe. According to IMF data for 2010, China’s GDP (in purchasing power parity) amounted to $10 billion; Japan’s, $4.3 billion; and South Korea’s, $1.5 billion. Combined, their GDP exceeds that of the European Union at $15.2 billion. Adding the GDP of Taiwan, Southeast Asia, Mongolia, and North Korea to the mix further boosts Asia’s relative weight.

Asian economies are also growing faster than those of Europe. The annual (incremental) increase in GDP in East Asia is higher than that in Europe by an order of magnitude. Moreover, the geographical diversification of trade is a universal guiding principle for every country, regardless of its political orientation. No country wants to put all its eggs in one basket. An economic focus on a single region is undesirable even if that region contains friendly partners. Why then Russia is so Eurocentric in its trade and investment patterns?

East–West Stereotypes and Economic Orientation

“The Russian eagle has two heads,” former Russian president Boris Yeltsin used to say, when questioned about Russia’s international orientation. “One is looking westward, the other is looking eastward.” Maybe so, but how much does the eastward-looking head actually see?

Whatever the reasons for Russia’s Eurocentric geographical pattern of trade and investment, they are mostly non-economic. Until the deterioration of relations with the West and the Ukraine conflict, Russia looked down upon China, not giving it the same attention China gave to Russia. For centuries, Russians have been unwilling to “become” Asians. They have identified themselves with and talked about European civilization—European education, values, services, consumer goods, and so on. Toward Asia, Russians have had a different set of idioms, such as Asian craftiness, cunning, even cruelty. The nicest phrase used has probably been “Asian exotics.”

This outlook is changing, but slowly. Russian liberals fear a pro-Eastern orientation the most. They do not like China because of its authoritarian, communist regime. Any contacts with China, or any study of its experience, they consider shameful. In China, Russian liberals are known as opponents of Russia-China cooperation. From the other side of the political spectrum too, it is not uncommon to hear talk about a “yellow peril” and the creeping expansion of Chinese migrants into Siberia and into major Russian cities. As a result, government policies, at least until recently, were far more favorable to developing ties with Europe than with Asia, in particular China.

Conclusion

Russian prejudices against closer relations with China are wrong and harmful. In ten years, maybe sooner, China will be more developed than Russia economically and no less democratic. Then it will be possible to carry out an objective evaluation and to compare the costs and benefits of the two countries’ transformationsby how much living standards have increased and how many lives were lost during the transition to market economy and democracy.

It may well be that in the next decades, with the benefit of hindsight, it will be only too obvious how Russia had sidestepped its Asian opportunities until 2014. Russia is lucky to border China—an emerging world economic leader—but it has not benefitted from this proximity as its primary policy goals have been Western-oriented, at least until the Ukraine conflict. Now the attitude of the Russian elite is changing, and there is no sign that Europe is willing to consider the inclusion of Russia into European structures. As a result, it is highly likely that the Russian economy will continue to reorient itself toward the East.

Vladimir Popov is Professor at the Russian Presidential Academy of National Economy and Public Administration, Professor Emeritus at the New Economic School, and Adjunct Research Professor at Carleton University.

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Figure  1.

Figure 2.

Figure 3 (A and B). Geographical structure of Russian trade in 2013, % of the total

A.

B.

Source: Federal Statistical Service of RF, http://www.gks.ru/

Figure 4 (A, B, and C). Geographical structure of foreign investment, foreign direct investment in Russia, and Russian direct investment abroad, % of total

A.

B.

C.

Source: Federal Statistical Service of RF. http://www.gks.ru/

Figure 5. Map showing states of the world resized according to their estimated GDP (PPP) in 2015

Source: Views of the World. http://www.viewsoftheworld.net/?p=870

 

About the author

Research Director, Dialogue of Civilizations Research Institute (Berlin); Principal Researcher, Russian Academy of Sciences; Professor Emeritus, New Economic School (Moscow); Adjunct Research Professor, Institute of European and Russian Studies, Carleton
Dialogue of Civilizations Research Institute (Berlin)