Little choice for Russia and China but to link up

For years, China and Russia have been making a show of seeking closer ties, but it has been more style than substance. Will the U.S. – China trade war kick the relationship into overdrive?

Two years ago, China and Russia reached an agreement to link the cities of Blagoveshchensk and Heihe. Now, two years later, the Chinese half is largely finished, and the Russian side remains little more than a building site.

Russia has recently pledged to wrap its side up by the end of the year, and put an end to a project which took nearly 28 years of negotiations to get started. This is good news for Blagoveshchensk, which has languished in an economic torpor in spite of Chinese investments, while the city right across the river boomed from a population around 130,000 in 1994 to 1.3 million today. Ironically enough for the citizens of Blagoveshchensk, Heihe’s growth was spurred by the lifting of trade barriers following the end of the Soviet Union.

“The two countries are desperate to cooperate with each other,” said Li Lihua, a Chinese entrepreneur who invested $120 million in Blagoveshchensk before attempting to offload those assets, in 2015. “On the ground, the joint action is not that obvious.”

The feeling across eastern Russia is that they have been left out of the economic bonanza experienced in China, and they blame the Russian central government for their plight. So much so that in September elections local officials opted to defy Moscow, and demanded a recount in an election for governor of the Primorsky Region, which includes the far-east Pacific port of Vladivostok. The Communist Party in Vladivostok became riled up over some irregularities in the vote count.

On a Sunday night after voting, a celebratory mood prevailed after seeing that their candidate was up by 2% with 99% of the vote counted. The next morning they woke up to discover that nearly all of the uncounted votes had been for the opponent, and their candidate lost to the Kremlin backed candidate.

With the situation still up in the air, follow up elections were held on Sept. 23, but were too close to call, and there won’t be additional elections until Dec. 16. The ensuing street protests and recount action came in spite of a propaganda spectacular, staged in Vladivostok the month before.

Investment in the Far East

Russian President Vladimir Putin and Chinese President Xi Jinping were both in attendance this September for the Eastern Economic Forum, an annual event held in Vladivostok. Aside from the pancakes, which were accompanied by caviar and vodka, the Eastern Economic Forum is meant to highlight the potential for investment in the far east of Russia. Promisingly, for Russians hoping for Chinese investment, this was the first time that President Xi attended the forum.

“Putin and Xi are on the same page when it comes to the fundamental concept of a desirable world order,” said Dmitri Trenin, the director of the Carnegie Moscow Center, in an op-ed in a state-run Chinese Newspaper. “[S]everal independent power centers instead of a single-nation hegemony; protection of state sovereignty from foreign political and ideological influence; and full equality in relations among the major powers, including the United States.”

The forum was accompanied by another show of unanimity, the Vostok 2018 war games. Hyped by the Russians as the largest war games since the fall of the Soviet Union, the games featured some 300,000 Russians, along with several thousand Chinese and Mongolian troops.

“China and Russia are not allies, and they are firm in not forging an alliance,” said an anonymous oped in the Global Times, another state run outlet. The oped was blunt in explaining the purpose of the games. “But the outside world shouldn’t make China and Russia feel an urgent need to strengthen their military cooperation.”

This sudden “urgency” in relations is being moved along by escalating trade barriers.

Russia has been contending with these barriers for years, with escalating sanctions in response to the annexation of Crimea, the conflict in Donbass, assorted assassinations, and interference in the 2016 U.S. Presidential Elections. These sanctions have continued to increase, contrary to President Donald Trump’s rhetorical friendliness toward Russia.

Up until recently this was of little concern to China, but over the summer, some of President Trump’s other rhetoric got real.

Tariffs have put the U.S. in a very strong bargaining position, with Billions of Dollars, and Jobs, flowing into our Country – and yet cost increases have thus far been almost unnoticeable. If countries will not make fair deals with us, they will be “Tariffed!”

— Donald J. Trump (@realDonaldTrump) September 17, 2018

First, on July 6th, President Trump announced $32 billion in tariffs targeting China, then $13 billion on August 23rd, and finally $189 billion on September 17th. The last round resulted in a substantial Chinese response, $60 billion in counter-tariffs on U.S. goods.

As ominous as the worsening relations between the U.S. and two of the other principle global powers may be, the story is more complex for the citizens of the Russian far east. On the one hand, pressure on China and Russia drives the two countries together. On the other, the Korean peninsula could be caught up in the back and forth, and that could spell trouble for the far east.

For years, investment in their region has been exemplary, primarily for its crony capitalism.

The much celebrated $400 billion gas deal between China and Russia in 2014 has been a boon for the oligarchy. However, for the citizens of the far east, persistent low oil prices and U.S. sanctions have made it into less of a bonanza than anticipated.

At September’s Eastern Economic Forum, Mongolian President Khaltmaa Battulga had proposed as part of Mongolia’s trilateral “Economic Corridor” policy that Russia build a natural gas pipeline to China via Mongolia. This included construction of an “Asian Super Grid” to help balance the regional electricity peak load.

Yet, outside of the flow of fuel and energy, where local businesses have to deal with well connected giant firms based in far-off Moscow, the development of infrastructure for other kinds of trade, like the bridge in Blagoveshchensk, have been agonizingly slow. One of the main trading points between China and Russia on the land border near Vladivostok appears to have secured $1.5 billion in investment to modernize the Suifenhe-Pogranichny Comprehensive Trade Complex, a free trade zone between the two countries. This is a project that people on both sides of the border have been waiting on since 2006.

In a show of optimism over the project, a new shopping center and Holiday Inn sprung into being on the Chinese side in 2006. Meanwhile, on the Russian side, in 2015, two Hyatt Hotels languished in abandoned construction sites after the money dried up.

Given the distance of Vladivostok from Moscow, it is not surprising that it is an epicenter of dissent. In 2009, when Russia was buffeted by the global financial crisis, the Kremlin implemented broad import controls to protect domestic industries and trade-dependent Vladivostok was the first city in Russia to erupt in protest. The city would end up benefiting from substantial investment from the federal government in the form of pipelines and other infrastructure.

However, the combination of infrastructure spending and trade barriers used to keep the economy afloat in the face of the global financial crisis, and years of poor oil prices, have burned through Russian currency reserves. Meaning that after nearly two decades of promises the central government may have to finally make good on its word.

Former Kremlin political aide and technological analyst, Alexey Chadayev, suggested that Putin should be wary of continuing to let down populations like Vladivostok’s, as these enduring failures in the far east have pushed voters to resentfully align themselves against the central government.

“If you live in the midst of this, you’ll vote for the devil himself out of spite,” Chadayev wrote.

A Little Help from Moscow

Yet, more help may be on the way.

This Wednesday, it was announced that Russian Prime Minister Dmitry Medvedev had signed a decree to allocate 8.4 billion rubles (about 130 million U.S. dollars) for projects in the Far Eastern Federal District (DFO).

“By a signed order, budget allocations in the amount of 8.4 billion rubles are directed to investment projects in the field of mining, transport, social and energy infrastructure, industrial projects.”

According to the announcement primary investment projects include development of the Khabarovsk airport, the construction of the Nizhneleninskoe-Tongjiang bridge railway crossing, the modernization of port infrastructure, the development of the international transport corridors Primorye-1 and Primorye-2, the construction of the mining and processing complex Inaglinsky, and the creation of a pulp paper mill in Khabarovsk.

According to TASS, the annual federal budget for development of the Far Eastern Federal District issued under the state program “Social and Economic Development of the Far East and the Baikal Region” is in the amount of 32.2 billion rubles. Of those funds, 21.2 billion rubles were distributed to entities that are part of the DFO, while the unallocated balance of budget allocations was reserved for state support for the development of the Far East.

Meanwhile, this month, the Commercial Port of Vladivostok (CPV, part of FESCO Transportation Group) said that its handling of cargo had increased by 40% for YoY 2018, while its container throughput grew by 15%, with general cargo by 77% to 3.8 million tonnes. The company said that it is going to reach a new record in 2018, about 10 million tonnes.

Anthony A. LoPresti reporting from Vladivostok, Russia, for LIMA CHARLIE NEWS

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