A Doubled-Edged Sword: Corruption and Russia’s Pivot East

By Nick Trickett

 

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“Strengthening Friendship in the Name of Peace and Happiness!”

 

Last year’s election cycle in the United States has created a surging interest in Russia’s array of tricks and conceits to influence, undermine, and rend western democracies. Democracy and, more importantly, transparency abroad threaten the legitimacy of the Russian regime at home, pushing Russia to seek out coercive or subtle means of disrupting democratic norms and engendering corruption for its own aims. For a regime that needs foreign investment at the same time it exploits corruption elsewhere, these tactics don’t always produce desired outcomes. Russia’s oft-maligned Pivot to Asia showcases this conundrum: corruption at home constrains Russia’s actions in Asia as much as being a tool to advance the Kremlin’s interests in Europe.

The Far East is one of Russia’s greatest strategic liabilities. Roughly 6.2 million people occupy an expanse accounting for a third of Russia’s territory next to an ascendant China with money to burn and historical interests. Vladivostok is about 5,600 miles from Moscow by ground transport. Goods come from far away and cost more, infrastructure of all kinds is of low quality, and local industries remain largely geared towards extraction and basic agriculture. 75% of the region’s goods went to market in Russia prior to 1991. Only 6% was exported.

Whereas the Soviets could subsidize everything, today’s Russia is structured differently and has considerably fewer resources to do so. Graft, black markets, weak property rights, and irregular rule of law have stunted the Far East’s turn from Russia to Asia. In the last 25 years, the region has lost a quarter of its population and ethnic Russians are voting with their feet to live further west. These trends and issues present a profound insecurity for Russian planners and drive a significant part of their need to engage China.

Putin announced the so-called “Pivot to Asia” at the St. Petersburg International Economic Forum in June of 2013. Russia would diversify itself away from its reliance on Europe for money and international respect. Selling gas to China could give Russia pricing power over European consumers, the United States would be reminded that Russia could partner up with its most powerful geopolitical rival, and, most importantly, much needed investment would pour into the Far East from elsewhere, not just China.

Instead of strategic diversification, Russia’s pivot has been defined by an increasingly awkward façade of partnership with China that may grow less cooperative in the near-future. South Korea and Japan have proven cautious. Most of their businesses don’t trust the region’s market, the regional authorities, or Moscow. Japanese and South Korean energy firms have not forgotten the Kremlin’s decision to strong-arm Shell and its Japanese partners Mitsui and Mitsubishi into selling a majority of the Sakhalin-II oil and gas project to Gazprom in 2006 by selectively enforcing environmental regulations. The Putin-Abe summit in December did not produce a substantive change in business attitudes and South Korea remains limited by domestic turmoil and Russia’s close ties to North Korea.

To address the region’s reputation, the Kremlin arrested the governor of Sakhalin Island in March of 2015 to create the impression that there are no “untouchables.” In 2016, scandals and arrests hit lower level figures such as the vice governor of Primorsky region and a city official in Vladivostok who stole 160 million rubles. Putin’s envoy to the Far East Yuri Trutnev has made statements about the systemic effects of rampant corruption in the logging and fishing industries, mainstays for the regional workforce. Shuffling governors or launching showy investigations may offer political relief, but do little to address the daily effects of corruption on people’s lives.

The Far East is not so much more corrupt than the rest of Russia. Rather, it’s so far away from Moscow and so haphazardly connected to both Russia and its Asian neighbors that its elites operate as if in a domestic offshore. Foreign investors have little reason to pursue what is a tiny market of consumers in a region burdened by its remote location, bad roads, difficult climate (natural and political), and local elites who continue to plunder the economy. Moscow won’t punish their thievery harshly if they remain loyal and preserve control. Last September’s arrest of Dmitry Zakharchenko, head of an anti-corruption agency within the Interior Ministry, was a move to placate the public with a sacrificial lamb. There’s little appetite for anything other than cosmetic reform.

Public data bears out foreign firms’ lack of trust. The Russian Minister for Far Eastern Development Alexander Galushka announced on March 15th that the Far East had received a total of $23 billion in investments, 20% of which came from foreigners. Definitions are screwy. Last May when the figure stood around $14.3 billion, Russian experts saw that the private firms involved were by and large registered to Russian offshore hubs. Russian firms use offshore intermediaries to jack up figures and make the Far East seem like a more attractive investment. Precious little money comes from elsewhere.

Russian planners often fear becoming a “resource appendage” for China’s massive manufacturing base. But their standoff with the West has forced them to more aggressively deepen ties with China. China has not exploited the Kremlin’s weakness to the extent one might expect. China’s largest banks have complied with western sanctions and approached deals skeptically. Most projects fall under infrastructure or agriculture and are slowly developing.

Japan and South Korea have floated investments in ports and some infrastructure, a decades-long strategy in the region dating back to the Soviet period. Deals signed in the last few years have mostly concerned social infrastructure, an area that Japan has stressed as part of its development agenda through its lending institutions. The billions in announced investments from South Korea and Japan through events like the Eastern Economic Forum in Vladivostok are often framework agreements. They do little more than state mutual interests as both sides jockey around costs: Russian firms generally try to inflate them for the benefit of uncompetitive bids from companies owned by local or national elites with connections.

The problem is compounded by the nature of competition within Putin’s circle in Moscow. Former Economy Minister Alexei Ulyukayev was arrested on corruption charges last November largely due to the machinations of Rosneft CEO Igor Sechin. Ulyukayev was part of a cadre of economic liberalizers and was Russia’s point-man to craft and realize an 8-point plan in conjunction with his Japanese counterpart to promote industrial cooperation in the Far East. His arrest seriously undermined the potential value of the Putin-Abe summit in December.

No one particularly enjoys the prospect of paying for absurd cost overruns, bribing customs officials, covering expenses imposed by lack of legal oversight, ensuring timely deliveries with unsavory third-parties, and so on. Unfortunately for Russia, these issues hobble its push to balance against its reliance on Europe.

Corruption, to paraphrase Dostoevsky, is a double-edged sword. It may weaken and divide Russia’s perceived adversaries in Europe but it also weakens and divides Russia as it seeks new relationships to manage China’s rise. Without Japanese and South Korean investment in areas that aren’t energy, the Far East will be stuck relying on the inadequate sums of money available from Russian elites playing games with the national economy.

Damaging legal norms abroad is a short-term tactic. Russia’s oligarchs need more transparent economies to remain so if they are to keep attracting foreign capital when it’s truly necessary. The latest protests evidence growing dissatisfaction with the way Putin has managed the economy. Mark Galeotti notes presciently that corruption at the highest levels is “impossible to address without breaking the whole machine.”  Russia’s threat to democracy in Europe is its greatest weakness in Asia. The west had best take note as it riddles over whatever it is the Kremlin plans to do next.

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