Surrounded by the West, Russia "pivots" to Asia

Russia has been going through some tough times in recent years. The economic downturn, plunging oil prices and Western sanctions have eroded Moscow’s competitive edge. All this has pushed Kremlin strategists to adopt an import substitution policy, reorganizing import supply chains, reducing dependence on oil exports and pivoting to Asia.

Russian President Vladimir Putin and Chinese President Xi Jinping. Photo: nationalinterest.

Russia sees Asia as a fast-growing alternative to the Western system of international political and economic relations. Moreover, the Kremlin sees this system as not reflecting today's economic and political realities. This is why Russia has begun to invest more time and effort in building and developing long-term relationships based on mutual respect and interest with its partners in Asia.

Despite the fading feelings towards its Western partners, Russia seems to be trying to sit on two chairs at the same time. Moscow cannot afford to completely alienate Europe, as the “old continent” is Russia’s major economic partner (accounting for more than 40% of total trade turnover) and also an important supplier of technology. At the same time, Russia is building and developing bridges with Asia, looking for potential new partners and markets with the aim of diversifying its current economic activities.

Since 2015, Russia has been hosting a “clone” of the St. Petersburg International Economic Forum (SPIEF) in the Far East, called the Eastern Economic Forum (EEF), which aims to open up new opportunities for Russian companies in the East and for Asian businesses in Russia. Just looking at these two forums and their guests, it is clear who has become the more important partner for Russia.

In 2018, the leaders of China, Japan, South Korea and Mongolia participated in the EEF, while the SPIEF was attended only by French President Emmanuel Macron and Japanese Prime Minister Shinzo Abe. Contracts signed within the framework of the most recent EEF amounted to more than $46 billion, while the value of contracts at the SPIEF was lower, reaching $38 billion.

Demand for petrochemicals

The global petrochemical market is considered to be the fastest growing, and is expected to grow significantly over the next five years, increasing from 1,464 million tonnes per annum (2015) to 1,708 million tonnes per annum by 2020 and 1,931.5 million tonnes per annum by 2026.

Furthermore, according to BP’s 2018 Energy Outlook, petrochemicals are expected to be the fastest growing source of demand, with Asia being the main driver of that growth, with China leading the way as the largest consumer of petrochemicals.

In Russia, chemical products account for 4.4% (19 billion USD) of total exports. Petrochemical products are the third largest export products of Russia, after minerals and metals. It seems that Moscow does not want to stop there and wants to make better use of the potential for the development of this industry.

Seyfeddin Roustamov, the businessman who runs Metafrax - one of the top three synthetic resin producers in Europe and the largest methanol producer and exporter in Russia, said his company is planning to invest more than 950 million euros ($1.1 billion) in the construction of a chemical products complex in Gubakha, Perm region.

The facility is designed to produce up to 575,000 tonnes of carbamide, 308,000 tonnes of ammonia and 41,000 tonnes of melamine per year. The project is Metafrax's biggest investment in decades.

East-West tug-of-war

In October 2017, Metafrax signed a €388 million ($447 million) contract with Swiss Casale SA (a world leader in the development and licensing of technologies for the production of ammonia, methanol, carbamide and melamine). This contract partly reflects the dependence of Russian products on European technology suppliers and licensors.

According to statistics, 40% of Metafrax's revenue comes from exporting products to the UK, Finland, Austria, Germany, Switzerland and other countries. European countries are the largest consumers of products manufactured by Metafrax.

In February 2018, Mr. Roustamov’s company established SamyangMeta – a joint venture with its Korean partner Sunghong Co., Ltd., with the stated aim of boosting its reach in the Asia-Pacific region. Notably, Metafrax also hopes to supply its products to the European market through this joint venture. This seems to be an attempt to find an alternative measure aimed at increasing Metafrax’s presence in Europe rather than in the Asian market.

Regardless, Moscow's efforts to expand into the Asian market in diversifying its economic partner options is actually a quite reasonable policy for the growth prospects of the Asian market.

Russia’s efforts, while attractive, appear to be fraught with challenges. Russia has successfully navigated the economic challenges it faces, but Moscow still lacks the structural reforms needed to sustain long-term economic growth.

The “pivot” to Asia policy alone cannot solve all of Russia’s economic problems, nor can it resolve Moscow’s current confrontation with the West. This is why the Kremlin does not “sacrifice” its relationship with the West in exchange for “affection” with Asia. Russia naturally understands that it needs to find a “healthy balance” that allows Moscow to develop successfully by making good use of East-West relations./.