Going Eastward: Can Russia’s ‘pivot to Asia’ succeed without Japan?

Troika Report (Rossiskaya Gazeta), 2015.08.27

Medvedev Kuriles

[Russian Prime Minister Dmitry Medvedev meets the participants of the Russian Youth Education Forum Iturup in the town of Kurilsk. The Russian Prime Minister came to Iturup, one of the Kuril Islands, during his visit to the Far Eastern Federal District. Source: Ria Novosti/Dmitry Astakhov]

Japanese leadership was upset by Russian Prime Minister Dmitry Medvedev setting foot on the island of Iturup of the Kuril archipelago in the Russian Far East last week. Seized by the USSR in 1945, the Kurils remain a bone of contention between the two countries and Japan continues to claim the four southernmost islands. As a symbolic rebuff to Medvedev’s visit, the Japanese foreign minister delayed his trip to Moscow.

Medvedev’s visit and his statement that the Kurils are an integral and natural part of Russia — “This is how it is and how it will be” — has jeopardized if not ruined altogether the chances of a pre-planned visit to Tokyo and summit between Shinzo Abe, Japan’s prime minister, and Russian President Vladimir Putin.

What is the price that Moscow seems to be so ready to pay for alienating Japan prior to much-anticipated high-level talks? Vladimir Skosyrev, a foreign affairs observer with Nezavisimaya Gazeta in Moscow, made this comment for Troika Report:

“I am a little astonished by the tough stance by Moscow. There are no chances of Russia giving away the islands to Japan in the foreseeable future. I do not understand why it is necessary for our prime minister to visit the island of Iturup at this very moment. We are facing hostile attitudes from the Western powers. Japan had a slightly milder position (regarding Russia). We are interested in Japanese investments. President Putin’s visit to Japan could have improved our relations. It could also lessen Russia’s dependence on China. Medvedev’s visit to Iturup shows that Moscow is not counting on positive results from Putin’s trip to Japan.”
— It looks like Russia’s “pivot to Asia” is becoming predominantly a pivot to China. Can this strategy succeed without positively engaging Japan?

“I think this so-called ‘pivot to Asia’ is not a very good move. We are becoming more and more dependent on China. We should seek some counterweight to China’s influence. Japan could be one of the possible players in this game. But we reject any possibility of improving relations with Tokyo.”
Russia’s stance is based on the premise that, given the extremely sensitive nature of the controversy, it makes sense to detach business from politics, leaving the settlement of the territorial dispute for subsequent generations.

Whoever follows the logic of horse sense would ask several crucial questions about the future of the turbulent relations between Russia and Japan.

Can Russia’s solemnly proclaimed strategy of a “pivot to Asia” succeed without a positive engagement of Japan? The answer is: no.

Given the potential of Russia-China cooperation, can Japan afford to stay on the sidelines of the new integration process that is gearing up in Eurasia? No.

Is it a genuine belief among the Japanese political class that the return of the disputed Kuril Islands would bury the hatchet of World War II and set bilateral ties on the path to peace and prosperity? No.

Do policy makers in Japan think that – regardless of whatever leader is in power in Moscow – the “giveaway” of part of Russia’s territory would earn support with the Russian public? No.

Now let’s try a set of positive answers. If the territorial dispute remains in total stalemate, will it adversely affect political and business cooperation between the two neighboring countries? Yes, it will.

In this case, will it deprive Russia and Japan of the benefits of meaningful and profitable interaction? Yes.
Will the prolonged discord persuade Russia to enhance ties and bet on a strategic (non-military) alliance with China, while convincing Japan it has no option but to keep its attachment to the United States? Yes. It brings both sides nowhere nearer a compromise. As The Financial Times pointed out, “the strength of Japan’s U.S. alliance gives Russia little incentive to make concessions.”

True, Shintaro Abe, the father of Japan’s current prime minister, made an attempt to resolve the frozen diplomatic conflict while serving as foreign minister back in the 1980s. It fell flat.

Today, his son, who seems to enjoy a special relationship with Vladimir Putin, is keen to achieve a breakthrough. It was reported that Abe was even considering attending the festivities in May in Moscow dedicated to the 70th anniversary of the Allied victory over the Axis powers in 1945. Rumor has it that the Russian president is interested in finding a sound solution to the dispute over the Kurils.

The bottom line of these logical calculations is that entrenched misunderstanding and animosity which is keeping Japan and Russia apart is beneficial to neither of them. For Moscow and Tokyo, the insurmountable obstacle in the form of the Kuril Islands dispute remains a classical lose-lose situation.

* * *

Globally Speaking: Chinese slowdown: Russia in for a rocky ride

The creeping effects of the devaluation of the yuan, the crash of China’s stock exchange and the accumulation of negative trends in the world’s second-largest economy has fueled speculations in the Moscow expert community that the timing of Russia’s declared “pivot to Asia” — with its emphasis on strategic partnership with China — might have been wrong.

The depreciation of the Chinese currency took everyone by surprise, triggering suspicions that these are the first shots in a currency war. However, one can convincingly argue that despite relatively small damage from the economic slowdown, at least, so far, China is fidgety since its previous growth drivers — export-oriented manufacturing sectors, real estate and investments in infrastructure projects — are no longer delivering as they did before.

One of the main reasons is the gradual drying up of the stream of migrant workers from rural areas. Since Deng Xiaoping launched his reforms back in 1978, some 278 million people have moved into China’s cities – most with moderate life aspirations and ready to accept modest remunerations. In 2014, the inflow shrank to 1.3 percent, and this year it may even go into the red. China has to accommodate more skilled and more demanding laborers, which inevitably ramps up wages and salaries across all key industries.

Subsequently, a more expensive workforce deprives China of its ultimate competitive advantage, which fueled its sustainable GDP growth at an average of 10 percent until 2010. It peaked in 2007 with an awesome 14.2 percent of added GDP value. However, by 2014 it had slowed to 7.4 percent, the country’s worst performance in the last 24 years. The final outcome of 2015, despite official forecasts of “around 7 percent” GDP growth, according to the general assessment, will amount to a maximum of around 4-5 percent.

The meltdown of the Chinese economy has sent shockwaves around the world’s financial markets, while experts are struggling to forecast its global impact. How serious is this downturn? What echoes will all these adverse developments in China have in Russia? Alexander Zotin, an observer with leading Russian business weekly Money, had this to say to Troika Report:

“Chinese GDP constitutes 10-12 percent of global GDP. But the Chinese share of global GDP growth is more than 33 percent, or a third. China has been the leader of global growth for the last 10 or even 20 years. Now, if China ceases to be that leader, the world will be stagnating.”

“Now we see the effects of an unstable growth model. We see the bubble on the stock market and in real estate. It means a strong headwind. For the outside world, it will mean difficult times ahead while trying to alleviate the effects of the Chinese slowdown.”

— How will Russia be affected by the adverse trends in the Chinese economy?

“The Russian economy is 75 percent dependent on the export of commodities. Two thirds of Russian exports is made up of oil and gas, plus 15 percent for industrial metals. The Chinese slowdown will depress prices for these commodities.”

“Russia is very dependent on global economic cycles. If the world’s economy is booming, Russia’s economy is also booming. If the trend is negative, Russia’s economy is contracting at an even higher rate. Russia is hypersensitive to growth cycles.”

What are the immediate repercussions of China’s slowdown and currency volatility for Russia? The alarm bells began ringing this year when the negotiations over the Western route to deliver pipeline gas to China (the Power of Siberia 2 project) started to drag their feet. While work on the eastern route project to bring 38 billion cubic meters per annum (bcma) of Siberian natural gas to China is underway, the original offer to supply an additional 30 bcma via the Altai region to China’s western regions has now become less attractive.

The reason is that while in 2012-2013 gas consumption in China surged by 12-13 percent, the rate of growth fell to 8.5 percent in 2014, and was reduced to 2 percent in the first quarter of 2015. The global oil price crunch was no less instrumental in stalling the talks.

This bearish trend might also affect purchases of goods with high added value, inflicting damage on countries like Germany, which exports sophisticated equipment and technology to its major trade client in the East. With deflationary pressure from China building up, the German economy would suffer as well.

Follow the logic: Since Germany is the key trade and economic partner of Russia, for Russian businesses there will be a spillover of troubles both from the east and the west – the classic “domino effect.”

Actually, this is the price to pay for globalization, which has enhanced the risks of interdependence to a level beyond anyone’s control. One Russian expert predicts that the next global recession will be “Made in China,” or at least in the coming years the Asian behemoth will be the single biggest source of global economic volatility.

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