Looking to Asia for business, Russia can’t go forward without the West

In a quest to decrease its dependency from crude oil exports, Russia looks to Asia as a fast-growing market for petrochemicals, but success closely tied to relations with West.

By ALEXEY KHLEBNIKOV
November 12, 2018 23:06
4 minute read.
Vladimir Putin

Vladimir Putin. (photo credit: MARC ISRAEL SELLEM/THE JERUSALEM POST)

 
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In recent years, Russia has been going through quite challenging times. Economic slowdown, oil prices collapse, Western sanctions which deprived Moscow from cheap money and technologies – all of these reaffirmed the Kremlin’s strategists to concentrate on import substitution policy, reorganization of import supply chains, decrease dependency on oil exports and push more for the country’s pivot to Asia. According to Moscow’s view, Asia is a rapidly growing alternative to the current Western-centric model of international economic and political system. Moreover, the Kremlin sees that this system does not reflect today’s economic and political realities, which bring Asia at the forefront of global economic development. This is why Russia started to pad big deal of time and effort on building and developing lasting relations with partners in Asia based on mutual respect and interests.

With Moscow’s recent “obsession” with the turning to the Asia-Pacific region, there are still doubts if Russia can do that at the expense of its Western partners. However, it seems that Moscow tries to sit on two chairs. Russia can’t afford to alienate Europe completely because it is its major economic partner (more than 40% of trade turnover) and provider of technologies. At the same time, it builds and develops bridges with Asia looking for new partners and markets that could potentially if not replace but diversify its current economic activities. Since 2015, Russia has been organizing a clone of St. Petersburg International Economic Forum (SPIEF) in the country’s Far East – Eastern Economic Forum (EEF) – which aims at opening new opportunities for Russian companies in the East and for Asian businesses in Russia. If to compare these two major economic venues it becomes clear which one is becoming more important. It is enough just to look at the high-profile guests of both forums. In 2018, leaders of China, Japan, South Korea and Mongolia took part in EEF while SPIEF was attended only by French President [Emmanuel] Macron and Japanese Prime Minister Shinzo Abe. Contracts signed during the EEF amount more than $46 billion while SPIEF gathered contracts worth $38 billion.

Against the backdrop of increasing Western sanctions pressure and unprecedented growth on the global petrochemicals market, both factors are pushing Russia to look increasingly toward the Asia-Pacific region. Moreover, it coincides with Moscow’s goal to diversify its markets and to develop its partnerships in the region.

Global petrochemicals market is considered to be the fastest growing and expected to increase considerably over the next five years, rising from 1,464 million ton per annum (mtpa) in 2015 to 1,708 mtpa by 2020 and to 1,931.5 mtpa in 2026. In addition to that, according to 2018 BP Energy Outlook, petrochemicals is projected to be the fastest growing source of demand. Asia is going to be the main driver of such growth, with China leading as a largest consumer of petrochemicals.

In Russia, chemical products account for 4.4% ($19 billion) of all exports. The industry’s goods are the third most exported from Russia, after minerals and metals. And it seems that the country’s industry wants to grow its capacities.

Seyfeddin Roustamov, a businessman who controls Russia’s group of companies Metafrax, one of the top three producers of synthetic resins in Europe and the largest producer and exporter of methanol in Russia, said that his company is planning to invest more than 950 million euros ($1.1 billion) in construction of a chemical complex construction in Gubakha of Perm Region. The facility is planned to produce up to 575,000 tons of carbamide, 308,000 tons of ammonia, and 41,000 tons of melamine per year. The project is the company’s biggest investment in decades.


IN OCTOBER 2017, Metafrax signed 388 million euros ($447 million) contract with Swiss Casale SA (the world leader in creating and licensing of its own technologies in production of ammonia, methanol, carbamide and melamine) which will provide services for project documentation, technological know-hows, equipment set up and the project’s construction management. Such cooperation confirms dependency of Russian producers from European suppliers of technologies and licenses. That said, 40% of Metafrax revenue comes from exports to UK, Finland, Austria, Germany, Switzerland, etc. European countries are the biggest consumers of the company’s products.

In February 2018, Roustamov’s company established SamyangMeta, a joint venture with Korean Sunghong Co. Ltd., to boost its outreach to the Asia-Pacific. Interestingly, Metafrax also hopes to deliver its products to the European market through this joint venture. It looks increasingly like an attempt to find alternative ways to increase its presence in the European market. Nevertheless, Moscow tries to expand to the Asian markets in a quest to diversify its economic partners which, in fact, is quite a rational policy given the prospects of Asian market growth.

This endeavor seems to be challenging, although very attractive. Despite the fact that Russian economy has been dealing quite successfully with the economic challenges, it still lacks structural reforms needed to provide a long-term effect on the country’s economic development. “Pivot to Asia” policy cannot resolve all Russia’s economic problems alone, and it will not smooth Moscow’s confrontation with the West. This is why Kremlin shall not develop ties with Asia at the expense of its relations with Europe. It needs to find a healthy balance which will allow Russia to develop successfully taking advantages from both worlds.

Alexey Khlebnikov is an international relations expert and strategic risk consultant focusing on Russia, Middle East and energy issues. He is also a non-resident expert at the Russian International Affairs Council and a senior analyst at Eurasia Strategies consulting group.

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