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Putin bets on Asia pivot to lift Russia's flagging Far East

Vladimir Putin, left, with U.S. actor Steven Seagal, center, at the Eastern Economic Forum in Vladivostok on September 4. Russian news agency Tass reported Seagal was in the city for a martial arts competition.
Dmitry Azarov | Kommersant | Getty Images
Vladimir Putin, left, with U.S. actor Steven Seagal, center, at the Eastern Economic Forum in Vladivostok on September 4. Russian news agency Tass reported Seagal was in the city for a martial arts competition.

With weeds choking the husks of many of its abandoned buildings, the tiny settlement of Khasan on the Russia-China-North Korea border is an object of curiosity for Chinese tourists and a symbol of neglect in Russia's Far East.

"They bring them here and tell them, 'Do you want democracy? Here it is'," a Russian border officer, who asked not to be identified, told Reuters, referring to tourists who gaze at the Russian settlement from China. "And they point to the ruins of Khasan."

But if Russian President Vladimir Putin gets his way and China opens its wallet, Khasan may not be poor for much longer.

As Russia's economy stutters, buffeted by cheap oil and Western sanctions imposed over the Ukraine crisis, Putin is turning his attention to the country's Far East region where he hopes Asian money can generate some much-needed prosperity.

On Friday, Putin wooed investors at the Eastern Economic Forum in Vladivostok, an inaugural event he initiated, urging them to bring their cash to a region famed for its abundance of natural resources, forestry and fish stocks.

"The possibilities here are enormous," the Russian leader told Chinese, South Korean and Japanese investors at the forum. Putin said he wanted the region, which amounts to more than a third of Russia's vast landmass, to become as profitable as other "leading business centres".

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Denied access to most Western financial markets because of the sanctions, Russia is looking particularly to China for investment opportunities.

With slowing economic growth hitting its stock market, China has its own problems.

But its proximity to Russia and its status as the world's second biggest economy makes it an attractive target for the Kremlin nonetheless. Putin visited Beijing on Thursday, securing a clutch of new business deals.

But there was no breakthrough on major infrastructure projects, underscoring the limits to a relationship Moscow has cast as a counterweight to the West. Chinese direct investment into Russia totaled around $8.4 billion in 2014, up more than 10 percent from the previous year. But that was dwarfed by Chinese direct investment into Europe for the same year, which hit $18 billion, according to Rhodium, a China-focused research group.

Putin told the forum on Friday he was confident the Asia-Pacific region would remain "the engine of the world economy" despite its current problems.

The forum's attendance reflected Russia's change in emphasis. China's delegation was headed by Deputy Prime Minister Wang Yang. The only high-profile Western participant was Ben van Beurden, chief executive of Royal Dutch Shell.

Speaking on Saturday, Wang said the Far East development strategy outlined by Putin coincided with China's strategy of "north-east rebirth".

""(The) Russia-Chinese partnership will definitely bring generous fruits," he said.

Wang's address to the forum was short and he left immediately afterwards, in the middle of the session, followed by Chinese officials, including Wang Yilin, chairman of the board at China National Petroleum Corporation.

"This was unexpected but this was okay, we managed," said Boris Titov, chairman of the Russian part of the China-Russia Friendship Committee for Peace and Development.

"The first session was delayed and they (the Chinese delegation) had already a briefing scheduled."

A CNPC official, who was accompanying Yilin but declined to give his name, said only: "The schedule has changed."

Some Russians fret over their country's increased economic reliance on China -- a process encouraged by the Western sanctions -- but there was no sign of any such reservations at the Vladivostok forum.

"Chinese counterparts ... are interested in investments, in organising joint companies - for them this region is of huge interest," Russia's First Deputy Prime Minister Igor Shuvalov told the state Rossiya-24 news channel.

And before his departure, CNPC's Yilin told reporters that developing ties with Russia was a priority for Beijing because of the desire to diversify its sources of energy.

"China is importing crude oil from other countries, usually via sea, while here we can import oil by land. This is good protection for the security of our country's crude oil imports."

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The Russian government has been passing laws to try to attract investors to the area and has designated Vladivostok a free port, a move that eases its visa regime and is aimed at increasing trade and tourism.

Putin promised on Friday to spend state money in the Far East -- some of it via state-backed investment funds. He pledged Russian companies would expand their presence, words backed by a decision of Rosneft, the country's largest oil producer, to invest 1.3 trillion roubles ($19.26 billion) in projects in the region.

"These huge investments by Russian standards, such attention from the government, this says that all of this (the focus on the Far East) is serious," Dmitry Golovanov, chairman at Eximbank, a unit of the state development bank, Vnesheconombank, told Reuters.

But the scale of the task is huge.

Russia's Far East has lost a quarter of its population since the collapse of the centralised Soviet economy 25 years ago and is now home to only about six million people.

One of Putin's ideas is to encourage internal migration: He has promised free land to Russians who want to develop it.

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In Khasan, whose population has halved to less than 1,000 people since 1991, a few new apartment buildings have been built in recent years, inhabited by people who have left their former houses to rot. But for some, Putin's promise of a better future for the region cannot materialise soon enough.

Local shops in Vladivostok are stocked mostly with lower-end products tailored for people's modest budgets, road infrastructure is dismal, and there is a lack of housing.

Alexander, a taxi driver born in Vladivostok and the father of a three-year-old, said he had one goal: to move to the European part of Russia.

"I may have hopes for the (Far East) region, but I have no hope that the quality of life will improve."

Ian Ivory, a partner at Golstblat BLP, was equally pessimitic that China would be the savior of the Far East, or indeed Russia.

He aid the Chinese slowdown would hardest affect emerging markets which are providers of raw materials.

"Russia is another classic example that will feel the pain, and China will be a further negative drag on the Russian economy," Ivory said in e-mailed comments.

- CNBC contributed to this report.