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Why Russia’s pivot East is crucial for its own survival

BEIJING, CHINA - SEPTEMBER 03: Russian President Vladimir Putin (C) chats with China's President Xi Jinping (R) next to South Korean President Park Geun-hye on Tiananmen Gate during the military parade marking the 70th anniversary of the end of World War Two on September 3, 2015 in Beijing, China. China is marking the 70th anniversary of the end of World War II and its role in defeating Japan with a new national holiday and a military parade in Beijing.
Jason Lee | Pool | Getty Images
BEIJING, CHINA - SEPTEMBER 03: Russian President Vladimir Putin (C) chats with China's President Xi Jinping (R) next to South Korean President Park Geun-hye on Tiananmen Gate during the military parade marking the 70th anniversary of the end of World War Two on September 3, 2015 in Beijing, China. China is marking the 70th anniversary of the end of World War II and its role in defeating Japan with a new national holiday and a military parade in Beijing.

After much rhetoric on Russia's "pivot East", the year started with bad news for Moscow and its push to strengthen its ties with China. The Chinese stock markets are tumbling growth is slowing and the volume of Russia's trade with China offers little room for optimism. Are things really as bad as they seem?

There are profound, strategic reasons that have led to Russia's pivot to Asia, one of the most dynamic regions in the world. Given Russia's geographical positioning, it is advantageous to participate in China's growth and strategically important for Moscow to maintain sovereignty over its own Far East.

However, questions have been asked about the rationale behind this pilot – and its viability. With business ties in the West looking fraught, the Russian economy has been backed into a corner, the turn to Asia has been seen by some as an act of desperation from the former world superpower running out of options.

Russia's economy has been badly hit by plunging oil prices and western sanctions and needs to replace lost sources of revenue and funding, as a matter of urgency. High growth markets in Asia and particularly China offer an obvious alternative, with push-pull factors involved for Russia.

Are there gains to be made?

There is plenty of scepticism around the level of financing and trade that is likely to come to Russia, given that bilateral trade between Russia and China actually dropped by a third last year and energy prices fell and China experienced its own domestic economic slow-down.

There are doubts around the level of financing and trade that is likely to head Russia's way, with bilateral trade between the two countries actually dropping by a third in 2015 as energy prices fall and China experiences its own domestic economic slow-down.

Several high-profile projects are currently stalled or being scaled-back and the president of Russian investment giant Sistema recently labelled the likelihood of Asian investment replacing Western capital for sanction-hit Russian "inefficient companies" as "a big myth".


Uncertainty in Asia

There are also questions to be asked about the reliability of seeking investment from the largest Asian market, given the crashes and crises that marked 2015, which many economists are retrospectively calling the Great Fall of China.

Whilst the tremors from China's stock market tumble have been felt around the world, the volatility that has spooked investors is arguably a red herring for Russia; given that the pivot east is much more long-term in scope and expectation for the country.


Waiting it out

It is important to remember that both China and Russia are playing a long game here. When looking in at Russia from the West, many regard the Russian attempts to pivot East as a failure, or disappointing at best.

Nonetheless, the longer-term trend supports Russia's pivot east and there are high-profile examples, such as the recent $15 billion fundraising by sanctioned Russian state oil giant Rosneft, purportedly from prepayments by China National Petroleum Corporation.

From another angle, Russia is also very conscious of its long-shared (and, in the past, disputed) border with China and the growing economic influence of China in Russia's own Far East, at a time when the Kremlin's influence there is being tested by shrinking national budgets, ageing infrastructure and the sheer distances, time zones and inclement weather involved. A sceptic might say that Russia is keeping its enemies closer.


East vs West

It is important to remember that in the West, politicians are shaped and guided by independent mass media, public opinion polls and the whim of the electorate, its large corporations and banks are measured in terms of annual profits and are answerable to their shareholders and institutional investors.

When looking out east from the walls of the Kremlin, different rules and timescales will apply.


Ian Ivory is a partner at international law firm Berwin Leighton Paisner.

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