Russia in Asia--Asia in Russia: Energy, Economics, and Regional Relations

At a recent Wilson Center conference on the Russian Far East (RFE) and Northeast Asia (NEA), four panels met over two days to examine the prospects for the large energy supplies of the RFE and the large and growing energy demand in NEA to drive closer economic and political integration within the region.

The conference opened with an address by Gene Lawson, U.S.-Russia Business Council, who described the tremendous energy resources situated within the RFE and the demand for those resources in the rapidly growing economies of NEA. He noted that in addition to the formidable obstacles of geography and climate, the bureaucratic and political obstacles within the Russian Federation have and will likely continue to impede the development of Russia's energy resources in the region, in spite of the great demand within the immediate vicinity.

The first conference panel, featuring Alexander Fedorovsky, Institute of World Economy and International Relations, Moscow; Robert Orttung, American University; Josh Newell, author, The Russian Far East: A Reference Guide for Conservation and Development; and Blair Ruble as chair, provided a general overview of economic, political, and environmental conditions in the RFE. The RFE contains a vast amount of territory, with a small and shrinking population. Yet while some regions have seen population declines as much as two-thirds, the southern regions along the Chinese border have had modest declines in population and in fact have experienced faster economic growth than the national average. That economic growth is almost completely linked to resource extraction (manufacturing is only about 10 percent of the economy). Sakhalin Island in the RFE, site of several major energy development projects, is the single largest recipient of foreign direct investment in Russia. Politically, the RFE seized a great deal of local autonomy during the 1990s. Local leaders cooperated with local business to keep out influences from larger parties and larger businesses. With hostility to outsiders and an economy driven by extracting and quickly exporting resources from energy and minerals to timber and fish, corruption and criminality flourished. Even with President Putin exerting greater central control over the region in recent years, hostility to outside influence, especially in the form of foreign migration, remains.

The second panel, chaired by Paul Rodzianko, Access Industries, included Shawn McCormick, TNK-BP; Michael Bradshaw, University of Leicester; Marshall Goldman, Wellesley College; and Nicholas Eberstadt, American Enterprise Institute examined the various energy projects and associated issues in the RFE. McCormick discussed the TNK-BP proposal to build a pipeline from the Kovytka natural gas field in Siberia to China and South Korea.* Located near environmentally sensitive Lake Baikal, the Kovytka field has more natural gas than all of Canada. The proposed pipeline to supply China and South Korea would cover a distance longer than Washington, DC to Seattle, WA. According to McCormick, plans for the pipeline would need to be finalized within a year, before customers in China and South Korea decide to use Liquefied Natural Gas (LNG) instead of pipeline gas. Bradshaw next described the various energy projects underway on Sakhalin. The two oldest projects, Sakhalin-1 and Sakhalin-2 (S1 and S2), have been in development since the 1960s with Japanese participation and have only recently come on-line. There is a larger battle over Russia's resources and how to get them to market, according to Goldman. Pipeline construction routes are contested by private companies interested in profits and governments interested in geopolitics and control over resources. The Russian government is particularly concerned about pipeline routes; they are anxious to avoid repeating their experience with building an expensive gas pipeline to Turkey, only to have Turkey decline to buy gas unless the price was reduced. The final speaker, Eberstadt, starkly illustrated the demographic and health challenges confronting the Russian nation and the RFE in particular.

The first day of the conference concluded with an address by Jeffrey L. Miller, Export-Import Bank of the United States. Miller described the Ex-Im Bank's role in financing American goods and services to the various energy projects in the RFE. He noted the promise for those energy projects for promoting regional economic integration and sparking economic development that in turn would provide even greater opportunities for U.S. businesses seeking to enter the markets of the region.

The second day of the conference focused on the NEA nations, and their relations with their Russian neighbor. The introductory speaker, Robert Sutter, Georgetown University, described the region as having states with strong, assertive governments that are strongly nationalistic and competitive. Sutter stated that regional rivalries persist; making it is difficult for these governments to cooperate or respond to outside pressure. As a result, the governments feel insecure and seek to hedge on their decisions by trying to keep options open as long as possible.

The third panel, chaired by Robert Manning, U.S. Department of State, featured presentations by James Dorian, international energy economist, Washington, D.C.; Joseph Ferguson, National Bureau of Asian Research; and John Fetter, FSI Energy on the energy demands of China, Japan, and Korea, respectively. Dorian noted that last year China overtook Japan as the world's second largest consumer of energy (though still only consuming10 percent of U.S. levels). Domestic coal is China's primary source of energy for electricity generation (70 percent today), but the central government is pushing to increase reliance on gas for generation to improve air quality. That gas must be imported, and China must compete with the other nations in the region for those gas supplies. Right now, power outages are common in two-thirds of China. In order to maintain economic growth, Dorian contended, China must lock in reliable sources of energy for power generation. Ferguson reiterated that the Sakhalin-1 and –2 projects were started in the 1960s. Japan is eager to help develop energy projects in Russia, in spite of political difficulties over Russia's Kurile Islands, which were seized from Japan in the closing days of WWII and have been claimed by Japan ever since. Japan is a prime driver behind the proposed pipeline route from the Kovytka field to the port city of Nakhodka, although there is little private interest in financing the enormous costs. Fetter described the positive economic and discouraging political factors surrounding a proposed gas pipeline from Sakhalin Island to South Korea. The Sakhalin pipeline would cost $3.5 billion compared to $18 billion for a Kovytka-Nakhodka pipeline. The Sakhalin pipeline, however, would have to go through North Korea. Fetter set out the case for the pipeline to be considered as an element in a solution to resolve the larger North Korean nuclear issue.

Concluding the conference, panelists Gilbert Rozman, Princeton University; Elizabeth Wishnick, Columbia University; and Daniel B. Poneman, Scowcroft Group, with panel chair Robert Hathaway, Asia Program, examined the political and security relations in Northeast Asia, including Russia. Rozman argued that in the post-Cold War period the power dynamic of the region shifted from a Moscow-Washington orientation to Beijing-Tokyo. He stated that the nations of NEA are returning to an emphasis on their Asian identity as the region becomes more economically integrated (regional trade has shot from $50 to $300 billion in recent years). Within this context, and especially on economics, it is difficult for Russia to fit, contended Rozman. However, the central governments have taken a greater interest in regional integration, and are supporting the goals of integration politically. Wishnick illustrated a number of issues, including migration, corruption, and globalization, that have security implications for the region and further complicate integration. The RFE has a population of 6.8 million along the China border. Over the border in northeast China, the population is 100 million and the local economy is not strong. While local leaders in the RFE claim that "millions" of Chinese migrants are swamping the region, the truth is that Chinese workers seldom stay long in Russia. The fear of foreigners in the RFE has spurred bureaucratic hurdles to migration that do more to encourage corruption and criminality than stem population flows, according to Wishnick. Finally, Poneman discussed the history of nuclear proliferation in the region and in North Korea in particular. North Korea has been extremely adept at playing other nations against each other in concealing prohibited programs and violations of the Nuclear Nonproliferation Treaty it signed in 1985. Now it has pulled out of that treaty, and is believed to have the capacity to build six nuclear weapons a year. Poneman argued that the current U.S. policy towards North Korea is one of "no carrots and no sticks." He warned that if North Korea successfully tests a nuclear weapon, then other NEA nations, especially Japan and South Korea, would be forced to seek nuclear weapons of their own. The other grave concern with a North Korea with nukes is its track record of exporting weapons to states of concern, Poneman noted.

*The original version of this report stated that TNK-BP planned to build a pipeline from Kovytka to the Russian port of Nakhodka. The Kennan Institute regrets this error.