Following the eruption of the Ukraine crisis, the Asia-Pacific was reticent to join Western sanctions on Russia. Maintaining a delicate balancing act, no Asian countries aligned with Washington’s punitive measures. Japan begrudgingly joined, but imposed only symbolic sanctions. Asia’s non-alignment became particularly instrumental for Moscow’s adaptation to Western sanctions. Initially, the pivot to Asia was envisioned as a short-term tactical measure designed to buy valuable time to develop homegrown analogues. The program of import substitution was launched to supplant equipment and technology in the energy and defense sectors, among others. However, due to the lack of domestic capabilities and poor inter-sectoral cooperation, progress on substitution has been protracted and weighed down by uncompetitive prices and low quality. The import diversification to non-Western countries has gradually replaced the drive for Russian-made substitutes and became a crucial part of Russia’s long-term agenda. The Asia-Pacific emerged as a new export market for hydrocarbons and weapons, as the leading supplier of state-of-art technology and as the main alternative to Western capital.
Market Diversification
As the relationship with the West deteriorated, Russia aimed to boost its energy exports and arms sales to Asian customers. With the launch of the East Siberia-Pacific Ocean pipeline, Russia became the largest oil supplier to China, replacing Saudi Arabia. Moscow is also slated to become a major natural gas supplier to China. In December 2019, the long-awaited Power of Siberia pipeline came online, starting the delivery of 38 billion cubic meters of natural gas per year for 30 years. A burgeoning Asian LNG market with high premium attracted Novatek, Russia’s leading LNG company. The company is planning to ship 80-85 percent of its liquefied natural gas from the Yamal and Gydan peninsulas to the Asia-Pacific.
Similarly, in the defense sector Russia prioritized the pivot to the East. Russia ramped up its weapons sales to Southeast Asia and become the largest arms exporter to the region. Over 60 percent of its arms shipments, including missile defense systems, tanks and fighter jets, were directed to India, Laos, Vietnam, Myanmar, the Philippines and Indonesia. India strengthened its position as Russia’s largest weapons customer and purchased more than $4 billion worth of arms in 2017. Defying Western sanctions, Russia sold its advanced military weapons such as the Sukhoi Su-35 air fighter and S-400 surface-to-air missile defense system to China and India. Once resistant to the idea, since 2014, Russia has opened its upstream sector and transportation infrastructure to investors from China and India.
Delivery of Advanced Technology and Equipment
According to the latest monitoring by Russia’s Gaidar Institute for Economic Policy, China and India emerged as the main beneficiaries of Russia’s lingering import substitution. Since 2014, Chinese companies have rapidly come to occupy Russia’s market of technological equipment and gradually enhanced their prowess. Originally, Chinese equipment was considered low-quality, but it stood the test at Novatek’s Yamal LNG. Breaking the Western technological monopoly, China’s six offshore engineering companies were involved in the module construction and manufacturing of transportation ships. Previously dominated by Western firms, Russia’s oilfield services market also has experienced a significant tilt toward China. Jereh Group and Sichuan Honghua Petroleum Equipment have become notable suppliers of drilling rigs, increasing their share on the Russian market to 45 percent. Recently, Chinese machinery exports to Russia has overtaken those of Germany for the first time. Chinese companies have assisted Russian energy majors in developing the technology of enhanced oil recovery, the transfer of which is partially banned under U.S. and EU sanctions. With China’s equipment quality significantly improving, Russian companies have found it suitable for their Arctic projects. Rosneft and Gazprom Neft have used the Chinese semi-submersible drilling rig “Nanhai VIII” in their sanctions-hit projects in the Kara Sea, while Novatek employed a Chinese-produced polar drilling rig on the Yamal peninsula.
Wary of Washington’s reaction, Japan, South Korea and Singapore have played a limited role and have mainly assisted in sectors adjacent to the sanctioned ones – LNG and shipbuilding. Japan’s JGC Corporation and Chiyoda Corporation became the main engineering contractor for Yamal LNG, while South Korean shipyards constructed LNG vessels for the same project. For Artic LNG-2, Samsung Heavy Industries and Hyundai Samho Heavy Industries will provide technology transfer to Rosneft-led Zvezda Shipyard to compensate its lack of expertise in shipbuilding.
In the defense sector, India has played a crucial role in Russia’s import substitution. Indian chipsets were chosen for Russia’s new generation satellites GLONASS after being affected by sectoral sanctions. In 2018, India finalized a long-pending contract for the building of four Russian guided-missile frigates at the Goa Shipyard. The ships were originally designed to be equipped with Ukrainian-made gas turbines, but after Ukraine’s military export ban the construction with technology transfer was given to the Indian state-owned shipyard for a lucrative price. Last year, India signed a cooperation agreement on the joint manufacturing of spare parts and components for Russian military equipment. Southeast Asia became a crucial supplier of electronic components, previously procured from NATO states. Despite Moscow’s distrust and reservations, the high-tech cooperation with Beijing appears to be a promising area of collaboration, including the building of Russia’s 5G infrastructure.
China’s and India’s assistance did not come at a low cost. Capitalizing on Russia’s isolation from the West, Beijing and Delhi leveraged their bargaining positions and dictated financial conditions and the asking prices favorable for them.
Alternatives to Western Funding
The Asian government-backed institutions have emerged as the main financial vehicles for cash-strapped Russian entities. Decoupled from Western financial systems, they have provided assurances for the private sector to mitigate the sanction risks. Without this, the participation of Asian businesses was less than guaranteed. Compounded by complex bureaucracy and the lack of knowledge of Russia, Chinese private banks refused to provide loans to sanctions-hit Novatek’s Yamal LNG. The external financing was secured only after a high-level political intervention and the restructuring of the loans with China’s state-owned Silk Road Fund, the China Development Bank and the Export-Import Bank of China. Similarly, the Japanese private trading house Mitsui & Co. agreed to acquire a 10 percent stake in Novatek’s Arctic LNG-2 only after the Japan Oil, Gas and Metals National Corporation, a government agency, agreed to cover 75 percent of investments.
Engagement with Asian state-owned institutions was not as effortless as it seemed. Several deals on equity participation and financial lending ran into difficulties. Russia’s reticence to grant controlling stakes and disagreements on the asking price hampered negotiations. Chinese withdrawal from equity participation in the Vankor field and the failure to provide $25 billion prepayment to Gazprom for Power of Siberia showed the limitations of China’s readiness to bankroll Russia’s ambitious projects at any price.
In the future, Asian government backing will remain crucial for securing external funding. But attracting Asian investments will be detrimental to Russia’s aspirations for self-sufficiency and technological sovereignty in the long run. As Chinese financial assistance is often conditioned on Chinese contractors and materiel, it will come at Russia’s expense to develop its homegrown production and reduce its over-dependence. To offset power asymmetry with Beijing, Moscow seeks to diversify to other actors in the region, but due to expanding U.S. sanctions, Russia’s pivot to Japan and South Korea will be limited in scope.
Dr. Maria Shagina is a postdoctoral fellow at the Center for Eastern European Studies at the University of Zurich. She specializes in international sanctions and post-Soviet studies. Currently, she is affiliated with the Geneva International Sanctions Network at the Graduate Institute. Her publications have appeared in the European Council on Foreign Relations, Foreign Policy Research Institute, Atlantic Council, New Eastern Europe, and Global Risk Insights.