Russia Update

As the international community grapples with the eastern Ukraine, we return to a theme we have followed more closely since the Park-Putin summit of last fall: the "Russian pivot” to Asia. The most significant economic development in this vein was undoubtedly the Gazprom deal with China. But we have also noted a succession of initiatives vis-a-vis North Korea. These include the official write-down of Soviet-era debt by the Duma in May, finally ratifying a deal that had been negotiated in 2012. We have been highly skeptical that Russia and North Korea could hit the ambitious target of $1 billion in two-way trade by 2020, announced at a bilateral meeting in March of this year. But several stories in the last several weeks provide more evidence of what the two countries are doing.

First up, KSG Nightwatch ran a useful summary in June on the 6^th meeting of the Intergovernmental Commission on Trade, Economic, Scientific and Technical Cooperation (ITAR-TASS coverage here), chaired on the Russian side by the Minister for Development of the Far East. Among the initiatives were:

• Discussion of Russian “cooperation”—read “investment”—in a number of raw materials projects. These include development of talc, copper, quartzite, vanadium anhydride and ultra-anthracite deposits and North Korean provision of coking coal, steel products and mangetite. In addition, the story cites Russian participation in a gold mine in exchange for second-hand Tu-204 airliners, a barter deal suggesting how Russian investments will be collateralized. Ironically, as KSG notes, these projects sound exactly like the ones Jang Song-thaek was promoting with the Chinese.

• An agreement in principle was reached for cooperation between the DPRK Ministry of Crude Oil Industry and the Russian firm TAIF to build a gas station network in North Korea. This project is interesting for several reasons, including the effort by North Korea to diversify away from reliance on Chinese energy sources. However it is also interesting in suggesting that there is adequate demand to sustain such an effort.

• The North Korean government agreed to simplify visa procedures for Russian investors and to permit use of the internet and mobile phones; even Chinese investors have faced problems on this front.

• The meeting confirmed the opening of corresponding banking relations that would permit settlement in rubles.

• The Russians proposed that a commercial fleet of tugs, refueling ships, a floating crane and a dredger be positioned at Rajin to keep the port open, reflecting concern that North Korea will not invest adequately to make the facilities useful.

Last week, Russian thinking about the uses of Rason was clarified by announcement that a new Russian-North Korean land freight terminal would be opened in the zone. The terminal was initially designed for transhipment of containerized cargo, but the two sides agreed that it would also be used for Russian coal. A story in the Moscow Times clarifies the logic. Demand for coal continues to rise in the Asia-Pacific, particularly in China. Russian ports specializing in coal export at Vostochny and Vanino are apparently operating at full capacity; Rason provides a backup, and one that is ice-free all year. Last month RZhD Logistika loaded a total of 9,000 metric tons of coal on two freight trains of 130 cars each for the Russian coal and steel group Mechel. The cargo was ultimately headed through Rason to Shanghai, Lianyungang and Guangzhou.

But Russian officials talked openly of reaching other customers via the North Korean port as well, including South Korean firms such as POSCO. Press coverage of the opening of the terminal noted that “South Korean businessmen” were present. The Russian investments in rail and port facilities at Rason continue to raise the question of whether South Korea’s so-called May 24^th sanctions, put in place following the sinking of the Cheonan, would ultimately be relaxed to accommodate joint ventures and trade through Rason.