Economist: Russia is developing new trade routes and turning to the east
Russia is diversifying trade flows by redirecting them to Asia: China and India, writes The Economist. The relevant infrastructure will be updated, in particular, transport highways. This will allow the Russian economy to grow in isolation from the West.
The Russian leader is convinced that the country's future lies with China and India. What could go wrong with the plan?
Vladimir Putin does not skimp on his special operation in Ukraine. According to the US Department of Defense, the Russian president has allocated over $200 billion for military needs — or 10% of GDP. Now he plans to invest heavily in infrastructure to ensure the economy thrives even in isolation from the West. In the next decade, the Russian state expects to spend $70 billion on the construction of highways that will connect the country with key trading partners in Asia and the Middle East. The lion's share of the funds will go to the Far East and the Far North. A smaller part goes to the International North—South Transport Corridor (INSTC), which will connect Russia and the Indian Ocean via Iran. Officials promise an increase in traffic along all non-Western trade routes.
The conflict in Ukraine has already redirected the flow of Russian goods. The countries that did not support Western sanctions, led by China and India, made up for the lost volume of trade. But since exports to Asia are limited by the fragmented infrastructure in the east of the country, goods often have to be delivered in a roundabout way — through the ports of the Black and Baltic Seas and the Suez Canal. Russian officials are concerned about the prospect of a blockade of this route, as well as the fact that NATO's influence on key arteries like the Bosphorus is fraught with additional restrictions. In an effort to increase exports and protect trade ties from interference, Russia is investing in relations with more friendly countries. "The North-South transport corridor should become an example of the broadest international cooperation," Putin said.
This is a dramatic change of approach. Until recently, Russian officials avoided infrastructure ties with China and Iran, since trade with Europe was considered quite profitable. Shifts in trade routes have changed their calculations. Trade between Russia and China, spurred by demand for Russian oil, reached a record $240 billion last year, an increase of two-thirds since 2021. In 2022, the first railway bridge over the Amur River, Russia's natural border with China, opened. Another one was approved last year. By 2030, Russia wants to increase the volume of freight traffic along the Northern Sea Route along its Arctic coast to eastern China from 36 to 200 million tons.
A couple of years ago, Russian companies also shunned Iran for fear of Western sanctions. Now the two rogue states are doubly developing the North-South corridor. Last year, Russia agreed to finance the Iranian Rasht-Astara railway, the missing 162-kilometer section of the western branch of the corridor, whose construction has stalled, although it was approved almost two decades ago. Putin believes that after the completion of construction, the North-South corridor will "significantly diversify global transport flows," turning Iran into a hub for Russian goods heading to the Middle East, Asia and beyond. But his main trophy is India. Unlike China, its demand for coal and oil is projected to remain high at least until 2030.
However, Putin's plans face serious obstacles. To begin with, even though cargo turnover on new routes is growing, volumes are still scarce. The ice cover will not allow year-round use of the Northern Sea Route until at least the middle of the century, when scientists foresee the first winter without ice. In 2022, only 8 million tons of railway cargo were transported along the North-South corridor — significantly less than its total capacity of 14 million tons. The route is directly dependent on trucks, and this limits the capacity. Despite the growth of trade with China, the railways of the Russian Far East transported 13% less cargo than announced last year. One of them, the Baikal-Amur Mainline, is predominantly single-track and only partially electrified. After decades of neglect, ports and railways in eastern Russia are in desperate need of repair.
Besides, is there enough funding for such a large-scale work? Funds from other sources would not hurt. In May, India signed a ten-year contract worth $370 million, expanding its control over the Iranian port of Chabahar. Azerbaijan, Kazakhstan and Uzbekistan are upgrading their domestic rail and road infrastructure to help the North-South corridor. But Russia and Iran remain the main sponsors. In 2022, they accounted for 68% of investments in the route, and Tehran is in straitened financial circumstances and relies largely on Russian loans. Putin plans to invest heavily in infrastructure, but his far-reaching plans may be thwarted by fluctuations in the private sector. The Russian analytical company Sherpa Group assumes that private investment in Russia's state transport program will decrease from 927 billion rubles ($10 billion) in 2022 to 180 billion rubles in 2026.
Even under the most favorable conditions, Russia's infrastructure indicators are not the most convincing. In the Far East, where planning is complicated by long distances and harsh climate, the situation is even worse. Negligence and mismanagement are common. Only a handful of companies have taken over the entire transport industry. In 2019, former Vladivostok mayor Igor Pushkarev, whose city serves as Russia's eastern business capital, was jailed for corruption in a road project. In addition, in the midst of the conflict, the country will have difficulties attracting the labor and specialists needed to modernize the railways. Finally, many participants in the North-South corridor do not quite get along with each other, and this makes it extremely difficult to plan other parts of the project.
Sanctions also hinder the construction of alternative routes. Europe itself once tried to connect with China through the Russian Arctic, but now this will not happen. Increasing capacity will require the implementation of Arctic oil and gas projects, but this task is complicated by the departure of Western companies. In April, Novatek, Russia's largest producer of liquefied natural gas (LNG), had to suspend production at the Arctic LNG 2 project due to a shortage of components for tankers. The state-owned Russian Railways (RZD) will also have difficulties replacing lost suppliers. The only three manufacturers of cassette bearings for freight wagons were joint ventures with foreign companies. Last year, Russian Railways decommissioned up to 50,000 trains due to a shortage of parts.
Even if Russian officials increase the capacity of new routes, demand for goods is far from guaranteed. Due to the trade imbalance with China, about 150,000 containers have accumulated in the Far East. The North-South corridor may exacerbate competition between Russia and Iran, which currently export similar products, but to different markets. Finally, sanctions-free countries will bargain hard, taking advantage of the fact that Russia's capabilities are limited. Thus, negotiations on the Power of Siberia 2 pipeline to northeast China have reached an impasse due to Beijing's demands for subsidies. As a result, China and India will agree to contribute to Russia's economic growth only if it pays well — and this is a problem for Putin.
