In 2008, Russian President Vladimir Putin and now former South Korean President Lee Myung-bak were delighted when their gas monopolies Gazprom and Kogas signed a $90-billion deal to build a pipeline from Russia to Korea. Three years later, Lee and Putin’s successor Dmitry Medvedev met and confirmed that construction would begin in 2013 and be available for use by 2017. However, as of November 2013, construction has yet to begin, and there is no word from either side on where the ambitious project stands, with little reason to assume that it will progress past the initial stages.
A recent Seoul-Moscow summit meeting held in Seoul on Nov. 13 harked back to the overambitious pipeline deal of 2008. At the meeting, Putin tried to convince current South Korean President Park Geun-hye to support the construction of a transcontinental railway network linking Russia and South Korea. The route would cut through Rajin, a port city in northeastern North Korea, and Khasan, a Russian city bordering North Korea. This so-called “Iron Silk Road Express” is one of the many large-scale infrastructure projects that Putin has pursued since his earlier terms, including a high-speed railway between Moscow and Kazan and highways from Moscow to other major cities such as St. Petersburg. A better connected Europe and Asia would theoretically benefit all by helping facilitate trade, but the salient question stands: would it be a sustainable, or even feasible, project given the geopolitical conditions of the region? Five years after the initial proposal, Putin’s staunch commitment to the Iron Silk Road Express project is raising eyebrows everywhere. Foreign investors remain unconvinced, and Russians question whether it will guarantee economic growth. The financial and political hurdles that the project and Putin, as its instigator, face seem insurmountable.
Although South Korea is geographically connected to Mainland China, it is virtually cut off from the greater Asian continent due to the isolation and unpredictability of North Korea. Positioned at the south of a politically closed off peninsula, South Korea functions more like an island nation in terms of trade and travel than one connected to land. To remedy this, Putin’s plan is to extend farther eastward the Trans-Siberian Railway, which currently runs from Moscow to Vladivostok, Russia’s largest eastern city. From Rajin, the new railway would run all the way down to South Korea’s logistics hub Busan, located in the southeastern corner of the country. The ultimate goal is ostensibly to transport cargo between East Asia and Europe via land rather than sea – a currently difficult operation due to the lack of direct land routes. The plan also entails the modernization of both Khasan and Rajin. The renovation of Rajin and its railways, costing $340 million, was already agreed upon by North Korea and Russia in the earliest stages of the plan in 2008.The upgrading of a 33.6-mile track from the border city of Khasan to Rajin was just recently completed in late September, albeit five years behind schedule.
In addition to geopolitical concerns, funding remains a continual struggle for the project. Putin announced this summer that Russia would turn to its pension reserves for up to $43.5 billion to fund railway construction. His intention to use public funds, looking to trade the immediate benefits of public infrastructure for the more long-term cost of public pension reserves, is risky. Because of this, Russia has a history of preferring foreign investment. The bilateral agreement reached at the meeting this November, also attended by Russian and Korean businessmen, said three Korean firms—steel company Posco, Hyundai Merchant Marine and state-owned Korail—may consider investing, while spokespeople from all three firms said otherwise afterward. President Park has negotiating power over these large corporations, as those that are on good terms with the government may enjoy perks such as opportunities to participate in government projects and benefits in interest rates and loans. The government can stall business for firms that don’t cooperate by launching lengthy, full-scale investigations of their operations and books through the national prosecutors’ office and tax administration. However, Posco has said it is not committed, while Hyundai and Korail said they have not yet seriously discussed the issue beyond “exploring the possibility” of investment.
These tentative statements make it unlikely that the companies will commit, as investing in Russian ventures is simply not attractive enough. In 2011, former president Lee asked Medvedev to support South Korean investment ventures in Russia by issuing licenses and tax benefits, but statistics from 2012 show that Korean businesses didn’t take the bait. Last year, sea-based trade between South Korea and Russia was worth $25 billion. To give some perspective, trade between South Korea and China was worth $256 billion, indicating a lot more trust and perceived stability in China’s economy. In the same year, South Korean investments in Russia amounted to only $1.9 billion, whereas investments in China added up to $56 billion. South Korean businesses know what to expect from investing in Russia—after the fall of the Soviet Union, they flocked to invest in the new market. However, they returned disappointed, moving their investments to China instead. In January of this year, Hyundai opened a transformer plant near Vladivostok, but local bureaucratic incompetence has interfered with operation. With few successes, South Korean investors will not pursue investment in Russian infrastructure or economy.
Even if Posco, Hyundai Maritime and Korail were to commit to the plan, it would face a profound economic obstacle: the South Korean government forbids its companies to invest in any way in North Korea, with the exception of the Kaesong industrial complex. Considering this ban, which has been in place since 2010, it’s strange that Putin seeks South Korean investments so strongly. Perhaps he truly believes in encouraging the gradual opening up of North Korea, or more unlikely, he believes that eventually, economic interest will trump an international sanction. But South Korea’s Ministry of Unification (established for the specific end of reuniting the two Koreas) said soon after the Nov. 13 summit that it would not be lifting the ban on investing in North Korea. Without this lift, it is dangerously unproductive to consider any sort of trans-peninsular network.
This is exacerbated by the problem of how a transnational, inter-Korean railway network would be maintained once it is completed. Putin drastically underestimates the complexities of the geopolitical issues that determine Seoul-Pyongyang-Moscow relations. Besides the large investments the project calls for, heavy negotiations, compromises, and appeasement would be necessary to elicit cooperation from such a historically volatile country like North Korea. For example, a joint tourist region in the Kumgang Mountains in North Korea was suspended in 2008 when the North Korean government refused the South’s push for a joint inquiry into the fatal shooting of a South Korean tourist – only one of many uncooperative actions the nation has taken over the years.
Even if the South Korean government lifts its investment sanction on North Korea, the Iron Silk Road Express is built, and cargo can finally be shipped across Russia, a huge political obstacle remains. Regardless of Russia’s intentions, North Korea will have been granted control, to a certain extent, of Russia and South Korea’s economies. If – or when – tensions on the peninsula flare, North Korea can hold the railway as a political hostage. As it demonstrated earlier this year when it unilaterally shut down operations in the Kaesong complex, North Korea rarely observes contracts with its neighbors and will sacrifice business for the sake of political maneuvering. Any careful business would not invest in a plan of economic cooperation that carries such a high risk. Although operations have been restored in the Kaesong complex, it is still recovering from the damage done by the events that unfolded this spring. The Kaesong complex, a special inter-Korean industrial region near the border, provides South Korean businesses with cheap, Korean-speaking laborers, but is more important to the North as a source of foreign currency. While South Korean businesses risk large losses from a shutdown like this spring’s, North Korea prioritizes regime preservation over economic development.
Relatively functional diplomatic relations between Russia and North Korea have led some to believe that North Korea would not risk losing an important ally by holding the railway hostage. But what little confidence South Korean investors had in North Korea has eroded due to the Kaesong incident, and Russia will not be able to go about building the Iron Silk Road Express without South Korean investments. The very tentative agreement reached at the Nov. 13 summit was that if the three South Korean firms were to officially commit, they would fund half of Russia’s 70 percent investment in the project. Putin’s unimpressive track record with completing large infrastructure projects and his inability to utilize soft power in soliciting foreign support (he was late to the November meeting and made several last-minute changes to the schedule) make this unlikely. Political commentators say Putin is more politically motivated in his push for the project, perhaps looking to compete with China in establishing regional hegemony in Northeast Asia. From the expansion of South Korea-Russia trade, China would face competition from Russia as an exporter of natural resources to Korea. Either way, not only is the project unfeasible on economic terms, but if completed will pave the way for greater geopolitical tension in the region.