Tuesday, 21 May 2013

Vietnam courts Russia as growth slows

A name synonymous with American overreach and Cold War hubris, Vietnam is nevertheless slowly escaping the bonds of neglected history. The Southeast Asian country has experienced steady growth in the recent past, but as this growth stabilises Hanoi is courting Russia to diversify its security and economic resilience.

While plenty of other countries were contracting or seeing stagnant growth during the last few years, Vietnam managed to average an impressive 6.3 percent GDP growth per year. Even the Vietnam’s unemployment rate, still climbing in some developed European countries, has dropped dramatically to 4.5 percent as rural Vietnamese take their chances closer to the cities. Forecast for 2013 could see 5.3 percent growth. 

Along with the steady GDP rise year-on-year, Vietnam has become a leader in agricultural exports ranging from coffee and cashew nuts, to rubber and fishery products. Vietnam is also one of the region’s most significant oil producers.

Although Vietnam's economic growth has been high,
 there is a struggle to access services in the large cities.
Yet while Vietnam’s economic trajectory is showing promise, it still has a long way to go before reaching stability. Vietnam’s growth rates have stumbled recently due to weak demand in Australia, Europe, and the United States and congealing institutional inefficiencies. Ultimately, Hanoi must undertake some fundamental economic and political reforms if it wants to remain competitive.

To prevent any more quarters like the first in 2013 which saw only 4.89 percent GDP growth, Vietnam’s ruling Communist Party is restructuring itself to better deal with the country’s economic growth. The party is facing pressure to dissolve the country’s single party structure to better deal with regional and international shifts. And as the country’s political system evolves, any upheavals - however minor - might further threaten a wonderful run of growth.

Nevertheless, there are a number of critical domestic investments Vietnam will have to address if it is to attract more foreign investors like Russia, with which Vietnam has enjoyed a long history of relations. Hopefully all the new work will not turn out to be too-little-too-late.

There are many difficulties in securing project financing within the industrial sector and Vietnam’s infrastructure and logistics are acutely underdeveloped. The country has almost no railroads to speak of. Vietnam’s highways, 25 percent of which are paved, are jammed and filled with motorcycles, bikes, and rickshaws. But Ho Chi Minh City is getting another airport, doubling the amount to two.

Getting Vietnam’s low-cost goods and resources to the coast for trade will require a new deep-water port under construction at Cai Mep-Thi Vai, with world-class ship-to-shore cranes potentially ready for implementation by 2015. Coupled with a lowering tolerance for institutional corruption, Vietnam’s planned reforms should positively redirect the country’s future.

And their future is very bright. In comparison to the region’s more traditional manufacturing choice in China, where a growing swathe of middle class workers are pushing China’s labour price higher, Vietnam offers bargain labour prices for new factories abroad. But Vietnam’s outdated politics have proven to be a significant obstacle.

Manufacturing, information technology, and high-tech industries are an important part of the growing economy. For example, Vietnam successfully tested six unmanned aerial vehicles, made by the Vietnam Space Technology Institute on May 19. The drones made 37 successful flights over three days of tests. They are expected to collect important information for use in natural resource management and forest coverage calculation, but also indicate Vietnam’s readiness to engage with the region.

Responding to Vietnam’s growth, Russia is developing stronger ties with the promising country. On May 15, Vietnamese Prime Minister Nguyen Tan Dung concluded his visit to Russia, where he met Prime Minister Dmitri Medvedev. Vietnam’s relationship with Russia is robust and includes defence contracts for Russian-made submarines and expanding energy deals, especially in the nuclear and petroleum sectors.

The Varshavyanka class submarine (archive - RIA Novosti. Igor Chuprin)
Vietnam’s interest in courting Russia is a reaction to its overlapping territorial claims with China in nearby waters. Below the waves could rest a huge 28 billion barrels of oil, but above the waves nationalist objectives clash. Mixing the two is, of course, causing friction. Vietnam is bolstering its defence capabilities and is one of the only Southeast Asian nations to hold its ground against Chinese encroachment.

To fortify Vietnamese territory, Hanoi will take delivery of six improved diesel-electric, Varshavyanka-class submarines from Russia by 2016. The evolving dynamic in the South China Sea is quickly moving past the present tactics of “fishing fleet diplomacy”. So once they are in operation around Vietnamese waters, the submarines will affect the balance of power in the region.

Amid official complaints from Beijing - ignored by Moscow - that bemoan Russia’s interference in the region, Russian energy cooperation and military contracts with Vietnam are set to expand in the coming years. Never one to miss an opportunity, Russia’s warmer relations with Vietnam will serve Moscow’s strategic interests.

This is because Russia is re-engaging with the Asia-Pacific. Russian energy sales to Asian markets are mounting each year, so any further security guarantees will be useful for Moscow. Befriending Hanoi also helps clear the way for a possible Russian return to the important naval base in Cam Ran Bay, a basing contract also desired by Washington.

Vietnam’s recent run of growth since the middle of the last decade appears now to be halting as pledged foreign investment drops off. But the Communist Party, in the midst of a political re-branding, is injecting new life into a dilapidated infrastructure and logistics network.

While Russia is extending a cooperative hand, China competes with Vietnam over territorial waters rich with natural resources and energy. All this puts Vietnam in the front of an exciting but changeable decade ahead. The Southeast Asian country is much closer to economic success than it was at the beginning of the millennium, but there remains much work to be done if it is to get back on track.

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