Russia to prioritize the development of its Far East

August 19, 2015 Alexei Lossan, RBTH
Russia’s “pivot to Asia” will require officials to shore up the country’s sparsely-populated Far Eastern regions, which border regional powerhouse China.
Vladivostok to get a free port status. Source: Lori/Legion Media
Vladivostok to get a free port status. Source: Lori/Legion Media

Amid multi-billion dollar energy deals with China and worsening relations with Western countries, Russia is in the midst of attempting a massive reorientation of its foreign policy known as the “pivot to Asia.”  Yet the domestic leg of this platform is posing Russian policymakers a tremendous challenge: the development of Russia’s vast Far East, a landmass that is almost as big as the continental United States, but has a population roughly equal to that of Denmark.

Russian officials fret that if left undeveloped and unprotected, this enormous, region could be swallowed up by an influx of Chinese immigrants and capital. The Russian Far East, with only 6 million inhabitants, shares a long border with China’s Heilongjiang province, which has a population of 40 million.

As a result, Russian officials have whipped up a plan to spur the region’s development by funneling a targeted 3.5 trillion rubles ($53 billion) to the Far East, with a goal to bring in 80 percent of that figure from private investors and companies through specially-targeted incentives.

The policy, ultimately, must be a balancing act for Russia: to use the Far East’s proximity to rising Asian markets as a means of attracting investors, while not allowing the region to be overrun by the expanding power of Pacific-Rim nations.

“Financial flows are gradually moving away from the EU and the United States and closer to the Asia-Pacific, since this region has all the required resources with next to no administrative barriers and is developing stronger trade ties with Russia, which is of immense importance for the domestic investors,” said Anton Soroko, an analyst with Moscow’s Finam investment company.

Dmitry Bedenkov, chief analyst at Russ-Invest investment company, characterized the Russian development plan as both aggressive and achievable.

“Such ambitious plans of attracting private investment seem justified, given the serious prospects the region shows,” Bedenkov said.

The government aims to raise 64 billion rubles ($977 million) of investment in 2015, and 243 billion rubles ($3.71 billion) by 2016.


Small and dwindling

The population of the Russian Far East is not only infinitesimal for the vast expanse of space, but in recent years it has also been falling rapidly.

From 1991 to 2011, the region lost about 22 percent of its population due to growing mortality rates and emigration.

Yet here, the new development program may already be showing early results.

In 2015, for the first time in years, the Far East achieved natural population growth, with the birth rate surpassing the death rate by 9,334 people. Moreover, as Russian Prime Minister Dmitry Medvedev said during a May 2015 cabinet meeting, the region showed “growth rates that are much higher than anywhere else in Russia” in 2014, with a promising advance of 20 percent in agriculture and 5 percent in industrial production.

Russia’s Ministry for the Development of the Far East is also creating a special fund, which will be filled by tax money coming from the investors operating in the region — which means, effectively, the creation of a Russian regional sovereign fund.


Key issues

Experts say one of the major problems hampering the growth of the Far East is its infrastructure. To resolve it, the government is aiming to direct some of the investment to the development of ports.

In December 2014, President Vladimir Putin pledged, in Russia’s version of the State of the Union Address, to provide the region’s largest city, Vladivostok, with a free port status “also facilitating customs procedures.”

This special status — which had previously helped Hong Kong become a major trade center and transformed the Chinese city of Shenzhen from a small fishing village populated by 3,000 people into a vast metropolis with 15 million inhabitants — usually implies duty-free import of goods.

But the measures will not focus exclusively on Vladivostok.  The special status will be granted not only to the city’s port, but also to its airport, as well as all neighboring major ports. Apart from customs privileges, port operators will receive tax incentives and the possibility to store cargo without paying fees and get a reduction in the ship call cost.

In order to attract the attention of investors, Russian authorities have also decided to hold an economic forum, the Eastern Economic Forum, in Vladivostok in September 2015.

Russia usually holds three major economic forums: one in Vladimir Putin’s native St. Petersburg, another in the southern city of Sochi which hosted the 2014 Winter Olympics and yet another in Krasnoyarsk in Siberia.

Putin is expected to take part in the opening ceremony at Vladivostok, and 400 Russian companies have applied to participate in the event.


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