Russia invests in the development of the Russian Far East

Russian authorities are turning their eyes towards the Russian Far East, seeing its development as an opportunity to balance the losses arising from the deterioration of political and economic relations with the West.

The strategic wealth of the Far Eastern Federal District is the deposits of energy-producing raw materials. The total resources of oil are estimated at 10-14 billion tons and gas deposits at approximately 14-15 trillion cubic meters (almost 1/3 of the overall confirmed natural gas resources in the territory of Russia). Energy commodities represent the main export item of the Russian Far East (70.3 per cent). The latest available data for 2015 indicate the importance of three main countries as trade partners of the region: Japan, China and South Korea, which account for 80 per cent of trade. The EU share amounts to approximately 10 per cent.

Natural resources

Since the commissioning of the ESPO (Eastern Siberia-Pacific Ocean) oil pipeline (constructed in 2007–2012), the role of the Asian route in Russian oil exports has been systematically increasing. In 2015, China obtained the status of the main individual importer of the Russian commodity (in total, it imported 41.29 million tons of crude oil by all routes). Japan and South Korea are also important consumers.

The raw material potential of the Russian Far East is unquestionable. However, its exploitation, modernization and the development of processing and infrastructure is a challenge. Costly investment is needed for this purpose. The insufficient capacity of the infrastructure is a particular problem.

The construction of the Power of Siberia-1 gas pipeline, connecting the Russian deposits of Eastern Siberia with the North-Eastern provinces of China by the so-called Eastern route, is another strategic project. A thirty-year contract for supplies of Russian gas to China, signed in May 2014 in Shanghai by Russian Gazprom and the Chinese CNPC concern, assumes a target of annual exports of 38 billion cubic meters (bcm) of gas to China. However, its implementation is questionable. The estimated cost of construction of the infrastructure and management of deposits to serve as a raw material resource base of the supplies is USD55bn. Despite the announced credit facility to be granted to Gazprom by the Bank of China in the amount of USD25bn, so far the Chinese bank has awarded less than 10 per cent of this amount to the company.

The only export LNG terminal operating in Russia is the gas liquefaction plant in the Sakhalin Oblast functioning since 2009. The biggest importers of LNG from Russia are Japan (almost 80 per cent of exports) and South Korea (almost 20 per cent). A small proportion is sent to China, Taiwan and Thailand. Russian companies are planning the construction of more LNG terminals, e.g. Gazprom in Vladivostok, and Rosnieft – its own terminal under the Sakhalin-1 project.

So far, the Kremlin has allocated much less than necessary to the Russian Far East. In 2015, less than RUB4bn reached Eastern Siberia and the Russian Far East, i.e. only 40 per cent of the total resources allocated by the federal authorities to geological works. However, the needs are greater. The low price of oil, smaller investment budgets of oil companies (among others, due to fiscal burdens) and imposed sanctions (difficulties related to the acquisition of external capital, problems with the import of equipment and technology from western countries, on which, for example, extraction projects on the Sakhalin Shelf are fully dependent) are the major reasons for the delay in the management of new deposits.

Infrastructure

Without investing in the development of the transport infrastructure, it will be impossible to achieve the expected increase in exports of raw materials to Asian (as well as European) countries and gain revenue from the transit of cargo from Asia to Europe. The development of transport infrastructure is uneven and the transport system (depots, sorting plants, transshipment stations and customs points, etc.) are not integrated in terms of logistics. Southern micro-regions and Sakhalin have a relatively well developed road network. Northern micro-regions hardly have any communications with the southern area or the center of Russia.

The logistical problems are particularly onerous in transport hubs connecting railway lines with seaports. Disproportions in terms of their technological equipment create a barrier to increasing transshipment and developing international transport. Nowadays, railway transport and Far Eastern ports play the most important role in the Russian Far East. Road and air transport is gradually gaining importance.

In order to enable the development of bulk cargo (petroleum, petroleum products, construction materials, timber) and mixed cargo transport, it is necessary to increase the capacity and improve the technical condition of the main railway lines on which the railway transport of the Russian Far East is based: the Trans-Siberian Railway (Transsib) and the Baikal-Amur Mainline (BAM).

The underinvested Russian Far East seaports require expansion and modernization, including an increase in their capacity. 95 per cent of cargo of the region and 17 per cent of cargo of all Russian seaports passes through 28 seaports and fishing ports. Ports of particular importance include Vostochnyi, Vanino, Nachodka, Vladivostok, De-Kastri and Posjet.

The share of road transport is growing, but the road infrastructure in the Russian Far East is poorly developed, except for federal routes: Amur, Ussuri, Vostok, Lena and Kolyma, connecting bigger cities. Many localities have no access to road infrastructure at all. The 107 Far Eastern civil airports also require modernization and expansion. Their condition is one of the factors discouraging potential investors from this region. Half of airports have no runways meeting international standards. Less than 70 per cent of them have infrastructure enabling flight service, including lighting.

For many years, no sufficient financial resources have been available to develop priority sectors recognized by the authorities of Russia as major sources of growth and economic development of the Russian Far East, and consequently the Federation. Only a minor part of proceeds from taxes on the exploitation of the region remains there – their major part supplies the central budget.

In 2010-2015, the amount of RUB5,358.2bn was transferred to the Far Eastern Federal District as a subsidy from the federal budget, more than three times less than to the central region (RUB18,094.1bn). The Sakhalin Oblast, the most dynamically developing region, does not benefit from these subsidies. The growth of the Russian Far East region depends on investment financed from the federal budget, but also on foreign investment. There is a shortage of funds for the first type of investment, so hopes are associated with foreign investors.

Foreign Direct Investment

According to data of the Central Bank of the Russian Federation, in 2016 the value of FDI in the Russian Far East amounted to over USD14bn, including the major part (70 per cent) of the capital invested in the Sakhalin Oblast – mainly in energy projects.

According to Ivan Zuyenko from the Far East University in Vladivostok, these data should be treated with caution. The majority of foreign capital inflowing to the Far East is domestic capital returning to the country as foreign capital from branches of Russian enterprises incorporated in Cyprus, the British Virgin Islands, the Bahamas and Bermuda. Those investors deposit the capital in numerous, but rather small ventures.

In the implementation of large energy and infrastructural projects, Russia is counting on its eastern partners. China and Japan are two major countries which may increase their engagement in real terms despite various problems related to mutual relations.

What is common for Russia and China is the critical approach to US policy and the aspiration to limit the position of the USA in the field of global leadership and international security. A burden for the mutual relations is the competitive activity of China in Central Asia, treated by Russia as its sphere of influence. On the one hand, Russia is trying to block the inflow of Chinese investment to the region, e.g. through imposing new import restrictions under the Eurasian Economic Union. However, these measures are ineffective. On the other hand, the authorities in Russia are aware that they need China.

China as the major partner

For the first time in the history of contemporary relations, China has become the dominant partner in the economic relations with Russia, but in terms of trade, Russia remains a secondary partner for China. The new strategy assumes an extension of the cooperation through measures aimed at the development of synergy mechanisms between the Chinese Initiative of the New Silk Road and the Eurasian Economic Union, as well as increased military and technical cooperation.

That is exactly why, despite the relatively limited scale of engagement so far (approximately USD1.7bn in 2016), China seems the most prospective investor in the Russian Far East. Energy projects are of a key importance, but routes used for the transport of goods other than energy commodities are equally important.

Japan is more active

The investment contribution of Japan in the Russian Far East to date has been limited and in 2016 amounted to approximately USD1.3bn. Russia hopes that it will manage to acquire Japanese capital for the implementation of joint investment projects, particularly in Sakhalin as well as increase exports of energy commodities to Japan.

Japan is interested in those plans, which is indicated by preliminarily concluded agreements, among others, concerning the construction of the third production line under the Sakhalin-2 project, and agreements between Japanese companies and Russian Rosnieft concerning the exploration and exploitation of deposits in the Japanese Sea. Talks concerning the construction of a gas pipeline from Russia to Japan have also been carried out for many years.

For the time being, Japan is striving to observe the sanctions against Russia, which it has also supported.

Kremlin plans for the Russian Far East

Moscow would like to transform the Russian Far East into a gate opening its opportunities for expansion and strengthening economic influences across the entire region of Asia and the Pacific. This should contribute to stimulating economic growth of the Russian Federation. However, the lack of a coherent development concept, ineffective management, problems related to human resources, and insufficient engagement of foreign investors will not foster the launch of development impulses in this distant region. Companies operating in the region are not interested in the results of research and development work of many universities and scientific institutes operating there. For them, gaining maximum income from extraction of raw materials is the key issue.

It is doubtful whether the Russian authorities can achieve the assumed goals of generating a high growth rate and bringing macroeconomic stability to the region by relying on the commodity model susceptible to price volatility. So far, Russia has been unable to implement the program of modernization and structural transformation, and unable to increase independence of the economy from energy commodities. There is no rationale for thinking that the Russian Far East will become a driving force of the economic growth of the Russian Federation and a tool to increase Russia’s influence in the region of Asia and the Pacific in the short and medium term. The region has huge potential; however, under the current conditions the maximum of Russia’s possibilities is limited to maintaining the status of a raw material resource base for China and other countries of the region.

Ewa Radomska, PhD, assistant professor at the Institute of Economic Studies, Faculty of Business and International Relations at the Vistula University.

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