Russia’s Far East accounts for a quarter of national FDI
Long overlooked, the vast region is starting to draw overseas investor interest, although analysts say a recent government report is over-optimistic
Russia’s resource-rich and sparsely populated Far Eastern region is – perhaps surprisingly – gaining in popularity with foreign investors.
The region accounted for about a quarter of all foreign investment into sanctions-hit Russia in the last four to five years, with most of that going to the manufacturing and transport sectors as opposed to natural resources, according to a new government report.
The Far East accommodates just 5% of Russia’s population, yet it accounts for more than a third of its territory. Its vast size and harsh climate, in which temperatures can drop below minus 40 degrees and rise above 30 degrees Celsius, have made economic development and logistics challenging. Poor bureaucratic oversight and distance from the capital have also held the region back.
A recent internal report by the Ministry for the Development of the Far East hints that the situation may finally be starting to change. The government strategy of creating multiple special economic zones offering localized tax-breaks, eased visa and customs processes and other initiatives, has helped the Far East attract 3.7 trillion rubles (US$64.8 billion) in foreign investment across 1,200 projects in the last four and a half years, the ministry says in its report, a copy of which was obtained by Asia Times.
While industry analysts warn that real results from the initiatives will take much longer to appear, the ministry’s report shows the bureaucrats have reason for optimism.
Over 30 new laws and 150 legislative acts aimed at making the Far East more attractive to foreign investors have helped to diversify the region away from of its traditional commodity base. “The new mechanisms deployed resulted in 3.7 trillion rubles of FDI to the Far East… and these investments are diversifying the economic structure as 90% of the money is going to industries outside of mining,” the Minister for the Development of the Far East, Alexander Galushka, says in the report.
The Far East currently boasts Russia’s largest construction projects, led by the US$17.5 billion Amur gas processing plant, the US$11 billion construction of the Eastern Petrochemical Complex, and a US$2.5 billion new shipyard project.
Foreign players step in
The most active foreign investors come from China, Japan and South Korea, as well as from Vietnam and India, according to the report. Most projects are in manufacturing for export of goods to the rest of the Asia-Pacific region.
Especially active are the Chinese investors. Chengtong Holdings is said to be investing US$1.5 billion in a pulp and paper mill in the Khabarovsk territory. And China Communications Construction Co. is completing a feasibility study for the Primorye-1 and Primorje-2 transport corridors.
The Far East is starting to attract entirely new investors also. For example, Indian firm KGK has opened a diamond polishing facility in Vladivostok, while Tata Power is developing the Krutogorovsky coal deposit in Kamchatka. The first Vietnamese company to invest, True Milk, has said it will build a dairy farm in the Primorsk area.
The Far East recorded its 100th new enterprise recently when Agrokhim DV opened a logistics center for storing pesticides and agrochemicals in the Amur area, bordering China.
Bureaucrats roll out red carpet
By the end of 2018, the number of enterprises could double, according to report forecasts. One of the major factors behind the change in investor sentiment has been the assigning of Free-Port status to Vladivostok, which eases the customs process there, and the opening of more special economic zones with in-built tax-break provisions.
Altogether, more than 730 businesses have registered to work inside the free-port and special zones, committing to invest about 2.58 trillion rubles in the process. The region’s profile has also been boosted by the creation of events such as the Eastern Economic Forum.
The 2017 edition was attended by President Vladimir Putin and the leaders of Japan, South Korea and Mongolia. China and India also sent top-level officials, while a US delegation was led by California Governor Edmund G. Brown. Investment agreements to the tune of more than US$43 billion were signed on the sidelines of the forum.
From here on, Far Eastern government initiatives will focus on sectors such as resource extraction, aqua-biological processing and forestry, according to Minister Galushka. The aim is to get more processing and value-added work done on Russian territory and move away from a raw material export model, he said.
Other initiatives will focus on getting more information to investors and expanding the simplified e-visa program, which allows nationals from certain countries to apply for a free visa online and collect it at the border upon entry to the Far East region.
Investors can also look forward to better financing terms at local banks, as the government pushes lenders to develop lower-cost loans in rubles, dollars and yuan. Increased interest from investors in the Far East likely stems from smart steps in the legislative arena, according to Alexander Abramov, director of the Far Eastern Center for the Economic Development and Integration of Russia in Asia-Pacific, which is part of the Far Eastern Federal University.
“Some of these steps have been copied in the rest of the country. For example, the special economic zone rules have been applied to several single-industry towns,” Abramov said.
He added: “Today, we still operate based on an export-oriented economic model in the Far East. Coal, liquefied gas, oil is sold abroad and port and other infrastructure facilitate that. Gradually, with some import-substitution, I expect the domestic market too will grow” and change the dynamic of the economy.
An exaggerated success?
According to political scientist Artem Lukin, the Ministry for the Economic Development of the Far East is being overly optimistic in its assessments to date, however.
“A qualitative breakthrough in the development of the Far East has not happened yet,” he says. “The hardest issues faced by the region are, first of all, financial conditions. There are no substantial investments here to date. The declared amount is 3.7 trillion rubles. But, will they all arrive? Yes, we see large funds coming in from Russian state companies, or some other quasi-government money. As for foreign investors, they are still rather cautious.”
Two areas with good potential are tourism, at least in the Primorsk territory, and food exports. As for moving into more value-added, more high-tech areas, the Far East may struggle.
“Nobody is waiting for us in the high-tech fields,” says Lukin. “There, there is very tough competition. The same is true for oil refining. Why should the Chinese invest in a petrochemical plant in the Far East if they can build the same at home? Why create a competitor? So, it’s doubtful that we will see foreign investors piling in significantly into industries outside of raw material exports.”
Still, he agrees that it will take time to assess how the investments of recent years play out. “The Far East is a complex region that lies on the border. You need 10 years for real results to come through.”