Vladimir Putin was ceremoniously
reinstated as Russia's head of state last week.
The country is relatively more stable and
prosperous than when he first assumed power in
2000. Nonetheless, Putin's six-year term will
still be wrought with serious challenges to the
welfare of the nation and tenuous economic growth.
In his short inauguration speech, Putin
noted that the Russian Federation was "entering a
new stage in [its] national development" which
depended on, among other things, the country's
"determination in developing its vast expanses
from the Baltic to the Pacific".
Indeed,
Moscow affirmed its intentions to foster
developments east of the Urals when it signed 27
contracts, collectively worth US$15 billion, with
Beijing during Chinese Vice Premier Li
Keqiang 's visit to
Russia in April. This, alongside Russia's
aspirations to increase energy exports to South
Korea and Japan, sets the stage for the new Putin
administration's active economic engagement in the
far east.
Exploitation of Eastern Siberia
and the far east is a national imperative because
the wealth beneath the unforgiving landscape could
propel the Russian economy forward for decades to
come. In fact, output of natural gas from Asian
Russia will exceed that from European Russia by
2030. [1]
With Northeast Asian economies
voraciously seeking energy supplies, the
opportunities for development and cooperation in
the region are boundless. It is simply the matter
of policymakers in Moscow effectively taking
advantage of the resources and conditions before
them.
China will be Russia's key economic
partner in the region and trade between the two
countries is booming. The Wall Street Journal
reported that trade between the two countries
increased by over 40% in 2011, amounting to $12.6
billion. However, as Ambassador M K Bhadrakumar
noted last week, Russia does not seek to be a mere
resource appendage to China. China
sets out on Putin presidency, Asia Times
Online, May 5, 2012.)
Although the recent
deal with Beijing included projects in transport,
communications, and other investments, until
further development takes place around
Vladivostok, energy exports will dominate Russia's
economic interaction in Northeast Asia; and Moscow
will seek to diversify its clients. Having
controlled the export of resources from Central
Asia since the dissolution of the Soviet Union,
Russia recognizes the power of monopsony better
than any other country.
And timing could
not have been better. The general insecurity that
plagues the oil supply from the Middle East is
driving up the demand for Russian suppliers. In
addition, Japan will be more reliant on oil and
natural gas as its 54 nuclear power reactors are
currently offline for safety checks. While Prime
Minister Yoshihiko Noda appears intent on
reactivating the nuclear plants after the
inspections, with more than half the population
opposing such measures and 80% distrusting
government safety measures, it will be politically
difficult for Tokyo to return to nuclear energy in
the near future. [2]
The Noda government
is certainly aware of the need to develop energy
relations with Russia. Earlier this month,
Democratic Party of Japan policy chief Seiji
Maehara and the vice president of Russian natural
gas company Gazprom, Alexander Medvedev, agreed to
study the possibility of laying a gas pipeline
linking Hokkaido and Sakhalin Islands. [3]
Some analysts have raised concerns about
the state of economic cooperation between North
Korea, South Korea and Russia after Pyongyang's
rocket test in April of this year. [4] However,
the double attacks on South Korea in 2010 did not
derail proposals for a trans-Korean gas pipeline,
which was given a nod of approval by both Korean
governments in 2011.
Although Moscow has
the difficult task ahead of enticing investors
from the South while also maintaining a good
relationship with the North, growing economic ties
with Seoul and continued cooperation with
Pyongyang show Kremlin's adroitness in the
balancing game.
There are also many other
challenges ahead; however, the key obstacle to
Russia's success in the far east is not going to
be external factors such as North Korea's
provocative behavior but Moscow's own
inefficiencies created by heavy handed state
intervention in regional development.
In
2006, presidential envoy to the Russian far east,
Kamil Iskhakov, suggested creating a state
commission on the far east that was directly
overseen by the prime minister (which would have
placed Putin in charge of the project when he took
over the premiership in 2008).
This April,
the Economic Development Ministry finalized a bill
to create a state corporation that will control
the distribution of licenses for mineral
extraction in 16 regions in Eastern Siberia and
the Russian far east. [5] Nicknamed the "Far
Eastern Republic", the corporation will be
partially exempt from federal legislation, receive
massive tax breaks, operate outside regional state
control, and receive shares of other state
companies as investment.
The corporation
is similar to Iskhakov's original proposal - only
this time the project is subordinate to the
president who will have the power to appoint the
head of the company and name the supervisory
board. Clearly Vladimir Putin is bent on staking
his reputation on the development of the Russian
far east. No doubt, the new president intends on
highlighting Russia's role in Asia-Pacific when he
hosts the Asia Pacific Economic Cooperation summit
in Vladivostok later this year.
Despite
the dedication that the Russian state is showing
with its involvement in the growth of its most
underdeveloped regions, former finance minister,
Alexei Kurdrin, heavily criticized the "Far
Eastern Republic" as something that will devastate
the investment climate in the country.
According to Kudrin,
The creation of such a market player
capable of implementing any private project,
considering the state's administrative resource
and [special preferences], means that any other
investor in this area must be aware that another
player with special preferences, special
administrative resources and special access to
finances may come to the market at any
moment.
State intervention is
particularly damaging for the Russian far east
because conditions appear very favorable for free
enterprise to be more active. When 73% stake in
the Vanino seaport in Khabarovsk Krai was
privatized and auctioned in May 2011, the
successful bid offered 10.8 billion roubles
(US$354 million) after the bid started at 934
million rubles ($30.6 million). [6] Although the
winning company is mired in lawsuits resulting
from its inability to make the down payment on the
seaport, it is an example of how much the assets
in the Russian far east are in demand.
The
problem is rooted in the ill repute that
privatization gained in the 1990s, when oligarchs
and corrupt government officials drove the country
to the ground. Many public figures point out that
the chaos of the 1990s did not bring development
to the far east, thus they argue that the state
must spearhead and command projects in the region.
The government certainly has a role to
play in curbing both criminal activities and
corruption in the region, but adding hierarchy and
bureaucracy will not jump start the
entrepreneurship necessary for the whole region to
become more dynamic. [7] In fact, simply pouring
resources into the region might make the existing
problems worse.
The Putin administration
is probably unwilling to allow development to
occur organically because it recognizes the deep
correlation between domestic support for the
government and real gross domestic product growth;
and Russia's economic is intrinsically tied to
energy exports. [8]
In its impatience and
shortsightedness, the Kremlin is going to dictate
the pace of development in the region so that
Russia can more rapidly tap into its reserves of
natural resources. But if Russia wants sustained
development in the far east, then its companies
must become more productive.
Such change
will require the government to allow for more
competitiveness in the domestic market which will
foster both efficiency and entrepreneurship among
businesses. President Dmitry Medvedev's
administration had taken small steps towards
lessening state control over energy companies, but
it is unlikely that President Putin will continue
these measures alongside his massive plans for the
far east.
For now, Moscow will probably
relegate development to bulking up the
infrastructure of Vladivostok as a showcase for
the 2012 Asia-Pacific Economic Cooperation summit.
Improvements in infrastructure and establishment
of industry in the depressed city will be lauded,
but there won't be a model that the rest of the
region can adopt. The Russian state may have
enough resources to invest in the region's most
important city, but it cannot bankroll the
development of a region that makes up 60% of its
entire national territory.
For the sake of
Russia's future, Putin should consider giving
privatization a second shot; it may be the only
shot that Russia has for a prosperous future.
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