The Putin administration is committing the first serious funding – in the order of 0.5 per cent of 2007 GDP annually over the next six years – for the rehabilitation of Russia’s economically backward and severely depopulated Far East. This reflects the geostrategic stakes for Russia in the region. But much more important even than federal government transfers is the effect of China’s ever-deepening participation in the region’s product and labour markets.
Chinese customs data show that border trade is much larger than official Russian statistics suggest. And if the extent of permanent Chinese settlement in the region tends to be exaggerated, our trusted sources on the ground highlight the importance of Chinese contract labour. The two investment plays are on regional resources enjoying Chinese demand – in particular, forest products and fisheries – and on domestic demand in the region boosted by both the local China trade and federal funding.
A gigantic land area extending from Siberia proper to Alaska, the Russian Far East (RFE) may be defined in administrative terms as the nine parts of the federation grouped into the Far East Federal District (see map below). Sovereignty over the southern band of this inhospitable territory – the only part more or less fit for concentrated human habitation – was ceded to Russia by China in treaties concluded in the mid-19th century. The treaties were later disputed, and there was a border skirmish between Russian (Soviet) and Chinese troops as recently as 1969. The frontier was finally agreed upon in a bilateral accord, negotiations for which had begun in the 1980s. That document was not ratified until 2004, however.
The RFE – an extension of Russia’s Siberian conquests – began as a smattering of military camps and sparse settlements. The start of the region’s economic integration into Russia dates back to the completion in 1916 of the Trans-Siberian railway with its terminus at the Russian Pacific port of Vladivostok. But integrating this far-flung territory into the economic heartland of Russia (in Europe and the Urals) has never been easy.
The Soviet period saw the beginning of systematic natural resource exploitation – mainly minerals (precious and base metals) and timber. Integration of a kind was also advanced by familiar Soviet methods:
The key subsidies were for transport and fuel, making it seem cost-free to travel between the RFE and European Russia and to deliver most consumer goods and other necessities by rail and air, despite distances of thousands of kilometres.
This whole set-up was, of course, unsustainable in any normal political and economic environment, and it duly collapsed along with the Soviet system as a whole in 1991. The impact on the RFE in the 1990s was dramatic. The economic and social pain caused by the Soviet collapse was felt more strongly in the RFE than in other regions of Russia. Four aspects stand out.
First, the concentration of defence industries made the RFE particularly vulnerable to the end of Soviet military procurement. Unemployment rose as industrial output contracted.
Second, the purchasing power of the RFE’s traditionally high wages – an incentive to work under otherwise hardship conditions – was undermined not only by the nationwide near-hyperinflation following price liberalisation but also by the reduction of subsidies for transporting food and consumer goods from European Russia and coal from Western Siberia for local electricity generation. The local population saw its living standards plummet.
To this day, RFE inflation and poverty indicators exceed the national average, while the cost of living in the region remains the highest of the seven federal districts – around 41 per cent above the federal average.
Third, against this bleak background, crime and corruption – endemic in the country as a whole – reached staggering proportions throughout the RFE, sapping the official regional economy of revenues.
Fourth, the impact of the unravelling of the RFE’s artificial Soviet-era integration into continental Russia is reflected most tellingly in demographic data. Since 1990 the region has experienced dramatic depopulation. Unemployment, the high cost of living and other adverse factors have driven away almost 20 per cent of the region’s inhabitants, compared with a national population decline (net of immigration) of 3.7 per cent. While the biggest losses have been in the extremely inhospitable Far North, even Primorye (the southernmost and richest part of the RFE) has seen its population shrivel by 23 per cent – from 2.6 million in 1990 to 2 million at the beginning of 2007.
(For our study on Russia’s regional differentiation, click here.)
Today, 6.5 million people (out of a total population of 142 million) live in an area covering 6.2 million square kilometres (more than one-third of the total area of the country). With just over one person per square kilometre, the region is one of the most sparsely populated in the world. Correspondingly, infrastructure in the RFE remains the least developed of all Russia’s federal districts: the density of rail track and roads is four and five times lower, respectively, than the federal average. Moreover, half of the rail network is for local traffic only, while just 10 per cent of roads are open all year round and more than half fall below official minimum safety standards.
Inevitably, the strategic and geopolitical implications of an under-populated and under-developed RFE are a highly charged political issue. Moscow sees the population shrinkage as potentially threatening the demographic stability of the region, not least because of the growing labour mobility of the more than 110 million residents crammed into neighbouring China’s northeastern provinces. At the same time, more than one-third of Russians fear Chinese irredentist ambitions towards the RFE, which they believe could endanger the country’s territorial integrity, if not its national security.
The lesson of the impact of the Soviet collapse on the RFE was quickly grasped by the new Russian government in the 1990s. Turning the region’s distance from the economic centre of Russia from a problem (unaffordable and chimerical integration into continental Russia) into an opportunity for much more natural economic integration with neighbouring Asian countries (all, with the obvious exception of North Korea, richer and/or growing faster than Russia) was considered key but took some time to receive substantive government support.
This shift began spontaneously in the 1990s, however, before any active government policy towards the region took shape. Simply as a result of the removal of the artificial props of free fuel and heavily subsidised transportation, the RFE was forced to reorient its trade towards its immediate neighbours and at the same time become more self-sufficient. Before 1991, some 75 per cent of goods produced in the RFE were destined for European Russia and only 6 per cent were exported. By the beginning of the present decade just 10 per cent were dispatched to the western half of Russia; 15 per cent of goods were exported – largely oil and oil products that were destined almost exclusively for neighbouring Asian markets – and the remainder supplied the local market. That export number, however, understates the real picture, since one of the region’s major industries – fishing – has operated largely in the shadow economy (click here for our survey of this sector, now dominated by Russia’s territorial waters in the Far East).
The first federal government programme to support the RFE was unveiled by Boris Yeltsin during the 1996 presidential election campaign. (From the title of this programme, “Economic and Social Development of the Far East and Trans-Baikal, 1996-2005”, it can be seen that for these purposes the regions around Lake Baikal were added to the Far East proper. The same goes for the programme’s successive updates – in 2002 and 2007.)
The latest version of the programme, approved by the federal government in August 2007, differs in two respects from its predecessors. First, the envisaged funding is contingent on the adoption of a long-term strategy for the development of the Far East and Baikal region. Putin commissioned this strategy document from a specially created government commission in March 2007. The definitive strategy has yet to be approved, but a draft has been published. Its main points are:
Second, after years of the sporadic disbursal of funds and constant disagreements between the centre and the individual regions over which projects to prioritise, this latest programme establishes clear priorities and puts some serious funding behind them – Rb567 billion committed for the period 2008-13. The implied annual funding commitment is equivalent to 0.3 per cent of 2007 GDP. To this must be added the RFE’s share of federal infrastructure spending.
Significantly, in contrast to most Russian government infrastructure spending – which envisages at least half of the total being financed by regional governments and/or the private sector – 75 per cent of the total funding is due to come from the federal budget.
The real priorities can be seen from the allocation of infrastructure spending to support natural resource sectors (the bulk) and to improve living conditions.
In the first (natural resources) category, there is a particular emphasis on ports and their hinterland. The region’s 330 sea ports, with an aggregate capacity of 80 million tonnes a year, are working on average at 60-70 per cent capacity. Other projects include providing transport access to natural resources in areas such as the northern half of Khabarovsk.
The second category of infrastructure development is clearly designed to promote inward migration and settlement. Besides improved transport connections between urban areas and isolated settlements, a substantial portion of the earmarked funds is to go towards the development of cities and towns – both existing and planned.
In addition, a Rb147 billion sub-programme provides for the speedy development of Vladivostok, the southernmost and most populous city (just under 600,000 residents, according to the 2002 census) of Russia’s Far East, in preparation for the APEC summit due to take place on Russky Island (off Vladivostok) in 2012. In particular, the sub-programme proposes a bridge connecting the island to the mainland. However, disagreements over the scope and focus of the Vladivostok project are reported to be the reason for the delayed signing of the programme as a whole.
Not surprisingly – given its geographical proximity and size – China is the RFE’s main trading partner (followed by Japan and South Korea). According to the Far East customs authorities, in 2006 China accounted for 38 per cent of the region’s exports (total worth $7.9 billion) and 28 per cent of its imports ($8.4 billion).
At $5.4 billion, China-RFE trade constituted 16.2 per cent of overall China-Russia trade ($33.4 billion), according to Russian official figures.
But these figures tell only part of the story. Border (or “shuttle”) trade – which took off almost immediately after the collapse of the Soviet Union when Chinese traders flooded into the Russian border areas plying cheap food products, clothing and other low-cost consumer goods to fill the vacuum that emerged when supplies from the federal centre dried up – is still thriving and continues to grow apace. Today the southernmost parts of the RFE (Amur, Khabarovsk and Primorye) and the northeastern provinces of China (Heilongjiang, Jilin and Liaoning) constitute a virtual microeconomy straddling the Russian-Chinese border.
Chinese official statistics appear to take much more account of Sino-Russian border trade than do Russian ones, explaining why the former are consistently higher than the latter. The total value of this trade is unclear, not least because so much of it is illegal. But Chinese customs figures for Heilongjiang province’s trade with Russia (almost all of which is with the directly neighbouring Kharbarovsk and Primorye regions) show the volume of border trade approaching that of recorded conventional (international) trade between companies. They also show small-scale border exports outstripping conventional exports in value.
Similarly, according to Chinese official statistics, border trade represents a significant proportion of overall trade between Russia and Jilin province – just over one-third in the first half of 2007 ($97 million out of a total trade turnover of $270 million). Though still relatively small in volume, exports from Jilin to Russia are growing rapidly, while imports from Russia to the Chinese province lag far behind.
Border traders in the RFE are by far the most visible sign of China’s economic involvement in the region. However, their very presence has frequently been the source of tension between Moscow and Beijing, with the former expressing concern that the latter turns a blind eye to illegal migration into the RFE. More recently, incentives have been offered mainly to ethnic Russians living in other countries of the former Soviet Union to settle in the region. This provision of the new Russian immigration rules in force since January 2007 reflects concerns in Moscow about the “Sinofication” of the RFE.
But just how many Chinese have settled in the RFE is unclear. A briefing posted on the Kremlin website in 2006 claimed that the number of Chinese living in the region had leapt from around 2,000 in 1989 to just under 1 million. This would mean that the ratio of Chinese to ethnic Russians in the RFE is roughly 1:7. The article also claimed that only one-quarter of all Chinese residents of the RFE are registered with the authorities.
However Bobo Lo, a leading expert on Sino-Russian relations, believes the extent of Chinese migration into the RFE has been vastly overstated by the authorities. The most reliable unofficial figures suggest that there are no more than 100,000 Chinese in the RFE and that less than half of these live there permanently. This is significantly lower than the number who lived in the RFE before Stalin expelled both the Chinese and Korean minorities in 1938.
Chinese migrant workers in the RFE are active mainly in retail, hospitality (restaurants and hotels), the minerals industry, agriculture and construction. But a trend has emerged to contract for more skilled labour from China to work on major engineering projects. These include the East Siberian-Pacific Ocean (ESPO) pipeline, the first stage of which (from Taishet in the Irkutsk region to Skovorodino in the Amur region) is due to be commissioned in December 2008 but has repeatedly overshot deadlines, not least owing to skilled labour shortages. (For our survey of Russia’s oil pipeline strategy, click here.)
The other main source of migrant labour in the RFE is North Korea. Here the problem of illegal migration does not arise owing to the strict controls imposed by the North Korean government. As might be expected of anything to do with North Korea, this aspect of the RFE labour market is a case apart: it has a long and, from the humanitarian perspective, dubious history. As an in-kind repayment for Soviet support during the Korean War, Pyongyang provided what amounted to slave labourers in logging camps in the Soviet Far East. Today, up to 20,000 North Korean seasonal contract workers are active each year in the Khabarovsk region’s timber industry.
On a strict measure, the largest foreign investors in the RFE are the energy companies (Japanese, US and European) participating in the giant oil and gas projects off Sakhalin island. This very fact highlights an important distinction between two tiers of the RFE economy.
First, there are large-scale sectors of strategic significance for Russia as a whole that happen to be located in the RFE. In addition to the Sakhalin projects, this category includes other natural resource endowments (including gold mining) and nationwide transport corridors (the Trans-Siberian railway, upgraded container port connections in Primorye and the ESPO oil pipeline). It is worth noting here that the only infrastructure project on which the federal government’s infrastructure spending vehicle (the Investment Fund) has disbursed funds in 2007 is the construction of transport links in Chita – especially on roads, to complete Russia’s first-ever highway that will be all-weather and span the breadth of the country.
For the RFE, these activities have the obvious benefits of employment, demand for ancillary services and spending power. Yuzhno-Sakhalinsk, the capital of Sakhalin, is now a well-established oil town. At the same time, these strategic sectors are not specific to the regional economy in the same way as are some other resources (forest products, fisheries), manufacturing and processing industries outside the defence sector and the still highly undeveloped service sectors.
In this second, more “local” tier of the RFE economy, Chinese investment has been growing steadily since 2001, albeit from a very low base, and last year it surged (see chart below). While much of that investment has been in retail and the hotel and restaurant industries, there is a growing trend towards investing in industries such as mining (particularly in Chita) and machine building (with a major project in Buryatia accounting for almost three-quarters of China’s total investment in the RFE in 2006).
China’s official economic presence in Russia’s Far East has been cemented through the establishment of special economic zones along or near the border between Heilongjiang province and Primorye. The Suifenhe-Pogranichny industrial trade zone, which covers 4.53 square kilometres, opened in summer 2006 (total committed investment of 10 billion yuan or $1.35 billion). One year later, in July 2007, China launched the first phase of a 2.28 square kilometre economic and trade cooperation zone in Ussuriisk. Six Chinese enterprises involved in shoe manufacturing, wood processing and the manufacture of furniture have since begun production (total commitment of 400 million yuan/$54 million).
Alexander Levintal, deputy governor of Khabarovsk
The federal government is right to focus on infrastructure in its new Far East programme: the development of transport links, the electricity sector and other types of infrastructure will create the conditions for attracting business to the region, which, in turn, will improve the socio-economic situation there. But the programme fails to answer the all-important question of how to attract people to live and work in the RFE. Without a resolution to this problem, the new infrastructure may not be needed at all.
Above all, federal government policy on the RFE should focus on the creation of favourable conditions for the consolidation of the region’s population – so that people can live there comfortably. For this to happen, it will be necessary to adopt a whole series of measures aimed at developing housing, education, health care and other social areas.
China already plays a big role in the development of the RFE, and the Chinese presence will become ever more important. Almost half of the Khabarovsk region’s exports go to China. At the same time, we receive a large amount of manufactured goods from China. These imports are destined to grow, as is the use of Chinese labour in the RFE. Cross-border traffic will be further increased by the development of tourism and related sectors. For now China is by far the main beneficiary of this economic relationship. It imports natural resources from Russia and the RFE while processing them on its soil. The Russian government must seek to correct this imbalance.
Alexander Abramov, General director of the Far East Centre for Economic Development
The main factor holding back the economic development of the RFE is the growing labour shortage. Against this background, the main role of China, North Korea, Vietnam and other countries in Asia and the Pacific Rim with abundant labour supplies could be to supply contract labour for the RFE’s major infrastructure construction projects. Other Asian-Pacific Rim countries – above all, Japan, South Korea and the United States – will be involved in technological, investment, administrative and organisational capacities.
Given the obvious geostrategic stakes for Russia in rehabilitating – both economically and demographically – its farthest-flung territories in Northeast Asia, it is revealing to recall the evolution of federal policy towards the RFE.
In the first years after the Soviet collapse, the particularly acute troubles of the RFE were lost amid the wider upheavals and national trauma. The region was accordingly cast adrift into harsh impoverishment, leading to dramatic depopulation. The problem came onto the radar screen only in 1996, when Boris Yeltsin was seeking re-election as president. The first federal support programme unveiled at that time was never properly funded.
As the federal coffers swelled thanks to the high oil price and tax reform under the Putin presidency, the RFE had to wait its turn behind federal priorities: the “national projects”, launched in 2005, on primary education, healthcare, housing and agriculture, and Putin’s demography initiative in 2006 providing material financial transfers to childbearing women (click here, for more details). But in 2007, the RFE’s time has come as far as federal funding is concerned. From this perspective, the RFE now appears to be the top regional priority – coming immediately behind the national projects. This reflects the region’s strategic significance.
The injection of federal funds into the RFE – which will likely amount to 0.5 per cent of GDP per year, assuming at least a pro rata share for the region in national infrastructure spending – is clearly meaningful from an economic and investment standpoint. But its impact needs to be seen in the context of demography and geography. Much of this context boils down to the relationship with the neighbouring northeastern provinces of China.
The consensus of our trusted sources – both based in Khabarovsk – has two main components. The first is that the region must be repopulated. But even financing well in excess of the material programme already announced could not be expected to lure millions (or even hundreds of thousands) of Russians to live there.
For one thing, the climate – though no harsher in Vladivostok than in the European Russian heartland – cannot compete with southern (European) Russia, which (apart from Moscow itself) is the main destination for internal Russian (and former Soviet) migration. But the main factor, of course, remains the sheer distance. To take a slightly risky but still illustrative analogy: if thousands of New Zealanders are still drawn every year to live in the British metropolis, how much stronger the pull of Moscow (and the Russian heartland) will likely remain for Russians.
The second consensus component of our trusted sources’ views is stated more obliquely. Alexander Levintal, a senior regional official, says that the role of China in the RFE is big and will get only bigger. Alexander Abramov stresses the problem of labour shortages and indicates Chinese contract labour as the solution for the region’s big infrastructure construction projects.
We noted in the Context section above an expert view that the extent of Chinese settlement (as opposed to contract labour and traders) in the RFE today is often exaggerated and probably stands at no more than around 1 per cent of the population. The “yellow peril” phobia reflected in Russian widespread fears of “losing” the RFE to a de facto Chinese demographic takeover can be discounted with even greater confidence.
Yet there is no getting away from the reality that China will be the main source both of the additional labour that the RFE needs and of demand for much of the RFE’s output. If anything, the desired inflow of Russian (or former Soviet) migrants into the RFE would much more likely follow than precede stronger economic growth based on an expanding Chinese presence in the region’s product and labour markets – with additional help from the planned federal financing for infrastructure.
The investment conclusion must be that the RFE offers two plays.
The first play is on Chinese demand for the region’s resource exports. There is an interesting contrast between the cautious Chinese approach to “strategic” Russian resources (piped oil and gas, requiring long-term pricing commitments that China continues to resist) and buoyant Chinese demand for resources from the RFE itself, notably timber and fish. This picture will be reinforced if the Russian government succeeds in its aim of increasing the amount of value-added processing of these resources on Russian soil before export. Processing industries are already attracting Chinese investment.
The second play is on the local economy, as demand increases as a result of federal funding and the regional trade with China. On a smaller scale (and so with less liquidity), the RFE offers the same opportunities in retail, media, financial services (especially) and other domestic demand-oriented businesses that have proved their worth so spectacularly in continental Russia.
Name |
Description |
|---|---|
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Gidrostroy |
The Sakhalin-based group is involved in building as well as fishing and fish processing. It has the largest fish-processing capacity of any company in Sakhalin. |
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Iyanin Kuth |
Based in Kamchatka, the closed joint-stock company owns some 60 fishing vessels. |
|
Okeanrybflot (RTS: ORFT) |
Based in Kamchatka, the listed company has a 20-strong fleet. |
|
RKLenin |
The Lenin Fishing Collective, based in Kamchatka, comprises some 30 fishing vessels. |
|
Akros |
With a fleet of some 25 vessels, this closed joint-stock company is one of the largest fishing companies in Kamchatka. |
|
NBAMR (RTS: NBAM) |
The verticially integrated Nakhodka Active Marine Fishery Base is the largest fishing company in the Far East; it employs more than 3,000 people and is involved in marine fishing, processing and distribution. |
|
Far East Telecommunications Company (RTS: ESPK ) |
Also known as Dalsvyaz, the company provides telecommunications and internet services mainly in Primorye. |
|
Peter Hambro Mining Plc (LSE: POG) |
The company holds interests in gold mines in Pokrovskoye in the Amur region. |
|
Russian Timber Group Ltd |
The holding company has assets in the Irkutsk region of East Siberia and the Russian Far East as well as in China (Heilongjiang province). Its planned IPO on AIM was postponed in November 2007. |
|
Koryakryba |
This closed joint-stock company based in Kamchatka has a 30-strong fishing fleet. |
|
PBTF |
The Primorye-based Preobrazhenskaya Trawler Fleet Base comprises some 70 vessels. |
|
Dalmoreprodukt (RTS: DMPR) |
A Primorye-based holding company that operates fishing boats and processes fish and crab. |
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