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Russia's regional differentiation

Context

Correcting Soviet distortions, and the Arizona effect

Shaping the heterogeneous evolution of Russia's regions are relatively big post-Soviet demographic shifts. These shifts have not been entirely along expected lines. In their 2003 book, The Siberian Curse: How Communist Planners Left Russia Out in the Cold (Brookings Institution), Fiona Hill and Clifford Gaddy argued inter alia that living in the cold knocked fully 2.25-3.0 percentage points off annual Russian GDP growth rates. A reasonable expectation was that Russia would follow the US "rust-belt-to-sun-belt" template with an evacuation of chilly Siberia in favour of the fertile Black Earth and Southern regions. In the US, between 1950 and 1980, major northeastern manufacturing cities lost up to half their populations to other (warmer) regions, with the political corollary that every elected U.S. president since 1964 was born, or resided, in the sun belt.

Between 1989 and 2006 Russia lost (completely) a fair chunk of her total population – 4.65 million people (3 per cent) – despite an influx of ethnic Russians from the newly independent neighbouring states. In the same period, interregional shifts among the seven federal districts coincided with Hill/Gaddy expectations insofar as the shift was generally from colder to warmer (see table below). A good example is the capital city of the archetypal Black Earth region of Belgorod, posting a striking population gain of 15 per cent in the period 1989-2006. These movements would have been even larger had there existed more workable land laws, a more developed housing market and fewer bureaucratic and financial obstacles to relocation.

Source: citypopulation.de (sourced partly from Rosstat)
*The 84 regions comprising the Russian Federation are grouped into seven federal districts

The other case in which population growth is significant is the small to medium-sized city booming on the back of natural resource wealth, despite being located in extremely inhospitable climes (see table below). This exception to the Hill/Gaddy rule (though only a partial exception since the employment driver is resource extraction more than industrial processing) will persist with the global commodity price boom.

The map below displays the concentration of investment in mineral extraction in these harsh regions, creating the employment which is attracting this migration into remote but growing population centres.

Regional beneficiaries of large-scale investment

Urbanization

Another important development not predicted by Hill and Gaddy is a shift to concentrated urban population centres. All seven federal districts contain large urban centres which are growing in population even as smaller cities and towns decline. Illustrating this point are regions which have lost overall population while their capital cities have grown in size. Among these are Krasnoyarsk, Yekaterinburg, Tula and Vladimir. Even in Magadan Oblast, which experienced catastrophic population decline, dropping 55 per cent in the 1989-2006 period, the regional capital city (also called Magadan) of this most climatically and historically pitiable place, registered, after a 34 per cent 1989-2002 drop, a "crocus-in-the-snow" 0.6 per cent rise in population between 2002 and 2006, from 99,000 to 100,000 residents.

Consequences of this urbanizing tendency are evident when conjoined with preliminary results from the World Bank's Country Economic Memorandum for Russia (set for autumn 2007 release): "Urban agglomeration, measured as the size of the largest city in a region, emerges as one of the most important explanatory variables [italics added] for regional growth." Another of the study's major finds is that proximity to wealthy regions has little impact on growth, while proximity to "rapidly growing regions with large economies" has measurable "spillover effects," evidenced in the regions near Moscow and St Petersburg or, to take an example from the populous south, Rostov on Don with its population (in 2006) of 1.05 million. High investment rates in the oblasts surrounding these three cities since 2004 have produced some of the fastest rates of industrial output growth – in the 15-18 per cent range – seen anywhere in the country.

The 'milioniki'

Since the middle of the present decade, the dozen cities besides Moscow and St Petersburg with populations of around 1 million or more have been targeted by investors seeking exposure to the spread of rapid real household income growth beyond the two capital cities (for background and comparative information on the milioniki, click here).

Real estate, retail and other consumer-oriented service sectors offer clean plays on that growth. The map below captures the scale of the expanding retail sector in these big centres.

Volume of modern retail development in major cities

But the driver of faster consumer demand growth in one region compared with another is the new or revived manufacturing industry. A winning mixture appears to be a strengthening industrial base – often, but not always, resource-processing industries – located in or near a major population centre. Examples of this phenomenon from the world of metals processing include Chelyabinsk and Yekaterinburg in the Urals and Krasnoyarsk in Siberia and from oil refining and petrochemicals Ufa, the capital city of the republic of Bashkortostan.

The charts below give a sense of the strength – both in relative and absolute terms – of the "milioniki." The first chart shows the impact of migration in allowing these cities to buck the trend of countrywide population decline averaging around 0.5 percent per year in the period 2002-06. The second chart shows the relative strength of housing prices in those populous industrial processing centres mentioned above.

Population in 2002 and 2006

Regional average price of residential space, 2007 (Rb/m2)

Regional variety of governance

(Note: please see the map above for geographical references in this sub-section)

Despite harsh and lingering criticism, President Putin's 2004 decision to switch from elected to (in effect) appointed regional governors has brought some notable benefits. The new system has above all helped introduce the idea that tenure is contingent on performance. The link will be strengthened by a July 2007 decree listing 43 (preliminary) points by which the executive branch at the regional level should be appraised. In his regular public contacts with governors, Putin has made a habit of introducing a competitive note by making public comparisons of their performance. While Putin's appointment policy has been cautious overall – with most established regional bosses being left in place – there have been some more imaginative appointments, including several quite dynamic individuals not orginally from the region in question.

All this presents a contrast with the traditional political elite, especially in the regions, which typically consists of those who began professional life as cogs in their respective regional Soviet Communist Party machines. The habits of that system (maintaining opacity and a patriarchal stance towards the public, belief in the power of hierarchy above all else, under-the-counter deals and immunity from criticism from below) are very ill suited to today's emerging market democracy in Russia. Some regional leaders such as Vladimir Butov, the former governor of Nenets Autonomous District and now convicted felon, remained in that mould into the present decade. Meanwhile others have tried to reinvent themselves in a business-friendly mode (Titov in Samara, Chub in Rostov, Polezhaev in Omsk, Kress in Tomsk) or at least show that they can "get things done" (Valery Shantsev in Nizhny Novgorod, Mikhail Men in Ivanovo).

Better still are the governors with experience of managing major companies – especially in the private sector, with its relative openness to new (better) ideas, use of cost-benefit analysis and pragmatism. There are several such governors. Alexander Khloponin (ex-Norilsk Nickel) in Krasnoyarsk and Vyacheslav Shtyrov (ex-Alrosa) in Sakha have both proved instrumental, for instance, in the coordination of regional infrastructural and business development. Poorly governed in the 1990s, the major industrial region of Perm revived under Yuri Trutnev, who was brought to Moscow in 2004 to join Putin's second-term government as natural resources minister and succeeded by young Oleg Chirkunov, who had been Russian trade representative in Switzerland.

The most famous businessman to govern a region is Roman Abramovich, but the story of his stewardship since 1999 of the remote and sparsely-populated Chukotka is an untypical one of personal financing of public goods. More significant and forward-looking is the case of Dmitry Zelenin (ex-Norilsk Nickel), who was reconfirmed in July 2007 for a second term as governor of Tver Oblast. This resource-poor and drug-troubled region between Moscow and St Petersburg is now benefiting from Zelenin's enlightened perspectives on business, moral leadership and even the "social contract."

Public Judgements

Widening disparities between the stronger regions and the also-rans

UNDP Human Development Report 2006/2007 for the Russian Federation. An assessment of Russia in terms of the UN's "human development index" (HDI) shows increasing inequality between the more developed regions of Russia, which have made strong progress, and the still lagging weaker regions. Growth appears inertial, with agglomeration effects and natural resources – rather than investment in human capital – providing momentum. Rankings have therefore not changed since the last UN HDI report.

Russian State Statistics Bureau (Rosstat) study of regional economic growth for Q1 2007, details reported in Kommersant, 7 June 2007. Unequal industrial and investment expenditure in the regions is resulting in corresponding uneven regional economic development.

Forces are working for convergence as well

World Bank Russian Economic Report No. 14 (June 2007). Although recent studies have emphasized regional disparities in economic development, the data do not confirm this as an overall trend. Actually the opposite may be happening, as poorer regions show faster recent growth, while growth in the resource-endowed has begun to slacken pace.

Institute of Regional Development, Krasnoyarsk Economic Forum working document "Russia on the threshhold of a greenfields epoch," February 2007. The largest-scale investment projects ($5-15 billion) are going to a rather small number of (otherwise relatively barren) regions. Just six out of the 84 regions are the big beneficiaries: Sakhalin, Krasnoyarsk, Yakutia, Yamalo-Nenets, Irkutsk and Murmansk.

National Institute for Systematic Studies of Entrepreneurship (NISSE), report entitled "The dynamic of small business development in the Russian regions, 2006." Russia's ethnic-based republics have done exceptionally well in the area of small business development in the last year, improving on four key measures: the number of enterprises, the number of employed in those enterprises, turnover and basic capital investment.

Clear trends are hard to discern

Moscow-based New Economic School/CEFIR, the 2006 report "Unleashing the Potential: Growth and Investment in Russia's Regions." A region's attractiveness cannot be measured only by investment flows since these are so limited and concentrated in natural resources. Moreover, a check-list for procedures related to business and investment may be of little use since scoring well on one criterion and poorly on another makes comparisons muddled instead of useful. (Example: Smolensk Region ranks best on the number of fire safety inspections but worst for the time required to get a certificate. Sakhalin was the worst for licensing cost, but best for fire, sanitary and administrative-technical inspections.) Internal regional variation prevails.

Regional centres have big futures

Karina Kreja, CEE manager in research at Jones Lang LaSalle, quoted by Euro PRW, Article 4456437, 15 June, 2007. The milioniki will increasingly gain the attention of developers of all kinds. While most big international retail developers are already present, to commercial real estate developers they are terra incognita.

Pascal Kuipers, writing for Elsevier Food International (industry journal), 4 November 2006. The centre of gravity of the Russian retail market is moving discernibly as the traditionally St Petersburg/Moscow-dominant northwestern and central regions give up market share to the Southern, Volga, Urals and Siberian regions.

Melissa Suggitt, reporting in euromonitor.com, 18 April 2007. Multinational retailers are feeling the same push-pull: mature markets are proving less profitable and new markets, like those in Russia's regions, are ever more appealing. Local governments have their own incentives to improve conditions for new retailers as they replace old and obsolete open-market space.

Wrap

The contradictory expert opinion about convergence and differentiation among Russia's regions recalls the three blind men and the elephant (each pondering a different aspect of the anatomy and concluding differently as to the whole). Rather than strive too hard to find a simple overarching story, analysis may conclude that the whole remains divergent in how it develops but convergent in that it does develop.

In other words: the natural resource investment is massive but limited in geographical reach; small business seems to be growing apace in the economically and politically challenging ethnic regions; while the consumer-oriented investment story has now firmly established itself in the "milioniki." The spillover effect from major centres already visible around Moscow and St Petersburg should be repeated in the environs of several of these "milioniki."

One prospective trend is not captured in the judgements surveyed here – mainly because for now it remains more a plan than a reality. This is state-driven infrastructural investment, part of which will be consciously directed towards the economically backward and depopulated regions, particularly in the Far East.

The conclusion of the NES/CEFIR study cautioning against facile ranking and categorization of regions is persuasive. The story of more effective governors popping up here and there out of Putin's appointment system nicely demonstrates this point – that for the forseeable future, picking regions with above-average potential will be a matter of careful case-by-case study.