Experts who attended the Krasnoyarsk Economic Forum argue that Ukraine's crisis won't seriously affect Russia's collaboration with its foreign partners in developing Siberia and the Far East.


The 11th Krasnoyarsk Economic Forum, held on February 27 - 1 March , brought together both Russian and foreign economists who make their guesses about the implications of the Crimea crisis for foreign investment plans for Siberia. Photo: RIA Novosti   

The U.S., Canada, South Korea and Japan are on the shortlist of the most likely partners to assist Russia in the development of Siberia and its Far East, according to participants at the 11th Krasnoyarsk Economic Forum, held on February 27 - March 1. Experts believe that the aggravation of the situation in Ukraine will not fundamentally impact the Russian government's plans, with the investment opportunities simply too attractive to be passed up by outside investors.

Development of these regions was declared a priority program back in December by Russian President Vladimir Putin. Earlier, at a cabinet meeting on March 21, 2013, it was announced that Russia’s eastern regions would be the focal point of the country's economic development as a whole. This decision was dictated by the state of the global economy.

“The ongoing systemic crisis in Europe is pushing Russia, while maintaining its positions in Europe, into more active cooperation with Asia-Pacific countries, since that is the most promising region,” said former Minister for Development of the Far East Viktor Ishayev. “The Far East should become a key part of the integration processes and Russia’s facade in the Asia-Pacific region, but that requires a radically new model for the economic and social development of the macro-region.”

“In the future, demand for raw materials will mainly come from South East Asia,” Professor Alexei Skopin, head of the Department of Regional Economy at the Higher School of Economics, told Russia Direct, highlighting the fact that Russia’s principal raw material stocks are concentrated in Siberia and the Far East.

“It is logical that these regions need to be developed,” he added. “Irkutsk, Novosibirsk, Krasnoyarsk, and other cities in this mega-region have the scientific potential to produce top-quality high-tech goods for sale in the markets of South East Asia, where demand will be high.”

Prime Minister Dmitry Medvedev has already put an approximate figure on the amount of funding required to develop the Far East and Siberia: “We are looking at a preliminary sum of around RUR 10 trillion ($27 billion). The amount is unprecedented and colossal, but will come from state financing, borrowed funds (they are unavoidable), and of course, private investments.”

Special economic zones for developing Siberia and the Far East

Experts agree that the most effective format for attracting investment in the development of Siberia and the Russian Far East will be to create Territories of Advanced Development (TADs).

In other words, special economic zones (industrial parks, techno- and agro-parks, etc.) will be established in various regions to allow investors to set up new production facilities, including ones focused on exports. For this purpose, the areas will operate under special preferential conditions.

A bill “on the creation of a territory of advanced social and economic development in the Far East” has already been submitted to the government for consideration. However, such a tool already exists in Russia. Since the mid-1990s, the country has been setting up Special Economic Zones (SEZs), of which there are now 17, most of them concentrated in the western part of Russia. But apart from six industrial zones, they have yet to have any real impact.

TADs are essentially an upgraded version of SEZs, presupposing a wider range of preferences. The administrative body will also be different. SEZs are run by the Ministry of Economic Development, while TADs will be under the Russian Ministry for Development of the Far East.

Development perks

The format of TADs has been successfully tested in China, Singapore, India and Myanmar. Now the Ministry for Development of the Far East is analyzing the region to determine the most suitable sites to create these special territories. A list should be ready by July 1.

Officials and experts are presently engaged in open talks to identify the optimal set of preferences needed to attract investors to these special territories.

For instance, Minister for Development of the Far East Alexander Galushka proposes, on top of tax breaks, to simplify the administrative procedures for obtaining licenses, whether they pertain to construction permits, customs rules, or technical regulations.

He says that TADs will require extensive exemptions from the general rules. Such a path has in fact been trodden already by Japan and China as part of an experiment in certain areas.

The need to simplify the legislation is reiterated by Vladislav Inozemtsev, scientific director of the Center for Post-Industrial Studies. But his formula for Siberia goes even further and proposes to open up Russia’s resources to investors.

“Siberia and the Far East should be less restrictive,” believes Inozemtsev. “Investors should be given an opportunity to develop mineral deposits there, and to build and buy up oil and gas pipelines and other parts of the transport infrastructure. The economic goals should override the political circumstances.”

Public-private partnership is hailed by experts as the most effective business format for developing these territories.

Professor of the Higher School of Economics Sergei Karaganov suggests developing those industries in which Russia has a competitive advantage. They include: agriculture, petrochemicals (in particular, the production of chemical fibers), deep timber processing (in particular, the production of paper and cardboard for export to Asia), energy-saving technologies, water supply, and water treatment.

Will the Ukrainian crisis impact future investment strategies?

Inozemtsev lists Japan and South Korea among the potential partners for Russia’s development of Siberia and the Far East. Investors from the U.S. and Canada could also be brought in. These countries have vast experience of developing areas under similar economic conditions to those in Russia.

However, expert opinions diverge when it comes to the U.S., Mikhail Akim of the European Business Association, who worked for many years there, told Russia Direct that companies on the West Coast of America could theoretically be interested in Russian projects, but that they would find it easier to go to South America.

“The Siberian vector of development is more relevant to European investors. Europe is stagnating and has no room for development. But its companies have a wealth of technologies and engineering expertise that could be put to good use in Russia to solve many problems,” reckons Akim.

To get a more dynamic response from U.S. businesses, it is important to distance the political component of the venture, underscores Akim. The rapidly developing conflict in Ukraine is one such political component that must be excluded. Yet relations between Moscow and Kiev, in the opinion of various experts, will not hamper the future development of Russia’s eastern regions.

“The share of American and European investments in projects in the Far East is likely to be small: just a few percent, maybe not even ten. The bulk of the investments will come from Japan (if we manage to reach an agreement over the Kurile Islands) and China. The latter has made it clear that it adheres to a neutral position with regard to the Russian-Ukrainian situation,” expounds Alexei Skopin of the Higher School of Economics.

His view is backed by Vladimir Klimanov, head of the Department of State Regulation of Economy under the Russian Presidential Academy of National Economy and Public Administration (RANEPA). In his opinion, the potential plans of U.S. investors are not so large-scale as to have a dramatic impact on the political situation.

“I would not overestimate the injection of Western cash into projects in the Far East. I do not think that investors from the U.S. and Canada will actively develop business in Siberia and the Russian Far East. Still, their interests in the region could be embedded in some unique production chains that are not strongly felt,” Klimanov told Russia Direct.

Japanese business representatives are eyeing Siberia with caution for the time being, although the idea of TADs and industrial parks is certainly of interest, stated Iwao Ohashi, chief representative in Russia of Nomura Research Institute, speaking in Krasnoyarsk.

But Japanese investors, he says, are not yet ready to cooperate with Russia’s Far East and Siberia. Their geographic frame of reference is dominated by China, India and Vietnam.

For them, Russia’s Far East is still just a source of oil, gas, and timber.

“To break this perception, it is necessary to create a duty-free transport infrastructure. The Development Bank of Japan is implementing Seamless Asia, a project to create a kind of barrier-free environment for people, finance, and information. I would like to see Russia’s Far East become part of this space,” said Ohashi.