Asian investors shun Russia’s Far East and its treacherous geopolitics

Russia’s plan to invite its Asian neighbours to transform its Far East region into an industrial port zone has thus far been cautious and subdued. Multiple challenges, from historical distrust to poor infrastructure, have contributed to this. Unless significant political changes are introduced, these factors are likely to limit East Asia’s investment appetite in Eastern Siberia.

Russian perspective

Russia’s Far East covers a third of its national territory. Despite large proven reserves of hydrocarbon and mineral deposits, it is one of the country’s poorest regions and its markets remain mired in deep economic malaise. This is evident from the rapid depopulation of the region, which saw its resident population drop from 6.3 million in 2010 to 4.5 million in 2015, as locals emigrated en masse to richer regions in the west, even though fertility rates in the Far East are higher than the national average.

There are several reasons behind this phenomenon. Historically, the Far East, which the central authorities have regarded as a peripheral region, has historically received less national funding. During the country’s transition to a market economy, spikes in transport prices coupled with perennial underinvestment in transport infrastructure resulted in the Far East being cut off from the rest of the country. This translated into an increase in the cost of living accompanied by a decline in business opportunities.

The lack of job opportunities, declining living standards and economic hardships have fuelled a growing wave of protests and strikes in the Far East

The lack of job opportunities, declining living standards and economic hardships have fuelled a growing wave of protests and strikes in the Far East, with potentially destabilising effects on the political leadership in Moscow. Large-scale anti-government demonstrations were held in major Far East cities between 2011 and 2013, and ongoing anti-corruption rallies began on 26 March 2017.

To quell social discontent, Moscow recognises the need to re-invest in the region. One way is through infrastructure projects. Given the scale of many of these initiatives, alongside shrinking regional budgets, Russia’s government is increasingly turning to public-private partnerships.

Rejuvenating the Far East

Plans to rejuvenate Vladivostok, the largest eastern port city, were conceived in 2014. Russian President Vladimir Putin designated it a special economic zone and a free port area to attract investment. During the Soviet era, the city was home to a major naval base and was therefore closed off to foreigners. Today, the Far East, with more than 22 commercial seaports, has become a crucial maritime hub for Russian exports due to its access to the Pacific. With the region already accounting for about 26 per cent of total freight turnover of Russian ports, development plans involve building up Vladivostok as an industrial port city.

To achieve this goal, Moscow is looking to its eastern neighbours to fund its projects amid a three-year economic slowdown as a result of sanctions imposed by the West over its annexation of Crimea in 2014 and a global slump in oil prices. China, in particular, is emerging as a key player. The world’s second largest economy is keen on the region’s extractive sectors and access to seaports among other reasons.

Despite the Kremlin’s active efforts, foreign direct investment from Asia into the Far East has, at best, been lukewarm

A handful of exporters in China’s north-eastern industrial provinces are starting to route their shipments through ports in Vladivostok and Zarubino, both in eastern Russia, citing cheaper port fees and shorter transit distance. The alternative would be through China’s congested railways to the overloaded port in Dalian, some 1,000km to the south-west. State-linked China National Light Industrial Products Import & Export Corp. is one company which has sent 7,000 TEUs via eastern Russian ports in the first three months of this year.

Challenges

Despite the Kremlin’s active efforts, foreign direct investment from Asia into the Far East has, at best, been lukewarm. This is in part due to the region’s complex business environment, where rampant corruption and higher than national average crime levels pose operational and reputational risks for companies…

Read the full article 

Back