Realism Instead of Utopia

28 december 2012

Siberia and the Far East as a Path to Russian Globalization

Oleg Barabanov - Programme Director of the Foundation for Development and Support of the Valdai Discussion Club, Academic Director of the European Studies Institute at the Moscow State Institute of International Relations (MGIMO), Professor of the Russian Academy of Science

Timofey Bordachev - Director of the Center for Comprehensive European and International Studies at the National Research University–Higher School of Economics, and Director of the Eurasian Program at the Valdai Club Foundation. He holds a Doctorate in Political Science.

Resume: We should not shut ourselves off from China, but cooperate with it: to identify the competitive advantages of the Transbaikal and the Russian Far East; to find points and areas of complementarity of the two economies; and to work along those lines.

Russia has recently conducted an active policy to develop Siberia and the Russian Far East and to gain access to markets in the Asia-Pacific region. Drafting an agenda for Russia’s presidency of the Asia-Pacific Economic Cooperation (APEC) in 2012 was a powerful stimulus to place an understanding of the strategic importance of this issue in the minds of the political leadership and public at large. Moscow openly proposed a thesis that it was the right moment to eliminate the imbalance between Europe and Asia in foreign-policy and in trade-and-investment cooperation priorities, as well as that a less-Eurocentric course corresponds to national interests.

After the APEC summit in Vladivostok in September 2012, some important decisions were made to develop transport-logistical networks in the Asia-Pacific region, ease customs barriers to the export of specially flagged groups of ecological goods and equipment, and enhance cooperation in the realms of energy security, as well as education and innovations. The implementation of these decisions will create extra incentives to developing Siberia and the Russian Far East as an integral part of the Asia-Pacific region.

In the course of preparations for the summit, the Valdai International Discussion Club drafted a special report which stated, among other things, the enormous export potential of Siberia and the Russian Far East and the need for their gradual and smooth involvement in the Asia-Pacific economies. Over the past six months since the publication of the report, several events have taken place in international and Russian politics capable of influencing the development of Asian regions. These are primarily a series of regional summits held in 2012 (APEC, ASEM in Laos, ASEAN, and the Southeast Asian Summit in Cambodia). They have produced a qualitative breakthrough towards the institutionalization of various options of free trade architecture in the Asia-Pacific region. A new mechanism of economic cooperation centered on ASEAN has been created. New steps have been taken towards creating a free trade zone of China, Japan, and South Korea. Russia’s is gradually developing a more well-disposed attitude towards the Trans-Pacific Partnership.

Within Russia during this period occurred the institutionalization of a new Ministry for the Development of the Russian Far East. The opening of its head office in Khabarovsk made the city a third capital (after Moscow and St. Petersburg) and, in fact, realized the Valdai Club’s proposal concerning the feasibility of transferring some of the capital’s functions to the Far East. Once the ministry was created and started work, a spirited debate arose which highlighted both the prospects and obstructions in the public mind regarding the region’s paths of development. Several major forums of experts proved helpful in consolidating analytical estimates and approaches. These fora include the 2nd APEC Forum held by the Russian Council for International Affairs, the 12th Russian-South Korean Expert Forum in Seoul, and some other events.

UNPLEASANT TRUTHS

Over the year of Russia’s APEC presidency quite a few analytical reviews and essays devoted to Siberia and the Russian Far East have appeared. Some were published in response to the Valdai Club report. They contain a great deal of valuable criticism, but many proposals in our opinion are utopian and put too much emphasis on “national interests,” understood in a very narrow way. The fundamental conclusion of the Valdai Club’s report was that the closed, autarchic model of the region’s development has exhausted itself, and the only option (we repeat, the only, indeed) for maintaining stability and competitiveness in the region suggests its integration into the existing Asia-Pacific economy. This, in turn, implies that Russia has to accept some very unpleasant truths, which, as a rule, it tends to ignore.

First, by degree of involvement in the Asia-Pacific economy Russia is second lowest among APEC countries – only ahead of Papua-New Guinea. The Russian Far East is virtually absent from the economic map of the region. The other Asia-Pacific countries see no need to turn to Moscow for a discussion of various free trade zone projects. It is precisely for this reason (and not due to the petty schemes of enemies) that U.S. Secretary of State Hillary Clinton in her policy article, entitled America’s Pacific Century, made no mention of Russia. Regrettably, there is nothing worth mentioning. One may indulge in nostalgia for the region’s Soviet-era might, dream of starting development from scratch or of hi-tech and profitable industries mushrooming at the stroke of a magic wand in each of the cities of the Russian Far East, and even blend these dreams into unrealistic federal targeted programs, but this will not change the situation. The huge Asia-Pacific economy operating without Russia is an inescapable truth.

The second truth concerns the infrastructural priorities of the state for the foreseeable future. They traditionally coincide with major international events. Vladivostok has already received hefty financial infusions, incommensurable to those made in other regions, to host the APEC summit. But the summit has concluded. Russia will have other infrastructure investment targets for the next several years – the July 2013 Universiade in Kazan, the 2014 Sochi Winter Olympics, and the 2018 FIFA World Cup. All these targets are located in the European part of the country, and for this reason there will not be more budget-funded outpouring of money east of the Urals.

The APEC summit did effectively change Vladivostok. The custom of ridiculing federal programs for the city’s development is unfair and not constructive. On one hand, everybody habitually hopes for government investment, but, on the other hand, when it appears, it is unappreciated. In any case, the country’s leadership had stated that pre-summit financial injections into Vladivostok’s infrastructure were just a launch pad for the future, and now the city and the region should use it to find a place in the Asia-Pacific economy, and not hope for new budget infusions.

The third truth is that scarce labor resources are the key problem of the Transbaikal region and the Russian Far East. There is a general shortage of personnel, not just skilled employees. Two decades of population flight from the region and of the social marginalization of many of those who stayed hit hard the region. Hence the fond dreams of building dozens of new factories in the region are utopian by definition. One has to clearly understand that, for these dreams to be realized, the labor force would have to be imported. There are no domestic labor resources. The architects of ambitious projects prefer to overlook this issue for understandable reasons. Is regional public opinion prepared for the new industrialization of the Transbaikal region and the Russian Far East to be accomplished by Chinese, Korean, Vietnamese, and Indian workers? At this point, it is unlikely.

Fourth, the discussion of the matter of creating the new Far East Development Ministry has highlighted yet another problem: the unpreparedness of public opinion and certain circles of power for the region to receive greater independence and autonomy than the others. The very creation of the Ministry and the proposals to adjust federal tax policies to the geographic characteristics of the Russian Far East aroused the apprehension that it might be the first step towards separatism and the disintegration of unity. On one hand, the redistribution and easing of the tax burden play a key role in the region’s reorganization projects; on the other hand, when these proposals begin to take definite shape as a result of actions by the authorities, everybody is frightened by separatism. A vicious circle occurs. It is germane to remember that the Chinese economic miracle, the break from Mao-era primitive blast furnaces in every village to the second-largest economy in the world, would have been impossible without free economic zones and special tax conditions as a driver of investment and economic growth. There is no other way.

The fifth, and final, factor is China. Many in Russia tend to fear the country. This motif is unmistakably present in many of the projects for the development of the Russian Far East. Anyone is acceptable, only not the Chinese – this proposed solution is deficient and utopian. First and foremost, no anti-Chinese fears will change the four thousand kilometers of a common border. In theory, it could be closed in response to a “Chinese menace” – but then what? Vladivostok probably would carry on thanks to its seaport, but the Transbaikal region and the Amur region would quickly fall into decline. Economic and cultural ties with China’s border provinces are, for the citizens of these regions, an important factor of growth and a powerful engine of social development – a kind of Chinese gateway for these regions to the world. If the people of Chita are not allowed to travel to Manchuria, the citizens of Blagoveshchensk to Heihe, and the citizens of Khabarovsk to Fuyuan, the authority of Moscow (and of Russia, which Moscow embodies) would fall in these cities to a critical low. This would be the first step towards separatism.

This is why we again reiterate the key thesis of the Valdai Club report: the development of Siberia and the Russian Far East is impossible without relations with China. We should not shut ourselves off from China, but cooperate with it: to identify the competitive advantages of the Transbaikal and the Russian Far East; to evaluate the real, and not the imaginary demand of the Chinese market for certain goods and services from Siberia and the Russian Far East; to find points and areas of complementarity of the two economies; and to work along those lines. These were and are the aims of the 2008 bilateral inter-state program for the joint development of the Russian Far East and China’s Northeast, which in Russia is just short of treason.

It is worth remembering that other countries have displayed far less interest in investing in the Russian Far East. The United States is quite commonly considered the first alternative to China. In the spring and summer of 2012, a working group for the future of Russian-U.S. relations, created by the Valdai Club and the Davis Center for Russian and Eurasian Studies at Harvard University, conducted a special survey of cooperation by Russia and the United States in the Asia-Pacific region.

The study revealed that, apart from minimal attention to the Northern Sea Route, U.S. businesses in general have no interest in the Russian Far East. It may not sound flattering, but that is the situation.

Japan, another candidate for the position of a priority partner, will never make the Russian Far East a target of large-scale investment under conditions of the tight ties of politics and business in that country and unresolved territorial problems. True, it is not a reason for curtailing the just-begun investment cooperation with Japan, mainly on Sakhalin, but the strategic vector is improbable.

To be fair, one must admit that South Korea has proposed some large-scale development projects for the Russian Far East. Specifically they include: a high-speed railway service between Vladivostok and Khabarovsk, a Trans-Korean gas pipeline, a Trans-Korean railway, and others. Seoul could become a reliable strategic partner in developing the Russian Far East. But attempting to set South Korea against China is not rational. It is far more beneficial to find opportunities of complementarity between these two partners of Russia.

 

USING THE COMPETITIVE ADVANTAGE

In our opinion it would be far more realistic and effective not to try to recreate a closed, Soviet-style industrialization model in the Transbaikal region and the Russian Far East, but to develop those sectors of the economy where we have international competitive advantages and which may find a niche in the Asia-Pacific economy. This is the key to the revival of the Russian Far East.

The authors of the Valdai Club report sought to identify what Russia’s partners expect of Siberia and the Russian Far East, in what ways the region may be of interest and useful to their economies, and which of the goods and services that Siberia can provide would be in demand on the international market. Farming in Siberia and the Russian Far East (mostly wheat) has a high potential for export. According to the foreign participants of the Valdai Club, East Siberia and the Russian Far East are the “last global virgin lands” – one of the few remaining territories in the contemporary world with fertile, humus-rich black earth or similar types of soil that have not been placed in large-scale agricultural production. Presently, the southern areas of Western and Central Siberia are actively used for wheat production; these areas are the forest steppe of the Altai Territory (which accounts for one-tenth of Russia’s arable land) and the Minusinsk Depression in the south of the Krasnoyarsk Territory in Khakassia. To these could be added several more regions in the Transbaikal region and in the Russian Far East, which have similar soil and actually constitute these “last virgin lands.”

These regions are the Daurian forest steppe in the south of Buryatia and the Chita Region, currently used only for livestock. The amount of land plowed for grain production is not sufficient. The Selenge Province in Mongolia on the other side of the border, which has identical climatic and soil parameters, boasts high yields and is reputed to be the country’s main grain producing area. This example makes one hopeful that the use of the Daurian lands for grain production may also be effective.

The two other “last virgin soil areas” are the southern areas of the Amur Region (lowlands along the Amur and Zeya rivers) and the Jewish Autonomous Region. In the Amur Region, active work has begun to grow wheat for the local market, for which it has already been nicknamed the Russian Far East’s “bread basket.” Large-scale draining is needed to improve the excessively moist soil and to expand the area of arable land here and in the Jewish Autonomous Region. This will create larger areas for wheat production for local use and for export.

Over the past five years Russia has become one of the world’s largest providers of wheat (depending on the annual crop, up to 25 million tons a year). By contrast, the Soviet Union was a grain importer, so this transformation is a major success of the new Russian economy. However, all bunker port terminals for reloading grain from railway cars to ships are located in the European part of the country, mostly in Novorossiisk, which is certainly a major constraint on grain export. The main consumers of Russian wheat are countries in the Mediterranean and the Middle East (Egypt, Turkey, Tunisia, and others). In 2012 the Summa Corporation, one of the largest grain market operators in Russia, declared that it intends to build, in two or three years, a new bunker terminal at the Zarubino port near Vladivostok. Russian wheat could then be sent to the Asia-Pacific market, which would make its production in “the last virgin soil areas” particularly feasible.

To illustrate the demand for Russian grain in the Asia-Pacific region one may use the following comparisons. Russia produces 75 million-90 million tons of wheat per year, depending on annual climate conditions. Chinese production is 100 million-110 million tons a year, but opportunities for expanding arable land are limited. The climate in China is suitable for growing wheat only in the northeastern regions – Manchuria and the Huang He river basin. Farther south, rice is the staple crop. For the near future, China will be interested in the import of Russian wheat. Two other major importers of wheat in the Asia-Pacific region – Japan and South Korea – have already shown demand for importing Russian wheat. With the commissioning of the bunker terminal in the Far East, Russia will become a new major operator on the Asia-Pacific grain market and a competitor of Canada and the United States, the traditional providers of wheat in the region.

Other industries of the Siberian and Russian Far Eastern economy that may prove quite lucrative are water intensive: woodworking, pulp and paper mills, and chemical industries. The abundant waters of Siberian rivers make locally placed industries requiring heavy water consumption far less costly than those in other Asia-Pacific countries, which, in turn, increases the export potential of their products.

Energy is the third item in great demand among foreign consumers. The Russian Far East has seen fundamental changes in this sphere over the past five years. Since 2007, Gazprom’s eastern program has implemented a number of large-scale projects, such as the launch of the country’s first gas liquefying plant for the Sakhalin-2 project. Russia is now not only a pipeline exporter of gas, but it has also entered the huge LNG market in the Asia-Pacific region. Plans have been unveiled to build a second gas liquefying plant near Vladivostok within the framework of Sakhalin-3 on the basis of the Kirinskoye deposit, the largest one off Sakhalin. Russia is thereby entering into competition with traditional providers of liquefied natural gas to Asia-Pacific countries (Qatar, Indonesia, and Australia), and also offers an alternative to the expected shale gas supplies to the Asia-Pacific region from the U.S. and Canada.

The gas pipeline infrastructure in the Russian Far East has also undergone significant changes. In 2011, Sakhalin-Komsomolsk-Khabarovsk-Vladivostok, a new gas carrier, was commissioned with the goal for it to become the main gas supply route from Sakhalin-3. In fact, the pipeline ends on the border with North Korea, which makes it much more likely that projects will be implemented to build a Trans-Korean gas pipeline from Russia across North Korea to South Korea.

Using the transit potential of Siberia and the Russian Far East is another possibility that has aroused great interest from foreign partners in the Valdai Club. It concerns, above all, the Northern Sea Route along Russia’s Arctic Coast. In the context of global warming and soaring insurance risks on the piracy-vulnerable routes through the Suez Canal, the Northern Sea Route may appear a commercially attractive alternative to the customary links between Europe and Asia. It is a very telling sign that Singapore, one of the region’s largest ports, actively supports the idea that the Northern Sea Route could be used more intensively.

On the other hand, the Customs Union of Russia, Belarus, and Kazakhstan has created a single customs space in railway traffic stretching from the Asia-Pacific market to the EU. South Korea, as has been said above, has shown interest in joining the construction of a high-speed railway line between Vladivostok and Khabarovsk. At the same time, Russian Railways, the country’s state-run rail company, is implementing a project to upgrade the railway link between Russia’s Khasan and North Korea’s special economic zone in Najin, thereby laying the technological foundations for a future Trans-Korean railway project.

Lastly, in investment terms, foreign partners have set their eyes on Russia’s newly-launched plans to create a third line of industrial development for Eastern Siberia and the Russian Far East, which should stretch from the northern districts of Irkutsk Region (north of Lake Baikal) through South Yakutia and Komsomolsk-on-Amur to the Pacific Ocean and Sakhalin. This line will be parallel to the two existing industrial development railways – the Trans-Siberian and the Baikal-Amur. Gazprom’s aforementioned eastern gas program will be its main driving force. In the near future, the program will tap the Kovykta deposit north of Lake Baikal and the Chayanda gas field in South Yakutia, and link them with the Sakhalin projects. Komsomolsk-on-Amur, located at the junction of Gazprom’s projects in Yakutia and in Sakhalin, and also cities in South Yakutia, such as Neryungri, will receive a powerful impetus for development. Plans are being discussed for the creation of a new base of heavy industry in the south of Yakutia and a new highly-specialized hi-tech facility in Komsomolsk. Low-cost energy will be the main competitive advantage of all these industrial clusters. Naturally, the demand for investment to implement these projects is very high, and Russia’s foreign partners may add their contribution.

Siberia and the Russian Far East have huge export and investment potential in the discussed branches of the economy. According to estimates by Valdai Club experts, this potential will be in great demand from Russia’s foreign partners in the Asia-Pacific region and can serve as a basis for the effective modernization of this region of the country.

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