Series: Looking for the Real Russia—Insights from Japan-Russia Experts (3)
Business Environment in the Far East Region of Russia:
Current State and Issues
Business Environment in the Far East Region of Russia:
Current State and Issues
Professor, Dept. of World Economy
Lead Researcher, Center for the Studies of Japan-Russia Relations,
Far Eastern Federal University, Vladivostok, Russia
Since December 2013, when President V. Putin declared development of the Far East as a national priority for the 21st century, new development measures produce first results such as new enterprises, higher economic growth and double-digit investment growth. Among foreign investors attracted with business chances, activities of Chinese companies look by far remarkable as they propose to invest billions of dollars into dozens of joint projects.
Four years ago, in December 2013, President of Russia V. Putin in his annual address to the Federal Assembly declared social and economic development of the Far East as a national priority for the 21st century. By January 1, 2018, Russia's authorities adopted and implemented as many as 22 federal laws and 77 governmental acts dedicated to the Far East development.
New measures for regional development - Advanced Special Economic Zones (ASEZ) and Vladivostok Free Port
Since 2015, the government established 18 ASEZ, kind of special economic zones designated for newly established companies or new investment projects. ASEZs provide residents with tax incentives, government-built infrastructure (roads, electricity, water, gas, etc.), simplified administrative procedures and possibility of free customs zone regime. So far, ASEZs attracted more than 200 residents, including companies from Australia, China, India, Japan, and Vietnam.
Another new mechanism for business environment development is Vladivostok Free Port. Regime of Vladivostok Free Port established in 2015 is quite different from Porto-franko as such. First, this special economic regime is not about only Vladivostok City, as it include 16 municipalities in Primorsky Territory and 5 municipalities in other regions. Second, this is not about foreign trade or port activities, as virtually all industries (with exception oil and natural gas extraction, banking and finance and some others) may be represented here. Third, a company may apply for the resident's status only if it proposes new projects or new spheres of business activities. More than 400 companies including several foreign businesses have obtained status of residents.
Achievements so far
By January 1, 2018, as many as 89 new enterprises started its work under new legal environment and regulation including some large investment projects. Overall, more than 1000 investment projects in the Far East are under way on various stages. In fact, the Far East is going to emerge as a major national construction site. Major ongoing projects include Amursky natural gas processing plant (ASEZ "Svobodniy"), Eastern petrochemical complex, Nakhodka mineral fertilizer plant (ASEZ "Neftehimicheskiy"), Zvezda shipbuilding complex (ASEZ "Bolshoi Kamen"), modernization of BAM and Siberian railroads, two bridges connecting Russia and China across Amur River (railroad bridge and motorway bridge) to name few.
Annual economic growth in the Far East is higher than national economic growth. Though most projects here are at the stage of construction, completed projects make some positive impact on regional economy thus proving that governmental measures for regional development begin to bring results. Accelerated growth of regional economy can be expected in coming years as estimated investments growth rate in the Far East in 2017 exceeded 11% and was about three times higher than national indicator.
Simplified e-visa issuance to visit Vladivostok Free Port started in August 2017, and more than 6000 nationals from 18 eligible countries including Japan, China, Singapore, etc. obtained e-visas free of charge. Since January 1, 2018, foreigners with e-visas may enter not only via Vladivostok International Airport and Vladivostok Sea Terminal, but also via seven more border-crossing points in Primorsky Territory, as well via Korsakov Port in Sakhalin and Petropavlovsk-Kamchatsky Port. As President V. Putin has ordered to the government to prepare proposals for broader usage of e-visas, the issue of entry to the Far East via any local international airport with e-visa looks feasible.
In fact, majority of plans included into the Public declaration of the Ministry for the development of the Far East of Russia for 2017 have transformed from words to something tangible. Maybe, the most important factor looks rather personal, as this is mainly due to control exercised by Mr. Y. Trutnev who combines powers of both Plenipotentiary representative of the President in the Far East Federal District and Deputy Prime-Minister. It was President V. Putin's idea to appoint Y. Trutnev, Deputy Prime-Minister, as his representative in the Far East back in 2013. Previous presidential representatives did not obtained formal power within the government, and for them to deal, for instance, with powerful Ministry of finance was almost impossible. Y. Trutnev has both President's trust and popularity with local people, and manages to make administrative procedures and boring arrangements with numeral governmental bodies much easier.
The Far East attracted about a quarter of FDI to Russia in 2017. Chinese companies participate in 28 investment projects, while the number of projects with Korean capital is nine, and with Japanese capital is six. For example, Japan-related projects include Mazda's car assembly and engine production; JGC's greenhouse vegetables production; JGC Hokuto Rehabilitation Center; Hokkaido Corp. greenhouse vegetable production; Arai Shoji Co. used cars utilization and e-vehicle assembly.
Amount of Chinese investments to projects in the Far East reportedly reached 3.7 bln USD, by far bigger than investments from any country. Russia-China Investment Fund acquired 42% of RFP Group - major wooden materials producer in the Far East, which exports 90% of its production to China. China Paper Corporation agreed to invest 1.5 bln USD to build a palp plant in Khabarovsk Territory.
As China seeks to diminish environmental damage produced by its heavy industries and support relocation of "dirty" enterprises from China to foreign countries, a number of Chinese companies proposed construction of its plants in the Russian Far East. A cement plant has been already built, and there are proposals to build a petrochemical plant and even a steel production cluster up to 10-mln ton yearly worth of five bln USD. While the Russian authorities welcome Chinese investments in the Far East, experts are more cautious as these plants can cause deterioration of environment in the Far East. Though some experts rely on stricter environmental standards in Russia, others stress that what Chinese companies really want is not to invest but to export outdated production facilities. Public opinion about Chinese investments is rather negative as ordinary people are well aware about vegetables grown on Chinese-rented farms and filled up with chemical fertilizers.
Chinese companies are also active in tourism-related business. Share of China in inbound tourism in the Far East is by far the biggest one, e.g. the number of Chinese nationals visited Vladivostok in 2017 counts 400000 out of 600000 foreigners. However, Russian experts say that Russia's revenues from this tourism is minimal as the money mostly circulate between Chinese stakeholders - Chinese travel companies, transportation companies, hotels, restaurants, guides and interpreters, etc. which are either officially or in fact under control by Chinese nationals.
Russia and China have boosted cooperation on developing bilateral transport routes connecting China's Heilongjiang and Jilin Provinces with ports in Primorsky Territory into real international transport corridors. China Communication Construction Company plan to prepare feasibility study about these routs by March 2018, and Russo-Chinese managing company is to be established soon. Again, some experts are cautious about this cooperation as to develop international corridors interests of other foreign stakeholders should be counted as well.
While detailed information about agreements between Russian and Chinese companies is far from being abundant, it is clear that at least some parts of agreements are still MOUs with unpredictable feasibility.
Issues to deal
Many issues of the Far East Region development require further consideration and improvement. Residents of ASEZs complain that construction of infrastructure is behind the schedule. They also require lower charges for electricity and natural gas supply. There are cases when potential investors cancelled their plans because the infrastructure was not provided. Just handful of ASEZs and Vladivostok Free Port residents actually use the regime of free customs zone as it turned to be complicated and expensive. For instance, a resident need to build special fence around its plant, set security cameras, arrange an equipped office for customs officers, etc.
Several ASEZs still have one or two investors, and the Russian government plan to inspect all ASEZs for their efficiency. Administrative pressure on businesses (inspections, examinations and audits by numeral governmental bodies) is still excessive. Financing is still expensive and difficult to obtain, especially for SMEs. As medical services suppliers from Japan, Korea and China express their interest to establish clinics, a special federal law is in need to allow foreign hospitals and doctors work here.
Besides, while investment projects in the Far East are expected to be launched one after another in coming years, two major challenges emerge. First, comprehensive development of relevant territories and municipalities, and, second, development of social sphere here (education, medical services, housing, etc.) so that all its indicators reach levels above the national average. That is why the government prepared the list of 27 national development programs with mandatory special "Far Eastern chapters", however, as financing of them is not yet approved it is too early to evaluate their actual importance for the development of the Far East of Russia.
About the Author
Tagir KHUZIYATOV, Professor, Department of World Economy;
Lead Researcher, Center for the Studies of Japan-Russia Relations, Far Eastern Federal University (Vladivostok, Russia).
Education & Training
Japanese Studies, Far Eastern State University (Vladivostok); International Economics (Ph.D. program), Institute of Oriental Studies, Russian Academy of Sciences (Moscow); International Marketing, Tokai University, Japan; International Economics, Kingston Polytechnic, UK; Business Development Program, Japan Productivity Center, etc.
Russia and Japan: looking together into the future (co-author), Far Eastern Federal University Press, 2016: Security and Cooperation in Northeast Asia: Joint Document of Russian and Korean Experts Joint Paper (co-author), Spetskniga, 2015 [published in Russian]: Russia in Asia Pacific: Perspectives of Integration (co-author), Far Eastern Federal University Press, 2011