Russia Forum Buzz: Tapping the Potential of Siberia and Russia’s Far East

April 19, 2013

 

Eastern Siberia and Russia’s Far East have unique development potential thanks to their super-rich resource bases and proximity to key economic centers in Southeast Asia. What steps does Russia need to take in order to tap into the macro-region’s potential and transform it into an economic growth engine? What is holding the region back: inadequate infrastructure, insufficient workforce, legislative hurdles, financing difficulties? What roles should the state and private investors play in developing Eastern Siberia and Russia’s Far East? Should the government focus on attracting FDI or developing a domestic investor base? How best to stop the depopulation trend and stimulate an inflow of new workers to the macro-region? Should economic incentives be introduced to boost the Far North’s population, or should the Canadian model of shift labor be used to tap into its resource base? What needs to be done to create a powerful manufacturing hub in Eastern Siberia and Russia’s Far East, converting the region’s natural resources into high value-added products?

Andrey Donskih started the discussion stating that Russia’s Far East and Siberia are blessed with an enormous endowment of resources and a favorable geographical location due to their proximity to Asian growth markets and access to the sea. However, the challenges involved in tapping these are just as great due to infrastructure bottlenecks, a lack of labor, harsh weather and a high cost of living. The region’s development is one of the government’s top 10 priorities, but it needs to create a favorable legal environment, attract private capital and expertise, and create industrial, business and social infrastructure, our panel participants argue.

Artem Volynets thinks the government should mobilize all available measures, including investments in infrastructure, a preferential tax regime, and attracting foreign investment. Infrastructure is paramount, and this is more than just physical infrastructure like railroads and bridges, but also business and social infrastructure to attract and retain human resources. He is also convinced that ties with the high-growth potential Southeast Asian neighbors should be strengthened via pipelines and electricity transmission lines to China. By creating a favorable business and social environment, internal demand will grow in the region, which would push economic growth.

Pavel Grachev, as a representative of the government, stressed that the Russian state understands that investment in infrastructure is difficult to attract from the private sector due to the suboptimal risk/reward profile (high cost of development, and long period of return), and thinks the government should take the lead and shoulder infrastructure development costs. Therefore, the state is developing the legal framework for concessions, creating long-term visibility in tariffs and increasing the attractiveness of these investments for the private sector.

Igor Zyuzin said his company was one of the first to move ahead with infrastructural development without government assistance (for its Elga project), and it felt the full brunt of the region’s challenges, including insufficient labor and the high cost of material and transport distances. He sees the availability of rail infrastructure as one of the key problems facing Mechel in the longer term, as coal output from Elga will reach 27 mln tpy and getting this to international markets will still require massive investment in railroad links by Russian Railways.

Pavel Maslovsky explained why only the gold industry has been able to develop in Russia’s Far East over the past decade. This industry has fewer infrastructure requirements, as shipping gold is much different than shipping iron ore. He thinks the government should be more aggressive in creating a favorable environment to attract investment from foreign players, as well as businesses already operating in the region, by providing tax breaks.

Vitaly Nesis is convinced that government investment is inefficient since it crowds out private investment. He illustrated his point by giving an example of a state financed road in Magadan that led to increasing contractor rates and higher material costs, while the road itself was not vital to the development of the businesses. He disagreed with Pavel Maslovsky on tax breaks in case of gold, since he believes that it will not help to increase efficiency. Conversely, he calls for the government to revise its approach to the legal framework and ease licensing procedures, which take from two to five years in Russia and are the biggest hurdle for the development of the gold industry.

Vadim Shvetsov talked about why SOLLERS opened an auto manufacturing plant in Russia’s Far East. Since western Russia is saturated and low-growth, the company decided to penetrate a growth market and opened its plant in Vladivostok. While he sees enormous potential for growth in the region, he mentioned the lack of social infrastructure and tough relation with the local authorities as the key bottlenecks hindering rapid expansion.