2023 Investment Trends & Incentives In The Russian Far East

Bordering China, foreign investment in Russia’s Far East increased 23% in 2022. We look at the investment trends, developments, and opportunities.

The Russian Far East occupies 41% of Russia yet has just 5.56% of its total population. Yet with Russia’s Pivot to Asia, and especially trade with China, there is great potential for growth in the export of business and IT services, education, and cultural tourism.

However, for the qualitative development of the Russian Far East’s infrastructure, significant investments are required – while Russian government funds allocated for these purposes are not yet sufficient. That has prevented the private sector home and abroad from taking advantage of the opportunities – investment into the Russian Far Eastern Federal District reached Rubles 537 billion (US$7.8 billion) an increase of 23% compared to 2021.

In total, over the past decade, Rubles 7.2 trillion (US$1 trillion) has been invested in Russian Far East projects, while last year, over 140 new enterprises began operating in the region.

During 2023, it is planned to attract up to Rubles 200 billion (US$2.9 billion) to projects under the Far Eastern Concession. It is planned to implement 30 projects using this capital, with the initial 14 projects already approved and being implemented. These include a new ski resort in Primorsky Krai, a children’s camp in the Khabarovsk Territory, lighting in Chita and Birobidzhan, heat supply for a village in the Trans-Baikal Territory, sports and social facilities in the Magadan Region.

Increasing quality of life

Alexei Chekunkov, Minister for the Development of the Far East and the Arctic, has stated to media that “Our first task is to keep today’s Far East residents and attract new ones.”

Almost 3,000 new projects are currently being implemented in the Far Eastern Advanced Development Territories (TOR) and the Free Port, of which 657 have already been launched. Some of these are global leaders that are changing the structure of the world economy: the Zvezda shipyard, the Power of Siberia gas pipeline, the Amur gas cluster, the Udokan, Malmyzh and Baimskoye fields, the Three Volcanoes tourist center and others.

Chekunkov’s stated second important task, is to maintain a comfortable environment for life. This goal is served by ideas for the renewal of Far Eastern cities, the housing project “Far Eastern Quarters”, and the education development program “Priority 2030. Far East”.

“Third, the Far East should be interesting,” Chekunkov continues. — We are opening creative clusters, branches of creative universities. These are just small touches to a large complex work that affects all areas of life – from the Northern Sea Route to the development of small and medium-sized businesses, from preschool education to active longevity, from Ulan-Ude to Kunashir.

Dynamic Far Eastern regions

According to the FANU “Eastern Center for State Planning”, in 2023 the volume of investments in the Far Eastern Federal District will increase. Positive dynamics are expected in nine regions of the Far East, among them the highest growth rates are in the Chukotka Autonomous Okrug (+41.7%, due to the development of the Baimskaya ore zone), the Republic of Buryatia (+25.6%, the implementation of projects in the field of mining minerals, aircraft manufacturing, agriculture, transport and tourism), Trans-Baikal Territory (+4.9%, development of mineral deposits, modernization and expansion of the BAM and the Trans-Siberian Railway).

VEB.RF, the Russian State Investment Fund, are also involved, and approved eight new projects in the Far East worth Rubles 126 billion (US$1.8 billion) in 2022. They stated “The development of infrastructure and ensuring its transport accessibility can improve the quality of life and the business climate of the microregion.”

Currently, VEB.RF has 21 projects with a total volume of Rubles 163 billion (US$1.8 billion) in the active stage of development, including projects to modernize airports, upgrade public transport, and create local digital infrastructure.

One of the programs is related to increasing energy efficiency using renewable sources in the villages of Transbaikalia. Although the Far East is a territory of great opportunities with a large financial centre, there are certain limitations: the labour force, lack of infrastructure, territorial remoteness, as well as difficult climatic conditions, the press service lists. To increase the investment attractiveness of the Far East, a concessional financing mechanism was created, implemented by VEB.RF together with the Ministry for the Development of the Russian Far East.

Personal incentives

One promising measure could be found in Primorsky Krai, which will become the first region in Russia where the payment for the birth of a third child will more than doubled (from Rubles 450,000 increased to Rubles 1 million). The funds can be used to pay off a mortgage.

Sergey Katryn, President of the Russian Chamber of Commerce and Industry, backed this up saying that “In order for people to want to live in the Far East, personnel and infrastructure are needed, it is important to reduce the tax burden on entrepreneurs, simplify bureaucratic procedures, and reduce interest rates on loans for small businesses.”

The most important direction in the development of the Russian Far East though remains infrastructural: communications, transport, energy. But improvements have been made – remote Chukotka is now the only Far East region where there is no cable. Small aircraft are required, the development of all-terrain and off-road transport, as well as the encouragement of efforts for the energy security of remote small villages and settlements in the Far East. It is necessary to switch to our own sources of boiler fuel wherever there is the slightest opportunity for this, with co-financing of these efforts by the federal centre.

There should also be measures to attract young people from Russia and the CIS countries to the Far East, such as settling benefits (low-cost loans and subsidies for the purchase of housing), an opportunity for young talents of a project approach in hiring – for a specific project, for a period of three years, with the payment of all benefits and guarantees.

Developing Free Trade Zones to access China

This includes the development of free trade zones. This tool is competently used in China for effective interaction with foreign partners. There, foreign capital is provided with tax preferences, simplified customs clearance procedures, and expanded access to certain sectors. Despite the fact that the area of all Chinese free trade zones is less than 0.4% of its total territory of China, they account for almost 17% of foreign investment attracted to the country.

Back to Chekunkov: “One of the main tasks is to link the North and the East.” Recently, a CEMI RAS study assessed interregional trade between the various Russian regions and the degree of their connectivity. It turned out that the integrity of the country’s economic space is largely determined by the Central and Volga federal districts, while Russian individuals are more part of world trade than economic units of the national economy.

“As for the Far Eastern Federal District, it does not have significant ties with the rest of the country, and this creates risks for its integrity and is an additional threat to national security.”

The development of Far Eastern transport and logistics, recreation and tourism potentials can increase the level of investment attractiveness, according to Stanislav Babich, Associate professor at St. Petersburg State University of Economics. “Both directions are based on the expansion of cross-border cooperation between Russia and China. The recreational and tourist potential is attractive for both countries, and in all its directions: cultural, environmental, health, and business tourism.”

However, according to Babich, the main deterrent to investment is the remoteness of the region from the western and central parts of Russia. The solution to this problem, in his opinion, is associated with a reduction in the cost of air and rail tickets for tourists who want to visit the Far East and Northeast China.

Elvira Kuskova, co-chair of the Delovaya Rossiya interregional branch for the Khabarovsk Territory and the Jewish Autonomous Region, says that “The outflow of the population towards metropolitan agglomerations continues. The development focus should be that the state considers the regions of the Far East as production and high-tech sites. To work with China, we need to study the creation of special international economic zones. This is currently being worked out in the KRDV and in the Ministry for the Development of the Far East and the Arctic. Separately, it makes sense to consider the possibility of the work of the Russian Export Center in the direction of imports.”

According to Kuskova, “Russian entrepreneurs are now receiving a lot of inquiries regarding the import of goods from China, since the markets in Europe and the United States are still closed due to sanctions. This is a time of Asian opportunity for the Russian Far East.”

Dezan Shira & Associates can undertake studies in the Russian market for interested investors. Please contact russia@dezshira.com for assistance.  

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