32% Of All FDI Into Russia Now Heads To Its Far East

Op/Ed by Chris Devonshire-Ellis

Entrepreneurial Asia Heading For The New Boom Areas Of Far East Russia

The rise of emerging Asia is having an unexpected spin off – an increase in foreign direct investment in the often-forgotten far east region of Russia. Far East Russia borders China, Mongolia and North Korea, with maritime borders with Japan and the United States across the Bering Strait, while the territory comprises Kamchatka, Primorsky and Khabarovsk Krai, Amur, Magadan and Sakhalin Oblasts, Yakutia and Chukotka. Although it is technically part of Siberia, it is administered as a separate region in Russia.

I have had first hand experience of the region as I served as the Vice-Chair of the UNDP “Greater Tumen Initiative” based in Beijing for six years, that included discussions with the regional governments of the Russian Far East, North-East China, Mongolia, North Korea and Japan. Much of these were centered on developing commercial activities. We published a “Greater Tumen Initiative Tourism Guide” (downloadable here) which was a lot of fun in researching at the time.

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In those days the entire region was considered something of a backwater. Today, and especially with a more concentrated effort from Moscow to develop the region, Far East Russia is experiencing something of a boom. Yury Trutnev, the Russian Deputy Prime Minister made the comments concerning FDI into the region earlier this week at a conference in Mumbai, where he is preparing for the visit of Indian Prime Minister Modi to the Far Eastern Economic Forum which will be held in Vladivostok in early September. Prime Minister Modi will be one of the principal speakers at the event – which Dezan Shira & Associates will also be attending. India, where our firm also has a presence – is in fact a large investor in the Russian Far East, both in securing gas supplies and in the diamond processing trade. The initial shipment of LNG gas to India from the Russia arctic was one of the first deals financed by China’s Silk Road Fund, while both China and India, with huge domestic consumer demand for gold and a state policy of strengthening national gold reserves have been investing in the Far East’s Klyuchevskoye Gold Mines. Vladovostok is also the home to the Eurasian Diamond Exchange, with investors from around the world. The Yakutia region of the Russian Far East carries the worlds largest diamond deposits, for both machinery and jewellery applications. Yakutia diamonds are a Russian girls best friend.

We can look in more detail at the Russian Far East from west to east as follows:

Yakutia (Sakha Republic)
Comprising half the Far East Federal District, Yakutia covers 3,083,523 square kilometers. Its capital city is Yakutsk. The region is well endowed with raw materials, with large reserves of oil, gas, coal, diamonds, gold, silver, tin, tungsten and many other precious and semi-precious materials and rare earths. Yakutia produces 99% of all Russian diamonds and over 25% of the diamonds mined in the world.

Amur Oblast
Amur Oblast is located on the banks of the Amur and Zeya Rivers, while the capital is Blagoveshchensk, one of the oldest settlements in the Russian Far East, founded in 1856. It is a traditional center of the fur trade and gold mining. The territory is accessed by both the Trans-Siberian and Baikal-Amur railways. The most important industrial sectors are manufacturing, dominated by food products and beverages, while machine building includes shipbuilding, lifting and transport vehicles, mining equipment, agricultural machinery, metal assemblies and goods, electrical appliances and electrical machines and tools. Mining and quarrying are also important, Amur Oblast ranks sixth in Russia for gold mining, and has the largest gold reserves in Russia, while there are large uranium deposits and processing facilities in Oktyabrsky near the Russia–China border. There are plans to develop other mineral deposits as well, such as titanium, iron, copper, nickel, apatite and so on.

Jewish Autonomous Oblast
This is the most enigmatic region of the Russian Far East. The southern part of the territory borders on China through the Amur River. The Jewish religion here maintain their own culture and laws. The administrative center is Birobidzhan. It has well-developed industrial and agricultural base and an excellent transportation network. Its status as a Special Economic Zone offering low taxes have made it a popular destination for Chinese and other Asian traders, while the oblast’s rich mineral and building and finishing material resources are in great demand elsewhere in Russia. Nonferrous metallurgy, engineering, metalworking, building materials, forestry, woodworking, and food processing are among the most developed industrial sectors.

Primorsky Krai
The territory is located in the southern part of the Far East and shares borders with North Korea, Mongolia and China, and has a coastline onto the Sea of Japan. Vladivostok is the regional capital, and is developing as a major eastern city in its own right with a huge sea port, free trade and special economic zones. Vladivostok is the end of the trans-Siberian express train – a 6 day journey to Moscow, or a 9 hour flight. Flights from Shanghai are 3 hours. Vladivostok enjoys a low tax regime and fast track 6 day visas upon arrival as it looks to become the primary city for administering Far East Russian regional development. The region as a whole is an important fisheries area and supports related industries in machinery, processing, refrigeration and shipping.

Khabarovsky Krai
Khabarovsky Krai borders the Sea of Okhotsk, and the Sea of Japan, and much is area of special scientific natural interest. Tourism here amounts to permits costing US$700 a day. Khabarovsk is the main city and has an international airport. The main industries in Kamchatka include fishing, forestry, while some coal and other mining is carried out. It is also developing as a coastal centre for Arctic standards shipbuilding, ship repair, and related services. There are oil and mineral resources which are yet to be fully developed.

Sakhalin Oblast
Sakhalin is located on 59 islands to the north of Japan and separated from the Japanese mainland by the sea of Japan. It also borders the Sea of Okhotsk and Pacific Ocean. The administrative center of the territory is Yuzhno-Sakhalinsk. Sakhalin has experienced an oil boom with extensive petroleum exploration and mining by most large oil corporations. The oil and natural gas reserves contain an estimated 14 billion barrels of oil and 2,700 km of gas and are being developed under production-sharing agreement contracts involving international oil companies.

Magadan Oblast
Magadan is in the Extreme North and borders the Arctic Sea of Okhotsk. Magadan city has an international airport. It is an important fishing and gold mining region, and is also being developed for servicing offshore LNG blocks sited off the coast. Its immediate future will be as an offshore drilling centre for oil and gas exploration in the Russian Arctic.

Kamchatka Krai
The Kamchatka peninsula is the north-eastern part of Russia and opens out onto the Okhotsk and Bering Seas, in addition to the Pacific Ocean. The region is famous for the quality of its seafoods and this makes up the majority of its industrial base. The administrative center of Kamchatka Krai is Petropavlovsk-Kamchatsky.

Chukotka
Chukotka is one of the least populated federal subjects of Russia and the least densely populated. Anadyr is the capital city. Chukotka is bordered in the north by the Chukchi and East Siberian Seas, which are part of the Arctic Ocean, to the Bering Strait and Bering Sea, part of the Pacific Ocean. The Chukchi Peninsula juts eastward forming the Bering Strait between Russia and the United States. The peninsula’s easternmost point, Cape Dezhnev, is the easternmost point of mainland Russia. Chukotka has large reserves of oil, natural gas, coal, gold, and tungsten, which are slowly being exploited, but much of the rural population survives on subsistence reindeer herding, whaling and fishing. The urban population is employed in mining, administration, construction, cultural work, education, medicine, and other occupations.

While traditional industries still hold sway over much of Far Eastern Russia, many of these are experiencing a new lease of life as improved technologies, a resurgent Asian consumer boom (especially in China and India) and in part, global warming have assisted in opening up large tracts of Far East Russia. Russia’s oil and gas reserves need no introduction, and while the region is often dismissed as being solely an oil and gas play, new technologies with downstream applications in the energy and other sectors are being developed. Agriculture is also being revitalized after years of neglect following the demise of the Soviet Union, including in industries such as dairy. Fishing is an important industry and also supports new developments in shipping and logistics, especially for dealing with extreme conditions becoming accessible in the Arctic.

I have written before about the development of Russia’s Arctic Ports, a region I retain interest in through my life membership of Cambridge University’s Scott Polar Research Institute.

The Russian Far East then offers a combination of old, yet revived industries, matched with new technologies, increased consumer demand for the minerals it offers and this, matched with tax incentives and well-positioned free trade and special economic zones make the region an area of East Asia to watch. If your business in involved in agriculture, energy, fishing, shipping and shipbuilding, logistics, mining, and related downstream industries including food processing, jewelry, and tourism, the Russian Far East is a region to be looking at.

A guide to Far Eastern Russia Investment Projects for foreign investors can be found here

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