Russian Asia Taking Off As Asian Interconnectivity Improves

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Not Mount Fuji. This is Petropavlovsk In Kamchatka, the Russian Far East

Op/Ed by Chris Devonshire-Ellis

  • Four Far East Russian regions are expecting increased and sustainable growth rates
  • Improving China, Asia and European interconnectivity is a growth driver 
  • Important raw materials, processing, agricultural and fishing opportunities   

The Asian part of Russia, which shares a huge border with China and other parts of North-East Asia, is set to grow slightly faster than the rest of Russia over the next three years, according to data released by the Eastern States Planning Centre.

Russia’s Federal Regions & Districts

The Russian Far East is a region of North Asia which includes the Far Eastern Federal District, the easternmost territory of Russia, between Lake Baikal in Eastern Siberia and the Pacific Ocean. Although commonly named “Siberia” overseas, the Russian Far East is categorized separately from Siberia, a separate region further North-West in Russia. The Russian Far East shares land borders with China, North Korea and Mongolia, to its south, and shares maritime borders with Japan to its southeast and with the United States (Alaska) to the northeast.

According to the last, 2010 population census, the Russian Far East had a population of 6,293,129. Most of it is concentrated in the southern parts. Given the vast territory of the Russian Far East, 6.3 million people translates to slightly less than one person per square kilometer, making the Russian Far East one of the most sparsely populated areas in the world. However, 75% of the population is urban, concentrated in 11 major cities.

The demographics of the Russian Far East are changing however as the influence and opportunities created by the rise of China to the south are having a ripple effect on the region. Interconnectivity, with increasing roads, rail, and cross border connections, especially between China and Russia, are improving. Global warming is having an impact, and will continue to do so in three major ways; Access to the regions undoubted vast mineral wealth; new settlements being developed to support this, and the development of the Northern Sea Passage, which cuts shipping times by 35% from Asia to Europe, Today, the Russian Far East receives 32% of all Foreign Investment going into Russia, at present in infrastructure development projects such as the Amur River Bridge and developing new Regional Airlines, but increasingly into the manufacturing and processing of Russian raw materials.

That is the result of new Russian policies which have previously seen Russia simply sell raw materials to China, who have then capitalized on this, and added value by processing them. Now, Russia itself wants to be adding such value, for example in the Diamond Processing and Timber industries. This is having the effect of drawing in FDI and repositioning some processing industries back into the region – the home of the raw products. Consequently, the Russian Far East, and Siberia – when raw materials are sourced there – is increasingly being developed as the processing and development center. Vladivostok, which is a major seaport, is also home to a Free Trade zone, has preferential tax policies, easy export facilities and is being used as a base for international businesses to locate experts in respective industries to oversee production. This reinvention of a long-neglected region is beginning to have an impact in terms of its emergence as a viable Asia manufacturing and production centre.

Asian Russia Growth Forecasts 2020-2023

2020 2021 2022 2023
Russia -3.9 +3.3 +3.4 +3.0
Far East Region -7.2 +3.4 +2.39 +3.52
Buryatia & Irkutsk -4.8 +1.5 +1.6 +1.7
Yakutia -5.0 +3.5 +4.6 +3.9
Zabaykalsky -3.5 +2.2 +2.7 +3.0
Kamchatka +0.1 +3.4 +3.5 +3.1
Primorsky -3.9 +3.8 +3.6 +3.8
Khabarovsk 0 +3.0 +2.7 +3.1
Amur +3.6 +13.3 +1.1 +3.8
Magadan +3.5 +3.4 +3.5 +3.1
Sakhalin -0.04 -5.2 -1.01 +1.1
Jewish Autonomous Region -0.08 +3.5 +4.0 +3.1
Chukotka +3.1 +5.2 +18.2 +9.1

Russian Far East Fixed Asset Infrastructure Investment

The projected growth rates for infrastructure investment 2020-2023 in the Russian Far East are slightly lower than the Russian average. Four regions pull the Far Eastern average down: Buryatia, Yakutia, Amur Region and Sakhalin. The main reason for this slowdown is however associated with the end of the investment phases of the largest regional projects in building transport infrastructure, mining, and energy. This may however be offset with the development of the Russian Arctic as a Free Trade Zone, announced last year. The Arctic FTZ region offers free land, tax incentives and other benefits to companies and businesses willing to invest in the region and this will create demand – and spur a secondary wave of infrastructure investment that has not yet been realized. The principal beneficiaries of this in the Russian Far East will be Chukotka, Magadan, Kamchatka, and Khabarovsk.

Far East Russia Industrial Growth 2020-2023

According to the Eastern States Planning Centre, Industrial growth in the Russian Far East will perform even better, at 8.4% compared to the rest of Russia at 4.3%. Most of the Far Eastern Federal Districts are forecasting growth at rates exceeding the average for Russia, except for Sakhalin and Chukotka. Most of this growth is expected from the mining and mineral extraction sectors. Sakhalin is sparsely populated and is subject to a territorial dispute with Japan, while Chukotka is the least populated area of Russia and mostly Arctic.

Far East Russia Manufacturing Growth 2020-2023

The Eastern States Planning Centre also predicts higher average manufacturing growth rates than the average Russian national rate in Primorsky, Khabarovsk, Amur and Magadan. Other regions are expected to bounce back after 2020 but return to 2019 levels.

We can look at these four growth areas of the Russian Far East as follows:


Primorsky
Primorsky is the region most impacted by Asia development and European trade as it includes the main Port of Vladivostok. Shipments from here are increasing via the Northern Sea Passage, with Vladivostok that last major seaport before heading to Europe, although smaller supporting Ports and services are being developed along the Khabarovsk, Kamchatka, Chukotka, and Yakutia coasts. Vladivostok is also the Far East Terminus for the Trans-Siberian express, providing competing rail services across to Europe while additionally servicing the Central Russian markets and major cities. I discussed this in the article: The Trans-Siberian Land Bridge: Top 20 Key Cities Between Vladivostok & Europe. The Trans-Siberian rail also heads south into China, crossing the border near Harbin and onto Beijing. With bilateral trade between the two countries set to double by 2024, Vladivostok and the Primorsky cities with rail connections bordering China such as Pogranichny and Kraskino will all be good options for trade and commercial development and investment.


Khabarovsk 
Khabarovsk region is the most industrialized territory of the Russian Far East, producing 30% of its total industrial products. The state capital, also called Khabarovsk, is the largest in the Russian Far East, with a population of 1.5 million. The machine construction industry consists primarily of a highly developed military-industrial complex of large-scale aircraft- and shipbuilding, while other major industries include metal working, timber-working and aquaculture.

Komsomolsk-On-Amur is the Far East’s iron and steel centre, while the East Asian Monsoon means that weather conditions to the south are suitable for cultivation of wheat and soya. Khabarovsk City is on the junction of the Amur River and the Trans-Siberian railway so has access to China, East Asia, Central Russia and Europe. Khabarovsk airport is a major regional hub, while the city lies just 30km from the Chinese border operating a regular ferry service to Fuyuan, Heilongjiang Province, along the Amur River. Fuyuan is connected to Harbin by rail and is a major cross-border trade hub.


Amur 
Amur is a traditional center of trade and gold mining and is accessed by two railways: The Trans-Siberian (giving access to China, Central Russia, East Asia, and Europe as well as the Baikal-Amur line which connects the Russian Far East with Siberia. It is an important manufacturing, hub, dominated by food products and beverages. Machine building includes shipbuilding machinery, lifting and transport vehicles, mining equipment, agricultural machinery, metal assemblies and goods, electrical appliances and electrical machines and tools are all produced here.

Numerous rivers flow through Amur, especially in the north, and account for 75% of the Russian Far East’s hydropower production, and the region has an energy surplus. In 2019, Amur produced 1 million tonnes of soybean, many of which are exported to neighboring China. Chinese companies have leased some 100 thousand hectares out of the 1.3 million hectares of farmland.

Amur’s main exports are raw timber (although that will now change to processed lumber) metal goods, machinery, equipment, and transport. The region’s main imports are food and beverages from China, Kazakhstan, Uzbekistan and Philippines; textiles and footwear from China; and machinery and equipment from Ukraine and Japan.

The capital city is Blagoveshchensk and is located at the confluence of the Amur and Zeya Rivers, opposite the Chinese city of Heihe, accessible by ferry and across the Blagoveshchensk-Heihe bridge. Heihe is connected by rail to Harbin.


Magadan 
Magadan’s economy is primarily based on mining, particularly gold, silver, and other non-ferrous metals, with the capital city, also called Magadan the only large industrial center. Magadan city does have a Special Economic Zone, with emphasis on this industry and related sectors. The secondary industry is fishing industry and the region’s only food sector. Magadan borders 600,000 square kilometers (230,000 sq mi) of the Sea of Okhotsk and is one of the most productive regions of the world’s oceans. Magadan Oblast has more than 15,900 kilometers (9,900 mi) of coastline and 29,016 kilometers (18,030 mi) of rivers of commercial importance. The fishing fleets are based in Magadan city, and the regional towns of Ola, Yamsk, and Evensk. The most important commercial fish are a local variety of cod, pollock, herring, flounder, and salmon while crab, squid, shrimp, and several varieties of shellfish are also harvested.

The Russian Far East may be remote for some, but its inclusion into the economies of Asia is arriving with improved infrastructure connections,  exploitation of natural resources and the advantage it has concerning shipping and transportation to and from Asia and Europe. Companies with an eye on certain processing industries would be advised to investigate the Russian Far East as alternatives to more expensive parts of Asia, and especially Japan and South Korea. The local processing industry of the regions huge natura reserves is also a factor driving foreign investment – and growth – into the Russian Far East.

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About Us

Russia Briefing is written by Dezan Shira & Associates. The firm has 28 offices throughout Eurasia, including China, Russia, India, and the ASEAN nations, assisting foreign investors into the Eurasian region. Please contact Maria Kotova at russia@dezshira.com for Russian investment advisory or assistance with market intelligence, legal, tax and compliance issues throughout Asia.

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