
3. The Kremlin’s Economic and Political Thinking on the RFE
The RFE is a vast geographical space, encompassing more than a third of Russia’s entire territory (41 per cent). It includes regions east of Siberia up to the city of Vladivostok, by the Sea of Japan.33 In November 2018, the territories of Buryatia and Zabaikal were transferred from the Siberian Federal Okrug (an administrative district) to the Far Eastern Okrug,34 so additional areas are now also considered part of the RFE and are able to receive funding and infrastructure subsidies accordingly. The RFE contains enormous quantities of oil, gas, coal and precious metals, but has a population of just over 6 million people,35 which makes it extremely difficult to locate skilled labour to extract these raw materials.
In many ways, the RFE is representative of the broader difficulties in Russia’s relationships with Asian countries such as China. Russia’s leadership is caught between two competing views: concerns voiced semi-privately about possible Chinese encroachment into the region are set against the Kremlin’s stated view that the RFE has the potential to become a new centre of multilateral engagement and investment.36
The RFE’s proximity to Asia has meant that the territory has always been part of Russia’s military and security thinking. The Pacific Fleet, for example, is based at Vladivostok. But state-led attempts to stimulate the regional economy during the Soviet era were piecemeal, and lacked a comprehensive strategy. Instead, developments in the RFE have usually been linked to specific events, which have created short-term interest but few long-term and sustainable projects. Soviet-era leaders had initially encouraged migration to the region and invested funds in improving industry there, but the collapse of the USSR meant the end of an organized way of maintaining these territories, despite repeated official assertions that the RFE was important.37
The Kremlin’s approach to the RFE has since shifted in favour of viewing the region as a potential economic hub. In 2012, Russia hosted the Asia-Pacific Economic Cooperation (APEC) summit in Vladivostok, which prompted a flurry of activity that included paving roads, constructing a new bridge across the Golden Horn Bay and building a new airport terminal, all with the intention of showcasing the region’s economic potential. With few good-quality roads and bridges in the region, Moscow ended up spending around R666 billion (around $22 billion at 2012 average exchange rates) on improving and constructing infrastructure in and around Vladivostok for the summit; this was in addition to funds provided by private investors.38 But roads laid in haste for the summit are already filled with potholes, and two of the promised hotels were never built.
The government’s approach to the RFE comes under the umbrella of Putin’s 12 ‘national projects’ – initiatives that he announced on his re-election in 2018 and which form the cornerstone of state economic policy during his fourth term as president. Planning documents for these initiatives make reference to upgrading various aspects of infrastructure, but do not describe specific projects; instead they give a list of sectors towards which investment should be directed, such as roads, small businesses and healthcare. There are few guidelines from Moscow about how investment should be stimulated, and which initiatives should be prioritized.
At the same time, it is far from clear that increased funding for the RFE would, on its own, truly address many of the region’s systemic problems (including corruption). In a meeting in December 2018 with dozens of private businesses, Putin suggested that the private sector could become more deeply involved in the projects, yet there is little evidence that many businesses have since taken up any opportunities.39 The national projects have been privately and publicly criticized by high-profile figures such as the former finance minister, Alexei Kudrin,40 as well as by the regional administrations tasked with implementing them. Complaints are that the plans are vague, burdensome and financially unviable.
The announcement of the national projects nonetheless marked a slight shift in the government’s policy focus, from boosting Russia’s hard military capabilities in previous speeches to refocusing on improving living standards, infrastructure and social development more widely. The timing of this announcement was no coincidence. There had been noisy protests since 2015 in satellite towns all over the Moscow region – beginning in the town of Volokolamsk – about the state of Russia’s urban infrastructure,41 and specifically about the authorities’ inability to organize safe waste disposal management that did not impact on the environment or locals’ health. While the protests took place chiefly in western Russia and were unlikely to have affected government decisions about the RFE, Putin’s announcement in 2018 could have been an attempt to engage more with protesters who were demonstrating along socio-economic lines – and whose numbers have been steadily mounting in recent years. Putin’s shift towards domestic issues and the refocus on infrastructure and the RFE have meant increased government funding for, but also scrutiny of, this region.
Significant stakeholders in the RFE
While Putin and his close circle of advisers have disproportionate control over most major policymaking decisions, the president does not entirely oversee day-to-day operations. He must delegate the routine running of the country to departments such as his Presidential Administration and, crucially, to regional governments. This means that the role of regional authorities and businesses in the development of the RFE is extremely important.
Constitutional changes announced by Putin in January 2020 may also indicate a growing role for regional government, particularly regarding implementation of the above-mentioned national projects. Some of the proposed amendments to the constitution envisage boosting the profile of the State Council, at which Russia’s regional governors are all represented. While the exact implications of the amendments are not yet clear, the move to give regional governors greater responsibility for – rather than power over – what is essentially Putin’s legacy will mean that the governors’ backgrounds and experience will become particularly significant.42
In previous years, many governors tended to be appointed and promoted because of their military experience or after postings in the Federal Security Service (FSB).43 But a trend is emerging whereby younger individuals with strong business backgrounds – such as in mining, metallurgy, or oil and gas – are being promoted to senior positions in regional administrations. This is a particularly salient issue in the RFE, where the appointment of certain people can give a sense of the Kremlin’s strategic decision-making. It is no accident that the governor of the Amur region, Vasily Orlov, appointed in 2018, speaks fluent Chinese.44 Orlov has been responsible for accompanying several Chinese delegations around the region.
Other powerful individuals in government also dominate the investment agenda in the RFE. The region’s minister for development, Alexander Kozlov, and Yuri Trutnev, a deputy prime minister who also serves as Putin’s envoy to the RFE, are two of the most important actors. Kozlov oversees all of the government’s plans for upgrading the RFE’s infrastructure, and in February 2019 Putin officially expanded the powers of the body headed by Kozlov – the Ministry for the Development of the Far East – to include the development of Russia’s Arctic region.45 Trutnev’s role is also significant. He has frequent contact with senior officials from Asia, and is responsible for meeting delegations from South Korea and China to discuss joint infrastructure projects, including the construction of railway bridges.46
Key players from the business sector also have interests in the region. Sergei Chemezov, the head of state-controlled Rostec (Russia’s major developer and exporter of technology products), signed a series of agreements in 2014 with Shenhua, a Chinese company, to improve coal extraction and export infrastructure in the RFE, although the proposed cooperation does not appear to have come to fruition.47 Despite his relatively low public profile, Chemezov is highly influential and a close associate of Putin. His company controls substantial industrial assets, including large parts of the defence industry. Igor Sechin, the owner of oil conglomerate Rosneft and also a powerful Putin ally, has numerous and long-standing economic interests in the RFE. His major projects include a liquefied natural gas (LNG) plant at De Kastri port, which will supply gas to Japan.48 Rosneft has invested significant amounts into programmes to explore and extract oil deposits in the RFE. In 2013 the company announced that it would invest R52 billion ($0.7 billion)49 to support its main activities in the region.50
Words vs deeds
Notwithstanding the powerful individuals overseeing many investment schemes, and a significant allocation of funds from the state, it is clear that Russia’s attempts to stimulate investment by Asian companies in the RFE have failed to yield the desired results. Just eight years after the APEC summit, local news outlets frequently report on the degradation of Vladivostok’s roads, particularly when storms wash away poorly laid asphalt.51 Heavy rain in the summer of 2019 caused almost R100 million ($1.4 million) worth of damage to the city’s infrastructure, including the road network. Oleg Kozhemyako, governor of the Primorskiy region where Vladivostok is located, acknowledged the validity of concerns over the issue, despite recent road renovations. Kozhemyako claimed that the heavy rain, a lack of funding and a lack of specialized companies to carry out roadworks were responsible for the poor condition of the roads.52
Mindful that poor infrastructure in the RFE risks deterring investors, the government for some years has been taking steps to improve connectivity. After the APEC summit, the Kremlin in 2013 put together several official strategies to improve infrastructure in the RFE and eastern Siberia, planning ahead until 2030. These documents included plans for high-speed rail links to expand the capacity of both the Baikal–Amur Mainline (BAM) railway and the Trans-Siberian Railway; for the laying of new railway tracks to Sakhalin Island in the northern part of the RFE; and for the development of a new Trans-Korean Railway.53 Putin also outlined the importance of the RFE in the Kremlin’s strategic thinking in his state-of-the-nation address in December 2013. He maintained that developing parts of eastern Siberia and the RFE was a key part of Russia’s long-term economic strategy, which includes establishing favourable tax regimes to stimulate investment and encourage foreign and Russian companies to locate their premises there.54
As part of this development strategy, special economic zones (SEZs) were set up in locations such as Russkiy Island in Vladivostok. In 2014 the government also introduced ‘advanced development zones’ (ADZs, or territorii operezhaiyushevo razvitiya) in various locations, including in the RFE. SEZs and ADZs offer investors advantages such as exemptions from certain profit taxes or reduced social contribution rates. The government also began to offer to provide business infrastructure in these areas, including assistance with opening new premises.55 Moscow created a range of institutions to advocate for and support foreign and domestic businesses. The new bodies included the Far East Human Capital Development Agency, designed to assist employers with finding labour, and the Far East Investment and Export Agency, which helps investors to navigate the SEZ system. However, the zones have been beset by problems, and the SEZ on Russkiy Island was short-lived – it closed in 2016 as competition for funding between the regional and federal authorities deterred potential investors, many of whom eventually withdrew.
Most of these areas have failed to attract the levels of foreign direct investment (FDI) that the Kremlin had hoped for. FDI amounts into SEZs such as the Free Port of Vladivostok remain low. The port currently has 540 ‘residents’ – companies that have registered premises there – but most of these are Russian businesses seeking to exploit the favourable tax regime; indeed Russian businesses have helped to boost investment in the port from R118 billion ($1.6 billion) in 2016 to R358 billion ($4.8 billion) in 2017.56 According to local sources, 64 per cent of the foreign investment in Vladivostok comes from China, whereas only 12 per cent originates in South Korea and 6 per cent in Japan.57 Even though foreign investors have residential status, many companies report that they are unable to begin operating because of uncertainties in the Russian economy, bureaucracy and unclear legislation. Foreign companies maintain that the municipal authorities often prevent them from operating once they have resident status, and that coordination with the customs authorities tasked with handling the zones’ tax advantages is poor.