4. Infrastructure and Connectivity in the RFE
Underpinning the specific challenges that foreign businesses have encountered in the RFE are more fundamental and practical issues for the region as a whole. One of the main hindrances to economic development in the RFE is a lack of connectivity, both within Russia and between Russia and other countries. In 2008 Putin, then prime minister, echoed these exact sentiments in a speech to the State Council on the government’s development strategy to 2020. In the speech, Putin maintained that Russia was rich in natural resources but that they were difficult to extract because of insufficient transport infrastructure.58
This poor connectivity stems from weaknesses in the region’s systems of roads, airports, railways and bridges, most notably the fact that they are insufficiently linked to port infrastructure. Raw materials mined or extracted from the RFE need to be transported by road and water to Asian markets, but many routes are seasonally dependent and inaccessible at certain times of the year.
It is clear that the Kremlin is starting to think beyond the logistical and transport hubs of Moscow and St Petersburg, and is considering how better to link up Russia’s vast territory. However, putting ideas into practice is a slow process. Following his re-inauguration as president in 2018, Putin announced that the government would allocate R8 trillion ($108 billion) to upgrading the economy, including infrastructure spending, until the scheduled end of his term in 2024.59 The most expensive of the planned projects are for non-energy-related infrastructure: these account for around R6.4 trillion ($86 billion) and include the large-scale upgrade and construction of roads, bridges and airports. State spending on roads during this period is scheduled to account for R4.8 trillion ($65 billion) alone.60
Systemic issues blight infrastructure
Attempts to develop infrastructure in the RFE suffer from three systemic issues that are common to infrastructure projects across the country.
The first is that the Kremlin’s approach to improving infrastructure is essentially to throw money at the problem, with little regard for specific needs. For example, huge infrastructure projects and investments were required ahead of the Winter Olympics in Sochi in 2014, and for the 11 cities hosting the FIFA World Cup in 2018. This resulted in one-off upgrades. Russia spent more than $50 billion on the Sochi Olympics, but the region has since failed to find a use for the stadiums and transport hubs that were constructed.61 As criticisms of Putin’s national projects have noted, the Russian government tends not to conduct feasibility studies, nor does it make comprehensive plans to prioritize regions’ economic development needs or link those needs to proposed infrastructure projects. Therefore, even if large amounts of state and private funding are pledged to a particular infrastructure project in the RFE, the investment may not be directed where it is most needed and the project may fail to meet the region’s requirements.
The second issue is systemic corruption. Large construction and infrastructure projects are often hampered by a behind-the-scenes struggle for power and funds,62 with the latter appropriated by subcontractors, regional authorities or unscrupulous private companies. This is particularly prevalent in the construction sector, in which tenders for large and lucrative projects are often granted to influential companies with close ties to the Kremlin. There is evidence of this having been a problem in Vladivostok. Following the 2012 APEC summit, investigators launched a probe into the multi-million-rouble embezzlement of project funds that had been allocated to upgrade the city – around R29 million ($0.4 million) was thought to have been siphoned off from various construction projects, with senior figures in the regional administration among the initial suspects.63 Ultimately, the mayor of Vladivostok, Igor Pushkaryov, was charged with abuse of office over his role in the embezzlement of funds from a project to lay roads in the region, and for bribing others to select a construction company to which he was personally linked for the tender.64
The third issue is political. The government tends to prioritize infrastructure projects with political significance, such as the Crimea Bridge. The first part of the bridge, designed to link the peninsula to mainland Russia, was completed in 2019. The bridge has cemented Russia’s political control over Crimea, and has made it more difficult to include the return of the region to Ukraine as a condition of easing Western sanctions on Russia. The bridge was constructed by a company owned by Arkady Rotenberg, a close family friend of Putin, at a cost of around $3.7 billion.65 The extent to which politically important projects are prioritized over those of practical use was seen when a significant portion of funds from a different bridge-building project across the River Lena in Yakutsk was redirected in 2014 to support the construction of the Crimea Bridge.66 When the government is intent on making a political point about Russia’s place in the world, there is less symbolic value to be had in allocating funds to lower-level – but no less important – projects such as regional railway systems.
In short, the Kremlin’s disregard for specifics, Russia’s systemic corruption and the prioritization of political over practical projects – underpinned by the lack of a government strategy to coordinate infrastructure policy and development – all mean that large parts of the RFE remain geographically isolated. As a result, Russia is prevented from taking advantage of the raw materials that the region has to offer, and from deepening its trade ties to Asian markets.
Improvements to Russia’s railways, bridges and port systems (and to a lesser extent its roads and airports) are the keys to developing closer links with these markets. However, as the following subsections – labelled ‘a’ to ‘e’ – detail, the poor quality of these transport systems and lack of consistent planning are holding Russia back.
a. Overburdened railway network
Russia’s vast territory and varied terrain mean that the railways have for more than 100 years been the staple of internal transport for passengers and freight. Railways are strategically significant for the economy, carrying freight traffic that mostly consists of coke, coal and ferrous metals.67 Yet many planned projects to improve Russian railways have fallen by the wayside. The Transport Strategy of 2008 specifically referred to the construction of railways in Yakutia68 and upgrades to the railways in the northern region of Sakhalin.69 Government strategies do not always guarantee that a project will proceed, although earmarking state funds gives a more concrete indication of the government’s interest in a project. But these plans were drawn up before the imposition of Western sanctions and oil price fluctuations, which prompted a devaluation of the rouble. Many railway construction projects have since come to a halt, and it is not clear whether the government still intends to follow through with this strategy.
A lack of competition for tenders in railway construction has allowed the entrenchment of companies such as Russian Railways (RZD), which dominates the sector and has been headed by Oleg Belozerov since 2015.70 A close ally of Putin, Belozerov has held numerous positions in government, including that of deputy transport minister (2009–15). RZD tends to win most state contracts for railways, with such contracts worth millions of roubles. The company completely controls network services, tracks and management of train drivers, while its subsidiaries control freight cars and passenger rail.71 There is some internal recognition of this monopoly – the Federal Antimonopoly Service has put RZD under sanctions several times72 in the past few years for using its control over the railways to benefit itself and its subsidiaries.
In an important meeting in August 2019 with the heads of coal-producing regions of the RFE and other senior government representatives (as well as Belozerov), Putin discussed prospects for expanding the capacity of the Baikal–Amur Mainline (BAM) to ship coal products.73 The Ministry of Energy has developed an optimistic plan to increase annual coal production to between 550 million and 670 million tonnes by 2035 – in 2018 Russia produced 440 million tonnes.74 It remains to be seen whether the government will be able to expand railway capacity to meet the demand for increased coal shipments.
Russia’s Transport Strategy stated the intention to expand railway capacity by laying tracks, increasing the number of freight wagons and, most importantly for the RFE, expanding the Trans-Siberian Railway in the east, at a combined cost of around R13.8 billion ($0.2 billion). But paying for these developments is complicated, and there is significant disagreement within the government about whether the Trans-Siberian Railway or the BAM should be a priority for funds. RZD is supposed to shoulder just under half the cost of upgrading the Trans-Siberian Railway, with the central government contributing around 20 per cent of the funding and private investors and regional governments expected to pay for the rest.75 Attempting to attract investment from Russian private companies into projects such as the BAM is difficult, as it is not clear whether the BAM will even be able to accept the required level of cargo.
These various factors – long-term neglect, lack of competition, low capacity and unreliable investment – mean that Russia’s railway network remains overburdened and underfunded as it attempts to meet government quotas. The result is delays to cargo shipments. RZD’s pre-eminent position also reduces interest from Russian private investors, who know that they must compete with RZD for any tenders. In the long term, unless the Russian authorities are prepared to move from this ultimately state-controlled model and increase competition, the rail infrastructure network is unlikely to improve sufficiently to meet the import and export needs of the Asian market.
b. Serious issues with bridges
Bridges are a fundamental part of the national infrastructure: without them it would be almost impossible to ship raw materials and goods around the country, let alone to export markets. However, efforts to improve the bridge network face multiple challenges. Among the most significant are geography and climate. Russia’s bridges are required to service a territory through which more than 2.8 million rivers flow.76 Yet there are relatively few bridges in the country – just 42,000 – and the total has risen by only 200 since Putin first came to power in 2000. Many bridges in the RFE are made of wood – around 60 per cent of all bridges in the far eastern Khabarovsk region are of wood, which is cheaper to use but warps in wetter seasons. There are few indications that Rosavtodor – the federal agency that oversees road management – is working to repair or construct new bridges in this region. For years, trains from the Trans-Siberian Railway and cars along the Kolyma highway have been unable to access Yakutsk (the regional capital of Yakutia) directly because there was no road or rail bridge. It was only announced in 2018 that a bridge would be constructed in 2020 across the River Lena – an idea mooted since the 1980s – at an estimated cost of R70–80 billion ($0.9–1.1 billion).77 Although the River Lena project is technically still under way, many other road, railway and bridge construction projects have been proposed and shelved in the past.
Procedural inconsistencies and shortcomings are also a problem. Upgrades to bridge infrastructure often focus on tourist-friendly areas. Vladivostok’s Russian Bridge, completed in 2012 ahead of the APEC summit, links Russkiy Island to the mainland across the Golden Horn Bay. While the bridge has improved access to the previously inaccessible island, it is used by only a few thousand people and has done little to improve interconnectivity in the wider region.
In addition, many projects are simply left unfinished or have been stuck in the planning phase for years. One of the most infamous is the bridge between the Amur region of Blagoveshchensk and the northern Chinese city of Heihe.78 Work has been in progress since 2016 and is now scheduled for completion in 2020, but the original agreement on construction was signed in 1995. The bridge is intended to facilitate border crossings between the RFE and China: the Chinese government maintains79 that the project’s completion would enable a tenfold increase in cargo traffic.
Other unfinished projects include the bridge at Nizhneleninskoye (in the Jewish Autonomous Republic of Birobidzhan), which was begun in 2013 to enable transportation of iron ore across the Amur River to Tongjiang. Although the Chinese partners in the project have already completed their side of the bridge, Russian contractors have yet to complete their work, and construction has now been delayed until 2021. This latest delay follows repeated postponements over the past seven years due to challenging weather and internal reviews of design decisions.80
The overall shortage of properly constructed bridges that results from these problems affects commercial supplies, as well as cross-border trade with China at a local level. The most successful Russia–China trade deals have gone ahead because they have had the support of regional actors, including local businesses. Bridges are not just symbolic structures to span political distances; they also facilitate more enduring people-to-people links that can support businesses.
c. Underdeveloped port systems
The effectiveness of connections between Russia’s railways and port infrastructure is vital in determining whether trade runs smoothly. Many of the raw materials mined in the RFE (as well as in the west of the country) need to be shipped through the port system. In many cases, coal-loading ports in the RFE are owned by coal producers based in other parts of the country. Given Russia’s dependency on the export of raw materials, this means that any failed projects in this sector tend to have a broader impact on economic security.
Many private companies have chosen to improve logistical infrastructure themselves. The East Mining Company (EMC) is a major thermal coal producer which has operations in parts of the RFE such as Sakhalin and Magadan. Coal is mined in the Solntsevskoye deposit in the Sakhalin region, for example, and then delivered to the Shakhtersk port by road to be loaded on to ships bound for countries such as Vietnam, South Korea and India.81 In July 2019, EMC announced that it would be investing R11.5 billion ($0.2 billion) in upgrading the Shakhtersk port to increase annual throughput.82 EMC has also invested in constructing roads from the Solntsevskoye mine to the port – it is believed that these upgrades will increase the annual volume of coal transported along this route from 7.5 million tonnes in 2018 to 20 million tonnes in the coming years.83 Russia is also attempting to develop the Northern Sea Route (NSR) – an Arctic maritime route that runs across northern Russia – as a key trade opportunity, capable of accepting a growing volume of cargo vessels from countries such as China and South Korea. In theory, use of the NSR would cut journey times by around 10 days, and would be of particular value for vessels transporting products with shorter shelf lives.84 Russia aims to attract investment from Asian countries into key ports in the RFE so that these ports can expand to accept a planned increase in cargo deliveries.
Very few ports in Russia’s High North or the RFE are capable of servicing ships or accommodating a significant increase in cargo. In the event of an incident at sea, such as an oil spill or an emergency on board a vessel, Russia does not have the search-and-rescue or other emergency capabilities to respond in a timely manner. Nor does it have repair stations in the High North – aside from in Murmansk – to assist large vessels in distress. Russia’s lack of ice-class cargo vessels to traverse the NSR is also likely to be an issue. Russia is planning to expand its fleet85 and already possesses light and medium icebreakers, but few of its vessels are able to cope with the Arctic’s thicker winter ice.
Even if the authorities were able to order the construction of new ports in the High North and the RFE, support services around ports would also need to be set up. This would require an increase in the local population to manage the port systems, housing to accommodate the new workers, and in some cases the construction of settlements from scratch. The Agency for the Development of Human Capital in the Far East, as the name suggests, has entire programmes devoted to the resettlement of the population. The agency runs regional programmes to attract specialists – such as engineers to assist with the construction of infrastructure – and even offers to move homeless people into accommodation in the region; financial incentives are promised for each family member who joins a relocation programme.86 Few people have decided to take the government up on such offers, however, and the RFE and High North still have serious population deficits.
Another issue is the lack of investment in port infrastructure. Ports in the RFE, such as Vladivostok, are overloaded and unable to expand much beyond their existing capacity. Cargo activity at Vladivostok is much lower, for example, than at major cargo ports such as Shanghai in China: in 2017 Vladivostok handled 112.9 million tonnes of cargo, whereas throughput at Shanghai was 812 million tonnes.87 Vladivostok lacks sufficient numbers of port workers to handle an increase in cargo to Shanghai levels, nor does it have the technology in place to increase its load-bearing ability.
Many proposed projects to upgrade ports in the RFE are unlikely to succeed, and investment deals often fall through. Existing ports with the scope for expansion – such as Nakhodka, Slavyanka and Zarubino – offer promising investment opportunities for foreign businesses, but uncertainty about throughput has made foreign partners wary. In October 2018, South Korea’s Ministry of Oceans and Fisheries announced that it would be conducting a feasibility study to assess the viability of using the Slavyanka port, near Russia’s borders with North Korea and China.88 That study has now been completed. However, there has been little indication that South Korean companies are planning investments in Slavyanka, and any moves to enter the market are likely to take many years to complete.
Meanwhile, the Kremlin has been trying to turn the port city of Zarubino, formerly a fishing village, into a cargo export hub called the ‘Big Port of Zarubino’.89 The aim is to link up road, railway and energy infrastructure between Zarubino and the northern Chinese city of Hunchun, creating a transit area for freight services across China and for the export and storage of Russian grain. The facility was due to begin operating in 2020. Summa Group, a Russian port operator, claimed to have invested R41.6 billion ($562 million) in the R104 billion ($1.4 billion) project, leaving a shortfall that would have required significant input from Chinese investors to sustain work on it.90 Further doubt was cast on the project in April 2018 when Summa Group’s owner, Ziyavudin Magomedov, was detained on embezzlement charges for an unrelated construction project, prompting the dissolution of the Summa Group.91
Countries such as India are also interested in Russian natural resources. Most of Russia’s exports to India consist of coking coal, energy and precious metals, despite Russian attempts to diversify its economic portfolio. As part of a bilateral economic agreement signed in September 2019, India’s prime minister, Narendra Modi, proposed joint India–Russia investment to construct new port infrastructure along the NSR. The two sides signed an MoU on developing improved communications between the ports of Vladivostok and Chennai.92 Passage along the sea route between Chennai and Vladivostok takes 24 days, compared to 40 days from Chennai to Europe, so if these slated investments come to fruition, Vladivostok could see a dramatic increase in cargo.93
d. Neglected roads in the RFE
Although Russia’s roads are less commercially important than its railway, bridge and port systems, they remain integral to internal connectivity. In particular, the road network fulfils an important social function, enabling people, including much-needed workers, to travel more easily around the country.
The government has focused on improving road connectivity in western Russia. As a result, the so-called ‘European part’ of the country is relatively well connected by road. This is not the case in the RFE, for two main reasons.
First, roads in the region are especially vulnerable to the elements, as poorly constructed road surfaces tend to break up easily under the highly changeable weather conditions of the RFE. During winter, many roads in the RFE are impassable. Communities beyond the major cities are sometimes entirely cut off. These practical difficulties increase the financial burden on construction companies, which are unwilling to take on projects that are logistically challenging, such as most of those in the RFE. A good illustration of this can be found in the inhospitable region of Yakutia. Stone to build a bridge across the Tangnary River in 2016 needed to be transported by railway from the central Kemerovo region to a loading station, and then by road to the project site almost 460 km away.94 Remote regions such as Yakutia have particularly poor road and rail connections, both internally and to other parts of Russia, and efforts to mitigate this problem have brought few tangible benefits.
The second reason for the lack of adequate road connectivity in the RFE is the prevalence of corruption and of cost-cutting by contractors. Road construction tenders lack transparency, and a handful of companies dominate the road-building sector. The Siberian region of Krasnoyarsk has more than 40,000 km of roads, but in 2017 only two companies, Novosibirskavtodor and Yeniseiavtodor, submitted bids to build new roads in the region – and those companies are actually part of the same firm.95 Locals report that repairs to roads in this region are extremely poor, and that much of the asphalt is easily washed off by rainfall. Contractors often cut corners on quality, for instance using cheaper materials for paving. Where problems subsequently emerge, the general lack of accountability in the construction sector allows contractors to maintain that it is the suppliers that have provided poor-quality concrete.
The Kremlin appears to be aware of the problem. Rosavtodor, the federal agency that oversees all of Russia’s motorways and road infrastructure, has several initiatives under way to address corruption in road construction tenders as part of its Anti-corruption Plan for 2018–20.96 These include measures to avoid conflicts of interest by identifying companies owned by relatives or friends of federal employees at the agency. Despite this, no firm plans are being discussed in the State Duma (the lower house of the Russian parliament) for how to increase state control over the risks of corruption in the road construction sector.
As with many of the Kremlin’s solutions, the main approach has been to increase funding to build more roads. However, the resultant projects are rarely aligned with the most pressing local needs.97 In 2014, the Ministry of Transport declared98 that by 2018 all main roads across the country would be upgraded, using funding from the Federal Road Fund; the allocation for 2014 alone was around R510 billion ($6.9 billion). But locals in the central Siberian region of Tyumen complained that despite government promises, insufficient funds were transferred for the repair of the main highway between Tyumen and Novy Urengoy,99 and the project was not completed.
Sometimes funds are allocated unevenly across the country. In March 2019, Prime Minister Dmitry Medvedev approved funds for a national project to upgrade roads in 82 regions. However, of the R110 billion ($1.5 billion) officially allocated, in the end only around R96.8 billion ($1.3 billion) in government funds were dispersed to finance the project. Moreover, most of that money was sent to central Russian regions such as Tatarstan, not the RFE.100 Other regions have been granted just R1–1.5 billion ($14–20 million), which is supposed to be sufficient to fund multiple large-scale road upgrades. It is unlikely this distribution of funds will adequately meet the needs of more isolated locations, particularly in the RFE.
e. Access by air
More isolated parts of the RFE rely on air transport to remain connected to the rest of Russia. However, internal airfares are expensive and seasonal weather conditions affect the frequency of flights. For the FIFA World Cup in 2018, airports in Russia’s 11 host cities were either renovated or newly built. Russia spent more than $1.9 billion on aviation infrastructure for the event,101 but the reconstruction of terminals and runways chiefly benefited airports in Moscow and western Russia, with very little tangible impact on the RFE.
In a highly critical report in 2019 to the Federation Council (the upper house of parliament), Russia’s Civil Aviation Association noted that smaller airports in the RFE are significantly degraded, and that their dilapidated state could endanger passengers. Passenger traffic has declined since the collapse of the Soviet Union, and the number of smaller airports in Russia has fallen from 1,450 to just 226.102
Larger cities such as Vladivostok, Khabarovsk and Sakhalin do have modern airports, but smaller facilities such as Kamchatka’s Yelizovo terminal are neglected, with plans to upgrade it repeatedly postponed. Numerous other plans have met similar fates: an airport in Blagoveshchensk requires a new runway; while Chinese businesses are thought to be interested in investing, there is no scheduled timeline for the project to begin.103 Of the 31 regional airports in Yakutia and Magadan – both regions boasting significant quantities of untapped and potentially lucrative natural resources – 25 are due to be closed in the next four years. Most runways at airports in the RFE are not paved, and some cannot operate in certain seasons, which affects shift workers who travel to the region for work.104
Policymakers are aware that Russia’s airports are not up to standard. The government has allocated around R200 billion ($2.7 billion) up to 2024 for upgrading 66 regional airports, and for improving links between the eastern and western parts of the country. Of this sum, R94 billion ($1.3 billion) is expected to be spent in the RFE.105 In 2019 construction began on a R3.6 billion ($49 million), four-year project to renovate an airport in the RFE’s northernmost territory of Chukotka, with six more airports in that region earmarked for reconstruction in the next three years.106 Chukotka is particularly remote, and the territory has an abundance of natural resources. The Kupol mine there has significant reserves of gold and silver – more than 1 million ounces – and its output is sold all over the world, including to Asian markets.107 During winter, only one road links the mine to the outside world. This road is used to bring in almost all supplies (including equipment and fuel), yet must be rebuilt every year. At other times, the lucrative mine relies on the nearby Arctic port of Pevek – operational for only three months of the year – or on air services for deliveries of supplies and personnel.
Improving regional airports would help to link companies that operate in inaccessible environments to road, rail and shipping routes. However, work on airport renovations is progressing slowly.