As the second Eastern Economic Forum came to an end in Vladivostok on Sept. 3, the Kremlin is still struggling with pledges to bolster the attractiveness of the Far East for potential investors.
Russia's Industry and Trade Minister Denis Manturov, left, and Senior Managing Executive Officer of Mazda Motor Corporation Yuji Nakamine during the Eastern Economic Forum in Vladivostok. Photo: RIA Novosti
The Eastern Economic Forum, which concluded on Sept. 3 in Vladivostok, emphasized one of the most important trends in Russia’s domestic and foreign policy: shifting priorities to the Asia-Pacific region and reinvigorating the controversial idea of Eurasianism, which sees Russia as the center of a big and robust Eurasia, bridging the East and the West. Bolstering the Far East region has now become one of the nation’s top priorities.
However, it remains unclear if Russia and its Far East are able to become the economic hub that will link two dynamic parts of the world — Asia and Europe, taking into account the numerous challenges that hamper the investment climate of the Far Eastern region. It appears that Russia is trying to punch above its weight, experts and independent observers warn.
Even though the Eastern Economic Forum brought together 3,500 participants from 56 countries, addressed the most pressing challenges of the Far East and ended up presenting deals worth 1.6 trillion rubles ($24.5 billion), its ambitious pledges to turn the region into the economic and innovative center linking Asia and Europe sound a bit premature and overly optimistic.
After all, the current economic situation within the country leaves much to be desired, while Russia’s ongoing geopolitical problems, including the confrontation with West, are far from being resolved. So, will European companies really be interested in investing in Russia's Far Eastern region and competing with their Asian counterparts?
“This is a centuries-old question, in that Russia may have completed its empire by expanding to the east but it didn’t really ever integrate its own country,” Christopher Hartwell, the president of the Center for Social and Economic Research in Warsaw (CASE), told Russia Direct. “Infrastructure is the key, and without better linkages to even just European Russia, the Far East will remain underdeveloped.”
According to Hartwell, the Far East should be looking to its Asian neighbors for integration, given that it has a better chance of working at a regional level than the national one. The expert believes that Russia should be less ambitious and assess its opportunities realistically to get its long-term plans off the ground.
“Let comparative advantage run its course and create some linkages cross-border in East Asia rather than focusing on Russia on the whole,” he said. “This has a better chance of both attracting Asian companies to Russia and attracting European countries looking at Russia’s Far East as a springboard to the rest of Asia. This second path is far less likely, but can be done if Moscow lets go of the reins and the Far East can find its own way regionally.”
Even though the Far East’s geographic location opens many opportunities for establishing win-win collaboration with Russia’s Asia-Pacific neighbors and their businesses, the key element of such collaboration should be not state-sponsored, large-scale plans and infrastructure projects. Instead, they should be giving much more freedom to businesses in implementing their plans, according to Oleg Buklemishev, an associate professor of Economics at Lomonosov Moscow State University.
“Encouraging private investment, not multibillion-dollar state infrastructure projects [with dubious returns], could make the region attractive for investments,” he said. “Developing infrastructure is, of course, necessary, but taking into account the interests of business and the local population is much more important. Only in this case, the Far East might take a leading position in the investment attractiveness rankings, involve its rich resources in the country’s economic turnover, create high-paid jobs for locals and, finally, contribute to overcoming Russia’s economic stagnation.”
According to Sergey Aleksashenko, Russia’s prominent economist and non-resident senior fellow at the Brookings Institution, from the point of view of investment, the Far East "does not have obvious advantages in comparison with other Russian regions, except one: proximity to China."
“If the region is able to offer something interesting to China, this project will be implemented, given the fact that Beijing didn’t join [the Western-led] sanctions,” Aleksahenko told Russia Direct. “But China is obviously interested only in natural resources and logistics (access to the Far Eastern ports). That’s why there is no reason to wait for something more from China. However, today the Far East is not so interesting for the other potential investors.”
Looking realistically at the Far East's untapped potential
At the same time, some Western investors believe that the ambitious nature of the Eastern Economic Forum is what Russia needs now during an economic crisis. For example, Philippe Pegorier, the president of Alstom Russia, a French multinational transportation company, argues that setting ambitious goals is crucial. Turning Russia’s Far East into the bridge between Europe and Asia is ambitious, but it doesn’t mean it is impossible to implement.
“In order to get ambitious results one should dream ambitiously,” he said at one of the forum’s sessions, “Development of Economic Cooperation From Lisbon to Vladivostok.”
One good sign is the fact that the participants of the Eastern Economic Forum admitted that the Far East is underdeveloped, with a lot of challenges — from bad infrastructure to the deficit of talent and the lack of rule of law — hampering the investment climate. However, they preferred to focus primarily on positive aspects, such as the Far East’s untapped potential.
Most of the forum’s sessions — including the one that brought together Russian President Vladimir Putin and his Korean and Japanese counterparts Park Geun-hye and Shinzo Abe — basically dealt with the investment attractiveness of the region. Officials presented their legislative, economic and political incentives for domestic and foreign investors as well as opportunities for them. The authorities and businesses introduced 34 investment projects worth an estimated 1.5 trillion rubles ($23 billion).
But this agenda overshadowed the most urgent and inconvenient facts about the region. Out of the forum’s 44 key sessions, few of them dealt with the most important problems that could prevent investors from coming to the Far East. Among them is the discussion about the protecting the rights of investors in the Far East and alleviating their risks in the region, vulnerable to natural and man-made disasters, which are commonplace in the Far East.
Ironically, during the first days of the forum, a typhoon hit one of the villages of Russia’s Primorsky Krai, one of the regions of the Far East, and caused some casualties, including some of the Emergency Ministry’s officers. Yet this incident didn’t get much publicity at the forum for obvious reasons.
However, this disaster is another reminder that the challenges and the risks of investing in the region are too high, not to mention the poor legal framework of the country’s institutions and general unpredictability throughout the country.
First and foremost, Russia’s Far East needs better “institutional capabilities” and infrastructure, as well as qualified specialists to implement its bold plans in the Far East, Hans-Paul Buerkner, the chairman of the Boston Consulting Group, reiterated at the forum. And this problem should be rigorously discussed on a daily basis, not once per year during the Eastern Economic Forum to make the Far East a “focal point of investment,” said Buerkner.
In this regard, Sergey Gorkov, the chairman of the Bank for Development and Foreign Economic Affairs (Vnesheconombank) argues that Russia’s big banks, including Sberbank and VTB, should team up to find the most promising points of growth in the Far East, invest in these new projects, gradually implement them and resolve the problem holistically, taking into account all factors and hidden problems.