Can the Russian Far East Open to the Pacific?

What Can Be Done About the Growing Gap

Between

Economic Potential and Performance in Asian

Russia?

Judith ThorntonDepartment of EconomicsUniversity of Washington

Why Do We Care About the RFE?

Due to its size, resource wealth, and strategic location in North East Asia

Its proximity to prosperous and rapidly growing Asian markets could afford potential for growth and integration into the Asian economy

It serves as a barometer of the storm winds ahead for federal government policy-makers in Russia

Evidence of Growing Regional Problems

Percent Unemployed by Age

05

101520253035404550

20-29 30-39

Large inflow of funds for infrastructure from Moscow

Investment by Gazprom and Rosneft in energy

Rising per capita income of the employed

Yet, weak total investment Little private foreign

investment Slow growth of labor

productivity

Is Russian Systema a Barrier?

Alena Ledeneva’s “Can Russia Modernize?” says Russian government institutions create incentives for evasion, corruption, kickbacks, informal activity and capital flight. Investment lags.

Total Investment Agriculture Fishery Extractive

Manufac-turing Energy,Gas

Construc-tion Trade Other

Far East 927,545 7,527 3,532 189,871 31,253 90,278 17,415 3,960 583,710

Sakha 148,015 889 2 33,361 788 27,764 7,381 932 76,899

Kamchatka 26,195 204 991 1,237 701 959 389 13 21,701

Primorye 256,931 1,378 771 1,504 7,887 31,179 1,862 1,431 210,918

Khabarovsk 168,733 2,200 210 7,857 20,542 6,854 3,054 841 127,175

Amur 113,020 2,048 0 18,263 372 13,614 2,915 360 75,449

Magadan 15,554 23 106 4,811 92 4,819 371 75 5,256

Sakhalin 168,436 426 1,450 117,156 596 2,270 1,070 185 45,285

Jewish Aut Obl 21,484 58 0 2,354 140 1,664 89 29 17,149

On the Eve of Transition Everyone Was in the Wrong Place and Doing the Wrong Thing

Siberia’s mono-cities were placed in remote, hostile environments with ten times more people above the Arctic Circle in Russia than in Canada.

Large sectors of RFE economy and capital stock were

unprofitable at world prices, including fishing and logging.

Repressed inflation, capital flight, and institutional collapse; Goods disappeared from shops. GDP fell 15 percent. Government deficit rose to 16.5 percent of GDP. Exports fell 40 percent, imports fell 84 percent.

Closure of military bases, cuts in production of military hardware, and loss of central subsidies led to unemployment and a collapse in incomes.

RFE Enjoyed Steady Recovery of GRP After 1996, Notably in Sakhalin

Far East Real GRP Indices 1996-2010

0

50

100

150

200

250

300

350

1994 1996 1998 2000 2002 2004 2006 2008 2010

RF

199

6 =

100

Far East Federal District Sakha Primorye

Khabarovsk Amur Magadan

Sakhalin

Real Income Fell to 60 Percent of 1994 but Grew Steadily after 2000

Far East Real Income 1994 to 2010

0

50

100

150

200

250

1990 1995 2000 2005 2010 2015

Russian Federation Far East Federal District

Sakha Primorye

Khabarovsk Sakhalin

Population Outflow Largest in the Far Eastern Federal District

Population Change from 1990 to 2011 by District

0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40

Far Eastern District

Northwest District

Siberian District

Volga District

Urals District

Central District

North Caucasus District

Moscow City

Russian Federation

RFE Population Fell 22 % between 1990 and 2011, Including 30% on Sakhalin

Population Fell 22 Percent from 1990 to 2011

0.00 0.20 0.40 0.60 0.80 1.00 1.20

Chukotka Auton OkrugMagadan

KamchatkaSakhalin

AmurJewish Auton Obl

KhabarovskPrimorye

SakhaFar Eastern DistrictRussian Federation

Murder Rates Remain High,But Infant Mortality Rates Fell

Infant Mortality Rates 1990, 2000, 2011

0 5 10 15 20 25 30

Russian Federation

Central District

Moscow

Far Eastern District

Sakha

Kamchatka

Primorye

Khabarovsk

Amur

Magadan

Sakhalin

Jewish Aut Obl.

Rat

e

1990 2000 2011

0.00 0.10 0.20 0.30 0.40

Rate Per Thous

Moscow City

Southern District

Central District

Volga District

St Petersburg

Russian Federation Average

Northwest District

Tiumen

Urals District

Siberian District

Far Eastern District

Murder Rates by District 2005 and 2009

Industry Employs a Small Share of the Population

Working Age

Pop 2010Total Employed

2010 Ratio

Far Eastern District 3997343 3313300 0.83

Sakha 613134 481100 0.78

Kamchatka 211118 189100 0.90

Primorye 1234356 980100 0.79

Khabarovsk 855445 729400 0.85

Amur 517915 437900 0.85

Magadan 104426 89900 0.86

Sakhalin 317170 288700 0.91

Jewish Aut Oblast 109770 81300 0.74

Chukotka 34009 35900 1.06 0 5 10 15 20 25

Ag andForestry

Extractive

Mfg, elec, gas

Construction

Trade, services

Transport,communication

Real estate

Education,health

Communalservices, other

Far Eastern District Primorye Khabarovsk

Investment in the RFE Shows Little Increase

Investment in Fixed Capital

0

500000

1000000

1500000

2000000

2500000

1998 2000 2002 2004 2006 2008 2010 2012

Thous

$

Central District Moscow Urals

Tiumen Siberian District Far Eastern District

Investment Focuses on Energy in Sakhalinand Sakha, Gold Mining in Chukotka

RFE Investment Fixed Capital

0

50000

100000

150000

200000

250000

1998 2000 2002 2004 2006 2008 2010 2012

Th

ou

s $

Sakha Kamchatka Primorye Khabarovsk

Amur Sakhalin Chukotka

China is Russia’s Largest Trading Partner

Value of Exports and Imports 2010 Russia to Partner Partner to Russia

$ million Export Import

Russian Federation Total 427,800 260,000

China 19,781 39,033

Including    

Crude oil 7,303  

Natural gas liquified 65  

Japan 12,501 10,300

Including    

Crude oil 5,338  

Natural gas liquified 2,203  

Republic of Korea 10,404 7,267

Including    

Natural gas liquified 629  

Mongolia 937 79

DPR Korea 46 16

Germany 15,860 26,616

USA 12,033 9,840

Russian Deliveries of Oil to China Grow

The first phase of the $23 billion ESPO pipeline opened in 2009, bringing crude from fields in east Siberia to Skovorodino near the Chinese border. The second phase, which doubled capacity and extended the line to Kozmino.

Crude oil supplies to China via the ESPO pipeline began in 2011. According to the agreement concluded in 2009, Rosneft and Transneft pledged to supply 15 million tons of oil to China for 20 years in exchange for Chinese loans totaling $25 billion.

Transneft expects ESPO to operate at maximum capacity of 30 million metric tons a year, or 600,000 barrels a day, by 2015.

Chinese President Xi Jinping Visits Moscow in April 2013

State-owned Rosneft will triple supplies to China to a million barrels per day, making China Russia's single biggest oil customer. Total exports to rise from 34 million tons to 50 million tons by 2018.

The Chinese offer Rosneft $30 billion in loans, which Rosneft will use to finance its purchase of the British-Russian TNK-BP at a cost of $55 billion.

Rosneft promises China National Petroleum Corporation (CNPC) a share in eight upstream projects including a deal to explore and exploit Russia's Arctic reserves.

Gazprom and CNPC agree that Russia will deliver 38 billion cubic meters of gas a year to China from 2018, although Russia and China remain far apart on prices.

China's Shenhua Group and Russia's EN Group agree to develop coal resources and RFE to expand Russian coal exports to China.

Expanded Oil Pipeline Network

What Can Be Done About the Gap Between Economic Potential and Performance in Russia?

Excerpts from Medvedev’s Report on the Government's performance in 2012, April 2013.

“First, as part of the National Entrepreneurial Initiative, procedures have been identified that cause the biggest problems for business. ..We are making good progress in some areas, for example, tax administration, and not such good progress in other areas.”

“Speaking of capital outflow, it is still very large. In countries with

comparable economies this kind of outflow doesn't exist and it means something is amiss in our country.”

“Last year Russia became a full member of the WTO. The accession talks, I wish to remind you, lasted 17 years.” (Yet, Russia has imposed a “scrapping fee” on import of foreign automobiles.)

Reducing the Gap Between Potential and Performance

Washington Post May 31, 2013: “Sergei Guriev, Russian economist critical of Putin flees to France, escaping ‘bogus’ legal pressure”

Modernization is threatened by lack of security of person, civil rights, and property rights.