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06.02.2015. A Turn to the East: Results and Objectives

A new center of economic development will emerge in Central Eurasia

The long-term deterioration of relations with the West, hopefully less dramatic in the future than now, and the need for restructuring foreign economic relations, largely malformed during the years of disintegration and chaotic attempts to restore them, make the partial economic turn to the East all the more necessary. The turn has started and it should be expanded.
Those of us who for years tried to prove the benefits of such a turn, feel satisfaction… but also concern.
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After years of debates and bureaucratic skirmish, in 2014 – at last – Russia began to build an institutional framework for implementing a new development model in the Far East that suggests the creation of territories of rapid development (TRD) and support of priority investment projects geared to boost exports to the Asia Pacific region.
It is would be out of trend to praise the government and its work, but the Ministry for the Development of the Far East and the vice-premier who oversees it are really doing well. The ministry’s powers have been clearly defined, a law on TRDs has been adopted, and the rules of selecting priority investment projects have been approved. There is now more clarity about the Far East and Baikal region Development Fund as its authorized capital will be increased with taxes collected in the region. TRDs and investment projects to be implemented in 2015 are expected to be selected within a month.
But the overall economic situation in Russia is worsening. With Crimea having become a new regional budget priority, a considerable part of the elite, which had always been skeptical about the turn to the East, called for holding it off. In the middle of 2014, the previously declared project for the development of the country’s eastern regions basically came to a standstill.
It got a new impetus on September 1, 2014 at a meeting on state support for investment projects and territories of rapid development when Vladimir Putin reaffirmed the seriousness of plans for the region. And yet, budget allocations for TRDs were more than halved from 89 billion to 42 billion rubles. Just five or six of them are expected to be created in 2015-2017, although the initial figure was 14. No agency for human resource development or agency for attraction of investment and export support has been created so far; and large corporations and federal agencies have not yet started to move their offices to the Far East, as the prime minister pledged they would do.
Difficulties can be overcome. But what is disturbing is that the new development model for the Russian East is slowly being emasculated.  
There are three main problems.
The first one is that political logic apparently tends to prevail over the economic one in determining concrete development territories. Initially, TRDs were intended to be a fine-tuned instrument for rapid development in a given region, based on meticulous assessment of specific sites and the use of synergy from a large number of investment projects located close to each other.
However, soon proposals were made, and accepted, that the TRD regime be extended to the rest of the country, which clearly runs counter to the original idea. In his Address to the Federal Assembly, the president suggested “applying the TRD regime to new projects in single-industry towns.” Later, Delovaya Rossiya, a public organization of entrepreneurs, came up with the idea of employing this regime in all new major, non-resource projects. At a meeting of a government commission on December 16, it proposed to extend the TRD regime to the Russian part of the Bolshoi Ussuriisky Island and the whole of the Kurile Islands.
This approach is upsetting. TRDs were designed to be not an instrument for supporting the weak but a mechanism for using the competitive advantages of the region to make it a driving force for economic development in the rest of the country. Otherwise, they will be no different from special economic zones, many of which were created for political, social or humanitarian considerations in disadvantaged regions and eventually failed.
We believe that TRDs and priority investment projects should be selected on a solely economic basis using criteria that have been announced and approved so many times. At this point it is especially important to step up interaction with potential foreign investors in order to get a clear idea of the sites that may interest them. Most foreign partners are waiting: they have declared their interests, but they want to understand which way the TRD concept will evolve and how the Russian economy will manage.  
The second problem is the lack of clarity about the regions where the rapid development model will be used. In the early stages of Russia’s eastward drive, everyone actively discussed Sergei Shoigu’s idea of establishing a state corporation for Siberia and the Far East to develop the entire territory east of the Urals. It was eventually dropped to limit the state and federal target programs to the Far East and the Baikal region. The programs were drafted by the Ministry for the Development of the Far East and the overseeing vice prime minister, even though the Baikal region formally is not within the scope of their responsibility. 
Accelerated development of Siberia seems to have been excluded from the government’s plans. In his Address to the Federal Assembly in 2013, Vladimir Putin proclaimed the development of Siberia and the Far East “a national priority for the whole 21st century.” But there was no mention of Siberia in his address last year.
The development of the Far East is impossible without the development of Siberia as these two regions are closely intertwined historically, economically and – most importantly – logistically. Unless thoroughly planned, a potential increase in export from the Far East will block export routes from Siberia and only exacerbate its isolation from external markets. However, Western Siberia and a part of Eastern Siberia have the best human resources and the potential for developing high value-added industries.
It would be more logical to use the rapid development model not only in the Far East but in the whole of Siberia, as was originally conceived. Development plans for the two regions should be interconnected. Until recently, Siberia was overseen by the Ministry of Regional Development which was dissolved and its responsibility was passed over to the Ministry of Economic Development. However, its coordination with the Ministry for the Development of the Far East is complicated as the former used to be a stronghold for the opponents of Russia’s turn to the East. 
Institutional ambiguity can also be seen in the way Arctic operations and the Northern Sea Route are managed. The Ministry for the Development of the Far East was put in charge of drafting and approving a project for the development of the Northern Sea Route. However, at a meeting of the Russian Security Council in April Vladimir Putin suggested creating “a single center responsible for the implementation of the Arctic policy.” In November there came the news about plans to create a Ministry for the Arctic and Northern Territories. They have no materialized so far. 
The third problem is that the whole concept of governing eastern regions follows in line of the previous economic model that proved ineffective nationwide. There is no way several legislative acts can spur economic activity and attract investors to the region where attempts to do so failed for twenty years. It would not be enough to declare the Russky Island a territory of rapid development and wait for an investment boom to begin there; or to build a university and expect a rapid improvement of human capital; or to announce Vladivostok a free port and think that it will immediately start operating at full capacity. Nor can five or six TRDs, even if they function as planned, change the East of Russia beyond recognition. Other, more radical, decisions are needed that will not involve additional subsidies (there is less and less money for that anyway) but a rethinking of the principles that govern the development of the region’s economy.   
Siberia and the Far East must be turned into an area of economic freedom and a model to be used in the rest of Russia; formal and informal restrictions on investment in any projects (except for those that are critical for national defense) must be lifted; and corruption must mercilessly fought with. The work of regional leaders should be evaluated by the amount of investments made and projects implemented. Liberalization is needed in key industries, primarily those connected with infrastructure and access to mineral resources. A new subsoil law has long been due. Steps must be taken to draw skilled professionals into the region (proposals to give them one hectare of land would certainly not be enough) and create incentives for people to move southward from isolated north-western regions.  State corporations and some ministries must transfer their offices to the Far East to create a third, Siberian-Far Eastern, capital. There is a need for gradual tax decentralization (the adoption of a new format for financing the Siberia and Far East Development Fund is only the first step that has to be followed by many others). Russia should also promote the Far Eastern agenda at regional integration forums and play a more active role in Asian financial mechanisms such as the Asian Development Bank or the Asian Infrastructure Investment Bank.  
Finally, there is a need for a new development concept not only for the Far East but also for the whole of Siberia, dovetailed to the development plans devised by the Eurasian Economic Union, Kazakhstan, Central Asian countries, and China for its Silk Road Economic Belt. Russia must make full use of the tremendous opportunities and concrete advantages it has been given by economic growth in Asia and primarily in China.
A new center of economic development will be emerging in Central Eurasia, brought to life by accelerated growth in western provinces of China, Kazakhstan, and Iran, and by the use of labor and natural resources in Central Asian countries. Russia’s Siberia lavishly endowed with industrial potential, natural resources and human capital should play a key, not peripheral, role in this process. But for this to happen, Russia should be viewed not only as a bridge between Europe and Asia (an ancestral but largely obsolete concept) but as a potential network of both latitudinal and longitudinal transport routes that will secure its advantageous and active participation in the creation of a new development center.   
 Meanwhile, the Russian bureaucracy and journalists are wringing hands over the dangers emanating from China’s Silk Road Belt concept allegedly aimed at diverting transport routes away from Russia. The present concept, however, aims to develop Central Eurasia and is more than open to Russia’s participation in it, if we do not oversleep it again, rambling about threats but not seeing opportunities, as we did during the explosive growth of East Asian markets in 1990-2000s.  
These and other ideas will be presented in two months’ time in our third Valdai Club report from the “Toward the Great Ocean” series.
Present-day and future realities require an integrated strategy for the development of Siberia, Central Eurasia, and the Far East in cooperation with our Asian partners. This may open up new vistas for Europe which has lost vigor. Naturally, the current political resentment and disagreements over values must not lead one to deny the fact that Russia is predominantly a European civilization. In its best days Europe relentlessly sought new opportunities and aspired to move forward. Greek seafarers discovered Crimea, Columbus discovered America, and Yermak and Dezhnev pulled Europe to the Pacific.

S.Karaganov -Dean, School of International Economics and Foreign Affairs, National Research University Higher School of Economics
I.Makarov - Associate Professor, School of International Economics and Foreign Affairs, National Research University Higher School of Economics

// The original Russian language version published in Rossiiskaya Gazeta, Federal issue No. 6595 (24)