Author`s name Michael Simpson

Far East in 21st Century: Economic Spasm or Political Boom?

Influence of China upon the region will still remain much stronger than Moscow's
The last year was the most contradictory for economy of Russia's Far East. That was a period in the country when reforming of the natural monopolies and Russia's incorporation into the WTO were the top priority issues; the period when it became evident that the Far East has settled firmly at the backyard of the federal economic priorities.

It was expected that a symposium and an investment fair in the network of the Asia-Pacific Economic Cooperation organization would be the most important events in the Far East. The events took place in Vladivostok in the first part of September 2002. Events of this scale were to have increased the business activity on the whole territory of Russia's Far East. However, the situation proved to be quite different in fact. The Asia-Pacific Economic Cooperation forum's events drew practically no attention of the federal authorities.

And it is clear why: for a rather long period already the Far East has been rated on bottom positions in majority of forecasts and ratings compiled by governmental authorities and independent experts. We may say again and again that the federal center doesn't understand problems and development perspectives of the Far East. However, at the same time we must admit that these estimates are mostly objective.

The reason of the situation in the Far East is very simple. The Far East is an integral part of the post-Soviet Russian Federation (with the same ineffective management system, low labor productivity, absence of market institutions, poor bank system, excessive political risks and fiscal system of taxation). But the region lacks two competitive advantages: cheap electricity and relatively inexpensive manpower. It was cheap manpower, which is originally a strong safety factor on the price setting level, that allowed majority of Russian companies to consolidate their positions on the world goods markets despite all domestic risks. Electricity wasn't cheap in the Far East, that is why right after liberalization of domestic prices majority of local enterprises couldn't compete on the Russian and foreign markets within the price-quality range.

Manpower resources in the Far East are also a serious problem. If we leave aside the patriotic statements about the Russian education system, and the high scientific potential of Russia's Primorye and Khabarovsk regions, we cannot but admit that price and quality of manpower in the Far East are rather poor as compared with other regions of the country. And it is clear why: the ruble in Primorye or in Kamchatka is not equal to the ruble in Russia's Belgorod or Stavropolye regions. The Soviet era clearly demonstrated that it is not the amount of money that matters, but the number of services and goods that can be bought with this money. For this very reason the manpower market in Russia's Far East was always in an unfavorable situation as compared with other regions of the country. Transport spending, low concentration of population and lack of its own production result in inflation of prices for goods and services, which in its turn entails automatic reduction of people's living standard.

At that, even the lowest living wage in the Far East is much higher than that in Russia on the whole and makes up 1,800 rubles. So, in order to get identical manpower resources, businessmen in the Far East have to pay higher wages to workers and bear additional expenses. If this is not done, population may leave the region which means the industry may lose skilled professionals first of all.

As the past year demonstrated, businessmen cannot pay higher price for less efficient manpower resources. Otherwise, expenses can be too high. Absence of competitive manpower resources has become almost the main problem of the local economy, and it may even reach the critical level within the next 2-3 years.

The structure of the Far Eastern energy system and manpower market differ from those of the European and Siberian parts of the Russian Federation. This in its turn confirms another not encouraging fact: the Far East has found itself at the backyard of the Russian economy policy which is oriented at one objective - gradual development of deeper processing of natural resources and substitution of raw stuff export with export of half-finished products.

Under the present-day conditions deeper processing of natural resources on the territory of the Far East is unprofitable; it is inevitably connected with increase of power consumption and labor intensiveness. Increase of value added in addition to practically free natural resources (with the exception of fish) entails reduction of total profitability of production. That is why the neighborhood with China's poorest provinces, that are unlikely to attract more foreign investments in the nearest 20 years and will hardly be a success with development of technological production, may become another deterrent on the way to deeper processing of natural resources. Since recently, it has become unprofitable for Far Eastern fishermen to make half-finished products of pollack they catch. From a commercial point of view, it is more effective to catch fish, eviscerate it, to cut the heads off, to freeze and then send it to China where it is turned into products that are in demand on the world market. There fish is frozen once again and sold. Even indirect interference of the European Union into the process, when it prohibited import of re-frozen products to its territory, didn't seriously change the scheme of work.
 
It is evident that mass inflow of investments is the key method to speed up economic growth in the Far East. Neither devaluation of the national currency, nor slowdown of the inflation rate or lots of monetary methods are suitable for the Far Eastern economy. What is more, under the present-day conditions it would be difficult to suppose what conjuncture changes could allow local enterprises strengthen the position on the domestic and foreign markets.
 
In fact, all investment sources can be divided into three categories. First, own investment resources of the Far East which still exist despite the low level of economic development. Second, resources of other regions of the country which, as the practice shows, can move about the country freely. And the third, foreign investments. It is no doubt that own resources of the region are more available and the top priority investments. They may at least slightly guarantee that a part of the gained value added will remain on the territory of the region. That is why any region or any country always try to realize the most promising projects with their own efforts and resort to external sources of borrowing only as a last resort. On the results of 2002, the aggregate profit of all enterprises in the Far East made up about 50 billion rubles, while investments in the basic assets made up only 90.6 billion rubles. After deduction of the state investments in the infrastructure, social-cultural sphere and communal and housing sector, it is clear that profit of the Far Eastern economy is comparable with its joint investments.

In this situation, it is at least naive to speak about attraction of Russian and foreign investments. If resources of the territory remain unused and they are in abundance there, any commercial effectiveness for foreign capital is out of the question. Investors from outside always have to suffer additional risks. 

Funds of the federal budget are a real source of outside investments in the region. It is only government that can invest in obviously ineffective programs and projects because it is guided with social and geopolitical motives. The social motive of the federal government is demonstrated in the way how it distributes transfers between the federation subjects. But now all social preferences mean providing the regions with minimum level of budgetary income.

Position of the federal center is clear in this situation. The government expects no economic growth from the Far East, that is why all efforts are spent on maintenance of vital capacity and on retention of the population on the region's territory. It means that it is cheaper now to give fish to citizens of the Far East than to give them an opportunity to process it themselves.

Geopolitical factors are another problem. The neighborhood with China, that is gaining more and more success, cannot be ignored by Moscow any longer. This understanding of the federal center is confirmed with additional preferences got by the Far East within the past two years: these are preferences concerning railway transportation pricing, development programs for the Far East and the Baikal region and so on.

To all appearance, the policy with respect to the Far East will in the nearest time focus on guaranteeing of minimal surviving needs. As it was registered, the outflow of population from the Far Eastern territory in 2002 considerably reduced, the living standard drew closer to the average Russian one.

What is more, views of the federal authorities and local officials of the Far East upon cooperation with China are getting more and more different. The neighborhood with China, that allowed to considerably reduce the net cost of life in Russia's Far East in the mid-1990s, is now treated as a strong competitive advantage for the Amur region, Primorye and the Khabarovsk region. China is not only a neighbor that exhausts all natural resources and value added from the Far East, but it means also a large domestic market and easily exported manpower resources. At the same time, it is unlikely that deep economic integration is possible without cultural and territorial assimilation. In any case, Chinese will not abandon the Far East in any case, it is more important to define what position they will have in the region's economy. After all, no matter how cooperation between the Far East and China develops, the influence of China upon the region will still remain much stronger than Moscow's influence during realization of its survival strategy.

Andrey Blinov
Far Eastern Capital newspaper