Socio-economic development of the Russian Far East: projects and realities

In 2015 the Russian Far East had to face various challenges

On the one hand, the region was affected by the country’s macroeconomic problems. Moreover, Western sanctions hampered some of the Russian Far East projects, for example the Kirinskoye gas and condensate field within Sakhalin III Gazprom project and also Rosneft's Komsomolsky oil refinery. On the other hand, the process of managing complex projects on different stages of implementation has made a positive contribution to the improvement of the key socio-economic and financial indicators. As the result, the Russian Far East economy has become one of the most successful regional economies within the whole country.

Socio-economic development of the Russian Far East: projects and realities

Lots of growth-enhancing investment projects have been making steady, though not the most rapid, but gradual progress. Russia has identified the fuel and energy and the accompanying infrastructure projects as being of key strategic importance, so the Russian Far East is gradually transforming into one of the country's major energy hubs. The following section presents some of the crucial projects, starting from Sakhalin which has been one of the country's most important oil and gas regions (some new facilities for LNG production and transportation are planned to be built there). However, Yakutia is becoming increasingly important regional supplier of fuel as Russia has launched the construction of the Power of Siberia pipeline, which will deliver gas to China from Yakutia and Irkutsk region just in a few years. Another example of the fuel and energy complex expansion is the Amur Gas Processing Plant in the Amur Region. Besides, within the year 2015 the new Pacific port of Kozmino was gradually increasing its’ export shipments. Transneft investment program should be also noticed here as it is aimed at modernization and expansion of the Eastern Siberia-Pacific Ocean Pipeline (ESPO pipeline) in order to increase the country’s oil exports.

Coal industry has also been considered as one of the top priority sector in the Far East Federal District. In the year 2015 some priority investment projects were selected by the Russian Federation government to be transformed into the so-called Advanced Special Economic Zones – ASEZ. Some accompanying co-financing projects were also chosen to be co-financed by the Far Eastern Federal District and Baikal Region Development Fund (six projects altogether). Three coal mining projects were included into the group - in Yakutia, Khabarovsk Krai and Sakhalin, plus one coal port terminal construction project in Khabarovsk Krai.

Metal industry has shown signs of improvement, especially the precious metal industry which is traditional for the territory since the Soviet Union era. Today, iron ore is one of the government's strategic priorities, including development of iron-ore deposits and setting up mining and processing enterprise in Yakutia, preparing to launch a mining and processing enterprise in the Jewish Autonomous Region (the project involves the construction of a railway bridge to China). Gold industry is another priority sector. In 2015, gold extraction and production was increased in predominately placer deposits in Magadan region. Russia's gold production is going to grow as one new deposit in the Amur region and two more in Kamchatka are to be launched in the near future. Apparently, the development project of the challenging Natalka deposit in the Magadan Region is also going to be expedited, though the launch was previously delayed due to some power supply problems.

Apparently, the Russian Far East remains focused on commodity-based economy and its interdependent infrastructure projects (for example, the project which is co-invested and supported by the National Wealth Fund and is aimed at upgrading the Trans-Siberian railway and Baikal-Amur Mainline). In addition, the government has defined the fisheries sector of the Russian Far East as another strategic objective. In 2015, there were lots of substantive discussions at various levels throughout the country, including the Russian Federation State Council, concerning the principles of the fisheries industry development in the Far East Federal District offshore basins. The themes discussed were quota allocations and the establishment of the largest in Russia fish processing cluster in Primorsky Krai.

With respect to manufacturing sector, it clearly lags behind the other industries. Even so, there are some positive changes in the industry, for example, it was determined by the Russian government to attract investments of the company “Rosneftegaz” to build a new shipbuilding and ship-repair enterprise “Star”. Besides, Komsomolsk-on-Amur Aviation Plant, which is also a government contractor, keeps increasing its output. Another example is one of the Russia's biggest and most ambitious projects aimed at creating a spaceport in the Russian Far East (Kosmodrom Vostochny or “Eastern Spaceport”). Although this project is behind schedule and is involved in a series of scandals, it is coming to the completion stage thanks to the President Vladimir Putin’s overriding interest to get Kosmodrom Vostochny built on time.

Subsequently, the Far East is at the stage of inertial development which is characterized by slow progressing of the recently launched projects with their low impacts on regional development. On the whole, the Russian Far East overall effectiveness seems to be quite favourable in terms of some positive trend in its’ industrial development, though not all of the regions within the Far Eastern Federal District encourage optimism. Nevertheless, while Russia is experiencing downturn in its’ industrial development, within the period January-October 2015, the Russian Far East increased its production by 3% (based on Russian Federal State Statistics Service (Rosstat) data), though industrial production in Russia within the same period decreased by 3.3%. The most successful commodity regions such as Sakhalin (14.4% growth) and Yakutia (5.9% growth) have become the driving forces influencing economic development of the whole Far Eastern Federal District. However, some regions have noticeably declined in the industrial sector, e.g. the Amur region (9.1% decline), Jewish AO (9.9% decline), Chukotka (12% decline). As for the major regions within the Federal District, Primorsky Krai declined its’ industrial production by 5.3%.

Rate of investment in developing regional economy has shown a similar tendency: while in Russia the overall rate of investment declined by 5.8% within the period January-September 2015 (according to Russian Federal State Statistics Service (Rosstat) data), in the Far Eastern Federal District it grew by 4.8% within the same period of time. However, the growth is erratic. Sakhalin (166.1 billion rubles within the above mentioned period) and Yakutia (133.9 billion rubles) remain the undisputed leaders in terms of investment. Moreover, Sakhalin showed substantial growth of investment by 14%. In addition, some favorable investment opportunities arose in the Amur and Magadan economy, as both regions presented growth by 59.6% and 59.3% respectively within the period January-September 2015. But despite some encouraging trends in these two areas, both of them are characterized by erratic social and economic situation, so the growth of investment cannot improve the current situation in these two regions so far.

As a result, the amount of money invested in the Amur region (66.2 billion dollars) was approximately equal to the investment in Khabarovsk Krai (66.6 billion dollars), but the best investment performance was shown in Primorsky Krai, where contributions were equal to 74.1 billion rubles. In contrast to them, the administrative center of the Far Eastern Federal District of Russia, Khabarovsk Krai, experienced a major downturn in investments down by 27.5%. All in all, five of the nine Far Eastern regions experienced a slow-down in the financing: Khabarovsk Krai, Primorsky Krai, Yakutia, Chukotka and Kamchatka. The most disappointing was the result for Primorsky Krai, where investment declined by 7%. To sum up, the overall trend for the five central administrative regions of the Russian Far East in their efforts to attract the investment was pointing downwards, though the four marginal raw-material-producing regions helped drum up investment for the whole Federal District. However, even the fact of creating priority development areas within the Far Eastern Federal Distict has not improved the situation so far.

Construction sector had a mixed bag of fortunes in the year 2015. The data present a mixed picture when construction industry in the Far Eastern Federal District decreased by 5.2% within the period January-October 2015 compared to the all-Russian industry trend data which represented the decline of 10.3%. Construction industry in the Amur region experienced a sudden and sharp increase by 74.2% which was fueled by a swell in infrastructure investments into the region. However, Primorsky Krai registered the decline in construction industry by 20%, Khabarovsky Krai – by 21.7% respectively. Construction in the Jewish Autonomous Region shrank by approximately 40% and in Sakhalin – by 15% respectively. As far as Yakutia concerns, its’ construction volume and investments remain essentially the same throughout the observed period.

It should be noted that the Far Eastern Federal District economy has to deal with a range of structural challenges, for example the federal district relies mostly on energy revenues to drive its’ growth. In 2015, there was not any evidence that any other industry rather than the above mentioned could reduce negative outcomes and lead to sustained positive impacts. Besides, the most dramatic declines in the agricultural sector in the first half of the year 2015 occurred in all the southern regions of the federal district such as Primorsky Krai, Khabarovsk Krai, Amur Oblast, the Jewish Autonomous Oblast (as reported by Rosstat), where agriculture and farming have always played an essential role. The high-density rural areas faced a serious decline, for example Amur Oblast (by 7.2%) and the Jewish Autonomous Oblast (by 13.4%). With respect to the northern territories, they never specialize on agriculture and farming, so this particular indicator does not capture the complexity of the economic situation there. Chukotka, for example, was adversely affected by the volatile business environment. According to the Russian Federal State Statistics Service (Rosstat), construction industry in the region grew up approximately five times, though agricultural sector within the period January-June 2015 fell down to the amount of 76,6 % in comparison with the same period a year before.

The Far Eastern Federal District have not yet established an effective system for resolving social issues more quickly. The recent trend in migrants' flows presents a decline of inflows to all of the regions within the Far Eastern Federal District in 2015 while outflows from the regions continued to grow. The trend is clearly seen from the data reported by Rosstat for the period January-September 2015. The difference between the number of people who arrived (181.6 thousand people) and left (199.5 thousand people) informs us that all the regions within the Far Eastern Federal District had a negative migration balance within the above mentioned period of time, though the overall outflow migration intensity remained unchanged, except only one region, Khabarovsk Krai, which represented the highest population decline rate within the above mentioned period.

However, taking all things together, social indicators of the Russian Far East have shown some positive dynamic despite the recent challenges. For instance, real income of the population remained stable within the period January-September 2015 (according to the Russian Federal State Statistics Service (Rosstat) data, it even increased by 0.2%), while in Russia this indicator fell by 4.2%. Although, this indicator reduced significantly in Magadan Oblast (by 11.4%). The results afford interesting comparison, because in Khabarovsk Krai, despite the negative economic and social situation in Russia, the region’s real incomes rose by 6.4%. The change in real income was not consistent across the rest of the Far Eastern regions, but none of the regions experienced a significant decline in real income, so the fact encourages optimism.

The volume of retail trade did fairly well in 2015, maintaining at or near the previous year level that is a good measure of the positive change in social welfare. As reported by Federal State Statistics Service (Rosstat), within the period January-October 2015 this indicator fell by 1%, though in Russia this indicator declined by 8.8% within the same period of time. Only two regions of the Far Eastern Federal District, Amur Oblast and Magadan Oblast, experienced a significant retail slowdown of more than 5%, but it was less that the decline within Russia.

The level of prices for goods and services in the Far Eastern Federal District increased by the approximately the same percentage amount as the national indicator: the food price level in October 2015 compared to the corresponding month of the preceding year was set at 110.3%, though in Russia it was 111.2%. However, the distant areas of the Far Eastern Federal District were the most affected to the food price increase, because of their isolated and geographically remote location. For instance, food price at Kamchatka rose by 10.6%, at Chukotka – by 9.5% in Magadan Oblast – by 11.4%. Thus, Magadan Oblast was the most deeply affected by a decline in the terms of trade and income. Unfortunately, all other regions of the Far Eastern Federal District saw a significant month-on-month rise in prices in 2015.

According to the Russian Federal State Statistics Service (Rosstat) data, within the period August-October 2015, unemployment level in the Russian Far East (5.8%) corresponded to the national level of unemployment as a whole (5.3%). The worst local regions for unemployment rate within the Far Eastern Federal District were the Jewish Autonomous Oblast (7.6%) and Yakutia, which showed the unexpected growth of this indicator (7.2%). The unusually high unemployment rate for Yakutia reveals some structural problems facing the labour market in this prosperous region. In positive contrast to that, unemployment rate did not exceed 4% of the workforce in Kamchatka, Chukotka, in the Magadan Oblast. The negative impact of declining federal investments and limited access to finance created significantly more binding constraints in comparison with any other challenging factors, such as tax collection or revenue administration.

The regional fiscal policy has some positive implications, as evidenced by relatively high growth rate of regional consolidated budget revenues which was 15% compared to the total amount of 6% within the whole country. The growth was mostly driven by local revenues (up 25%), rather than federal transfers (down 11%). The data were provided by the Federal Treasury of the Russian Federation for the period January-October 2015 compared to the same period of the previous year. This increase was most likely driven by Sakhalin region which showed the growth in revenues by 51%, including the tax and non-tax revenues growth by 56%. With respect to the other territories, Yakutia presented the revenue growth by 24%, Chukotka – by 46%, Magadan’s revenue grew by 20%, Amur oblast – by 11%. However, Khabarovsk Krai and the Jewish Autonomous Oblast, showed a declining trend. Budget revenues in Khabarovsk Krai decreased by 10% (local revenue reduced by 2%), in the Jewish Autonomous Oblast - by 6% (local revenue reduced by 4%). Limited access to federal financing was a very severe business environment constraint affecting all the regions within the Far Eastern Federal District.

The Russian federal authorities began changing their attitude toward the Far Eastern Federal District by establishing new development and investment projects to create an effective, innovative and economically self-sufficient region. However, the federal authorities try to imply the policy of fiscal autonomy in the Russian Far East, so the volume of transfers coming from Moscow is gradually reducing. In 2015, transfers to Khabarovsk Krai reduced by 34%, to Magadan Oblast –by 24% and Amur Oblast - by12%. However, most of the Far Eastern territories are not yet ready to bear full responsibilities of self-sustaining autonomous regions and they still need financial support from the central government. The only region within the Russian Far East that has been able to meet the tough challenge so far is Sakhalin where the local budget showed a surplus in 2015. The Russian Far East economy remains under severe pressure from considerable debt. According to the information of the Ministry of Finance of the Russian Federation from 1st November 2015, compared to the same period in 2014, the Federal District had a much larger debt load compared to the same indicator across Russia. The total debt of the constituent entities of the Russian Federation grew by 21% within the above mentioned period, but the Far Eastern debt grew by 46%. Amur Oblast, Magadan Oblast, Jewish Autonomous Oblast and Chukotka suffered from excessive debt burden (government debt to current fiscal revenue ratio). In Magadan Oblast, the debt increased 2,2 times, in Primorsky Krai the debt increased 4,3 times, in Khabarovsk Krai it grew up 68%, in Kamchatka - 75% up. Even though, there is no particular reason to worry about the budget deficit.

Despite all the challenges, the regional authorities were able to fulfill their economic goals and social responsibilities with respect to the key public services. The recent increase in growth of healthcare expenditures within the Far Eastern Federal District is a very promising objective indicator. According to the data of the Ministry of Finance within the period January-October, 2015, compared to the same period in 2014, the regional health budget allocations grew by more than 10%, though in Russia this indicator increased by 5% only. Monthly average wage in healthcare industry within the Far Eastern Federal District was significantly higher than the national average level. For example, in the first half of 2015 an average doctor’s salary exceeded the average doctor’s salary within Russia by 27% (in Yakutia), and in the Jewish Autonomous Oblast it was almost twice higher than the national average for the industry. With respect to education, the expenditure for education rose slightly only by 3% (the figure is the same both in the Far Eastern Federal District and in Russia overall). Wages in education sector were significantly lower than wages in healthcare industry. In such regions, as Sakhalin and Chukotka, in the first half of the year, average wages in education were equivalent to the same indicator among the whole Federal District. However, within the rest of the regions of the Far Eastern Federal District, the level of wages in education sector exceeded the average Federal District level by more than 24% (e.g. in Yakutia and the Jewish AO), or even by 35% (e.g. in Kamchatka). These findings can be interpreted as suggesting that all regions within the Far Eastern Federal District are at present broadly in line with country-wide priorities (presidential decree of May, 2015) on healthcare and education, but so far in healthcare sector the situation has been better than in education sector.

Access to finance is one of the major constraints in housing and utilities infrastructure sector across the Far Eastern Federal District. The process of reducing costs affected this industry in the most dramatic way as the expenses were cut by 7% within the Far Eastern Federal District compared to the national reduction of only 3% (taking into account the fact that costs and expenses on housing and utilities across the Far Eastern Federal District are always higher than across Russia due to higher demand particularly in remote areas of the Russian Far East). Public road system was also negatively affected by cost cutting measures and it declined by 2% (though this indicator showed growth by 6% within Russia). As for the year 2016, all regions within the Far Eastern Federal District tried to keep their local budgets in line with social goals, though the increasing debt to the government was one of the major constraints. Some regions within the Far Eastern Federal District reduced their local budget spending, e.g. the Amur Oblast (15% down within the period January-October 2015, compared with the same period in 2014) and Jewish AO (down 13%). Social expenditures were hurt the most in the Amur Oblast (18% down on social policy, 14% down on education, 10% down on healthcare, 31% down on housing and utilities sector.

According to our calculations, as of November, 1st, 2015, the budget deficits of the Magadan Oblast, Khabarovsk Krai and the Jewish AO exceeded 10%. On the contrary, Sakhalin stood out (compared to any other obsered regions) as being a unique territory among all Russian regions where revenues exceeded expenditure (the budget surplus exceeded 30%, and in the previous months it had been even higher). That is why it was decided to finance the federal target program for the socioeconomic development of the Kuril Islands (which should be put into operation in 2016) from the Sakhalin regional budget.

To sum up, on the one hand, the Russian Far East does not demonstrate any negative dynamics in its socio-economic development. The region has regained its traditional mineral-commodity focus and it makes use of the positive effects of the so-called “soviet inertia”. During the Soviet Union period, many projects were left incomplete or were postponed indefinitely, suffering from such factors as lack of demand and distant geographical locations. As the result, most of the recent development projects are rooted in the in previous Soviet era. On the other hand, the government budget constraint and problems of deficit spending are slowly reducing the safety margin of the Russian Far East against economic and social collapse. The Russian government is stimulating the region’s economic growth by suitable laws and regulations to strengthen its’ business environment, but the country authorities limit the region’s access to financial services to create in the region some new approaches to business and generate its’ inner financial resources. It should also be noted, that the strategic regional projects and initiatives are not in position to deliver development profits yet. So far, they still need some time, most likely years, to be further implemented and be able to stimulate economic growth of the Far Eastern Federal District. It means that for the next few years the Russian Far East is going to face the problem of disproportion between high expectations and challenging business environment and will also have to meet particular challenges to overcome specific interregional constraints to doing business as the local business environment is difficult and it varies substantially from region to region within the broad federal framework of the Russian Far East.