By the Blouin News Business staff

FEATURE: An economic boom in Russia’s Far East?

by in Asia-Pacific.

The Kuril Islands, disputed by Russia and Japan. NASA via Wikicommons

The Kuril Islands, disputed by Russia and Japan. NASA via Wikicommons

Russia’s long-neglected Far East is having its moment. In an op-ed published on Tuesday, President Vladimir Putin wrote that Russia places great importance on the region as a key to connectivity and growth. Recent legislative changes established a free port in Vladivostok, and gave “what for Russia are unprecedented tax and other incentives” to the surrounding underdeveloped areas. “We plan to extend this status to other key ports in the Far East. These, along with the northern sea route, and modernisation of our mainline railways will all contribute to greater integration with the Asia-Pacific region and create an important infrastructure link between the Asia-Pacific region and Europe,” he added.

The desired end result is for these “advanced development territories” (ADTs) in Russia’s Far East to compete with Hong Kong, Singapore, China, Japan, and South Korea. To get the ball rolling, the First East Russia Economic Forum was held from September 3-5. The government envisioned about $6.3 billion in private investments, leading to further increases as ADTs grow and attract other investors.

So earlier this month Moscow formally approved a ten-year plan “to ensure the sustainable development of the Far Eastern economy and social stability of border regions and make them competitive with the territories of adjacent countries.” The program is designed to encourage local residents to remain in the region, expand the local system of entrepreneurship, create hi-tech production facilities, and boost the area’s tourist potential. Through 2016, organizational measures will be made, including an action plan. And starting in 2017, the regional plans will be implemented.

Encouragingly, there are already signs of an economic revival in the area. Last week the first casino of the Primorye gambling zone (located in Muravyinaya Bay near Vladivostok) officially opened. As an indicator of international interest, one of the key investors in the casino is Malayasian firm Nagacorp Ltd. And when the full zone is completed by 2022, it will include entertainment centers, casinos, hotels, villas, a yacht club, and other tourist infrastructure.

Likewise, the first of 15 highly-efficient agricultural wholesale distribution centers using Israeli technology will be set up near Vladivostock, Primorye Territory Governor Vladimir Miklushevsky said last Friday. An agreement to set up the center was signed by the Primorye Administration and Biotecmarket, a Russian-Israeli company, during the Eastern Economic Forum in September, according to Russia Beyond the Headlines. An interregional network of such centers is being created in Russia, which is expected to reduce consumer food prices, increase quality, and boost agro-businesses’ income 30-50% (by providing reliable long-term food storage). Furthermore, the Primorye Administration is offering tax waivers for local agricultural producers to increase their investments, with a goal of increasing the region’s gross production of agricultural and food products 150% by 2018.

And greater international trade connectivity is also materializing in Russia’s Pacific backyard. Last month, Israeli shipping operator ZIM launched regular weekly service of six cargo vessels between the Chinese cities of Shanghai and Ningbo, the South Korean cities of Busan and Pusan, and the Russian Far Eastern port of Vostochny.

And in particular, Moscow is putting considerable effort into wooing Tokyo to invest in the Russian Far East. This is a delicate balancing act, because Russia and Japan are still technically at war, having never concluded a peace treaty after WWII. The sticking point is over the Kuril Islands, annexed from Japan by the Soviet Union at the end of the war. All attempts to resolve the dispute have been unsuccessful thus far. There are major hydrocarbon reserves surrounding the islands, and it is a strategic area to project military influence in Northeast Asia and (in the not-too-distant future) by Arctic shipping routes. Plus the islands are symbolic, with national pride and assertive strength at play, making neither side willing to cave in.

But economic ties, with a particular focus on exporting abundant Russian energy to voracious Japan, may trump the historical dispute — or better yet lead to its final settlement. For example, earlier this month, Russian state oil firm Rosneft (the world’s top listed oil producer by output), offered Japanese companies a chance to join projects (both existing and planned) in Russia’s East Siberia and Far East. CEO Igor Sechin spoke of the huge potential for cooperation between the two countries. “We proposed to our Japanese partners deals with total reserves of 6 billion barrels and with a resource base of 100 billion barrels,” he said, adding “We would like to work with Japan.” Sechin didn’t disclose the names of the Japanese firms he contacted, but he noted that with their improved technology, Rosneft had significant scope to expand its oil and gas output.

Noting that Japanese exploration companies had huge write-downs over the last three years over unviable hydrocarbon projects in the U.S., Canada, and the North Sea, he instead asked them to invest in Russian projects, whose profitability he claimed is well above the global average.

RigZone reported:

Sechin said there is a potential for a joint development offshore Sakhalin island, participation in the Far-East Petrochemical Co refining and petrochemical project, the development of Zvezda shipyard, and a possible pipeline to supply natural gas to Japan from Sakhalin. Investments in any upstream projects would have to start now to be ready for commercial operations by the time oil prices return to higher levels within five to six years, Sechin said.

And Moscow’s efforts might be starting to pay off. To rival China’s Silk Road, Japan intends to create a $110 billion Asia-focused investment fund. And Hiroshi Watanabe, the head of the Japan Bank for International Cooperation (Tokyo’s export credit agency), said on Tuesday that any interesting projects in the Russian Far East would be eligible to receive funding.

Will economics trump geopolitics between Japan and Russia in the Far East? Moscow plans to further develop the Kuril Islands (now home to 30,000 Russians), including with a major new military base. But Russia and China successfully resolved their geographically much larger disputed border to mutual satisfaction, so anything’s possible. And even if the Kuril Islands dispute remains on the back burner indefinitely, Japan looks likely to get in on the new opportunities of Russia’s Far East. And chances are it will have plenty of company in the coming years.