Pavel Minakir,
Corresponding Member,
Russian Academy of Sciences,
Institute of Economic Research,
Far Eastern Division,
Russian Academy of Sciences

T

he Far East is not just an enormous region accounting for almost 40 % of Russia’s territory. This is, in fact, a whole country occupying 6.2 million square kilometers and having a specific economic structure. It is also a relatively new region: the history of its development by Russia comes to less than 150 years. During this period there were two types of economic policy towards the Far East: the state patronage in 1861 to 1917 and from 1930 to 1990 as well a relative economic autonomy from 1922 to 1930 and after 1991.
The share of this region in the Russian economy amounts to about 6%. If individual products, such as coal, wood, gold, fish, are considered, then, its indexes are much higher. This proves the industrial specialization of the Far East.
When the Far East is discussed, there is often much talk about the wealth of its subsoil, although by reserves of minerals the region yields significantly to China, above all, to its north eastern part. However, if its reserves of main economically efficient minerals are correlated with volumes of the gross regional product (GRP) and the population (there are less than 7 million people living in the Far East), then, the Far East turns out to be on the same level with such countries as South Korea or Japan.
The space magnitude distorts not only the resource factor. The capital intensity of the GRP increment is higher than Russia’s average by 50% to 600% in the region’s north and by 30% to 35% in the south. This is the result of enormous spaces and high expenses on maintaining the infrastructure part of the gross product.
By rates of development in the period of economic growth, which has started in Russia from 1999, the Far East has been lagging behind the Russian average indexes all these years. The output of industrial products per capita is constantly going down there. The capacity of the region’s local market is catastrophically low.
In the Soviet years the population of the Far East had been formed by 95 % as a result of the positive migration. Now there is a population outflow. In 15 years (since 1988, when the population reached its maximum of 8,012 thousand people), it went down by more than 1 million people.
In this situation an extraordinary change has taken place in the structure of the GRP distribution. In 1990 19% of GRP was realized inside the region and in 2000 this share jumped up to 77.5 %. Accordingly, in 1990 81 % of GRP was taken outside the region and exports accounted for only 6% of this volume. A decade later, in 2000, only 22.5 % of GRP left the region, while the share of exports in this volume amounted to between 15% and 17%.
What does the realization of 77% to 80% of GRP in the domestic regional market mean? When this market is small, then, to realize such a volume of products is only possible, if the output is significantly down. And precisely here lies the secret of the stability in the Far East, at least in its southern part anyway. It is believed that since 1996 the region’s economy has been balanced. Yes, this is so since supply and demand are about equal but their amounts are extremely limited.
Maintaining trade relations with Russia’s other regions is costing too much. The ‘transport shoulder’ of supplies comes to almost 5,000 km, if they are shipped to Eastern Siberia, 6,500 km to Western Siberia and over 7,000 km to the Urals, The distance to economic centers in the European part of Russia amounts to almost 10,000 km. Even in the Far East distances of supply shipments reach 3,000 and more kilometers.
In order to promote the region’s development, it was planned to change, above all, the tariff policy. The matter is that so far the average tariff on electric power in the Far East by about 40% and on heat energy by 72 % is higher than Russia’s average. Experts believed: as soon as the transport and energy barriers were removed, this would automatically ensure an economic upturn of the Far East and would contribute to its integration in the Asian-Pacific region.
In 1996 the program to develop the Far East was adopted. It emphasized three priorities: ‘to fasten’ the population, to compensate transportation expenses so as to tie up the region to the national market and to make up for energy costs so as to prevent production costs from undermining the competitiveness of local manufacturers’ products in the national market.
This program was met with much criticism because of its alleged normative indexes and planning. But since 1930 the State policy towards the Far East had been always based on programs different in forms. All in all, there were five of them, the efficiency of their fulfillment had been constantly decreasing. The extent of this decrease had been in direct proportion to the weakening of the State’s ability to accumulate and efficiently distribute its resources.
Under the 1996 program, it was planned to invest during 10 years as much as $75 billion in developing the Far East, including $18 billion of budget investments. But already in 2001 it became clear that the program failed. Only 10% of planned funds was received for the region’s development.
One of the program’s goals was a basic restructuring of the Far Eastern economy. Indeed, its industrial structure changed but, at the same time, the total indicators of the extractive industries remained practically the same. The peak level of the region’s net export was reached by 1996 and it stabilized after that. Sales of products in foreign markets are maintained thanks to export orders for production of arms, mainly, military aircraft, which are made in the city of Komsomolsk-on-Amur.
As a whole, the structure of export in the Far East is rather limited (pic 1). China accounts for a major share of export shipments. These are machinery and equipment. The rest – wood, fish products as well as a small amount of oil products – goes, mainly, to the Republic of Korea. These markets are short on mobility. With the existing range of supplies their capacity is practically all used up.
Foreign investments failed to become the major factor of development in the Far East, although they are playing a more significant role in the regions than in Russia as a whole. Investors put their funds, mainly, in projects of developing oil and gas fields on Sakhalin’s shelf.
The development of the Far East is promoted by such important factors as the absence of infrastructure limits, the availability of efficient natural resources and comparatively favorable investment climate. In order to realize these opportunities, a new program covering the period till 2010 has been proposed. This program does not differ much from the previous one but it contains several strategic beneficial peculiarities.
The first one of them lies in the fact that the Far East is a region, where international transport corridors should be developed exploiting its advantageous location as a transit territory for North East Asia. Trans-Sib, of course, is the key corridor. So far attempts to fully use it have not succeeded. The Iraqi crisis has helped a little in this respect: after the war in Iraq started, some carriers switched from sea freight to land routes. Thus, the passage of containers increased. But with the maximum annual capacity of Trans-Sib amounting to almost 400,000 containers the corridor is being used by 25%.
The second strategic peculiarity is connected to energy. Energy resources of the Far East and Eastern Siberia, namely Sakhalin’s shelf fields, East Siberian fields of gas and oil, are a natural basis for constructing pipeline systems with the subsequent export of gas and oil to North East Asia. This is all the more promising since energy consumption rates in the Far East are not sufficient enough to ensure efficient development of explored fields. At the same time, expected needs of countries in North East Asia – Japan, China and South Korea – are constantly rising. According to available estimates, after 2006 the Far East will become a net exporter of primary energy.
It is necessary to keep in mind that countries of North East Asia lack a developed gas pipeline infrastructure and use, mainly, liquefied gas. Because of it operators of the Sakhalin projects are building the world’s largest mill for liquefying gas in the Island’s South. Natural gas will be transported there through a pipeline from shelf fields and after being liquefied it will be exported to countries of North East Asia.
Oil is a different matter. The growth of its export shipments from Russia corresponds with strong desires on the part of Japan, China, South Korea. That is precisely why there is a heated international discussion underway around the project of constructing an oil pipeline, which may have either one of two probable and competing routes: to continental China or to ports on the Japanese Sea coast. In a longer term no less attractive is the option of processing energy resources on the spot with a subsequent transmission of electric power to countries of North East Asia. All these projects are combined in a general program of creating an engineering infrastructure of international energy cooperation.
The Far East would like to improve its fuel-and-energy balance and reduce the GRP power consumption. At present, natural gas accounts for only 10% of the region’s balance. By years 2010 to 2012 its share will presumably reach 33 %. In 1996, when the strategy was being developed, it was assumed that it would be very good because in calculations the price for natural gas was set at $45 per 1, 000 cubic meters. Today, the price for the Far East is mentioned at the level being not lower than $90 and, most likely, it will come to between $110 and $115, i.e. it will match the world price. Nevertheless, since 1999 works have been underway on constructing a gas pipeline, which is to be extended to Vladivostok.
So far, efforts to determine a model of state strategy with respect to the Far East have failed. In case of proceeding from interests of geopolitics, it is necessary to undertake a massive pumping of financial and other resources from state reserves. This will allow to support the region’s stability but will not bring either high efficiency or any dramatic breakthroughs. The alternative option is to establish a pseudoautonomous economic system, i.e. to set up an economic mechanism in the Far East and adopt about the same approach towards it as it was the case in the 1920s. The middle way between the institutional and resource policies is also a possibility. It may create prerequisites for a balanced development of the Far East.


Export of main products from the Far East, million dollars

500
450
400
350
300
250
200
150
100
50
0

Machinery
Coal
Oil
Wood
Fish products

11.5 491 8.2 115,6 0.3 23.8 0 170,8 338,7 249 123,6 59.9 315,7 44.3 203


Transport corridors in North East Asia

Existing corridors
Planned corridors
Russia
Mongolia
China
North Korea
South Korea
Japan


Yakutsk
Tynda
Komsomolsk-on-Amur
Khabarovsk
Vanino
Yuzhno-Sakhalinsk
Tayshet
Irkutsk
Ulan-Ude
Ulan Bator
Chita
Blagoveshchensk
Manchouli
Harbin
Changchun
Tumen
Erenkhot
Suifenhe
Vladivostok
Nakhodka
Zarubino
Posiet
Niigata
Tokyo
Seoul
Beijing
Tianjin
Pusan
Dalian

Production and consumption of primary energy in the Far East (million tons of equivalent fuel)

120
100
80
60
40
20
0

1990 2000 2006 2010

Production
40.6 30.8 45.2 108.2

Consumption
60.3 41.7 46.3 50.5