Irkutsk
Ulan-Ude

Blagoveshchensk
Chita
Yakutsk

Birobidzhan
Vladivostok
Khabarovsk

Magadan
Yuzhno-Sakhalinsk

Anadyr
Petropavlovsk-
Kamchatsky
Moscow

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Economic phobias and geopolitical ambitions of the Far East

On the turn to the East, the flight of the population, the problems of real and contrived

The Institute of Economics and Industrial Engineering of the Siberian Branch of the Russian Academy of Sciences publishes the "EKO" magazine, known and recognized in the scientific world, from the year 1970. Several issues of this journal in recent years have been devoted entirely to the development of the Far East. On the eve of the Eastern Economic Forum, the IEIOPE SB RAS decided to compile the best publications on these topics in the book. Readers of IA Eastrussia have a unique opportunity to get acquainted with some texts even before it leaves the press - within the framework of the joint project "ECO - Far East". The authors of the first material in this series are the academician of the Russian Academy of Sciences Pavel Minakir and the director of the Institute of Economic Research FEB RAS Olga Prokapalo.

Economic phobias and geopolitical ambitions of the Far East
Photo: 14 years ago, Vladimir Putin has already opened hydropower stations on the Bureya. Photo kremlin.ru

Over the past 15 years, a peculiar public-private partnership has developed in the Far East: public funds are concentrated in the infrastructure segment, and private ones - in the segment of extraction and export of natural resources. True, the state strongly opposes such a “division of spheres”, insisting on the need for deep structural modernization and considering this to be an effective means of “accelerating” the development of the macroregion.


Ending. Read the beginning here


PROBLEMS OF REAL AND CONCERNED
With the onset of radical economic reform, the regional economy has undergone significant changes. But is it destroyed, as it seems to the mass expert consciousness and society? Is the problem in "salvation" or adaptation? And is this problem exclusively Far Eastern or system-wide, facing the entire national economy?

Problems arose a lot. Among them, the most critical for the Far Eastern socio-economic system were:
- the destruction of the system of guarantees of state demand, which is especially painful for the heavy and defense industries;
- a drastic reduction and qualitative change in the military group in the Far East;
- Suspension of preferential treatment provided by the development program until 2000 year;
- a significant reduction in the amount of financial support from the state;
- the refusal of the state to recognize the Far East as a priority region in terms of both the allocation of resources and the social status of the population.

The loss of markets provoked a rapid decline in industrial production, whose index in 1995 was only 46% to the level of 1990 of the year. The change in the proportions of prices and the reduction in output in individual industries led to a strong modification of the industrial structure in the region. The mobilization of export opportunities, including the existence of long-term ties with Asian foreign partners, as well as the full use of the possibilities of increasing exports and supplies through imports, have made it possible to retain the position of branches of traditional specialization (forestry and fishing, non-ferrous metallurgy). Their share declined slightly (from 54,7% to 53,4%) due to withdrawal from the market of uncompetitive industries (pulp and paper, fish processing, some types of food products).

The heaviest blow fell on machine building, ferrous metallurgy, light industry, production of building materials, whose share in the cost of industrial output fell from 30,4% to 13,6%. At the same time, the possibility of replacing the one that became inaccessible due to the commercial noncompetitiveness of the products of the nationwide market with the intraregional one was absent or was minimal.

Foreign investment, on which high hopes were pinned, fell short of expectations. Over 1988 – 1993, the number of joint ventures in the region reached 633, having increased 1,9 times, mainly due to a joint venture with Chinese capital. They were created for speculative profits in connection with the liberalization of foreign trade operations in Russia and easy access to raw materials in the region. In 1993, only 38% of these enterprises actually functioned or at least paid part of the share capital. Hopes for the emergence of large investment projects, such as compensation agreements in the 1960 – 1970-s, did not materialize. The negative general economic and financial situation in the Russian economy, in which the income from foreign trade was practically the only attractive argument for investing, had an effect. But this argument has also been significantly weakened due to the extremely cumbersome and unfavorable for investors currency conversion system. The surprising inconsistency of liberalization, the rapid spread of the national economic regime, the abolition of tax incentives, frequent changes in regulation, and aggressive competition (more correctly, squeezing) from Russian entrepreneurs, often supported by local officials, also had an effect. This was explained by the fact that both domestic and foreign entrepreneurs had a common field of activity for generating income - foreign trade in natural resources. Already in 1993, the volume of foreign trade operations of enterprises with foreign capital decreased by 38%.

The attempt to copy the Chinese experience of creating special economic zones was also unsuccessful. Attempts to form such zones in Nakhodka, in the Vladivostok area (Bolshoy Vladivostok), in the Jewish Autonomous Region (EVA), in the Magadan Region, in the Vanino-Sovgavan industrial hub of the Khabarovsk Territory have not been successful.

Domestic investment declined even faster than output. By the beginning of the financial crisis, the volume of investment in fixed assets was no more than 30% of the year’s 1990 level. The loss of the domestic market and the action of a number of upward-pricing factors launched the mechanism of endogenous adaptation of the regional economy. Firstly, the complex of extractive industries has intensified, and secondly, there has been a reorientation from internal to external sales markets. In the 1992 year alone, the volume of foreign trade has doubled compared with 1991. A primitive but effective model of the regional economy has been formed: an increase in investment in fixed assets - an increase in exports and gross output. In the 1999-2015 years, each percentage point of the increase in investment in fixed assets caused an increase in exports in the amount of 3,3 pp, but only 0,35 pp increase in gross regional product.

The industrial complex of the region continued to contract until the financial and economic crisis of 1998, the decline was the deepest among all economic regions of the Russian Federation and amounted to 1997% of the 57 level by 1990. At the same time, there was an outflow of the population, which began at the end of the 1980s and sharply increased after the 1992 year.

Three factors determined the federal government’s attempt to restore centralized patronage over the Far East: outflow of population, fear of “yellow annexation” and fear of “separatism” as a result of frustration of regional elites accustomed to state care and irritation of the population towards the federal government that “threw” them. By 1995, systemic problems became apparent, threatening not only a deterioration of the socio-economic situation, but also a blocking of the existing opportunities for its improvement (lack of energy resources, depletion of the raw material bases of the industries of specialization, transport tariffs excessive for many industries, progressive localization of economic turnover within the region).

In April 1996 the new state program "Economic and social development of the Far East and Trans-Baikal region for 1996-2005 years" was signed, which received the proud name "presidential". It declared the solution of the transport and energy problems in the region, the restructuring of the economic structure, integration into the APR and the consolidation of the population on the basis of raising the standard of living. This program suffered the same fate as the 1987 program of the year. Already in the 1998, the financial and economic crisis broke out, which devalued almost everything, not just the Far East, forecasts and intentions. And with 2000, the political and economic situation in the country began to change dramatically, which caused changes in the macroeconomic, geopolitical and spatial spheres.


EASTERN DISCHARGE
In the 2001 year, 15 years after Gorbachev’s Vladivostok speech, Putin’s Annunciation speech was made, which also marked the Pacific landmark for the Far East. It was still about consolidating the population, about lagging behind the growth rates from the average for Russia, proportional development of industries, structural modernization, which meant “avoiding raw materials”. In 2002, a new version of the 1996 program of the year was adopted with its prolongation up to 2010. After that, all new versions of the regional development program appeared with an enviable constancy (2007, 2014 and 2016 years, the development strategy is 2009). Unfortunately, they had a very indirect relationship to economic recovery and the solution of real economic and social problems. Although they played a certain role, supporting the “degree of tension”, drawing attention to certain problems.

The flurry of programs and strategies, the list of which can be supplemented with similar documents from the subjects of the Federation, was generated, on the one hand, by real problems, and on the other, by habitual stamps convenient for “knocking out” additional resources from the center and often based on myths. In 2000 – 2008, many of the region’s system problems were eliminated or mitigated. The commissioning of new power generating facilities, network construction, and the completion of the construction part of the hydrocarbon development project on the Sakhalin shelf have led the region to switch from energy-deficient to energy-surplus. The modernization of the Trans-Siberian Railway and the beginning of the reconstruction and development of the Baikal-Amur Mainline together with the adjustment of the tariff policy for rail transport, the development of seaports significantly improved the state of the transport infrastructure. The investment situation has changed significantly, the export sector of the economy has developed rapidly. Despite the decline in 2009, which, by the way, due to the effect of foreign trade, was weaker than in the Russian economy as a whole, the entire period of 2000 – 2015 was relatively successful for the region.


Comparative macroeconomic indicators of the Russian Federation and the Far East in the 2015 year (2000 year taken for 100%).
Indicator RF Far East
Gross product 182,5 174,6
Fixed investment 295,0 397,0
Export 323,6 790,2
Incomes 322,1 348,2

Of course, the obtrusive idea of ​​the leading average Russian growth rates of the Far Eastern economy does not want to be implemented. But how can the investment multiplier increase at times if the vast majority of investments are invested in infrastructure projects? Can we hope for a high investment multiplier with an extremely low level of localization of economic effects within the region? Remaining relatively low from the point of view of creating a positive migration motivation, the incomes of the population still show growth, which reflects, among other things, structural changes in the industrial complex. The best reflection of these changes is the change in the structure of the value of exports from the region.


Structure of commodity exports of the Far East to the countries of Northeast Asia in 2000 and 2015,%
Export 2000 2015
Total 100 100
Machinery, equipment, vehicles 16,5 2,4
Fuel, mineral raw materials, metals 34,9 77,1
Wood and pulp and paper products 17,3 5,3
Foodstuffs 23,4 15,1
other 7,9 0,1

Over the past 15 years, the Far East has become an oil exporting region, thanks to the start of large-scale export of hydrocarbons from the Sakhalin shelf. The concentration of almost 99% of regional exports on traditional and new products of raw specialization (fuel and forest products, non-ferrous metals, metal ores, fish products) indicates a progressive consolidation of a new, in comparison with the Soviet period of development, effective from the point of view of commercial placement criteria and specialization. This also shows that in the region there is an objective rational division of investment spheres: public funds are concentrated in the infrastructure segment, and private funds are in the segment of extraction and export of natural resources. This is most clearly manifested in the fact that 89% of all foreign direct investment accumulated in the region by 2015 was concentrated in the Sakhalin region.

Thus, there was an original state-private partnership in the development and development of the Far East, although the state strongly opposes such a "division of spheres," insisting on the need for deep structural modernization and considering this an effective means of "acceleration".


ABOUT LAMBIA POPULATION
Another problem that constantly worries society and state experts is the outflow of the population. Constant references to the "loss of the region" 20% of the population, the escape of 1,8 million people are used as a win-win argument for emergency measures to "secure" the population. In reality, outflow of population is a fact, but not exclusively in the Far East.

Dynamics of the population of the Russian Federation (without the Crimea) in 1991 and 2015 years, million people
Federal District 1991 2015 Gain (+)Loss (-)
Central 38,1 39,1 + 1,0
Northwest 15,2 13,8 --1,4
Privolzhsky 31,9 29,7 --2,2
South 13,6 14,0 + 0,4
North Caucasus 6,6 9,7 + 3,1
The Urals 12,7 12,3 --0,4
Siberian 21,1 19,3 --1,8
Far Eastern 8,05 6,2 --1,85
RF as a whole 147,2 144,1 --3,1
Source: Rosstat.

The situation in absolute numbers looks like an ordinary one, but in relative figures it is emotionally served as a catastrophe: in the region, only 6 million people versus more than 100 million across the border in China. And although the entire population of the Russian Federation is less than 150 million people, the “lack of humanity” is exploited as an argument for taking all kinds of extraordinary and miraculous measures very widely and with great taste.

The reason for the outflow of population from the Far East was the reduction in the scale and change in the structure of economic activity in the region in the 1990-ies, the desire to protect their property rights in the new states (the previous guarantees for the preservation of the right to housing in the "native" areas for the Far East were automatically lost Came from the former Soviet republics). It was also lost confidence that the income received in the Far East is a guarantee of savings for the future life. Earlier this guarantee, and not even the current level of nominal incomes, was regulated in many respects by the migration behavior of the population in the regions that supplied migrants to the Far East.

In a sense, Russia on its Pacific borders has found itself in the same position as 150 years ago, when the movement to the east, the accession of new lands along the Amur and Ussuri seemed like new opportunities for the economic development of the whole country. The European market was still the main one, but the opportunities for extensive increase in export revenues were exhausted, given Russia's obvious unpreparedness to use structural and technological modernization to intensify the withdrawal of foreign trade rents. Raw material remained the only structural niche for extracting this rent. Continuation of the course for extensive development due to an external factor objectively required the search for a new spatial niche. Such a new economic space for Russia began to appear East Asia, including China.

An unproved assertion that it is much easier to succeed in this direction is much more common, since Asian countries are not hostile towards Russia and do not impose their own rules on the game, masking their arguments about their indisputable value leadership. However, the obstacles specific to East Asia are not taken into account. Among them is the "bad history" syndrome. After all, the declaration of the year 1987 about the turn of the Soviet economy to the East remained a declaration, and after the 1991 year the "turn" was turned in favor of the Eurocentric model of reform and trade.


ABOUT THE DIVORCE TO THE EAST
The current “turn” has intensified only after the exacerbation of political relations with Europe, so the Asian partners are not sure of its irreversibility. But the most important thing is that for Asian countries the basis of interaction is the economic presence of Russia in Asia, and the presence of trade relations in a very limited range is not enough here. It is about building up not only investment, technological, humanitarian, but also institutional cooperation. Asian economies maintain a high level of non-tariff barriers, which impedes the liberalization of markets, especially the entry of new large players with non-energy goods into the market. Overcoming these barriers is possible only within the framework of creating a single institutional space. Only point experiments in the Far East with institutional regimes will not help.

The access to the new economic space on the old structural (raw materials) basis was possible only with the large-scale construction of the main infrastructure corridors for export. These corridors could only pass through the Far East. And it was this region that was to be presented to the East Asian and the Pacific community as a spatial "ambassador" of Russia. And the ambassador must speak in the language of the host country, he must be recognized, be "his own". And the Far East, from this point of view, should become not simply developed in the sense of the former state plan presentation (complexity, self-sufficiency, statistical dynamism), but in terms of creating a comfortable infrastructure that provides intra- and interregional mobility, comfortable and comparable to the East Asian levels of medicine development , Education, cultural environment, communal and social infrastructure (housing, improvement, ecology), a favorable business environment.

The formation of the main export infrastructure in the Far East (road, pipeline, power grid) is a very important project of national importance, which is supported by the course of the national economy forced in the near future to build up extensive external relations. Of course, there are certain successes in this area. Over 2008 – 2015, the share of APR markets in the Russian foreign trade turnover increased by 10 points. But without large-scale cooperation in the markets of factors of production, without creating a common institutional platform, without destroying the myths that the development of the Far East is forced industrialization according to Soviet patterns, that acceleration of growth rates, increasing investments at any cost, mass relocation to the Far East and others are needed macroeconomic wonders, there’s no real turnaround.

(ECO magazine, No. 4 for 2017 year; abbreviated version. End. Start read here)
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