Perspectives on the Economy of Far Eastern Russia

|Russia

Against the background of skyrocketing energy prices and booming exports of oil and natural gas, in July 2006 Russia’s foreign exchange reserves surpassed those of Taiwan to put Russia in third place after China and Japan. It was also decided in August 2006 to repay the Paris Club ahead of schedule. When one thinks back to around 2001-2002, when there were fears about whether or not Russia would be able to service its debt without any problems, this really does seem like a sea change.

On the other hand, the situation in Russia’s Far Eastern region, which is located in Northeast Asia, still does not permit optimism. While there has indeed been a recovery in production, the pace has not reached the nationwide level. What has been attracting attention amidst this situation is the strengthening of external economic relations in the Far Eastern region. Not only “peddler trade”, which was much talked-about at one stage in terms of its microscopic aspects, but also the possibility of regional growth that could stem from the development of the Sakhalin continental shelf and the construction of an oil pipeline from Eastern Siberia is coming to be the focus of attention.

However, if we look at the situation in terms of the degree to which this will have an impact on the Japanese economy or economic relations between Japan and Russia, the prospects are exceedingly dubious. As is widely known, in terms of the scale of its population, the Far Eastern region accounts for less than 5% of the total for Russia as a whole (143 million) and there are at most 6.6 million inhabitants scattered across a vast area. Both the value of regional imports and exports, and foreign investment in the Far Eastern region account for just 5% of the share of Russia’s total imports and exports and total foreign investment in the country. Furthermore, the overwhelming share of the industries that have been the focus of foreign direct investment have been basic materials industries, such as energy, non-ferrous metals and timber, and one cannot help but harbor doubts about the degree to which this investment has a wide-ranging positive impact on Russia itself.

For Japan, which faces the region across the Japan Sea, Far Eastern Russia can be seen as a region that has a population scale that is less than half that of Kyushu, or which has a population that only exceeds that of Hyogo Prefecture (5.5 million) by a million people, and the significance of this region, where average monthly income has at last exceeded 30,000 yen, is extremely limited. Considered in conjunction with the fact that if companies do expand into the region, the land area that they have to cover when forming their service network is vast, there are good reasons that explain why there has been little progress in the expansion of Japanese companies into Far Eastern Russia. Moreover, when thinking of the region as a production base, the fact that wage levels are high in comparison with China is something of a stumbling block. If we consider the skills required for production, there is a limiting factor in terms of the fact that the pool of available labor is small. Furthermore, it is perhaps necessary to add as a background factor that the progress of local manufacturing industry is lagging behind.

With regard to the resources in the Far Eastern region, which have become a hot topic of late, problems remain with regard to their use. As you are doubtless aware, even if the resources are extracted, there has been no progress in developing the industrial and social infrastructure required for their transport. There are those who advocate the introduction of foreign capital, but it is thought to be difficult for foreign capital to enter the infrastructure sector, where it is hard in the first place to predict the prospects for making a profit, without adopting an economic assistance type of approach. That is the reason why the necessity of intergovernmental cooperation is being strongly promoted.

The era of abrupt deterioration in the economic situation due to systemic transformation has already passed. However, one cannot take this to mean that sustained expansion in the economy of Far Eastern Russia will continue in the future. Naturally, we can expect resource development in response to recent conditions in international energy markets. Nevertheless, taking into consideration the various problems faced by Russia’s Far Eastern region, unless there is a major change in the political environment, in the form of a fundamental transformation in the central government’s policy on the development of the Far Eastern region or a rapid deepening in Russo-Japanese and Russo-Chinese energy links, achieving progress in their development should perhaps be seen as a task for the future. Speaking from this perspective, it is likely to become necessary to focus on the effectiveness of the 2006 budget, which placed major emphasis on the development of the Far Eastern region, and on policy dynamics in Russia in the future.

[Translated by ERINA]