Putin’s Return to the Wild East

During a Russian Federation Security Council meeting in December 2006, the presidential envoy to the Russian Far East suggested creating a commission subordinate to the prime minister which would oversee all development projects in Eastern Siberia and the Russian Far East. Last month, the Economic Development Ministry drafted a bill that will establish a state corporation authorized to distribute licenses for mineral extraction in 16 administrative zones. Nicknamed the “Far Eastern Republic,” the corporation will be partially exempt from federal legislation, receive massive tax breaks, operate outside regional state control, and receive shares of other state companies as investment.

The idea behind the “Far Eastern Republic” is similar to the 2006 proposal - only this time the project is subordinate to the president who will have the power to appoint the head of the company and name the supervisory board. This constant proposal to present special economic authority to Putin (who would have been in charge of the project in 2008 as premier) represents a clear indication that Vladimir Vladimirovich is heavily invested in the development of the Far East. Indeed, he probably recognizes that domestic support for his administration rides on continued economic growth. For that to occur, Russia must tap into the vast natural resource reserves beneath its most underdeveloped regions.

Alongside exports to China, Russia has also opened up export opportunities to Japan and the Koreas. Earlier this month, Democratic Party of Japan policy chief Seiji Maehara and Alexander Medvedev, Vice President of Gazprom, agreed to study the possibility of laying a gas pipeline linking Hokkaido and Sakhalin Islands.

With all these opportunities, the biggest obstacle to Russia's development in the Far East will be the heavy handed involvement of the state in the region. The "Far Eastern Republic" is being heavily criticized by Russia's former finance minister Alexei Kudrin who recognizes that

the creation of such a market player capable of implementing any private project, considering the state's administrative resource and [special preferences], means that any other investor in this area must be aware that another player with special preferences, special administrative resources and special access to finances may come to the market at any moment

A supporter of privatization, Kudrin believes that Moscow's current policies are damaging to the investment climate in the country.

Indeed given the opportunity, enterprises in Russia appear ready to invest in assets in the Russian Far East. For example, when Vanino seaport in Khabarovsk Krai was privatized in May 2011, 73% stake in the seaport was bought for 10.8 billion rubles ($354 million) after the bid started at 934 million rubles ($30.6 million). Although the winning company is currently undergoing trial resulting from its failure to make the down payment on the seaport, it is an example of how much the assets in the Russian Far East are in demand.

The problem with privatization for the Kremlin is two things:

1. "Privatization" of the 1990s left a bad reputation for entrepreneurship; the Russian people only remember economic downfall, oligarchs and corruption - the Putin administration came to power in 2000 with the goal of cleaning up the socio-economic ramifications of the Yeltsin era, thus  openly endorsing privatization for the Far East is politically difficult
2. Privatization would mean letting go of control over major companies. This will in the short term decrease government revenue

Putin is intent on spearheading development in the Far East; however, beyond building some infrastructure in Vladivostok, the Russian state will not be able to sustain its investments in the region. President Medvedev’s administration had taken small steps towards lessening state control over energy companies, but Putin is unlikely to continue these policies with the "Far Eastern Republic."

While Putin will undoubtedly remain closely engaged in the Far East during his 6-year term, the efforts to develop the Russian Far East have already been sullied by heavy state control over the project. If Moscow desires a prosperous future for the Russian people, it really must consider a more effective and efficient means of access its mineral wealth.

Read my article on Asia Times Online