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Russia’s East IV: Latest Developments

As I noted back in June, some commentators have been heralding a new dynamic in Russia’s economic orientation, driven by disagreements with the West and greater interest in striking deals with China. I still maintain that such speculation is overblown for two reasons. First Russia’s connection with China runs much deeper than a knee-jerk reaction to recent events. And second smart investment continues in both directions between Russia and Europe/the US, even at a time of high geopolitical tension. For a while these East Asian investors have been at the vanguard of recognising the profitability of Russia’s more overlooked regions and opportunities. In this post I give an update on the latest developments for Russia’s Chinese, and more broadly Far Eastern, connections.

It may be a cliché, but Russia’s vast size serves as an attraction for firms wishing to expand outside China’s crowded urban spaces. At the Chinese-Russia Expo held in Harbin earlier this month, Krasnodar’s mayor extended a special invitation to Chinese companies to set up businesses in his city. One thing the mayor and delegation leader Vladimir Evlanov pointed out was that Krasnodar had enough territory to accommodate prospective Chinese companies in manufacturing, including instruments, machinery and food packaging. Although these investments remain on the drawing board, this move, as well as the Volga-Yangtze Project, highlights the ties between these two neighbouring giants go deeper than the trade area that hugs the frontier. This is exemplified by the fact that even though Harbin is within easy reach of Khabarovsk or Vladivostok, this northeastern Chinese metropolis has been twinned with Krasnodar since 2008.

Map of Russia and China

In May RusHydro and PowerChina signed an agreement on their shared intention to invest in small Russian hydroelectric plants and infrastructure. Just as Krasnodar’s partners will use the ample space on offer in Russia’s cities, this joint project takes advantage of the country’s epic – and underutilised – geography. As part of the venture, the two companies seek to build 35 plants by 2020, using the fast-flowing streams and mountain rivers of southern Russia.

Yet East Asian interest in Russia goes beyond harnessing Russia’s dynamic geography. In a sign that the central government is finally recognising the development potential of Russia’s East, new Russian legislation is earmarking the region as a hub for Areas of Advanced Development (or TORs from their Russian name – территории опережающего развития). These new TORs will offer numerous incentives for new arrivals, just as China’s Special Economic Zones have over the past two decades. With rates of federal tax at 0% and regional taxes as low as 5% for the first decade of operations, as well as a lifting of restrictions on the numbers of foreign workers, it is not surprising that these areas are set to attract investment from Korean and Japanese companies, with the likes of Kawasaki, Mitsubishi, LG and Samsung already expressing an interest.

These are just a few examples demonstrating Russia’s eastern connections and the role that East Asian investors play in identifying exciting opportunities, be they the lure of Russia’s under-utilised landmass or the appeal of tax relief. Most importantly, the TORs are likely to allow the Russian Far East to integrate further into the regional Asian economy, something it has not managed to do over the last couple of decades. Although some of the plans from RusHydro to TORs are still in the early stages, I would predict that wise investors, like Krasnodar with its own eastward gaze, would do well to look more closely at Russia’s East.

 

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