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Russia’s Far East, with its 4,000 kilometer border with China, should in theory be the main beneficiary of the strategic partnership between Moscow and Beijing. On paper, at least, the region has everything needed to attract Chinese investment: geographical proximity, experience in cooperation, and differences in their economic development. So far, however, that theory has not translated into practice.
Official statistics on Chinese investment in Russia are unreliable. Russian central bank figures do not take into account informal business activity, investments by small businesses, or end investors in offshore schemes (which account for up to 95 percent of foreign capital investment in the Far East), who may be well known to be Chinese, but appear as Russian or from the Bahamas in official statistics.
The Ministry for the Development of the Far East’s estimates are many times greater than the central bank’s. This appears to be due to the ministry relying on the figures announced, rather than verifying how much funding has actually entered the region.
In other words, no one knows how much Chinese investment there is in the Far East. This is useful for both officials and potential investors. Chinese intermediaries can boast of their successes to officials and receive discounted financing. There have been cases of Russian companies making grandiose announcements of Chinese investment, only for it to come to nothing, with the alleged Chinese investor knowing nothing about the project. Many memorandums of understanding are signed, but ultimately yield no results.
This imitation of brisk activity leads not only to inflated expectations on the Russian side, but also to alarmist sentiment among the public. Many Russians believe that officials secretly want to sell off Siberia and the Far East to the Chinese, and that programs to develop these subsidized and peripheral regions are nothing but pre-sale preparations.
Unfortunately, this kind of sentiment often prevents real Chinese investment projects from being implemented. Just last year, there was a huge public outcry over plans to build a Chinese-funded bottled water plant in the Irkutsk region drawing water from Lake Baikal, causing the plans to be shelved.
What Chinese capital there is in the Far East is concentrated in several southern regions (Primorsky Krai, Amur region, and the Jewish Autonomous Region) and in certain industries: primarily agriculture, timber, and construction, as well as mineral resources extraction, the service industry, and seafood. As a rule, it involves small and medium-sized businesses.
The gulf between the pompous statements made and the rather modest results begs the question: what’s the problem? Yet there is no problem. There’s nothing getting in the way of investment, and efforts are being made, though Russian officials often have contradictory ideas about China that are both pragmatic and conspiratorial, which makes their actions inconsistent and unpredictable.
Chinese investment in the Far East is precisely what it should be given the current level of the region’s development: the state of the local market, labor resources, and transport and manufacturing infrastructure, including border crossings. Most of the Far East, with the exception of a few centers of entrepreneurship like Vladivostok and Ussuriysk, is more focused on obtaining subsidies from Moscow than foreign investment. The lack of investment from China is seen there not as a bad thing but as a positive result.
As for major Chinese investors, who can invest their money anywhere in the world, they are guided by basic factors: the cost of labor and transport, access to markets, and the predictability (or controllability) of local officials. As a rule, these stars do not align in Russia’s Far East.
In the coming years, the scale of Chinese companies’ activity in the Far East will not only fail to increase, it will actually decrease. It has become harder to employ Chinese laborers (some Far Eastern regions have ended their quotas for foreign workers in recent years, and Chinese nationals are currently barred from entering Russia over coronavirus fears); the government has started making more concerted efforts to bring business out of the shadows; and the competition for land resources is fierce. In addition, major Russian corporations have entered the region and are displacing smaller Chinese companies. The position of Chinese business is so fragile that the coronavirus epidemic and related restrictions could simply finish it off.
This creates good opportunities to increase investment flows from Japan and South Korea. These U.S. allies have found themselves in a quandary in recent years: on the one hand, they want to counteract China’s rise, and are looking for ways of gaining a foothold in Russia’s economy. On the other hand, since 2014, investment deals with Russian partners have been outlawed by U.S. sanctions. The U.S.-China trade war has revealed the priorities in the list of U.S. foes, and now the task of weakening China is likely perceived as more pressing than that of offsetting the development of Russia’s Far East.
At the same time, the Japanese and Koreans have done even less than the Chinese to turn words into actions. There are two reasons for this. The first is their extensive risk analysis. The Koreans and, even more so, the Japanese are prepared to spend decades calculating the risks before testing out their intentions.
Second, they lack the foundation of informal ties with Russian partners and contractors that Chinese investors and intermediaries have built up over decades of doing business with Russians ever since they started transporting consumer goods over the border in the 1990s.
Japanese and South Korean investors have a different competitive advantage, however: their investment in the Far East will not elicit protests from panic-prone locals. Japanese and South Korean manufacturing has a good reputation in Russia, and the Russian public does not have the same conspiratorial suspicion of businesses from those countries as it does of the Chinese. There are plenty of opportunities to start small: Vladivostok and other big cities in the region have a lack of decent hotels, there is a market gap in the production of greenhouse fruit and vegetables, and there are also opportunities on the mariculture market.
There are no systemic restrictions on investment from Japan and South Korea. There is, however, support from the local government, looser visa requirements, and clear interest in capital and technology. But the two countries should not look to Russia’s Far East simply to spite China: otherwise, their words will never become actions, since Chinese investment is far from large-scale. Instead, they should look to it for the sake of the opportunities there. Those opportunities may not be as golden as the propaganda portrays them, but they are entirely realistic.
This publication is part of the Sino-Russian Entente project carried out with the support of the UK Foreign and Commonwealth Office.
Carnegie does not take institutional positions on public policy issues; the views represented herein are those of the author(s) and do not necessarily reflect the views of Carnegie, its staff, or its trustees.
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