ECONOMIC COOPERATION BETWEEN THE RUSSIAN FAR EAST AND ASIA-PACIFIC COUNTRIES 5885700737

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RUSSIAN ACADEMY OF SCIENCES FAR EASTERN BRANCH ECONOMIC RESEARCH INSTITUTE SASAKAWA PEACE FOUNDATION

Economic Cooperation between the Russian Far East and Asia-Pacific Countries

Khabarovsk RIOTIP 2007 

UDC 339.92 (5-012) BBC 65.9 (2R55) 8

Economic Cooperation between the Russian Far East and Asia-Pacific Countries / edited by P.A. Minakir; Rus. Acad. Sci., Far-Eastern Branch, Economic Research Institute; the Sasakawa Peace Foundation – Khabarovsk: «RIOTIP», 2007. – 208 p. ISBN 5-88570-073-7 The monograph presents a summarizing result of the three-year research conducted within the framework of an international project initiated by the Sasakawa Peace Foundation in 2004, on the problems of cooperation between the Russian Far East and countries of the Asia-Pacific region (�������������������������������������������������������������� А������������������������������������������������������������� PR). The project is focused on determining challenges and opportunities, political and economic mechanisms promoting integration of the Russian Far East into the rapidly developing processes of economic cooperation in Northeast Asia. Key words: the Russian Far East, APR, NEA, cooperation potential, integration, institutional background.

Edited by P.A.Minakir, academician Authorized for printing by the Academic council, ERI FEB RAS Iissued with the support of the Sasakawa Peace Foundation

ISBN 5-88570-073-7



 Economic Research Institute FEB RAS, 2007  The Sasakawa Peace Foundation, 2007

Contents

Preface.......................................................................................................5 Introduction...............................................................................................7 Part I. Cooperation Potential..................................................... 13 1. The Russian Far East’s economy: potential for economic cooperation.......................................................................................... 15 2. Russia and the Russian Far East in economies of the APR and NEA.............................................................................................. 49 Part II. Forms and Structure of the Russian Far East and the APR Integration............................................................. 55 3. Natural resources sector of the Far East economy: integration potential.............................................................................. 57 3.1. The role of natural resources industries.................................... 57 3.2. Features of natural resources use.............................................. 59 3.3. Economic problems of the Russian Far East natural resources sector.............................................................................. 69 3.4. Social and environmental problems of nature use in the RFE..................................................................................... 71 3.5. Potentiality for cooperation of the Russian Far East natural resources sectors with the APR economies.......................... 72 3.6. Tools and mechanisms of integration of the Russian Far East natural resources sectors into the APR.............................. 76 4. Fuel and power complex of the Russian Far East................................. 81 4.1. Current trends of the power development................................. 81 4.2. Strategic problems and challenges............................................ 86 4.3. Assessment of the future development...................................... 90 4.4. Initiatives of the Russian Federation in the development of the energy sector of East Siberia and the Far East with participation of international companies......................................... 94 4.5. Major principles of the energy cooperation between the Russian Far East and Northeast Asian countries...................... 103 

5. Foreign trade of the Russian Far East............................................... 105 5.1. Commodity composition of foreign trade............................... 107 5.2. Geographical structure of foreign trade.................................. 110 5.3. Problems and prospects for foreign trade development........... 120 Part III. Institutional Basis for the International Integration ............................................ 131 6. The external integration environment: problems and prospects of economic integration in Northeast Asia........................ 133 7. Stages and mechanisms of integration into the APR........................... 162 7.1. The goal of the integration. Challenges and opportunities of the integration.......................................................................... 162 7.2. Possible scenarios for establishing the integration mechanisms................................................................................. 165 7.3. Integration mechanisms. Major political and economic integration formats....................................................................... 166 7.4. Organizational issues of integration........................................ 177 List of references.................................................................................... 179



Preface In-depth studies of international economic cooperation capacities of Northeast Asia were launched in a big way in the early 1990s. The concept of sub-regional economic integration within the region of Northeast Asia (originally termed the Japan Sea Rim, or the Japan Sea Ring), put forward by H. Kanamori, R. Scalapino, K. Ogawa and other researchers, already in 1991 was substantiated in economic and political terms into an international project of economic development of the Tumen-river area at the common boundary of China, DPRK and Russia. Not only researchers, but also politicians pinned great hopes on that “Golden Delta”. The idea of subregional cooperation within that region received a powerful backing from the international communities. The UNO Development Program organized a special office in Beijing intended for consolidating the international forces advocating this project. The issues of economic cooperation in the Tumen-river area and in Northeast Asia in general have attracted and are attracting a great number of scholars and experts from research, public and political organizations of many countries: Japan, the Republic of Korea, China, Russia, the USA, Finland, Mongolia and the DPRK. Bustling activity in this direction was and still is performed by Northeast Asia Economic Forum (with the head-office in Honolulu), Economic Research Institute for Northeast Asia (Niigata), Institute for Russian and NIS Economic Studies (Tokyo), Yonsei University (Seoul), Mongolian Development Research Center (Ulaanbaatar), Economic Research Institute FEB RAS (Khabarovsk), East-West Center (Honolulu), Shanghai Institute for International Studies (Shanghai), Korea Institute for International Economic Policy (Seoul) and other research centers. From the very beginning (1991), these studies have been most actively promoted and supported by the Sasakawa Peace Foundation (Tokyo). Under its aegis, important interdisciplinary and multinational projects concerning the development of guidelines and strategies for economic cooperation in Northeast Asia have been accomplished. In 1991–1993 the Sasakawa Peace Foundation backed the first of those projects that was aimed at the information compliance of the Russian Far East involvement in the economic cooperation processes in Northeast Asia. Within the framework of this project carried out by the Economic Research Institute FEB RAS, a monograph called The Russian Far East: an Economic Survey was prepared for publication in Russian, English and Japanese. Later this work was revised and published twice. That project was the initial 

stage of the building of today’s information infrastructure for international cooperation in the Russian Far East area. In 2004 under the support provided by the Sasakawa Peace Foundation, the Economic Research Institute began to work on a new project aimed at identification of challenges, potentialities, as well as political and economic tools for the involvement of the Russian Far East in economic cooperation moving along in Northeast Asia. The compiled monograph is a summarized result of a three year research carried out in the bounds of that project. In that project an emphasis was intentionally laid on the external and internal conditions promoting and/or detrimental to the involvement of Russia and the Russian Far East in sub-global integration processes in Northeast Asia as well as on institutional mechanisms coordinating that involvement. The authors will be grateful for any constructive comments and suggestions for a more detailed elaboration of the mechanisms facilitating economic integration in the sub-region of Northeast Asia. The project was accompanied by two editions reflecting preliminary results of the research, they were “The Russian Far East in the Asia-Pacific Region. Proceedings of the International Workshop held 25–26 January, 2005. Khabarovsk” and “The Russian Far East in the Asia-Pacific Region. Materials of Field Studies 24 October – 5 November 2005”. A large international group of authors and experts took part in the development of the project and in the preparation of the monograph which is the summarizing result of the tree-year project research. The project manager, compiler and scientific editor of the monograph is Academician P.A. Minakir. Contributors of separate sections of the book are: E.I. Devaeva, Doctor (Economics) (5), V.D. Kalashnikov, Professor (Economics) (4), V.V. Kuchuk, Doctor (Economics) (6), S.N. Leonov, Professor (Economics) (7), P.A. Minakir, Academician (2, 7, Introduction), O. M. Prokapalo, Doctor (Economics) (1), A. S. Sheingauz, Professor (Agriculture) (3). Group of experts: Prof. Susumu Yoshida (Japan), Prof. Kiichi Mochizuki (Japan), Mr. Hiroshi Takahashi (Japan), Dr. Takashi Yajima (Japan), Prof. Satoshi Mizobata (Japan), Prof. Qu Wei (China), Prof. Yin Jiangping (China), Dr. Jin Park (Republic of Korea), Dr. Mohamed Ariff (Malaysia), Prof. Mya Than (Thailand), Dr. Sung Kyu Lee (Republic of Korea), Dr. Nyamtseren Lkhamsuren (Mongolia), and Prof. Li Chuan-Xun (China). Logistic provision group: V.G. Buldakova, M.Y. Bausheva, Chen Woo Lee, Kaori Kobayashi, Lolahon Saiidova. Editorial and technical group: L.A. Samokhina. The monograph is issued in the Russian and English languages. Translated from the Russian by Y.V. Kucheryavenko.



Introduction A concept of export-oriented development of the Russian Far East under a planned system of economy was first defined by Academician V.S. Nemchinov early in the 1960s. Export was supposed to be restricted by involvement only the contiguous countries of the Pacific region. It was only at first sight that this idea had a purely practical relevance. At its basis lay an attempt of seeking a way the resources “closing on themselves” could be involved in a commercial turnover. There was a time in the Soviet history when that very same approach was already used. But then, in the 1920s, there did not exist the centralized planning, while the region’s economy development was organized in compliance with market economy principles, although under the State’s control. Anyway, that idea, in essence, had anticipated the market oriented economy that came as a revolutionized the life after 40 years. Already since 1964 that idea began to be implemented through compensation agreements. Later, in 1986, the idea was appreciated from a political angle, and since then it has turned into just a commonplace formula. It ran through the conceptual declarations of all the three state programs devoted to development of the Far East and Trans-Baikal areas (issued in 1987, 1996 and 2002). In the late 1980s, R. Scalapino put forward a concept of a natural economic territory in which he noted Northeast Asia’s predisposition to economic cooperation among the countries constituting the area, the predisposition that is based on the naturally presupposed distribution of production capacities and economic resources that part of the Asia-Pacific Region has at its disposal (Tab. I-1). The author of the concept put into its basis the idea of existence of two groupings of countries with mutually   ���� “… ������������������������������������������������������������������������������������� the Baikal and Far East deposits of iron ore.., the coking coals of Chulman and Neryungri, the forest resources of the Amur, Bureya and Zeya rivers, and the gas of the Vilyui river can be effectively used only if the development of the Trans-Baikal and Far Eastern areas economies are oriented to export”. [Nemchinov, V.S. Teoreticheskiye voprosy ratsionalnogo razmeshcheniya proizvoditelnykh sil // Voprosy ekonomiki (Theoretical issues of rational distribution of productive capacities // Problems of Economics). 1961. No 6].   ������������������������������������������������������������������������������������ Compensation agreements with Japan on developing forest and coal resources, and on prospecting of natural gas deposits.    Dalni Vostok I Zabaikalie – 2010 (Far East and Trans Baikal Areas, 2010) / Ed. by P.A. Minakir. M.: Ekonomika, 2002.   ��������������������������������������������������� Professor, University of California, Berkeley, USA



Introduction

complementing economic resources. That idea was further developed by many other researchers studying the countries of that sub-region, and is known now under the names Japan Sea Rim Concept, Japan Sea Rim Economic Ring, and Northeast Asian Economics Integration Concept. Table I-1 Distribution of industrial capacities and natural resources in Northeast Asia Capital

Technology

Labor

Natural resources

Japan

***

***

–

–

Republic of Korea

**

**

–

–

PRC

**

–

***

***

Russia’s Pacific area

–

–

–

***

Mongolia

–

–

**

*

DPRK

–

–

–

–

Country

Note: *** vast resources, ** adequate resources, * scarce resources, – lack of factor or resource.

The idea of economic cooperation in the bounds of Northeast Asia was received in Russia with enthusiasm. It was assumed as a basis for analytical and official concepts of economic integration of Russia’s eastern areas into the APR. One of the reasons why that idea was unanimously welcomed in Russia and her eastern parts was, obviously, its recognizability. After all, the theories of economic zonation and capacities distribution had been also based on the territorial division of labor preconditioned by mutual resource complementarity. In addition, the concept offered an extremely simple interpretation of Russia’s economic gains from that integration. Indeed, Russia was supposed to play its natural and habitual role of a never exhausted supplier of the natural resources the other Northeast Asian countries lack. The economic mechanism of such integration appears to be both simple and effective. Russia trades her law valued natural resources for capital-, hightech- and labor-intensive production highly valued by Russia and offered by the countries of the sub-region, and vice versa. In essence, Russia was offered a role of a resource trap. In the mid-1980s playing such a role appeared to be a natural way for Pacific Russia to integrate into the markets of the NEA countries, which would promote a consequent involvement of the rest of the Russian economy into the integration process. When in 1986, in Vladivostok, M.S. Gorbachov declared a turnabout of   ������������������������������������������������������������������������������������� The best known authors of these concepts are K. Kanamori, K.Ogawa (Japan), R. Scalapino, Li Tsei Cho (USA) and Shi Min (China).   �������������������������������������������������������������������������������������� See, for example: Ekonomicheskaya integratsia: prostranstvenny aspect (Economic integration: spatial aspect) / Ed. by P.A. Minakir. M.: Ekonomika, 2004.



Introduction

the USSR’s economic policy towards the Asia-Pacific region, cooperation with this part of the globe began to display obvious signs of dynamism. It also became evident that this cooperation was inevitably localized within certain areas of the APR and certain sectoral markets. The most dynamic and important appeared the economic ties with the countries of Northeast Asia, and with certain countries of Southeast and South Asia. Among the sectoral markets, prospective as Russian companies’ partners, stand out, first of all, an armaments, hydrocarbonaceous raw material, fish, coal, forest resources markets and markets of certain types of electronics and domestic electric appliances. A further integration of Russia into the world-wide economy on the basis of international labor division has become a principle of the foreign economic policy of Russia. The foreign economy strategy of Russia in the 21st century will be defined by such key factors of the world economy development as globalization and advance in informational technologies. Russia whose two thirds of the territory lie in Asia, is an inalienable part of the Asia-Pacific region, so the developments occurring here, can’t help involving Russia’s interests. The participation of Russia in the development of the APR countries, and her involvement in the ongoing integration processes facilitate the creation of favorable conditions for the economic development of the RFE’s areas and for enhancing a geopolitical role of Russia. The development of economic interrelations with the APR countries is one of the main goals of the state foreign policy of Russia today. The analysis of economic and political transformation processes going on in the Far Eastern areas of Russia reveals the necessity for studying natural environment as a new and objectively existing factor with an increasingly growing impact on national economies in the present. Assessment of the developments going on in the Asia-Pacific region, one of the most difficult regions in the world politically, militarily and economically, becomes particularly important for Russia whose geo-strategic interests and chances of being involved in the regional economic integration may depend on it. Regionalization of the Russian Far East will become apparent, at least, in two aspects. First, new growth poles and economic development centers will emerge in the region, enhanced by the progressing of science and engineering, and, on the other hand, by the necessity to satisfy the needs in certain products. In the upcoming years, certain dynamics will be witnessed by the the economies of such territories as Sakha Republic (Yakutia), Primorskiy Krai, Khabarovskiy Krai, and Sakhalinskaya Oblast. In 5-10 years, these processes will inevitably cause some changes in the proportion of economic potentials of separate areas of the Russian Far East. Secondly, the processes of regionalization in frontier krais and oblasts (Primorskiy and Khabarovskiy Krais, Amurskaya and Sakhalinskaya Oblasts) may, with time, bring to formation of economically interdependent and mutually complementary territorial units (that would incorporate the 

Introduction

neighboring regions of the Russian Federation and the neighboring countries) willing to jointly produce goods and services. In such conditions, it is only too natural to expect that the regions of the Russian Far East would become effectively instrumental in Russia’s integration into the APR. Successful economic cooperation of Russia with the APR countries depends very much on the creation of an international transportation infrastructure and a fuel-and-power system in NEA. Involvement of the Far East in the Asian market should be accompanied not only with the increase of raw materials resources exports, but also with exports of value added goods. Creation of a favorable investment climate in the Far East and elaboration of the adequate regional legislation will enhance the production and the exports of value added goods. The APR’s community at whose disposal are the real finances and technologies, refers Russia to the zone of potential interests and intends to place investments into natural resources industries of the region. Due to its outlying position, the Russian Far East is regarded to be a region that sustains the globalization effects more than any other areas. So far, these effects are sort of latent because of effective frontier, customs and other barriers. On the other hand, the Russian Far East is located in the zone of strong geopolitical conflicting influences. The states the Russian Federation borders on in this region, have different socio-political systems than Russia and, what is more important, a higher level of socio-economic development. Therefore in the future, provided that contacts with certain contiguous countries will become stronger, the areas of the Russian Far East will inevitably get drawn into the orbit of economic and political influence of those countries. In this context it is extremely important that the state and the region pursue such a policy, which, on the one hand, would make the countries gain as much benefit from such contacts as possible, and on the other, would be conducive to the integrity of Russia as a state. At present, radical changes occur across the world and offer a new view of the world-wide process of social refinement. Objectively, mutual integration processes directed at the formation of a world market economy are going on under the influence of globalization and they serve as an economic basis of the rapprochement of the nations inhabiting the region. This primarily applies to the APR countries where tempestuous integration processes are being observed to happen, and a new world trade center is emerging with its unique culture, huge labor and raw material resources, and advanced technologies. Specific intra-territorial problems that arise in the APR have a considerable impact on the development of the international (or rather world-wide) economic system. Working out the Russian strategy built on the assumption that the integration is a beneficial process, it is necessary to keep in mind that Russia is a Euro-Asian state, wedged in between the EU and NEA, so it would be unwise to neglect a dual orientation in her development. 10

Introduction

The strategy of supporting Russia’s and certain companies’ attempts to offer their involvement in economic processes going on in the APR should be based on the general concept of forming an infrastructural framework for international economic integration. A system of alternative international transport corridors passing over the territory of the Russian Federation, or an energy infrastructural system connecting eastern parts of Russia and the power markets in the NEA countries can be such an infrastructural framework. The combined system of transport corridors and a power infrastructure would in perspective create a T-shaped framework on whose basis a scale and a structure of the diversified and integration-based cooperation will be identified.

11

12

Part 1

COOPERATION POTENTIAL 1. The Russian Far East’s economy: potential for economic cooperation 2. Russia and the Russian Far East in economies of the APR and NEA

13

14

1 The Russian Far East’s Economy: Potential for Economic Cooperation

The Russian Far East is the largest federal okrug (district) of Russia. Its area is 6.2 million square kilometers which is equal to 36.2% of the territory of Russia. At present, the okrug is home to over 4.6% of all the population of Russia, it produces 5.0% of Russia’s GDP, 4.0% of all the industrial outcome, 3.0% of agricultural outcome, its economy assimilates 6.6% of Russia’s investments. In 1999-2005, the contribution of the Far Eastern Federal Okrug into the national economy has reduced in terms of the principle macroeconomic indices (Tab. 1.1). Between 1998 and 2005, the economy of the Far East area had its ups and downs, as it reflected the changes in the current business climate. The rise of the economy after the 1998 crisis was determined by the following factors. Factor one – devaluation – had caused a shortage in import and a largescaled import substitution. Demand on the domestic products and manufacturing outcome had risen.   ������������������������������������ The Russian Far East area includes Sakha Republic (Yakutia), Primorskiy Krai, Khabarovskiy Krai, Amurskaya Oblast, Kamchatskaya Oblast (with the Koryakskiy ����������������� Autonomous Okrug (KAO)������������������������ ), Magadanskaya Oblast, Sakhalinskaya Oblast, ��������������������� Yevreiskaya (Jewish) Autonomous Oblast (YeAO)����������������� , and Chukotskiy ����������� Autonomous Okrug (ChAO)�.

15

Part 1. cooperation potential

Factor two – rise in prices in the middle of 1999 for oil, gas, and metals, and certain reduction in prices for Russian imported items – called forth a growth of profitability of the production and the increase of investments to the fixed capital, which had turned out to be instrumental in the growth of economy of the area. Table 1.1 Contribution of the Far East Federal Okrug’s economy principle sectors to Russia’s economy, % I�������� ndicator Production of GRP� Per capita production of GRP Volume of industrial output�

1999

2000

2001

2002

2003

2004

5�� .� 7

5�� .� 0

5�� .�1

5�� .�1

5�� .� 0

4�� .� 7

2005 4�� .� 6

120�� .� 0

106�� .� 6

108�� .� 8

109�� .� 0

108�� .�1

102�� .� 3

101�� .� 4

4�� .� 9

4�� .� 9

4�� .� 7

4�� .� 5

4�� .� 2

3�� .� 7

3��� .�� 6*

Investment in fixed capital

6�� .�1

4�� .� 6

5�� .� 7

6�� .� 5

6�� .� 2

6�� .� 2

6�� .� 6

Permanent population

4�� .� 8

4�� .� 7

4�� .� 7

4�� .� 6

4�� .� 6

4�� .� 6

4�� .� 6

Note: * – Estimated assessment Source: Calculated from: Natsionalnyie scheta Rossiyi v 1997–2004 godakh (Russia’s National Accounts in 1997–2004). М., 2005; Regiony Rossiyi (Regions of Russia). M., 2005; Sotsialno-ekonomicheskoye polozheniye DVFO in 2005 (Socio-economic situation of the FEFD in 2005). M., 2006.

The third factor – an increase in domestic ultimate demands as a consequence of the increase in the output of consumer industries and in regions in 2000 – preconditioned certain reorientation of the Far Eastern production to interregional economic ties. The fourth factor – a substantial growth of consumer expenses since 2004 – caused another impulse for the ultimate demand increase. In 1999, the economy of the Far East federal district manifested an accelerated development relative to Russia’s average indices, but, in 2000 this advantage was lost. During the following period, the Far East area’s economy was developing at a much lower rate than the economy of Russia (Tab. 1.2). Table 1.2 Dynamics of the GRP in 1999–2005, in % of the preceding period Territory

1999

2000

2001

2002

2003

2004

2005

Russian Federation

105,6

110,7

106,0

105,6

107,6

107,4

106,4

Far East Federal Okrug

106,2

103,0

105,9

103,8

106,0

106,6

104,3*

Note: * – Estimated assessment. Source: Natsionalniye scheta Rossiyi v 1997–2004 godakh (National Accounts of Russia in 1997 to 2004). М., 2005; Ofitsialni sait federalnoi sluzhby gosudarstvennoi statistiki (Official Site of Federal State Statistic Service). – http://www.gks.ru.

16

1. The Russian Far East’s еconomy: potential for economic cooperation

The Far East Federal Okrug’s significantly lagging behind in the rates of economic development is explained by the peculiarities of the national economic sector composition (Tab. 1.3). A considerable share of the GRP is provided by the industrial sector whose spheres are subject to the influence of the current prices and market conditions to the highest degree. It is the development of the industrial sector’s branches that is ultimately responsible for the dynamics of the development of the region’s economy. Table 1.3 The Sectoral Structure of the Gross Regional Product, in % of the Total 1999 Sector

2003

Russian Federation

Russia Far East

Russian Federation

Russia Far East

Commodity production sectors

46�� .� 6

52�� .� 0

42�� .� 8

46�� .� 4

Industry

32�� .� 2

39�� .�1

28�� .� 5

31�� .� 2

Agriculture

7�� .� 7

4�� .� 5

5�� .� 6

4�� .�1

Construction

6�� .� 2

7�� .� 8

7�� .� 8

10�� .� 2

Service offering sectors

45�� .� 6

46�� .� 9

49�� .� 9

51�� .� 2

Transport

7�� .� 9

11�� .� 5

7�� .� 2

11�� .� 4

Communication

1�� .� 8

1�� .� 6

2�� .� 0

1�� .� 8

Commerce

18�� .� 5

11�� .� 9

20�� .� 0

11�� .� 7

Source: Natsionalnye scheta Rossiyi v 1997–2004 gg. (National Accounts of Russia in 1997–2004). M., 2004.

Development of the Far East Federal Okrug’s economy, although characterized with positive dynamics, is clearly cyclic. The effect of the devaluation has already brought to squandering its positive resources, while a relative stabilization of the ruble slowed down the process of production and deteriorated the exports, as it had caused aggravation of the financial situation and enhanced the inflation. The factors that were so instrumental earlier ceased to exist, except for the domestic demand that continued to grow. A positive rate of the growth was maintained by the internal sources. The lag in the rates of development behind the Federation’s average figures has been observed virtually all over the sectors of the region’s economy (Tab. 1.4). Gross Regional Product. In 2003, the gross regional product in the current prices over the district on the whole accounted for 581.2 bln rubles, that is it increased by 6% and 16% against 2002 and 1996 respectively. In the gross regional product measured in the market current prices, during the period of 1995–2003, a tendency was observed of decreasing the share of commodity production and of increasing the share of services. Thus, while in 2000–2001 the share of commodity manufacturing constituted nearly 55%, in 2003 lowered down to 47.5%. 17

Part 1. cooperation potential Table 1.4 Development trends in the growth of the Russian Far East’s and the Russian Federation’s economies in comparison, in % of the previous period Indicator

Russian Federation

Far East of Russia

1999

2002

2005

1999

2002

2005

Volume of industrial output

111.0

103.7

104.0

107.0

100.2

102.2

Volume of agricultural output

104.1

101.5

102.0

94.3

102.9

101.8

–

105.3

103.1

–

108.3

98.3

Railway turnover of goods Amount of work, designated as “Construction”, accomplished

–

–

110.5

–

–

114.1

Commissioning of dwelling houses

104.6

106.7

106.1

118.0

86.6

113.0

Retail trade turnover

94.2

109.3

112.8

94.3

110.7

111.9

Source: Dannye Federalnoi sluzhby gosudarstvennoi statistiki Rossiskoi Federatsiyi (materials of the Federal Service of the Russian Federation State Statistics).

The structure of commodity manufacturing sector underwent cyclic changes. The contribution of the industry to the formation of the federal regional product has a clearly amplitudinous character. The decrease of an industrial share in the gross regional product went on during all the second half of the 1990s, making up 28.3% by 1997. However, after the monetary crisis of 1998, the enlivening of the industrial sector was observed through its share growing to 42.3% in 2000. Since 2001, the economy slowed down ensuing the lowering of the industry share till 31.3%. In the construction sector some notable changes also took place. In 1995, the construction share accounted for 9.6%, while in 2000, 6.4%. Since 2001, the role of the construction sector abruptly enhanced, and in 2004 its share reached the level of 10.4%. Agriculture’s share in the federal GRP during the entire period stayed at the level of 4.5-5%, and by 2004 it had lowered down to 4.0%. In the market service production sector, the share of transportation by the second half of the 1990s had increased and reached 16.5% in 1997. However, gradually this share lowered down and in 2004 was as low as 11.1%. The share of the trade and commercial sector in 1995-2003 changed negligibly, fluctuating between 11.0 and 11.9% (Fig. 1.1). The share of ultimate consumption expenses in the GRP during the period between 1998 and 2001 tended to become reduced, but in 2002–2003 it increased, which occurred mainly due to an increase of consumption by households (Tab. 1.5). The change of the fixed capital gross increment share in the GRP in 2001 facilitated stemming the slump. Thus, while in 2000 the share of the fixed capital gross increment in the GRP of the Far East Federal Okrug accounted only for 16.9%, in 2003 it rose to 24.9%. However, low figures of the fixed 18

1. The Russian Far East’s еconomy: potential for economic cooperation

capital gross increment are common for entire Russia. In Southeast Asian countries, in the period of their most active development, these indications were at a level of 30–40%.

Fig. 1.1. Shares of major sectors of national economy in the GRP of the FE Federal Okrug, % Table1.5 FE Federal Okrug’s GRP structure by separate consumption elements, in % of the total Indicator

1998

1999

2000

2001

2002

20�� 03

Gross Regional Product�

100�� .� 0

100�� ����� .� 0

100�� .� 0

100�� ����� .� 0

100�� .� 0

100�� .� 0

Ultimate���������������������� Consumption���������� ��������������������� Expenses� ���������

64�� .�1

55�� .� 6

54�� .� 7

59�� .�1

63�� .� 4

63�� .� 9

Private Households

48�� .� 9

45�� .� 8

44�� .� 2

47�� .� 5

49�� .� 2

50�� .� 3

Gross Fixed Capital Accretion

17�� .� 2

17�� .� 0

16�� .� 9

23�� .� 6

25�� .� 3

24�� .� 9

Source: Natsionalniye scheta Rossiyi v 1997–2004 godakh. Statisticheski Sbornik (National Bank Accounts of Russia 1997–2004. Statistic Year-Book). M., 2005.

In the past few years the dynamics of the gross regional product was explained by a rapid growth of the production of other kinds of services in trade and by deceleration of industrial growth (Fig. 1.2). 19

Part 1. cooperation potential

Fig. 1.2. Dynamics of the GRP, industrial production and retail trade turnover in the Far East federal okrug, growth rate in % of the previous period indices

To assess the quality of the economic development of the areas, a GRP production indicator per capita is used. In nominal terms, growth of the GRP per capita over the entire district increased in 2003 by 4.7 times, while in real terms, by 1.3 times relative to 1997. The most intensive growth of the GRP per capita over the period in question was observed in Chukotskiy Autonomous Okrug , Sakhalinskaya Oblast and Yevreiskaya (Jewish) Autonomous Oblast. The economic activity of the areas of the Far East federal okrug went on parallel to a steady growth of the productivity rates in economics as a whole, and their vigorous dynamics relative to the investments placed in fixed capital. Investments. In 2005, the volume of the investments placed in the fixed capital amounted to a little over 86% of the investing done in 1992. In 19921998 capital investments in economy of the district were steadily reduced until they came down to the basic level, cut by 72%. Since 1999, a surge of investing activities was observed, and over the six last years the average yearly growth rate of investing in the fixed capital made up more than 14%. It is noteworthy that the acceleration in investing in the fixed capital in comparison with the dynamics of the GRP growth and industrial production is of a clearly amplitudinous character (Fig. 1.3). A 2000–2005 period witnessed instability in the investing activity in the economies both all over the country and across the Fare East federal okrug. A certain upbeat in this sphere was noted in 2001 (147.9% growth relative to the previous period level). During the next three years there was a positive dynamics, although the rates of investing fell behind those observed in 2001. 20

1. The Russian Far East’s еconomy: potential for economic cooperation

In 2000–2005, the economics of the Far East federal okrug experienced the conditions of an investment lag. A great volume of investments was channeled to large-scaled projects (like Bureya hydroelectric power station, Sakhalin-One and Sakhalin-Two projects) with long-term commercial returns. So far the result of the enhanced investing relative to the industrial and economic growth rates, does not meet estimated expectations (Tab. 1.6).

Fig. 1.3. Dynamics of the major macroeconomic indices of the FE federal okrug development, in % of the previous year Table 1.6 Major FEFD economy indices growth rates, in % (in prices comparable with the previous year’s prices) Indicator

2000

2001

2002

2003

2004

2005

–1�� .� 6

47�� .� 9

15�� .� 3

4�� .� 5

13�� .� 5

5�� .� 5

Industrial production volume

7�� .� 4

–0�� .�1

0�� .� 2

4�� .� 7

4�� .�1

2�� .� 2

GRP

3�� .� 0

5�� .� 9

3�� .� 8

6�� .� 0

6�� .� 6

4��� .�� 3*

Investments

Note: * – Estimated assessment Source: Regiony Rossixi (Regions of Russia). М., 2004; Natsionalniye scheta Rossiyi v 1997–2004 godakh (Bank Accounts of Russia in 1997–2004). М., 2004; Osnovnye pokazateli sotsialno-ekonomicheskogo polozheniya regionov Dalnevostochnogo federalnogo okruga v yanvare-dekabre 2004 goda (Principle socio-economic highlights in the regions of the Far East federal okrug in January–December, 2004). Khabarovsk, 2005; Osnovnye pokazateli sotsialnoekonomicheskogo polozheniya regionov Dalnevostochnogo federalnogo okruga v yanvare– dekabre 2005 goda (Principal Figures of socio-economic conditions of the regions of the Far East federal okrug in January-December, 2005). Khabarovsk, 2006; Sotsialno-ekonomicheskoye polozheniye Dalnevostochnogo federalnogo okruga v 2005 godu (Socio-economic condition of the Far East federal okrug in 2005). М., 2006; Ofitsialni sait fedralnoi sluzhby gosudarstvennoi statistiki (official Website of the State Statistics Federal Service). – www.gsk.ru.

21

Part 1. cooperation potential

Substantial changes took place also in the structure of the investment sector. Over the past five years the investments in industry and transport increased in volume so that their total share became 70-75% of the total volume of investments made in the fixed capital. On the other hand, the share of the resources used in a housing and communal sector has drastically shrunk (Tab.1.7). Table 1.7 Structure of fixed capital investments by sectors of the FEFD, % 1996

2000

2002

2003

2004

Industry�

Sector

37�� .� 0

45�� .� 5

57�� .� 3

45�� .� 4

42�� .�1

Agriculture

3�� .�1

2�� .�1

1�� .� 2

2�� .� 0

1�� .� 2

Construction

1.6

3.1

3.8

3.5

3.1

Transportation

19.4

25.7

18.5

23.0

28.5

Communication

2.1

2.0

1.9

3.5

4.7

Trade and Public catering services

2.4

1.8

1.3

1.3

1.4

Housing and communal services

19.7

7.5

4.4

7.0

6.1

Public Health Services

2.8

2.4

1.8

3.2

2.6

Education

3.1

2.5

2.2

2.0

1.9

Source: Regiony Rossixi. Sotsialno-ekonomicheskiye pokazateli. (Regions of Russia. Socio-economic Highlights). М., 2004; Regiony Rossiyi. Sotsialno-ekonomicheskiye pokazateli (Regions of Russia. Socio-economic Highlights). М., 2005.

Changes in the structure of the capital investments sector in the postreform period were directly connected with the different financial conditions of certain industries in terms of their exporting potentials or the specificity of their economy activities. The industries whose outcome was primarily oriented to the domestic demand, were subject to a dramatic reduction of their industrial activities and investments. A high price of credit resources made them prohibitive for the most enterprises and organizations of the real economic sector. Therefore, in the funding of economic developments prior to 2001, the orientation was predominantly made to the use of the enterprises’ internal means. Later, a tendency for an increase of attracted funds in the overall volume of investments was observed. While in 1998, the share of the attracted funds district-wide amounted to 51.5%, in 2004 it accounted for 71.7%. It was attributed to the fact that the large-scaled investment projects carried out over the territory of the Far East federal okrug were being backed up from corporative budgets. To major factors inhibiting the activities of the investments sector, should be referred the absence of any visible improvement of the private business and investment climates in the country, the lack of signs of strengthening of mutual trust between business and government, still high risks in economy (especially 22

1. The Russian Far East’s еconomy: potential for economic cooperation

in the sphere of ownership), imperfection of financial support mediators, and the situation in banks in the middle of the year. The low level of investing does not match the real needs in the renewal of equipment which, in turn, slows down the rates of changing over to manufacturing high-tech and competitive products. At the same time such other factors as the removal of administrative barriers in private business, state management reforms aimed at certain liberalization in economics, and the development of programs for crediting (particularly consumers crediting) by banks made the economy investment-attractive and had a positive impact on the effective demand of the population. The regional investment policy set a goal to attract foreign investments as well as funds from joint-stock companies, private entities, banks, and insurance agencies. The Far East area’s industries most attractive for investors, according to the members of the First Far Eastern Investment Forum “Financial tools for development of enterprises and for drawing investments to the region” held in November 2004, are sea ports and electric communication agencies. Fishery could have taken a third place in the investment attraction priority list, if, according to experts, the system of financial turnover in this industry had been transparent enough to enable domestic and foreign investors to make large and risk free investments. In order to draw investments to the region, one should make provision for a number of such measures as a reduction of investment risks, creation of an attractive image of the region, the removal of legislative bans, improvement of conditions for organization of business, introduction of funding interest bearing deposits mechanisms, etc. In the long run, the long term deposits made in the economy of the region should secure the employment for the population and create a financial basis for the heightening of the living standards for the residents of the Far East federal okrug. Capital Assets. According to the data of late 2004, the overall accounting cost of the capital assets over the district was 1992.2 bln rubles. A reduction of the federal capital assets share was observed Russia-wide. In 1995, for instance, the all-federation capital assets cost was 6.9% of the average Russia figure, while in 2000 it was 6.6%, and in 2003 – already 5.7%. The Far East federal okrug takes the last (seventh) place in the Russian Federation by that index (Tab. 1.8). The bulk of the funds is concentrated in industry and transportation sectors, their joint share making up 53.7%. In 2000-2004, an intensive growth of the funds in the transportation sector, was accompanied by a noticeable decrease of their share in industry, agriculture, and construction spheres (Tab.1.9).   ����������������������������������������������������������������������������������� In December 2003 a Federal Law “On amendments made in legislative acts of the Russian Federation in part of improvement of state registration procedures of legal entities and individual businessmen” (N8 185–ФЗ of December 23, 2003).

23

Part 1. cooperation potential Table 1.8 Territorial Structure of the Capital Assets Cost, by Federal Okrugs, in percentage of Total Federal Okrug

1995

2000

2004

Central

22�� .� 9

25�� .� 0

26�� .6

North-Western

10�� .� 8

10�� .� 2

10�� .5

Southern

10�� .�1

10�� .� 3

9�� .4

Privolzhskiy (Volga)

20�� .� 5

20�� .� 4

18�� .5

Urals

14�� .� 9

14�� .� 3

17�� .9

Siberian�

13�� .� 9

13�� .� 2

11�� .4

Far East

6�� .� 9

6�� .� 6

5�� .7

Source: Regiony Rossii. Sotsialno-economicheskiye pokazateli. Statisticheski sbornik (Regions of Russia. Socio-economic Data. Statistics Year-book). М., 2005. Table 1.9 Sectoral structure of capital assets by national economy branches over the Far East federal okrug, in percentage of the overall volume of capital assets 2000

2004

Industry

Sector

24�� .� 7

21�� .� 3

Agriculture

4�� .� 2

2�� .� 7

Construction

2�� .� 9

1�� .� 7

Transport

17�� .� 9

32�� .� 4

Communication Capital assets, total

1�� .� 2

1�� .� 6

100�� .� 0

100�� .� 0

Source: Regiony Rossii. Statisticheski sbornik. Tom 2 (Regions of Russia. Statstics Year-book. Vol 2). M., 2001; Regiony Rossii. Sotsialno-economicheskiye pokazateli. Statisticheski sbornik (Regions of Russia. Socio-economic Data. Statistics Year-book). М., 2005.

The period of economic reforms was accompanied by adverse shifts in the active part of the funds in the major sectors of national economy. Over the past few years there were tendencies of the equipment extensive aging caused, above all, by delays in putting new equipment into operation and in replacing the outdated ones. Activation of fixed assets is not an adequate method of replacing the aged and depreciated assets. Thus, by 2001 the share of machinery and equipment in Russia’s industrial sector, manufactured 20 years back, accounted for 38.2%. The situation in the Far East federal okrug looks better. While in Russia at   � Pimakhov, S. Analiz problem obnovleniya osnovnykh proizvodstvennykh fondov rossiiskikh predpriyatij (Analysis of issues of renovation of major working capitals at Russian enterprises). – http://unlease.ru/service/project_members/editions/industrial_marketing/article_008/

24

1. The Russian Far East’s еconomy: potential for economic cooperation

the beginning of 2005 completely worn-out production capacities accounted for 20.2%, in agriculture 16,5%, in construction 11.8% and in transportation 5.3%, in the Far East area they amounted to 13.8%, 12.3%, 8.6% and 5.1% respectively. Only in the Far Eastern communication agencies the percentage of completely worn out equipment was higher (19.2% against 11.8% in Russia). In 2000–2004 a decrease of fixed assets depreciation was notable in all the economy sectors of the district, especially in construction and transportation (Tab. 1.10). Table 1.10 Level of fixed assets depreciation by economy sectors of the Far East federal okrug, in percentage Sector

Depreciation level 2000

Share of completely worn out fixed assets

2004

2000

2004

Industry

44.1

43.6

13.3

13.8

Agriculture

46.1

43.5

7.7

12.3

Construction

41.2

35.6

11.5

8.6

Transport

48.4

17.2

…

5.1

Communication

48.3

43.3

…

19.2

Total in sectors

40.5

34.3

8.4

10.0

Source: Regiony Rossii. Statisticheski sbornik. Tom 2 (Regions of Russia. Statstics Year-book. Vol. 2). M., 2001; Regiony Rossii. Sotsialno-economicheskiye pokazateli. Statisticheski sbornik (Regions of Russia. Socio-economic Data. Statistics Year-book). М., 2005.

Unavailability of the federal statistics revealing such important indices as capital assets updating ratios and amounts of depreciation allocations for the acquirement and creation of fixed assets is responsible for the absence of an in-depth analysis of the condition and usability of the fixed assets in the economy of the Far East federal okrug. Industry. The industry of the Far East area keeps on playing a noticeable part in forming the gross regional product. During the last decade the share of industry accounted for 32–43% of the area’s aggregate volume of the gross added value cost. The natural resource extraction specialization of the Far East area, as well as the area’s geographic position, has been responsible for a specific structure of the industrial production. in which presently, non-ferrous metallurgy (30.6%), electric power-and-fuel industry (29.0%), food industry (17.1%), machine building and metal working (9.8%) dominate.   ��������������������������������������������������������������������������������� Osnovnie pokazateli sotsialno-ekonomicheskogo polozheniya regionov Dalnevostochnogo federalnogo okruga v yanvare-ekabre 2004 goda (Principal data of socio-economic condition of the regions of the Far East federal okrug in January-December, 2004). Khabarovsk, 2004.

25

Part 1. cooperation potential

The principle peculiarity of the structural changes occurring in the Far East area’s industry is seen in the fact that, despite certain fluctuations manifested by different sectors in their shares, their role as contributors to the industry sector remains negligible because the specialization branches preserved their pre-reform leadership. In 2005, the industrial production constituted 61% of the 1992 level. The outset of the reform was characterized by securing a better macroeconomic business climate in the Far East area than on the average in Russia. However, since the middle of 1993 the comparative parameters of the macroeconomic condition began to deteriorate all over the country until in 1994 the decline in the Far East area’s industrial production volume became deeper than on the average in Russia. This tendency has been preserved (Tab. 1.11). Table 1.11 Industrial production growth (slump) rate, in percentage of previous year data 1994

1995

1997

2000

2002

2004

Russia

Territory

–18�� .� 0 –14�� .�1 –20�� .� 9

1992

1993

–3�� .� 3

2�� .� 0

11�� .� 9

3�� .� 7

6�� .�1

2005 4�� .� 0

The Far East area

–15�� .� 2 –12�� .� 3 –22�� .� 8 –18�� .� 0

–5�� .� 0

7�� .� 4

0�� .� 2

4�� .�1

2�� .� 2

Source: Regiony Rossii. Tom 2 (Regions of Russia. Vol 2). M., 1998; Regiony Rossii. Sotsialno-economicheskiye pokazateli. Statisticheski sbornik (Regions of Russia. Socio-economic Data. Statistics Year-book). М., 2004; Rossiiski statisticheski ezhegodnik. 2005 (Russia statistics Year-book. 2005). M., 2005; Sotsialno-ekonomicheskoye polozheniye Dalnevostochnogo federalnogo okruga v 2005 godu (Socio-economic condition of the Far East federal okrug in 2005). M., 2006.

The region-wide rate is determined by the production growth (or decline) rates in certain areas, which in turn depends on the peculiarities of the sectoral structure of the economy, the dynamics of prices, financial results, the accumulated potential, interactions with the authorities, and other factors. But some branches of industry and sectors of national economy that reacted to the change of the mechanism of management and of the criteria of success had a much stronger impact on the industry growth rate over the region in that period. Not all industries and not all sectors found themselves to be ready to accept the change in their work under new conditions. The gravest slump in the output occurred in the industries dealing with a high degree processing of raw materials, i.e. in forestry, wood-working (particularly related to the military industrial complex), ferrous metallurgy and construction materials industries (Tab. 1.12). The fall in demand for investment goods, which due to the technological chain would have resulted in the aggravation of the raw materials sector condition and facilitated the structural reorganization, actually only enhanced the marking up and finally restored and even strengthened a raw material orientation of the Far Eastern economy. In current prices, the structure of the industrial production of the district changed to make the primary sector industries stronger. 26

1. The Russian Far East’s еconomy: potential for economic cooperation Table 1.12. Dynamics of yielding certain products in the Far East, % Indicator

1995/ 1991

1998/ 1995

2000/ 1998

2005/ 2000

2005/ 1991

Electric power production

84.8

90.9

110.8

104.6

89.2

Oil production

97�� .�1

101�� .� 4

195�� .� 4

115�� .�1

221�� .� 4

Gas production

96�� .� 7

101�� .� 9

105�� .� 5

98�� .� 9

102�� .� 4

Coal production

75�� .�1

82�� .�1

102�� .� 0

115�� .� 3

72�� .� 3

Gold mining

85�� .� 4

–

–

–

–

Removal of logs

41�� .� 0

60�� .� 8

158�� .� 7

142�� .� 3

52�� .�1

Saw timber cutting

21�� .� 4

49�� .� 7

139�� .� 2

174�� .� 2

24�� .�1

Industrial wood production

37��� .�� 2

66�� .� 7

172�� .� 0

147�� .� 7

-

Fish and other marine products catching

69�� .� 3

105�� .�1

77�� .� 0

86�� .� 9

47�� .� 8

Source: estimated on the data borrowed from Promyshlennost Rossiyi (Industry of Russia) 1996. M., 1996; Regiony Rossiyi. Tom 2 (Regions of Russia, Vol. 2). M., 1997; Promyshlennost Rossiyi. (Industry of Russia) M., 1998; Economicheskaya reforma: teoriya i praktika (Economic reform: theory and practice). Vladivostok, 1997; Mineralniye resursy Rossiyi: ekonomika i upravleniye (Mineral resources of Russia: economics and management). 1997. No 2; 1998. No 2; Regiony Rossiyi: sotsialno-ekonomicheskiye pokazateli (Regions of Russia: socio-economic data) M., 2004; Osnovnye pokazateli sotsialno-ekonomicheskogo polozheniya regionov Dalnevostochnogo federalnogo okruga v yanvare-dekabre 2004 goda (Principal data of socioeconomic condition of the regions of the Far East federal okrug in January-December, 2004) Khabarovsk, 2005; Osnovnye pokazateli sotsialno-ekonomicheskogo polozheniya regionov Dalnevostochnogo federalnogo okruga v yanvare-dekabre 2005 goda (Principal data of socioeconomic condition of the regions of the Far East federal okrug in January-December, 2005) Khabarovsk, 2006.

The development of self-sufficiency trends, the growth of expenses and the rise of prices for the fuel-and-power complex (FPC), and transport tariffs have caused an abrupt increase of the share of that complex in the structure of the industrial production to 29% in 2004 against 7.3% in 1991 (Fig. 1.4). The mining industry, the core of non-ferrous metallurgy of the Far East, owing to the advantages gained from the price dynamics and from a relatively steady demand in domestic and foreign markets, increased in 2004 its share by 11.2 percentage points relative to 1991. At the same time, the other specialization sectors’ industries, forest and food, reduced their shares in the structure of industrial production of 2003 relative to 1991 from 9.2% to 5.1% and from 31.8% to 17.1% respectively. A smaller shrinking of the share of the food industry occurred due to compensating the decrease of demand at the domestic market for a quite steady demand at foreign markets. However, the demand for forest industry production of the region at the foreign market failed to offset the abrupt fall of the demand at the domestic market. The development of the machine building sector of the district directly depends on the armaments and arms market conditions. At present, an average 27

Part 1. cooperation potential

capacity of regional defense enterprises makes up not more than 15%. Lack of demands and the reduction of the production for export caused a decrease of the machine building sector’s share more than by one third.

Fig. 1.4. Dynamics of the sectoral structure of the Far East area’s industrial production, %

The other industries, ferrous metallurgy, chemical, petrochemical, and construction materials industries, whose shares have decreased, can gain back their lost positions through expanding their investment and consumer demands. This can be clearly illustrated with the development of ferrous metallurgy. The economic crisis, that became apparent in the cut of demand for investment goods, brought to a sharp slump of ferrous metals production in the Far East, despite the fact that ferrous metallurgy is, basically, represented in the    Pos’etcev A. Gosoboronotkaz // Dal’nevostochnyj kapital. 2004. No 3. – http://kapital. zipress.ru/subjnum/2002/0301.asp.

28

1. The Russian Far East’s еconomy: potential for economic cooperation

region by only one semi-integrated steelworks “Amur-metall” (Khabarovskiy Krai). Excessively high costs of production as a result of high transport and power tariffs together with the outdated technology are responsible for noncompetitiveness of the region’s steel and rolled metal, even though foreign investors and consumers keep being interested in these products. As a result, by 1997, the share of ferrous metallurgy in the aggregate volume of industrial output had become twice as small. However, the monetary crisis of 1998 made its amendments to the course of the development of that industry, which in turn enhanced the domestic demand for the products. Finally, in 2004, the share of the industry accounted for 1.8% against 1.1 in 1991, and 0.5% in 1995. During the past few years the production of steel and rolled metal has grown, the “Amurmetall” Company is being under reconstruction aimed at the reduction of fusing process expenses and at the increasing of output volumes. No more existent is such an industry as light that had reduced its share from 4.2% in 1991 to 0.4% in 2004. There were some attempts from certain Federation constituents within the Far East federal okrug to restore the industry, but these attempts failed. Light industry never used to play an important role in economy and will unlikely return its pre-reform position ever again. One of the ways to identify the growth trigger points of a certain territory is the calculation of localization indices. According to classical definitions, the territory of the Far East area has conditions for developing the industries whose localization index is more than one unit. The Far East federal okrug’s priority industries are power engineering (its localization coefficient in 2003 was 1.5), non-ferrous metallurgy (3.8), timber-logging and wood-working industries (1.2) and food industry (1.4). It is the potentiality of these industries that guarantees a revivification of the respective sectors in the future. It is them that will spawn the dramatic changes in favor of domestic market and export orientations. Interregional barter. Until the reformation period (till 1991) of development, the economy of the Far East was an “open” system with the country’s different regions extensively and variformly interconnected регионами страны.. The “openness” of the region (its export oriented character), measured by the share of the region’s gross production export and by the share of the imported resources to be consumed in the region,    Mikheeva, N.N. Mezhregionalnye ekonomicheskiye svyazi // Ekonomicheskaya reforma na Dalnem Vostoke: resultaty, probleme, kontseptsiya razvitiya (Interregional economic ties // Economic reformation in the Far East: results, issues, and development concept). Khabarovsk, 1993. P. 40–43; Mikheeva, N.N. Mezhregionalniye svyazi // Ekonomika Dalnego Vostoka: reforma i krizis (Interregional ties // Economy of the Far East: reformation and crisis). Khabarovsk– Vladivostok: Dalnauka, 1994. P. 165–171; Mikheeva, N.N. Mezhregionalnye svyazi Dalnego Vostoka // Dalni Vostok Rossiyi: ekonomicheskoye obozreniye (Interregional ties of the Far East // Russia Far East: Economic survey). Khabarovsk: RIOTIP, 1995. P. 69–75.

29

Part 1. cooperation potential

is an important feature of the regional economy’s structure. In that period the interregional ties had a strong impact on the formation of reproduction proportions in the region. The imports of resources consistently exceeded the exports. According to the 1987 data, the resources imported to the region amounted to 24.9%, while the exported resources, during the same period, made up 15.8%. The traditional industries of the Far East were mostly oriented to interregional market needs. Non-ferrous metallurgy branch of the Far East exported nearly 94% of its output, forestry and woodworking industries a little over 38%. All the industrial branches the region’s economy is specialized in, except for forestry, woodworking and pulp and paper industry, strongly depend on the interregional barter where the acquisition of resources for inner development is concerned. The reason is the narrow specialization of the region. It provided the interregional market with a small set of unprocessed material and was compelled to import the entire complex of processed products even those related to its traditional specialization. In the Far East’s imports, products of machine building and of those branches that deal with imported consumer goods (light and food industries) prevailed. On the whole, the share of these three industries in 1987, amounted to over 72% of the total cost of the resources imported to the region. The Far East area had far reaching and variegated two-way ties allowing it to exchange goods nearly with all the regions of the country. Simultaneously, the Far East’s orientation to the remotest markets of the former Soviet Union was being shaped. Export and import ties of the Far East with Siberian regions caused a much lesser concern as the economies of Siberia and the Far East have almost identical structure that made a tight cooperation barely essential. In addition, the economies of these two macro-regions formed to be oriented to the markets of the regions located to the west of the Urals. At the end of the 1980s, nearly 53% of the Far East’s imports and 26% of its exports fell on non-Russian republics of the USSR (predominantly, Kazakhstan and Central Asia) and the European regions of Russia. Siberia exported 15% of its products to and imported 22% from the Far East. During the period of the market reforms, a noticeable change in the degree of the dependence of the Far East on the foreign economic ties with the other regions took place. The reason of the change was explained, on the one hand, by severance of the economic ties between enterprises, and the strengthening of centrifugal tendencies in the development of the regions, and, on the other hand, by the increase of the significance of enterprises’ economic output indices. The high level of shipping costs and the ensuing non-competitiveness of the local industry made the local market a factor worth more attention, and caused the region to develop the inner economic ties as well as to re-orientate to foreign markets. Thus by the beginning of the 2000s, consumption within the region had sharply raised, and the region’s involvement of the foreign economy had increased more than threefold (Fig. 1.5). 30

1. The Russian Far East’s еconomy: potential for economic cooperation

Fig 1.5. Markets for the Russia Far East’s production, %

Population’s incomes. Nominal sizes of monetary incomes in the Far East have been and are remaining to be 10-15% higher than the Russia average. The main source of the population’s incomes is the wages which is (nominally) by 1.5-3 times (in certain administrative constituents of the Far East) higher than the average across the RF. However, due to the outstripping rise of consumer prices, the size of the real (take home) wages in the district is smaller than the average across the country. Over the period of 1995 – 2004 the real wages of the residents grew by 2.8 times, while across Russia it grew by 3.4 times on the average. In 2005, there remained a steady and positive growth of the population’s real income, but, as the tentative data show, its growth rate slowed down in comparison with the year 2004. This slowing down was witnessed nearly in all the parts of the Far East area (except for Amurskaya and Sakhalinskaya Oblasts). There remains a substantial interregional difference in per capita incomes. For example, in 2005, the maximal (Chukotskiy AO) and minimal (Amurskaya Oblast) varied in size by 2.5 times. Adverse influence on the dynamics of the population’s real incomes was exerted by the protracted New Year vacations, proclaimed official since the previous year, as they diminished the size of the incomes the population had received from their private entrepreneurial activities. Likewise unfavorable for the population’s real incomes growth rate was the growth of interest payments of credits caused by the continued expansion of consumer crediting practice. In 2005 the sizes of wages substantially differed from industry to industry, from region to region, from enterprise to enterprise and from category to category of the employee. The highest wages was earned in natural minerals 31

Part 1. cooperation potential

mining, finances, transport and communication areas. The lowest is still typical of agriculture and public services sectors. A low paid employee (agriculture, hunting and timber logging) earns 3.3 times lower than a wellpaid one (natural minerals extraction). The size of a real wages is not tightly connected with efficient use of labor force. For the past two years, the gap between the rates of labor productivity growth and remuneration for that productivity has constituted 1.4 times (Fig. 1.6).

Fig. 1.6. Take-home pay – labor productivity ratio, growth rate in % of the previous period

The population of the Far East federal okrug gradually loses their privilege of earning higher incomes relative to the average Russian level. In November 2005, the population’s average income per capita exceeded the federal-mean level only by 6.3%, while the cost of a set of consumer goods and services officially established as a means of interregional comparisons of purchasing capacity, exceeded the Russia average level by 35%. Inflation. In 2005 inflation at consumer market constituted 13.3%, which exceeded the average federal level by 2.4 pp and the target level, established by the Law on federal budget for the year 2005 by 4.8 pp. On the backdrop of   ���������������������������������������������������������������������������������� Materially Instituta Ekonomicheskikh Issledovani Dalnevostochnogo Otdeleniya Rossiskoi Akademiyi Nauk (Materials of the Economics Research Institute. Russian Academy of Sciences, Far Eastern Branch)   ������������������������������������������������������������������������������������ Sotsialno-ekonomicheskoye polozheniye Rossii (Socio-economic condition of Russia). 2005. M., 2006.

32

1. The Russian Far East’s еconomy: potential for economic cooperation

a generally restrained inflation in Russia, the consumer prices in the Far East federal okrug rose by 2 pp relative to the prices of 2004. All the areas of the district witnessed the excess of average Russian-wide figures (Fig 1.7).

Fig. 1.7. Consumer price indices, December 2005 in % relative to December 2004

During 2001–2005 consumer goods and services prices rose by 64%. In comparison with 2001, the maintenance of the living standards of the population in the Far East federal okrug cost more by 39%. Persistence of the high inflation is explained by a number of reasons. The following ones are the most important: an abrupt rise of tariffs on the housing and communal services, which was caused by a resolution about a 100% pay for the services by the population; the cut of subsidies from the federal budget; high prices established by natural resources monopolies; rise of prices for meat as a consequence of a jump of prices for fodder in 2003-2004 and the customs policy of securing a Russian market; and rise of price for gasoline. In 2005, commodities manufacturers price index across the Far East federal okrug on the whole rose by 11.8%, which is lower than the consumer inflation rate by 1.5 pp. It should be mentioned that while in 2004 this index was minimal relative to the other federal districts, in 2005 the leading positions were lost even though the Far East federal okrug was the only area where the rising of this index had occurred.   ������������������������������������������������������������������������ RF Economics and Commerce development Ministry Official Website. – www. government.gov.ru; Macroeconomic analysis and short-term forecasting Center Official Website. – www.forecast.ru.

33

Part 1. cooperation potential

Fig. 1.8. Commodities manufacturers price indices, December in % of the previous period

The results of 2001–2005 evidence that on the whole during that period, the growth of consumer commodities and services prices indices outstripped the growth rate in industrial production, agricultural manufacturers and the tariffs for cargo carriages price indices by 2.5, 11.6 and 5.8% respectively. Demography. As of January 1st, 2005, there were 6,593 thousand people living in the Far East federal okrug, that makes up 99.4% relative to the year 2004, and 90.8% to the year 1999. After the 1989 census, the district lost 1.3 million people (16.5% of the population). The diminishing of the population is explained both by natural death and by a migration outflow. For a long time, the number of newly born was substantially outnumbered by those passing away. Only in 2000-2004 the birth rate was observed to rise, due to the childbearing age of the women who had been born during the population explosion of the 1980s. However in 2005, this tendency was disrupted, which entailed a natural loss of as many as 24.6 thousand people. An intensive decrease of the birth-rate in the Far East is accompanied by a likewise intensive death rate. During the period of 1998-2005 the death   ���������������������������������������������������������������������������������������� Materials of the Economic Research Institute (Russian Academy of Sciences, Far Eastern Branch)

34

1. The Russian Far East’s еconomy: potential for economic cooperation

rate rose by 37%. In 2005 the average regional mortality coefficient had been exceeded in Primorskiy and Khabarovskiy Krais, in Amurskaya and Sakhalinskaya Oblasts and in Yevreiskaya Autonomous Oblast. The natural reduction of the population is progressing across all the territorial units of the district (except for Sakha Republic (Yakutia) and Chukotskiy Autonomous Okrug) (Tab. 1.13). The preservation of a favorable demographic situation in Sakha Republic (Yakutia) and in Chukotskiy Autonomous Okrug is explained by national traditions oriented to a high birthrate. Table 1.13 Dynamics of average coefficients of fertility, mortality and natural increase (loss) of the population over the areas of the Far East Federal Okrug Fertility coefficient

Mortality coefficient

Coefficient of natural increase (loss) of population

1998

2003

2005

1998

2003

2005

1998

2003

2005

Far East Federal Okrug

9.8

11.6

11.5

11.5

14.9

15.2

–1.7

–3.3

–3.7

Sakha Republic (Yakutia)

13.8

15.0

14.3

9.0

10.2

10.1

+4.8

+4.8

+4.2

Primorskiy Krai

8.4

10.5

10.5

11.9

15.6

16.1

–3.5

–5.1

–5.6

Khabarovskiy Krai

8.9

10.8

10.9

12.5

16.3

16.3

–3.6

–5.5

–5.4

Amurskaya Oblast

10.4

12.4

12.0

12.2

17.2

16.9

–1.8

–4.8

–4.9

Kamchatskaya Oblast

9.8

10.8

11.0

9.6

12.2

12.4

+0.2

–1.4

–1.4

Magadanskaya Oblast

9.9

11.2

10.9

9.4

12.6

13.5

+0.5

–1.4

–2.6

Sakhalinskaya Oblast

9.3

10.9

11.3

12.1

16.4

17.3

–2.8

–5.5

–6.0

Yevreiskaya Autonomous Oblast

10.2

12.0

11.5

11.9

16.1

17.7

–1.7

–4.1

–6.2

Chukotskiy Autonomous Okrug

12.3

13.0

15.6

8.8

10.7

11.8

+3.5

+2.3

+3.8

Territory

Source: Regiony Rossixi. Sotsialno-ekonomicheskiye pokazateli (Regions of Russia. Socioeconomic data). 2005. M., 2006; Rossiski statisticheski ezhegodnik (Russia statistiс Year book). 2005. M., 2006; Sotsialno-ekonomicheskoye polozheniye Dalnevostochnogo federalnogo okruga v 2005 godu (Socio-economic condition of the Far East Federal District in 2005). M., 2006.

The life expectancy of the population in the Far East Federal Okrug is also low and does not reach the Russia average level. In 1989-1990 Russia’s average life expectancy was 69.38 years. In the Far East it amounted to 67.6 years. For those who were born in the Far East in 2004, the life expectancy is estimated at 62.36 years (in Russia it is 65.27 years). Mortality at a relatively younger age is explained by the extremes of socio-economic, demographic and climatic-and-geographic conditions of the Far East relative to other regions of the Russian Federation. 35

Part 1. cooperation potential

The current demographic tendencies bring to the deformation of the age bracket structure of the population which remains yet comparatively favorable even though the aging rate in the district is much higher than that in Russia as a whole. In 1990, the share of the population of the age older than the working age bracket amounted to about 11.5% in the district and 19% in the RF, while in 2004 these figures were 15.7% and 20.3% respectively. The decisive reason for the decrease of the population in the district is migration. During 1991–2005 migration was responsible for nearly 90% of the general decrease of the population of the Far East area. In 2005, the migration outflow made the number of the population of the Far East Federal Okrug still less by 21.6 thousand people. During the past few years the migration balance has been moving from the red to the black. One reason is that the surplus migration resource has depleted itself and people see no perspectives for the realization of their priorities and social ambitions in any other place they may move out to. Another reason is a certain stagnation of the socio-economic situation in the district. However the migration potentiality is still high. Thus, in 2005 the number of those who left the district was 19% more than the number of those who moved in to stay (Tab. 1.14). Table 1.14 In- and out- migrants ratio by the areas of the Far East Federal Okrug Territory

Excess of in-migrants over out-migrants, % January-November 2004

January-November 2005

Far East Federal Okrug

19.3

19.0

Sakha Republic (Yakutia)

21.9

26.8

Primorskiy Krai

17.9

17.8

Khabarovskiy Krai

1.5

2.1

Amurskaya Oblast

11.5

8.9

Kamchatskaya Oblast

50.0

55.8

Magadanskaya Oblast

72.3

53.5

Sakhalinskaya Oblast

43.1

41.2

Yevreiskaya Autonomous Oblast

5.0

23.5

Chukotskiy Autonomous Okrug

75.5

32.6

Source: Osnovnye pokazateli sotsialno-ekonomiocheskogo polozheniya regionov Dalnevostochnogo federalnogo okruga v yanvare-dekabre 2005 (Principal data of the socioeconomic condition of the regions of the Far East Federal Okrug, January-December, 2005). Khabarovsk, 2006.   �������������������������������������������������������������������������������������� Materials of the Economics Research Institute (Russian Academy of Sciences, Far Eastern Branch).   ������ Ibid.

36

1. The Russian Far East’s еconomy: potential for economic cooperation

Job market. In 2003–2005, the situation on the job market was characterized by stabilization tendencies. According to the sample survey of the population carried out to address employment issues, the average number of economically active population in 2005 amounted to 3.5 mln people. More than 75% of the Far East residents engaged in economy, are concentrated in the Sakha Republic (Yakutia), Primorskiy and Khabarovskiy Krais, and Amurskaya Oblast. The number of jobless people district-wide amounted to 276 thousand (10.7% less than in the previous period). Almost in all the areas of the Russian Far East (with the exception of Sakhalin Oblast) a decline in unemployment was observed. The issue of employment in the Far East federal okrug is still acute. One vacancy offered to those registered as jobless at the State job security agency is responded by 4.3 applicants, which considerably exceeds the Russian average (2.5). There remains a great demand for highly skilled male engineers, technicians and workers. Highly popular are bricklayers and related specialists: fitters, plasterers, house painters, finishers, drivers of various classes, gas electro-welders, plumbers, and sanitary engineers. In constant demand are engineers, technicians, designers, systemic planners, real estate business specialists, accountants and auditors. In catering, a steady demand remains for confectioners, barmen, waiters, cooks, and bakers. In public health and education service areas, in great demand are specialists with higher and secondary special education (particularly in rural areas). In spite of the enlivening of the macroeconomic condition, observed since 1999, no signs of steady development of economy or of any changes in the fundamental parameters determining the economic growth and the market climate cycle in the district (country-wide too) have been observed as far as investment dynamics, consumer expenses, exports physical volume, etc., are concerned. So what occurs is: •  stunted growth of economic development; •  slowing down of investment demand; •  the district economy growth acceleration, directly linked with the development of raw materials sectors (as raw materials orientation of economy presently prevails); •  persistent reduction of the number of the district’s population due to both natural loss and a migratory outflow because of the worsening of living standards;   ���������������������������������������������������������������������������������� Sotsialno-ekonomicheskoye polozheniye Dalnevostochnogo federalnogo okruga v 2005 godu (Socio-economic condition of the Far East Federal Okrug in 2005). M., 2006.   ��������������������������������������������������������������������������������� Materials Economic Research Institute (Russian Academy of Sciences. Far Eastern Branch).

37

Part 1. cooperation potential

•  a high degree of deterioration of basic production assets (over 50% in certain sectors of economy); •  unfavorable financial condition still persistent at a great number of enterprises that possess no means of updating or technically re-equipping their means of production. Among the positive sides of the economic development in the Far East federal okrug are: •  continuous economic upswing under the impact of the speeding-up of production in non-ferrous metallurgy, fuel industry, and fishery; •  intensive development of the transportation sector; •  continuous and intensive growth of the population’s real incomes. Territorial proportions. The territories of the Russian Far East area considerably differ in terms of natural resources, economic potentials, and the issues they confront. The specificities of the economic sectors of the territories of the Far East is presented in Table 1.15. Table 1.15 Characteristics of the economic sectors over the territories of the Far East area Territory

Specific character of the economic potential

Sakha Republic (Yakutia)

Regional complex intensively formed on the basis of natural resources extraction.

Primorskiy Krai

Multi-industrial complex with highly developed industry and transport. Oriented to oceanic fishery.

Khabarovskiy Krai

Diversified industry with a powerful defense production and processing branches. Regional-wide basis for processing oil. Transportation transit.

Amurskaya Oblast

An agro-industrial and electric power basis of a regional magnitude. Transportation transit.

Kamchatskaya Oblast

Mono-industrial specialization in fishery. Well-developed sea transport.

Magadanskaya Oblast

Mono-industrially specialized complex (mining industry).

Sakhalinskaya Oblast

Multi-industrial complex. Fishery and oil-processing specialization.

Yevreiskaya Autonomous Oblast

Area with tight cooperation of agriculture and industry.

Chukotskiy Autonomous Okrug

Mono-industrial mining area.

Source: Syrkin, V.I. Regionalnoye razvitiye v perekhodnoi ekonomike (Regional development in the transitional economy). Vladivostok, Dalnauka. 1997. P. 106; Leonov, S.N. Regionalnaya ekonomicheskaya politika v perekhodnoi ekonomike (Regional economic policy during the transitional economy). Vladivostok: Dalnauka, 1998. P. 153).

38

1. The Russian Far East’s еconomy: potential for economic cooperation

Because of the specific features, the economy of the Far East is markedly differentiated territory-wise (Tab. 1.16). Table 1.16 Territorial structure of major macro-indices of the Far East of Russia in 2005, % Territory

Territory

Population

Production of GRP*

Volume of investments 18.8

Sakha Republic (Yakutia)

49.9

14.5

24.0

Primorskiy Krai

2.7

30.8

21.5

9.3

Khabarovskiy Krai

12.7

21.6

19.7

17.2

Amurskaya Oblast

5.8

13.4

9.7

10.4

Kamchatskaya Oblast

7.6

5.4

4.9

3.3

Magadanskaya Oblast

7.4

2.7

3.5

1.8

Sakhalinskaya Oblast

1.4

8.0

12.8

33.2

Yevreiskaya Autonomous Oblast

0.6

2.8

1.7

2.5

Chukotskiy Autonomous Okrug

11.9

0.8

2.2

3.1

Far East of Russia

100.0

100.0

100.0

100.0

Note: * – data for 2004. Source: informatsiya Federalnoi sluzhby gosudarstvennoi statistiki Rossiskoi Federatsiyi (Information of Federal Service of the Russian Federation State statistics).

The development of market relations causes every constituent of the Federation to yearn for self-affirmation, and for such an economic form that is capable to secure its niche in the market economy. Under these conditions, the region with the effective competitive position wins. The influx of capital is determined by the competitive capacities of the region and by the prospects of their build-up. In this case, a region acquires a privileged position in the market, benefiting maximally in efficiently developing productive forces and spatial organization of the economy. Competitiveness of territories is ultimately defined by the competitiveness of various industries and smaller entities (companies) in these industries over the territory. Thus all the competitiveness relations can be classed in three categories (levels): •  micro: particular kinds of production, industry, and/or enterprise; •  meso: branches, sectoral corporative associations of enterprises, and/ or firms with a horizontal type of integration; •  macro: national economic complexes with inter-industrial type of integration. Steady development of a regional economy depends directly on the   � Gelvanovski, M.I. et al. ������������������������������������������������������������������ Natsionalnaya konkurentosposobnost: ponyatie, faktory, pokazateli (Competitivness of a Nation: concept, facts, indices) // Voprosy statistiki. 1999. No 12. P. 16.

39

Part 1. cooperation potential

existence of the corresponding socio-economic potential, which makes the region attractive for the deployment of new and the updating of existing industries. Entrepreneurship capital is directed to those regions and activity spheres that provide favorable conditions for a competitive industry or a profitable business. In this context, each region is to assess its own socioeconomic potential and make it more attractive for various projects, as well as for Russian and foreign investors. By the method, elaborated at the ERI (FE Branch of the Russian Academy of Sciences) and described in detail elsewhere, assessments of the socio-economic capacities of the RF constituents composing the Far East area have been made for a number of years. The figures used for the calculations of particular potentials out of which the integral socio-economic potential is derived, are shown in Table 1.17. Table 1.17 Indices used to calculate particular potentials Potential

Natural resources�

Territorial-andgeographical

Demographical

Positive indices 1. Fuel and power resource reserves 2. Total reserves of mineral and raw material resources 3. Agricultural ���������������������� resources 4. Forest ���������������� resources 1. Area 2. Economic business density 3. Railroad density (per 10 ths.sq. km of the area) 4. Hard surface motor roads density (per 1000 sq.km of the area) 1. Population ���������� 2. Birth ����������� rate�

Negative indices

–

–

1. Mortality rate 2. Infant mortality rate

Labour

1. Quantity of the employed in 1. Ratio of the number of the unembusinesses ployed to the annual average number 2. Percentage of those actively in- of those employed in economy volved in economy

Productive�

1.Production of GRP 2.Per capita production of GRP 3.Foreign trade turnover 4.Per capita gains from the export 5.������������ Export quota

1.Dynamics of the industrial output (rates of the decline relative to 1992)

   Prokapalo, O.M. Sravnitelnaya otsenka sotsialno-ekonomicheskikh potentsialov subyektov Federatsii Dalnego Vostoka (Compatative evaluation of socio-economic potentials of the Federative constituents of the Far East area) // Region: ekonomika i sotsiologiya. 2000. No 2. P. 146–155; Prostranstvennye transformatsiyi v rossiskoi ekonomike (Spatial transofmations in Russian economy). M.: Ekonomika, 2002. P. 106–120.

40

1. The Russian Far East’s еconomy: potential for economic cooperation 1

Socio-infrastructural

Financial�

Scientific-and-innovational

2

3

1.Per capita average cash income 2.Quantity of day time secondary schools per 10 ths residents 3.Number of students of higher schools per 10 ths residents 4.Number of physicians per 10 ths residents 5.Commissioning of dwelling houses per 1000 residents

1.Exhausts of contaminants 2.Number of crimes registered per 10 ths residents 3.Number of registered homicides and murderous assaults 4.Aggregative index of consumer costs

1.Budget income per capita 2.Balanced financial result

1.�������������� Budget deficit

1.Percentage of those involved in scientific research among the employed in economy. 2.Percentage of graduates with academic degrees among those involved in scientific research 3.Scientific research costs 4.Technical innovations costs

–

The system of evaluations of particular potentials over the territories of the Far East in 2004 is presented in Table 1.18.

41

42 4.5

fish resources

Natural resources potential rating

9 5 6 8 6

relation with the Pacific Rim countries

land borders with other countries

availability of territory-wide railroads

railroad density (per 10 ths sq km of area)

hard surface motor roads density (per 1000 sq km of area)

Territorial-and-geographic potential rating

population

positive indicators 3

9

economic activities density (ratio of GRP to area)

Demographic potential

1 8

area

Territorial-and-geographic potential

1 8

raw and mineral resources

6 4

natural energy resources

2

percentage of forested lands

Natural resources potential

1

Indices

Table 1.18

1

1

2

2

1

1

1

2

7

1

2

5

2

1

3

2

2

5

5

1

1

1

4

2

3

5

2

5

4

4

4

4

3

4

1

1

9

5

6

4.5

8

6

3

3

5

6

7

7

9

9

9

9

6

4

6

4

8

7

5

6

8

8

6

9

9

9

9

7

5

7

3

8

6

8

7

5

5

4

3

9

9

1

1

8

2

1

8

1

2

8

7

3

1

1

1

1

9

3

9

9

8

3.5

9

7

9

9

9

9

9

9

9

9

9

3

8

6

3.5

8

9

10

Yevreis- ChuPriKam- MagaSakha Khaba- AmurSakhakaya kotskiy morchatdanRepublic rovskiy skaya linskaya AutoAutoskiy skaya skaya (Yakutia) krai Oblast Oblast nomous nomous krai Oblast Oblast Oblast Okrug

Systematized evaluation of sectoral potentials on the territories of the Far East Federal Okrug in 2004

Part 1. cooperation potential

1

Demographic potential rating

7

number of those employed in economic sphere in comparison with the total population

6

Labor force potential rating

2 4.5

foreign goods turnover

gain from exports per capita

export quota

Productive potential rating

dynamics of industrial production (rates of the fall relative to 1992) 1

1

3

per capita production of GRP

negative indicators

1 2

production of GRP

positive indicators

Industrial output potential

6

level of the total unemployment (in % of population active in economic sphere)

negative indicators

3

number of those employed in economic sphere

positive indicators

Labor force potential

1 4

1

2

infant mortality rate

1

mortality rate

negative indicators

birth rate

5

5

4.5

5

1

8

2

4.5

7

5

1

3

3

5

9

3

4

6

2

4

2

5

3

1

2

6

2

5

6

6

7

4

8

8

6

8

6

7

5

8

9

8

4

7.5

7

9

3

5

6

7

7

7

6

7

6

6

7

8

3

6

3

2

2

8

7

6

4

9

7

8

3

7

4.5

4

2

7

3

1

4

5

3

3

3

3

4

4

4

3

3

4

5

7.5

5

7

6

8

9

9

9

8

9

9

9

9

9

5

9

8

9

9

8

4

2

2

1

1

5

1

8

2

1

1

9

6

8

3

2

10

1. The Russian Far East’s еconomy: potential for economic cooperation

43

44

1

2 4 7 2

quantity of higher school students per 10 ths residents

quantity of physicians per 10 ths residents

commissioning of dwelling houses per 1000 residents 7 2 7 2 2.5

exhausts of contaminants

quantity of registered crimes per 100000 residents

quantity of registered homicides and murderous assaults

aggregative index of consumer costs

Socio-infrastructural potential rating

negative indicators

2

quantity of day-time general educational schools per 10 ths residents

2

cash income per capita

positive indicators

Socio-infrastructural potential

8

3

9

5

9

5

5

3

8.5

7

3

8

9

8

8

8

3

3

1

8.5

6

4

5

8

6

3

6

6

2

6

4

9

5

4

5

3

6

4

8

6

2

6

5

6

2.5

1

2

4

2

9

4

5

5

4

7

6

6

5

7

5

4

8

8

7

3

8

8

7

4

9

1

7

9

7

3

8

9

1

4

1

1

3

1

1

9

1

1

10

Part 1. cooperation potential

2

2

Financial potential rating 4 4 2 2 2.5

percentage of those involved in scientific sphere in the total number of those employed in business

percentage of researchers with academic degrees in the total number of those involved in scientific sphere

scientific researching costs

technological innovations costs

Scientific-and-innovational potential rating

Scientific-and-innovational potential

8

budget deficit

negative indicators

2

2

Balanced financial result

1

Budget income per capita

positive indicators

Financial potential

1

3

1

2

2

4

3

3

9

3

2.5

1

4

1

6

8

9

4

6

4

7

6

7

6

7

8

5

7

7

5

4

4

3

7

1

4

6

5

4

6

5

8

6

5

3

4

4

8

3

7

6

5

5

9

5

6

7

6

5

8

8

7

9

3

9

8

2

9

8

9

9

9

8

8

8

1

1

1

1

10

1. The Russian Far East’s еconomy: potential for economic cooperation

45

Part 1. cooperation potential

The accomplished analysis shows that •  The three areas best provided with natural resources per one square kilometer of the area are Primorskiy Krai, Sakhalinskaya Oblast and Khabarovskiy Krai (in the decreasing order). The fourth and the fifth are Yakutia and the Amurskaya Oblast respectively. •  Naturally, the most beneficial are the territorial and geographical positions of the southern parts of the Far East area: Primorskiy and Khabarovskiy Krais, the Yevreiskaya Autonomous Oblast and the Amurskaya Oblast. •  The most favorite demographic situation in 2004 was observed in Yakutia, Primorskiy Krai, and Magadanskaya and Kamchatskaya Oblasts. Khabarovskiy Krai, with low birth and high mortality rates, ranks fifth. Sakhalinskaya and Amurskaya Oblasts, as well as the Yevreiskaya Autonomous Oblast enjoy low parameters of their demographic potentials. •  The labor force potential is considerable in Khabarovskiy Krai, Chukotskiy Autonomous Okrug, and Sakhalinskaya Oblast. Kamchatskaya and Amurskaya Oblasts, conjointly with the Yevreiskaya Autonomous Oblast, make up the lowest labor potential bracket. •  The leader in industrial output potential, in 2004, was Yakutia. Chukotskiy Autonomous Okrug unexpectedly rose to rank second as a result of the enlivened foreign economic activities. Third and fourth were Sakhalinskaya Oblast and Khabarovskiy Krai. Primorskiy Krai, with its low indicators of the production of the Gross Regional Product per capita, and its medium indicators of foreign economic activities, finished fifth. •  The first three leaders in the integrally evaluated socio-infrastructural potential, are Chukotskiy Autonomous Okrug, Yakutia and Magadanskaya oblast. These territories are known for a higher provision with medical service, lower level of criminality (including homicides), and a healthier environment than the other territories of the Far East. •  The financial potential rating is high in Chukotskiy Autonomous Orkug and Yakutia. The third, fourth, and fifth were ranked by Primorskiy Krai, Kamchatskaya and Magadanskaya Oblasts. Khabarovskiy Krai ranks here the eighth due to not very high budget incomes per capita, and a considerable budget deficit. •  The scientific-innovational potential is high in Primorskiy Krai, Yakutia, and Khabarovskiy Krai. It is explained by a considerable R&D personnel, and high scientific research and developments costs. The ratings of the 1994–2004 socio-economic potential constituents are presented in Table 1.19. Judging from the calculations made to evaluate comparable specific and integral socio-economic potentials of the Far Eastern constituents of the   �������������������������������������������������������������������� In 2004, the exports of Chukotskiy Autonomous Okrug amounted to US $724 �������������� million, which made it a leader in such indices as “earning from exports per capita”, and “export quota”.

46

1. The Russian Far East’s еconomy: potential for economic cooperation

Federation in 1993, 1997 and 2004, the Federation constituents form four groups different in the dynamics of specific and integral socio-economic potentials. Group One comprises the territories with consistently high indicators of all the specific potentials. This leading group includes Sakha Republic (Yakutia), Primorskiy and Khabarovskiy Krais, with the former being an absolute leader all over the period under analysis, and never ranking lower, and with the latter two alternatively being second and third. The year 2004 found Primorskiy Krai in a second position, as did the year 1993, and Khabarovskiy Krai in a third one, which is lower position relative to 1997. The second group of territories is formed up of the ones whose socioeconomic capacities had been consolidated. These are Sakhalinskaya Oblast and Chukotskiy Autonomous Okrug that ranked fourth and fifth according to the results of 2004. Noticeable achievements are demonstrated by Chukotskiy Autonomous Okrug that raised from the eighth level in 1993-1997 to the middle of the ranking table due to the improvement of the indicators of production, labor and financial potentials. The third group comprises the territories with a sliding development potential: Magadanskaya and Amurskaya Oblasts, with the latter lowering down more intensively than the former. Being at the identical levels in 1993, in 2004 the Magadanskaya Oblast appears to rank sixth and the Amurskaya Oblast – eighth. The demographic, labor, production, socio-infrastructural, financial and scientific-and-innovational potentials of Amurskaya Oblast are observed to be falling. The fourth group is composed of the territories that, during the entire period under analysis, had steadily low development capacity. These are Kamchatskaya Oblast and the Yevreiskaya Autonomous Oblast, the latter consistently taking the lowest line position of the rating table. The compared socio-economic development capacities of the Federation constituents in 1993-2004 testify that the specific ratings of production (industrial output), financial and socio-infrastructure, change more vigorously. And consequently, it is successful carrying out the tasks in the production, financial and socio-infrastructural areas that will strengthen the position of the region and provide it with investment resources, because, as the recently adopted RF regions socio-economic development strategy concept envisages, only effectively working regions can claim to attract the attention of the Federal center and receive more financial assistance.

47

48

2/7/1

2.5/2/2

1/1/1

Financial

Scientific-and- innovational

Socio-economic

5/3/2

2/2/2

3/3/3

Khabarovskiy krai

2/3/2

1/1/2

4/8.5/6

8/6.5/8

5/2.5/2

3/2/3

2.5/3/7

8/2/6

8/5/4.5

4/5.5/3

4.5/3.5/2 1/3.5/6

3/6/4.5

1/1/1

1/1/1

Primorskiy krai

8/5/4.5

7/6/5.5

8/3/3.5

5/3/3

8/7/6.5

8/7.5/6

7.5/6/4.5

4/3.5/3.5

4.5/4.5/4.5

Amurskaya Oblast

Note: First figure – 2004; second figure – 1997; third figure – 1993.

1/1/1

2.5/1/1

6/1/1

Labor force

Socio-infrastructural

1/1/1

Demographic

Industrial output

6/6/6

4.5/4.5/4.5

Territorial and geographical

Natural resources

Potentials

Sakha Republic (Yakutia) 7/7/7

Magadankaya Oblast

7/4/7

4/5/5.5

4/8.5/9

4/3/2

7/4/4.5

7/2/6

3/2/7.5

6/6.5/4.5

5/4/2

4/1/2

2.5/6.5/6

6/5.5/6.5

4.5/5.5/3

3/6/4.5

7/7.5/7.5 8/7.5/7.5

6/6/6

Kamchatkaya Oblast

Socio-economic potential constituents ratings in 1993–2004

4.5/6.5/6

6/8.5/8

6/4/3.5

6/8/8

3/2.5/4.5

3/7.5/6

7.5/6/4.5

5/5/5

2/2/2

Sakhalinskaya Oblast

9/9/9

8/7/9

8/5.5/8

8/9/8

9/9/8.5

9/9/9

9/9/9

3/3.5/3.5

9/9/9

Yevreiskaya Autonomous Oblast

4.5/8/8

9/8.5/4

1/5.5/6

1/3/4.5

2/8/8.5

2/5.5/6

6/6/7.5

9/9/9

8/8/8

Chukotskiy Autonomous Okrug

Table 1.19 Part 1. cooperation potential

2 Russia and the Russian Far East in Economies of the APR and NEA

The process of Russia’s political alignment in the Asian-Pacific region is impressive especially on the backdrop of its sluggish start. After numerous lame attempts made over years, finally in 1998, Russia formally joined the Asian-Pacific Economic Cooperation (APEC) Forum. The Forum combines nearly all the Asian and American countries bordering the Pacific. In the “Concept of Russia’s membership in the AsianPacific Cooperation Forum”, adopted in 2000, a new, Asian-Pacific direction was identified as one of top priority tasks within the structure of the Russian foreign policy.” For the past few years, multi-lateral and bilateral political ties with Russia’s involvement in this region have intensively developed. Nominally, Russia’s political interests in the Asian-Pacific region match the growing status of the region in context of the global economic and political processes. However, in reality the degree of Russia’s involvement in the processes of international integration in the APR,  Nowadays the APEC consists of Russia, Canada, USA, Mexico, Peru, Chile, China, Japan, Republic of Korea, Taiwan, Hong Kong, Thailand, Malaysia, Indonesia, Vietnam, Philippines, Brunei, Singapore, Australia, New Zealand, and Papua New Guinea.

49

Part 1. cooperation potential

mildly speaking, is not adequate. Russia is one of the two APEC’s countrymembers (along with Papua New Guinea) that have not yet been integrated into any regional associations. So, Russia gains no benefit from economic cooperation, whose significance has been confirmed in a number of regional trade agreements concluded between the country members of the APEC. Membership in these agreements provide a number of actual privileges and preferences, but not for Russia, whose 80% of imports comes in from other countries and macro-regions of the rest of the world. It is the same story all over with Russia who is still not certain whether or not it needs the services of such an organization as APEC, and therefore disregards those opportunities that this organization is offering already now. Meanwhile, the APR’s share (excluding the contribution of the APEC’s American members) in the economies of the three principal world business centers (North America, West Europe and APR) is steadily growing and until 2010 will be changing in favor of the Asiatic part of the APEC. If we take into account the economic capacity of the “Great APR” (comprising all the members of the APEC), then it becomes clear that the role of that global player determines the perspectives and the potentialities of the whole world: a third of the global population (2.6 bln people), nearly 60% of the world’s GDP ($19.25 trillion) and about 47% of the world trade. By 2010 the region’s share in world trade is expected to exceed 53% (Table 2.1) and the one in GDP production 70%. Table 2.1 World trade share by regions, % World Region

1986

1996

2010

АРR (APEC – NAFTA)

21.2

30.8

34.3

NAFTA

22.2

19.8

19.2

ЕU

44.3

39.2

36.8

The rest of the world

12.3

10.2

10.0

Source: Estimated from “Zolotaya kniga rossiiskogo predprinimatelstva: Almanac (Golden Book of Russian Entrepreneurship: Anthology) Part 2. M.: ASMO-press, 1998.

The importance of the APR as a component of the world capital market is also uninterruptedly growing. During the 1990s, the size of direct foreign investments in China, Taiwan, DPRK, the Republic of Korea and Japan increased by five times. The “Great China” (Macao, Hong Kong, Taiwan, and Singapore) was the most attractive site for investments, in fact, over 80% of the total foreign investments were directed to southern, eastern and southeastern areas of Asia. East Asia begins to play a role of a huge “investment vacuum cleaner” drawing in an increasingly big part of the world capital. 

50

APEC Economic Outlook – 2004. APEC Economic Committee, 2004. P. 64.

2. Russia and the Russian Far East in economies of the APR and NEA

Within the bounds of East Asia, from the mid-1980s, a sub-region of Northeast Asia began to take shape, comprising Japan, China, the Republic of Korea, DPRK, Mongolia and the Far East of Russia. R.Skalapino’s suggestion of “naturalness” of the area bordering the Sea of Japan is thus becoming a fact politically and economically. Of course, there is somewhat artificial in an identification of such a sub-region (Northeast Asia). Some questions can hardly be answered, therefore they are restrained from being asked. First, what does Mongolia have to do with the Sea of Japan area, if the subregion is supposed to be defined geographically? The simplest answer, that has some historical grounds, is this: Mongolia is interested in being present at the “club” whose other members, by their “economic and geographical rights” are such powerful neighbors as China and Russia. On Mongolia’s part, this is quite a reasonable desire at a time when great powers are not enthusiastic to take into account even the existence of smaller powers. Thus Mongolia finds it fair that it should plague others with its presence, that it should remind others of her own interests, and that it should not lose any chance of making use of any support extended by any coalition, even consisting of only two partners. At the same time, its economy, geographical position and restricted resources abundance, fate Mongolia to remain an alien body, which was naturally taken into account during the integration processes going on inside that group of countries. Second, how can the Democratic People’s Republic of Korea be integrated with the other countries of NEA? Geographically, there are no doubts that it is one of the “Six”. But this country is hardly compatible with its economy, politics, involvement in world economy processes, humanitarian thinking, cross-cultural mechanisms and economic potentials. Of course, the scenarios of the reunification of the two Koreas have long been also discussed. Should such a reunification become a fact, the newly formed “Five” would pose far fewer problems. The question is how good the chances for such a reunification are in the foreseeable future. For it to become a reality there needs to be a coincidence of the interests of all the parties concerned about the situation on the Korean peninsula. Such parties are six in number: the Republic of Korea, DPRK, China, USA, Russia and Japan. It is clear that in spite of the eloquent rhetoric all the six resort to, in order to assure themselves and their partners of their devotion to the idea of unification of the Korean states, their real commitments to that cause is nothing but a myth. DPRK is hardly interested in the reunification as it may cause a complete change of its political and economical systems, elimination of the ruling  The following exposition of the interests of the six-sided committee’s members concerning the settlement of the Korean issue belongs to R. Scalapino who made it during his private discussion with the author about the report made at the international symposium “Northeast Asia and Mongolia: opportunities and challenges” convened by the Hawaiian University’s AsianPacific research and security problems center on November 8-10, in Honolulu (USA). The author fully shares R. Scalapino’s point of view.

51

Part 1. cooperation potential

elite, and a collapse of the traditional society represented by contemporary DPRK. The latter is not only dangerous for the political elite circles, but is also traumatic for the broad masses of population. The Republic of Korea fears a financial and economic crash, should the Koreas unite, because the price to be paid for it would be several times as much as the price paid for the reunification of the two Germanies within the then FRG. China is certainly not enthusiastic about the US bases being drawn nearer to its land border. Russia is not interested in losing its influence on the Korean peninsula, which would occur without fail after the reunification: Russia’s influence (no matter how week it is now) would disappear, and the Russian sphere of interests would automatically become the American one. Japan is not interested in political strengthening of the Republic of Korea. The USA is not interested in the easing of the tension in this region, as under these conditions the “natural” reasons for the US military and political control will stop existing. Third, Russia’s status in Northeast Asia remains unclear. Russia is no “natural” partner in that group of countries – the geographical object is too small, and – what is more important – China, Japan and the Republic of Korea are the Russian Federation’s partners on the global level which, when transferred onto a sub-regional level, would certainly become “reduced in their status”. On the other hand, the Russian Far East can be considered a natural area of Northeast Asia only geographically, not institutionally, as it cannot play an active part in the region. The more so, as a formal entity the Russian Far East does not even exist. The term is essentially conditional. In fact, what is termed the (Russian) Far East is a territory on which ten separate constituents of the Russian Federation are located. Those questions show how really complex is the situation, and that they so far can hardly be answered. The most dynamic area of the NEA in terms of its integration abilities is the “Great Three” consisting of Japan, China and Republic of Korea. It is in the bounds of the “Great Three” that an intensive expansion of trade and economic ties in the sub-region of NEA is occurring. In 2003 the Japanese-Chinese commodity turnover reached $132 billion (against $89.3 billion in 2001). Mutual trade between PRC and Republic of Korea during the same period increased from $35.9 billion to $63.2 billion. The volume of Japanese-South Korean trade amounted to $51.4 billion (in 2001 – $42.7 billion). Although in comparison with European Union or NAFTA the role of the intraregional trade in Northeast Asia is yet not great (24-30%), within the “Great Three” it steadily grows and brings up their economies to the rear of the sub-regional economiс interactions. At the same time the share of Russia in commodity turnover of NEA does not exceed one per cent. Russia remains on the outskirts of economic integration activities of Northeast Asia and East Asia as a whole, while the economic integration in 

52

Borrowed from site: www.polpred.com

2. Russia and the Russian Far East in economies of the APR and NEA

East Asia is actually gathering speed. While in 1986, the summarized trade of the three leading countries of NEA and the countries of Southeast Asia (Japan, China with Hong Kong, the Republic Korea and ASEAN countries with Singapore) accounted for 16% of the world trade, by 2010 it amounted to over 26%. It is advisable to take into account that Northeast Asia and Southeast Asia is for Russia a geographical and economy key to economically boundless capacities of the “Great APEC”, whose share in the world trade, according to certain prognoses, is to approach 55% by 2010. Despite the economic integration with the economies of the APR and particularly of the Northeast Asia has been declared a top priority purpose in the economic development of the Far East of Russia as early as in 1987, when it was part of the State program, up to now no visible progress has been achieved. Neither Russia in general, nor its Far East in particular, have been able to secure a noticeable niche in foreign trade and on capital market of the APR. Of course, the economy of the Far East of Russia is maximally oriented to the markets of the APR and NEA countries. Thus, the share of the APEC countries, and particularly of the NEA countries, in foreign trade of Russia’s European Federal Okrugs constitutes from 7 to 17% and from 5 to 10% respectively, while in the Far East Federal Okrug these indices amount to 85 and 77% of the foreign trade commodity turnover respectively. Nearly 17% of the total commodity turnover of Russia with the APEC countries falls on the Far East area. The concepts of East-Asian integration that 10 to 15 years back were rated as strategic pioneering, today are heatedly discussed on expert and political elite communities of East Asia. For Russia’s Far East in particular and for the Russian Federation in general, questions of integration with the APR become increasingly important. The center of the world business activity is being shifted in the direction of the APR. The proportions of economic capacities of the three main world business centers, North America, West Europe, and APR, on which three quarters of the gross world product fall, rapidly change in favor of the APR countries. The share of the latter grows both in the GDP production and in international commerce, its positions in the world financial system have markedly consolidated. The contents and the economic effectiveness of the Russian Far East’s integration with the APR countries substantially depend on the degree of Russia’s involvement in the processes of international cooperation. In terms of regional integration criteria ( involvement of APR countries in agreements on free trade and regional cooperation, as well as import structure by these institutions), Russia’s involvement in the economy of  In terms of states, East Asia is divided into North-East Asia (comprising China, Japan, North Korea and Mongolia) and South-East Asia (comprising the ASEAN countries).

53

Part 1. cooperation potential

APR is probably the least among the other country-members of APEC. Russia does not take part in regional trade agreements (RTA) concluded between the members of APEC and offering real benefits and privileges from the economic cooperation. This tells on the economic figures: the bulk of commodity turnover of the Russian Far East falls on the APR countries while nearly 80% of the Russia-wide import comes to Russia from other countries and macro-regions of the rest of the world. Over the period from 1998 to 2003 a slight decrease of the export share of the APEC countries (including the counties of the NEA) occurred: from 58 to 55%. At the same time, in the structure of foreign trade turnover of the Russian Far East, the exports share grew from 61 to 72%. From 2000, due to the real appreciation of the ruble and the reduction of import prices, the import positions in Russia became considerably stronger (during 2000-2003 the share of the import in foreign trade turnover of the Far East grew from 16.5% to 28.5%). Thus, the most important source for perspective economic development of the Far East of Russia remains the foreign demand on the production of the primary sector of the region by the countries of the APR and first of all of NEA. The use of the efficiency of the foreign demand is based on the realization of the potentiality of economic cooperation between the countries of the region. Favorable political developments going on in the region after the end of the “Cold War” were the objective reasons of more active discussions of the urgent questions of multilateral economic cooperation in NEA. That is how a concept of a large scale international investment project of the Tumen river basin was brought up. Unfortunately, more or less intelligible concept of economic cooperation in this sub-region is yet to be thought up of. There is no clearly understanding of the principal driving forces that would empower economic cooperation in the bounds of NEA. While the economies of NEA, NE China, Russian Far East, Mongolia and DPRK remain to be oriented mainly to the domestic market, the economies of Japan and South Korea have acquired a pronounced export orientation. It is not clear which of the developing countries of the region can become the main market strong enough to make a breakthrough in the exports, the way the USA once made with regard to Japan and the ‘new industrial countries” of eastern Asia. Unlike the situation in Southeast Asia where the integration factor is essentially informal networks with the key parts played by ethnic Chinese and their capital assets, obstacles of cultural and institutional order in NEA should be taken into account.  Estimated from: UNCTAD Handbook Of Statistics // UN Conference on Trade and Development., 2004.  Dalni Vostok i Zabaikalie v Rossiyi i ATR (The Far East and Trans-Baikal areas in Russia and the APR) Khabarovsk, 2005. P. 11.

54

Part 2

FORMS AND STRUCTURE OF THE RUSSIAN FAR EAST AND THE APR INTEGRATION 3. Natural resources sector of the Far East economy: integration potential 4. Fuel and power complex of the Russian Far East 5. Foreign trade of the Russian Far East 55

56

3 Natural resources sector of the Far East economy: integration potential

3.1. The role of natural resources industries The following factors facilitate the development of natural resources industries of economy and their integration into the economy of the APR: 1. Abundance of various biological and non-biological natural resources, unique ones among them, found both on land and in water. The Far Eastern forests, covering an area of 280.1 million ha, are a store of 20.0 billion cu m of wood. Nearly 3.2 billion tons of fish and marine products are hauled from the coastal waters adjacent to the district. The subsoil depths of the Russian Far East area contain commercial deposits of over 70 kinds of mineral resources. The potential stores of fossilized fuel include 10.8 billion tons of oil, 24.3 trillion cu m of natural gas, and 1.2 trillion tons of coal. Potential capacities of hydropower are 1.0 trillion kW-hr. 2. Geographical and economic ties of the district with the country’s major centers of industrial activity are not intensive but, on the other hand, the district is situated on a direct transportation route connecting it with many APR countries (primarily those of Northeast Asia), many of which 57

Part 2. FORMS AND STRUCTURE OF THE RUSSIAN FAR EAST AND THE APR INTEGRATION

suffer either from the lack of the natural resources the RFE has in large quantities, or from their deficit. 3. The many-faceted ties have historically established between the Far East of Russia and the NE Asian countries are traced back to the time of the first pioneers discovering the local natural resources and laying the foundation for a natural resources economic sector. That was the time of using the familiarization experience of foreign nations (first of all those of Manchuria and Hokkaido); the time of the outset of a technologies exchanging practices (agro-industrial operations including); the time of a long-standing (although varying in level and intensity) experience of involving migrants with the process of getting familiarized with the local economic activities. 4. A long standing compatibility of the area’s natural resources sector with the world natural resources markets, and, since 1991, with the Russian domestic market is noteworthy too. Here are the factors that hinder the development of the natural resources sector’s capacities: 1. Insufficient information on the available reserves of resources and their condition, for which incompletely prospecting of natural resources, and deficiencies in registration of the discovered resources, whether minerals, forest, fish et al., are responsible. 2. Inadequate performance of the monitoring of natural resources use and of their dynamics, which entails a deficiency of the resources use specifications, impairs the management of the natural resources capacities that can’t keep pace with the dynamics of the advanced economy, especially of the APR/NEA countries. 3. A lower quality of many natural resources in comparison with the similar natural resources mined in the neighboring countries. 4. More long terms to reproduce biological resources and more high costs to reproduce (to explore and to develop) non-biological natural resources in comparison with the other APR countries that is determined by geographic conditions. 5. An excessive environmental fragility of the local ecosystems across a bigger half of the area’s territory, which needs additional expenses on environment-friendly measures during the performance of the natural resources use operations. 6. Underdevelopment or a sheer absence of the industries that are responsible for a complete processing of raw materials, which causes a deficient and incomprehensive depletion of raw material stores. A question of reforming the FE economy resource sector into something better than just a raw material supply source has been brought up not once. However, the consideration of this issue has always been hitched to the degree of processing industries development. Actually, the priority has continued to be given to extraction and mining industries, while processing industries were increasingly lagging 58

3. Natural resources sector of the Far East economy: integration potential

behind. The current integration of the natural resources sector of the RFE into the world market extends and deepens this traditional development orientation, that is connected with cheap raw materials processing really existing in many countries of East Asia (China, Vietnam, Malaysia, Thailand, Indonesia etc.). 7. A grave lagging in labor productivity over the most of natural resource industries of RFE behind the developed counties of the APR. Thus, in the RFE’s agriculture, it is by 5–7 times lower than in agricultural sectors of Japan, the US and Canada. In the RFE’s forestry, labor productivity is averaged 10 times as low as in West Canada and the US. Unfortunately those are only few cases out of many. Low labor productivity is a major factor that hinders the effect of the combination of relatively low wages and highly qualified manpower. 8. High resource- and power-intensity of the industry aggravated by poor management, poor labor discipline, and outdated technologies inherent in the process of production. These specifically sectoral issues are complemented by macroeconomic obstacles that get particularly adverse in the light of shortcomings in the natural resources sector: a shortage of investments or difficulties in attracting them; insufficiency of manpower and a sparse density of the population of the entire area, underdevelopment of the transport networks, underdevelopment of a social infrastructure, primarily of qualified executive personnel training. The natural resources sector of the Far East economy is a real web of a multitude of vertically and horizontally directed ties connecting it not only with the entire economy of the area, but also with the economies of the other RF regions, as well as with the NEA and other APR countries. Simultaneously, the RFE natural resources sectors are fully or partly fall under the nature management systems of such integral nature management units as the basins of the Amur river, the Sea of Okhotsk, the Sea of Japan, the Bering Sea, etc. Each of these basin systems, as well as other integral nature management units of a smaller size or importance, making up the Far East, is encumbered with resource and environmental issues of both regional and international significance.

3.2. Features of natural resources use Agricultural lands. The Far East is predominantly a mountainous area. Fairly flat expanses cover not more than one quarter of the region. It is on these flat lands that the bulk of the population and the economy capacities (agricultural  Minakir, P.A. Ekonomika regionov. Dal’nij Vostok (The regional economy. Far East). M.: Ekonomika, 2006; Minakir, P.A., Renzin, O.M. and Chichkanov, V.P. Ekonomika Dal’nego Vostoka: perspektivy uskorenija (The Far East economy: perspectives of speeding up). Khabarovsk, 1986; Problemy razvitija lesnogo kompleksa Dal’nego Vostoka (The problems of developing the forests of the Far East). Khabarovsk, 1984.

59

Part 2. FORMS AND STRUCTURE OF THE RUSSIAN FAR EAST AND THE APR INTEGRATION

lands including) are concentrated. Conversion of lands into agriculturally suitable ones was one of the priority tasks during the colonization of the region. By 1998, the size of agricultural areas had expanded to cover 1,659.3 thousand ha, however, it decreased to 1185.6 million ha by 2004 (Fig. 3.1).

Fig. 3.1. Dynamics of the expansion of areas under crops (sowing lands) in the RFE, 1859-2004

Source: ERI’s Database, 2006.

The croplands (without pastures for deer and horse breeding) cover only 1.3, and the plough lands only 0.4% of the region’s territory. However, they make quite a sizable area (Tab. 3.1). With deer and horse breeding pastures this area expands to occupy 30.3% of land. An average per capita share across the region accounts for 0.32 ha of cultivated land. An average provision with cropland over the region makes up 0.66 hectares per capita (against 0.27 in Northeast China; 0.09 in North Korea; 0.04 in Japan and in South Korea, that is 0.14 as a per capita average all over Northeast Asia). The bulk of croplands, including 90.5% of cultivated lands, is concentrated within the southern plains of the Amurskaya Oblast, Primorskiy and Khabarovskiy Krais and the Yevreiskaya (Jewish) Autonomous Oblast. According to the estimation made in the 1970s to 1980s by regional planners, more than 2.5 million ha of land in these areas can be subject to reclamation. Thus under 4.0 – 4.5 million ha in the south of RFE can be converted into sowing lands. The agrarian reform carried out at the time of the economic depression caused an abrupt slump in productivity, and its adverse impact continues to be felt in agriculture still now, unlike the other sectors. Nowadays, agriculture meets only half of all the needs for foodstuff required by the population of the   ������������������������������������������������������������������������������������������ Here we leave aside the estimations made later for the cropland that was expanded in the area of the Baikal-Amursk mainline, as agriculture in this zone is too risky and hardly effective in the described stage of productive forces development.

60

3. Natural resources sector of the Far East economy: integration potential

region. The way out of the crisis is seen in new technologies, in a substantial rise of labor productivity and in updating the organizational forms and legal regulations. With sound land management and agrarian policies, and with taking into account the experience of the neighboring countries, land use sector in the Far East can become a locomotive power in the entire regional economy and draw the attention of the other regions of NE Asia. Table 3.1. Croplands and deer breeding pastures in the agricultural land use sector of the Far East region, thousands of hectares Agricultural lands Territory

Total (2004)

Including arable lands (2004)

Deer pastures (2002)

Sakha Republic (Yakutia)

853.1

96.7

90036.8

Primorskiy Krai

1163.2

672.1

0

Khabarovskiy Krai

261.1

94.1

10421.9

Amurskaya Oblast

1771.6

1131.8

543.7

Kamchatskaya Oblast

81.7

51.4

782.7

Magadanskaya Oblast

53.5

15.1

18474.8

Sakhalinskaya Oblast

88.7

42.2

1035.8

YeAO

170.6

75.0

0

KAO

25.3

1.6

16315.2

ChAO

7.7

0.0

42595

4476.5

2180.0

180205.9

RFE

Source: ERI’s Database, 2006.

The output of the agricultural products in the region can widen through expanding the cultivated areas (land extensification) that can be performed, among other techniques, by hydrotechnical amelioration, use of chemical fertilizers and new technologies that envisage reduction of areas under cultivation (productivity intensification). However, misuse of chemicals may make the soil less productive and the environment contaminated. That is why chemicalization is more often than not refuted as a technique of soil cultivating. However, today agrotechnicians permit such ways of intensification of productivity as use of organic fertilizers, taking biological measures of protecting plants, and growing and using more productive kinds of plants and domestic animal breeds. Most of the APR countries suffer from the deficit of agriculturally productive soil areas. In the future, this situation is likely to aggravate due to: 1) reduction of productive soil lands, especially plough lands, in those countries, due to an expansion of lands populated, provided with transportation passages, communication lines and storage pools; 61

Part 2. FORMS AND STRUCTURE OF THE RUSSIAN FAR EAST AND THE APR INTEGRATION

2) persistent increase of population. By 2015–2020, China may cease being an exporter and become an importer of foodstuff. Then the lands of the Far East will become the major reserve of providing the NEA foodstuff basis expansion. Application of advanced agrotechnical insights may enhance the productivity of cultivated Far East lands up to twice as much and even more. As noted above, a considerable expansion of agricultural lands in the future, remains a very likely occurrence. Forest resources use. Forest resources of the Far East are huge by the world standards. In 2003 (the last state forest inventory), the forested area occupied 280.9 million ha, with 20.0 billion cu m of timber (Tab. 3.2). Use of industrial timber over the region on the whole comes to 20% of the potential harvest volume, with no more than 66% in any of the Russian Federation constituent. Thus, we can speak of considerable reserves of forests not yet involved in commercial turnover. Table 3.2. Far East Forest Sector Indices, 2003 Territory

Forested areas in 2003, mln ha

Sakha Republic (Yakutia)

144.3

8825.6

30587.1

539.0

1.8

Primorskiy Krai

12.6

1753.1

6029.1

3959.4

65.7

Khabarovskiy Krai

52.1

5034.6

15600.0

8200.0

52.6

Amurskaya Oblast

23.3

2000.4

9972.6

1066.4

10.7

Kamchatskaya Oblast

9.7

623.1

852.2

176.5

20.7

Magadanskaya Oblast

16.8

387.3

40.5

5.3

13.1

Sakhalinskaya Oblast

5.7

618.3

2162.1

370.0

17.1

YeAO

1.6

170.1

613.1

143.3

23.4

KAO

9.8

553.4

–

–

–

ChAO

5.0

82.0

–

–

–

280.9

20047.9

65856.7

14459.9

22.0

RFE

Wood Annual Removal of Use of annual stock in allowable timber in allowable cut 2003, mln cut in 2004, 2005, ths in 2005, % cu m ths cu m cu m

Source: ERI’s Database, 2006.

Use of forest resources was not viewed as the original purpose of colonization, for the settlers it was just part of the process of their adjustment to new living conditions. Since 1870, timber felling acquired a commercial nature, and early in the 20th century timber became an export item. Timber harvest volumes were steadily increasing until 1986. The commercial timber production slump by 5.9 times from 1986 (the year of a   ��������������������������������������������������������������������������������������� The 1940–1950 decline was partly caused by a temporary military re-orientation of the economy and partly by the policy of replacing firewood with coal in the fuel balance.

62

3. Natural resources sector of the Far East economy: integration potential

historical maximum in harvesting, 36.7 million cu m) to 1998 was called forth by a sharp cut in domestic demand for wooden products mostly because of nearly complete cessation of any building practice. That slump could have been graver but for the continuous export of timber that was going on all those years. The 1998–2005 period witnessed a rapid growth of the harvest of commercial timber (254%) which appeared to be in great demand at foreign markets.

Fig. 3.2. Dynamics of harvesting in the RFE from 1850 to 2005

Source: ERI’s Database, 2006.

At that time the RFE timber processing complex (TPC) had to a considerable degree changed over to the use of imported logging machines and timber processing equipment. Thus, the transition period and the economic depression accompanying it strengthened external economic links of the RFE TPC mostly through sales and also through supplies. The confinement of production to foreign consumers called forth some restructuring in the region’s TPC. First, Japanese users in their quest to provide their timber mills with raw wood, requested merchantable unprocessed round timber, mostly because the timber mills in the Russian Far East did not produce wood sawn to Japanese market standards. Later, when the labor cost in Japan grew and the import of processed wood products from the Far East to Japan became profitable, simultaneously demand on unprocessed wood rose in China, but the Far East forestry still failing to produce sawn wood in required amounts and of required quality. As a result, the output structure became quite primitive. It boiled down mostly to round timber. In 1990, 56.0% of the harvested timber underwent processing, in 2005 – only 15.8%, while the share of processed wood (in terms of round timber) for export accounted only for 7.3% (Fig. 3.3). 63

Part 2. FORMS AND STRUCTURE OF THE RUSSIAN FAR EAST AND THE APR INTEGRATION

Fig. 3.3. Itemized export of timber from the RFE

Source: ERI’s Database, 2006.

The most developed are the forest sectors in Primorisky and Khabarovskiy Krais, Yevreiskaya Autonomous Oblast and Amurskaya and Sakhalinskaya Oblasts. These five constituents produce 96% of the regional forestry output. Today nearly 90% of the region’s products manufactured of wood are exported. But not primarily to Japan whose market has always been most fastidious and expensive, and to which the RFE export of timber was oriented 5–7 years back, but to China whose economy had been impressively growing and in 2005 consumed 61% of the RFE timber export. The volume of timber export in 2005 exceeded the peak figure of pre-crisis exports by 1.4 times. A notable adverse phenomenon of the post-Soviet period is illegal felling that accounts for nearly a quarter of all the harvesting in the region. Such timber is mostly exported (primarily to China), and the practice seriously damages the financial and budget system, undermines the image of the region’s forest sector, and has negative social and environmental consequences. The Russian Far East area is the only area in NEA, and one of the largest in the northern hemisphere, whose forest industry is capable to expand at the expense of the undeveloped forests estimated to meet the needs of the region during another 20 years and longer (Fig.3.1). Great volumes of forest resources, considerable part of which has not 64

3. Natural resources sector of the Far East economy: integration potential

yet been developed, availability of highly skilled and relatively low paid manpower, potentiality of the domestic market and a proximity to capacious markets of NEA make the Far East area a region with a forest sector attractive for foreign capital investments. So far, these foreign investments do not flow in in big quantities (making up 3% of all the investments in the Khabarovskiy Krai forest sector in 2003), and are funneled mostly in either harvesting or primitive wood-working industries. Big joint projects (priced at US$300 thousand to US$1 million) remain at the preliminary stage yet or are not put to implementation at all. Use of biologic non-timber resources. The natural raw material base for biological non-timber resources in the Far East includes over a thousand kinds of medicinal, over 350 kinds of edible, 250 kinds of honey-producing and pollen-bearing plants, more than 400 varieties of mushrooms, 31 species of fur bearing and eight species of ungulate animals, and nearly 100 species of birds. Commercialized resources constitute from 1 to 20% of plants and mushrooms, and from 45 to 100% of animals. In the 1990s, 2.5 thousand tons of pine nut, 15 thousand tons of berries and one thousand tons of mushrooms were annually stored on average. In the late 1980s the production reached its peak and soon abruptly fell (Fig. 3.4). Poaching has become more intensive over the past few years. As a result, the quantity of all the hoofed, and in some areas the populations of most valuable fur-bearing animals have reduced. Wholesale purchasing has declined by 35–60% in furs, and by 80–85% in meat, which does not mean that the actual use of these resources has also declined. The most valuable products, fur, antlers of young Siberian stags, ginseng, eleutherococcus (Siberian ginseng, wild pepper), and fern have always brought good profit as items of export. Today poaching of biological raw material, especially parts of bodies and fur of tigers, bears, musk glands of musk-deer, tree-frogs, etc. is at a very grave level. These products are poached to be smuggled mostly to China. The amount of illegal use of these resources accounts for about 20% of the entire harvesting (18 thousand tons per year). NEA countries are known for their long standing traditions of using non timber vegetative resources. Undoubtedly, under a sound management this economic sector of the Far East is capable to export many products highly valued in the APR countries. During the transition period, traditional export of fur skins, medicinal raw material and fern, as well as the smuggling of parts of animals, was complemented by a legal export of pine nuts. There is a great demand for pine nuts in many countries of eastern Asia, Europe and the US. It has always been in short supply, especially in lean years. The total turnover of pine nuts at the world market makes up US$100 million. The RFE export can cover not less than 30% of that sum. On average, during 2000–2004, according to the RFE customs records, the annual export of pine nuts constituted 11.8 thousand tons per year. 65

Part 2. FORMS AND STRUCTURE OF THE RUSSIAN FAR EAST AND THE APR INTEGRATION

Fig. 3.4. Average annual harvesting of nontimber vegetative resources in the RFE (1966–2000)

Source: Prirodopolsovaniye (Nature Use) (2005).

Use of sea biological resources. Sea biological resources are represented by migrating shoals of fish and sea animals of indefinite ownership, so there is no way of identifying either their amounts or their ownership to a certain country or an area. As far as international practice goes, such resources are acknowledged to be in possession of a certain economic zone during a certain period. In the Russian economic zone of the Pacific Ocean and its seas, the amount of fish and marine products is estimated at 26 million tons, of those inhabiting fresh water bodies of the region at 55 thousand tons. An annual maximum catch of fish and marine products is estimated at 4.0 – 4.5 million tons. In 2004, the official average amount of fish and marine products accounted for 1.7 million tons. The 1986–1990 period witnessed a maximum annual catch in the Far Eastern part of the Russian economic zone, averaging at 3.7 million tons (Fig. 3.5). The decline in catches that began after 1990 is not tending to cease. Until the middle of the 1980s the most of the sea products of the Far East were consumed within the USSR, and only such delicacies as salmon, caviar and crabs were exported. Today, legal exports amount to 32% of the actual catch of an unsorted composition. The most important part of the export is made up of valuable seafood: crabs, trepangs, scallops, sea urchin roe and others. It is these items that are mainly poached on and it is due to this kind of poaching that the estimated annual allowable catches (EAC) of marine 66

3. Natural resources sector of the Far East economy: integration potential

animals actually increase manifold resulting in complete depletion of quite a number of marketable fishing grounds. In the field of legal catching also exhaustive methods prevail. In the 1960s, a rapid development of fishery was accompanied by overfishing many valuable items. As a result, by the 1990s the resources of Alaska pollack, iwashi, pacific herring, cod, flounder, halibut and other valuable species had been considerably exhausted.

Fig. 3.5. Catches of fish and marine products in the RFE in 1970 to 2004

Sources: Prirodopol’zovanie Dal’nego Vostoka Rossii i Severo-Vostochnoj Azii: potencial integracii i ustojchivogo razvitija (Natural resources using in the Russian Far East and NEA: integration and sustainable development potential). – Vladivostok; Khabarovsk: DVO RAN, 2005; ERI’s Database, 2006.

One of the major commercially developed water body, the Sea of Okhotsk, is a sort of an inland sea of the region, as it is nearly completely surrounded by the Russian economic zone. But its central part is an international zone accessible to professional fishermen of any country. This fact makes it possible not only to legally catch the sea resources from the international portion of the sea, but also to poach in the sea’s richest areas allotted to Russia. The fish, sea animals and mollusks of the Sea of Okhotsk sustain excessive exploitation. So do the sea biological resources of the southern part of the Far East area. In inland water bodies of the Far East, an injurious catching of fish, especially of salmon varieties (Siberian salmon, hunchback salmon, red salmon, silver salmon, etc.) is carried on. There are official restrictions for catches, but actually the resources of salmon are steadily decreasing. Salmon is a transiting species. It gets spawned out in inland fresh water bodies which it later leave for the sea, and in three years it returns back for spawning. Fishing it in the fresh water basins has always had a great impact on its reproduction 67

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capacities. So does fishing it in the sea. Therefore special international agreements are known for many years to have been regulating the norms of catching this fish, and that is why fish-farming facilities have been organized at its spawning grounds. All the illegally caught marine products are smuggled abroad. According to certain assessments, the total amount of export (of legally and illegally caught products) makes up not less than 60% of the physical catch volumes and under 70% of the cost profit gained. The bulk of the illegal export of marine products is funneled, however, not to China, but to Japan. The fishery sector has been tightly connected with international markets of NEA, where it has its own niche for supply, and where, in turn, it is offered maintenance services, equipment for catching, fuel, etc. This sector has an abundant experience of organizing joint ventures in the Far East. The fishing industry of the region faces the issues of replacing and upgrading its fleet, of widening the range of commercial marine biological resources, of restoring coastal fishing and fish-processing, of transferring to a comprehensive and waste-free technology of processing various raw products, and of accelerated cultivation of marine species. Meeting these challenges requires new technologies and equipment, i.e. investments and wide international cooperation. Use of raw mineral resources. The Far East area takes a leading position in Russia in the abundance and the extraction of many types of raw mineral resources. The extraction of minerals here exceeds the needs of the region. A little less than 100% of Russian diamonds (almost a forth of the world excavation), 50% of Russian gold, practically all Russian tin, considerable amounts of silver, platinum, tungsten, lead, and zinc are extracted in this region. However, the quantity of non-ferrous metal ores seldom meet the quality standards required abroad. The raw mineral sector of the Far East had no direct links with the world market until the economic reform. In the post-Soviet period some such links appeared, but the complicated raw material basis, the current technologies that did not meet the world level requirements, and high working expenses hardly give a chance for the direct export of raw minerals to the NEA countries to become a strategic direction of the economic development in today’s conditions. The bulk of the mineral deposits in the region is found on the economically underdeveloped territories, while densely populated and intensively developed territories lack great deposits of minerals and well developed mining industries. An exception is tin-and-complex ores of Gornozavodsk (Primorskiy Krai) and Komsomoslk (Khabarovskiy Krai), tin bearing fields, and fluorine deposits (Priomorskiy Krai) that have been developed for decades. Being detrimental to the local economy, such distribution of minerals is beneficial environmentally as it does not create ecological problems the regional economy is not yet able to handle. Worldwide, the Far East today is viewed as a prospective exporter of mineral resources, although the input in their extraction industry yet entails high risks. 68

3. Natural resources sector of the Far East economy: integration potential

3.3. Economic problems of the Russian Far East natural resources sector Undoubtedly, the structure of the natural resources sector of the Russian Far East is a real web of long standing stereotypes, traditions, elements and links inherited from the Soviet times and intricately intertwined with the new market-oriented suggestions and some of the post-industrial trends. This provides a high dynamics stimulus to the sector, but reduces its stability. Today, the natural resources sector is a combination of private or corporation-owned industrial (extracting) infrastructure with the state-owned natural resources entrusted in part to private users for a limited time. This causes some controversies the regulation of which, as the foreign experience shows, requires a powerful governmental machinery and a well developed law enforcement system. The more raw material was subject to a secondary processing, the graver was the decline in productivity in the course of the economic recession of the 1990s (Tab. 3.3). In other words, the natural resources sector’s output became less sophisticated and consisted actually of sheer raw material. A better situation was in the precious metals and coals extraction industries, while the oil-and-gas production complex even exceeded the pre-crisis volume figures. Table 3.3. Far East natural resources sector’s output Maximum Output

2004 in % of maximum

year(s)

volume

volume

Grain, thousand tons

1976–1980

1485a

392b

26,4

Potatoes, thousand tons

2001–2004

1697a

1697b

100,0

Industrial wood, million cu m

1986

28,8

12,1

42,0

Lumber, thousand cu m

1986

6595

1146

17,4

Chip Boards, thousand cu m

1989

227

16

7,0

Wood Pulp, thousand tons

1988

625,8

0

0,0

Paper, thousand tons

1979

248,7

0

0,0

Fishing, thousand tons

1988

4965

1896с

38,2

Gold mining, tons

1991

96,6

74,3d

76,9

Coal extraction, million tons

1988

57,2

31,9

55,8

Oil production, million tons

2001

4,2

3,9

92,9

Gas production, billion cu m,

2003

3,62

3,59

99,2

a annual average; b annual average for the 2001–2004 period; с average for the 2001–2003 period; d the year 2003. Source: ERI’s Database, 2004.

69

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In the course of the post-crisis recovering, the situation became slightly better due to the following factors: •  transformation of the natural raw products basis intensified at the expense of ecology friendly methods of exploiting and preserving natural resources at all levels of businesses and all levels of administration; •  a considerable part of manufacturing equipment proved to be unusable after a several year downtime; •  in the course of reformation, the production quality criteria heightened considerably, which caused the obsolescence of the bulk of available capacities; •  wear of fixed assets and obsolescence of current technologies demand considerable investments in upgrading and expansion of the producing entities; the outdated equipment should be replaced by new one, as a rule, more efficient and environment-friendlier, even though more expensive; •  creation of new businesses also requires the investments of many billion dollars; •  because of a considerable shortage of investments and increasing dependence on cheap manpower markets of, primarily, China (see below), the natural resources sector’s production grows in quantity but remains unrestructured. One of the most important strategic tasks the region’s natural resources sector needs to handle is to cease the intensive squandering of natural resources encouraged by lack of a sound policy of resource preservation. The causes for the latter are the following: •  even today the natural resources are viewed in the region and in Russia and its Far East as something never ending and abundant; •  extraction technologies, though replace one another, remain of depleting character; •  payment for natural resources use, introduced in the 1990s, has not resolved the problem of efficient nature use, as the payments are too small and, especially in the form of excises, perform only one function – the withdrawal of part of the user’s profit in favor of the state or the municipal budget, failing to enforce a rational practice of natural resources use. Natural resources are fixed assets, but are not viewed as such by private business, because they are owned by the state. The state has not only failed to organize an adequate nature use management, but ruined even the system that existed earlier. Such thriftless attitude towards natural resources from the owner and the users, causes an increased depletion of the natural resources potential of the region, shortens its life span, and finally undermines the chances for a long term cooperation. At the same time, the great amounts of natural resources the bulk of which has not yet been developed, the available well skilled, competent and relatively cheap manpower, as well as good prospects for the domestic market, and the proximity to capacious markets of NEA and the APR, continue to attract investments (also foreign) to the natural resources sector of the Russian Far East area. 70

3. Natural resources sector of the Far East economy: integration potential

3.4. Social and environmental problems of nature use in the RFE A significant and predominantly detrimental impact that the use of natural resources, as well as the activities of the natural resources sector have on the natural environment has become an internationally acknowledged factor. This adverse effect has been produced not only in the forms known long ago – like discharges of harmful substances into the air, discharges of pollutants into water, creation of massive solid wastes, etc. – but also in specific forms discussed below. There are numerous cases evidencing that environmental issues originating in the Russian Far East spread across its borders and turn into interregional and international problems. Forest fires fill air with smoke not only over the Russian Far East area, but also over adjacent Japan and northeast China, while the vegetation fires in Northeast China discharge great clouds of smoke in the direction of the south of the Russian Far East. Another serious and urgent problem is the joint contamination of the Amur river by China, by Amurskaya Oblast, by Eastern Siberia and by Mongolia. Similar occurrences take place on Khanka Lake that is also being contaminated. The felling of forests in the Russian Far East and in Northeast China affects the condition of the atmosphere and the reproduction of fish all over the NEA countries. Everchanging regulations for hunting for the migrating birds that winter in China and fly to the Far East, cause considerable, sometimes aggravating reduction of their populations. During the transition period, natural resources use control and management deteriorated, resulting in qualitatively negative developments. For example, in agriculture, fewer lands remain to which scientifically grounded crop rotation and agronomics are applied; land amelioration has been removed from land use practice or is performed with serious technological mismanagement. In the forest sector, illegal felling has widened, valuable wood species are mercilessly logged down, whether they are kept under special environmental care or are growing in protection forests, while the least valuable species are left standing. Particularly hazardous for the environment and for the health of the residents of the Far East is the increase of a forest fire incidence rate. Game hunting and fishing exceed admissible levels. Even species registered as endangered are being poached on. As a result, the upsetting of natural environment and natural resources potential of the Far East has been aggravated and today it exceeds 40%. This level of transformation has worsened the mismatching between the condition of the natural raw material basis and the methods of its development, the methods being oriented to the natural state of resources, not to their nowadays actual condition. This aggravates the environmental issues raised in the processes of nature use. A sharp decline in regeneration of resources is likely to cause a decrease in 71

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raw minerals extraction output during the upcoming decade, and a decrease in such biological materials as wood and marine products – during the upcoming two or three decades. This menace can be removed or considerably assuaged if regeneration operations are restored within the norms of regeneration practice. Russia has recently declared numerous decisions concerning the ecology all over the country and over the Far East area in particular, however not all of them have been adequately enforced through relevant laws. The only decision that has practically been implemented referred to a 1.8 time increase of the Far East defense lands during the period of 1985–2000. Environmental and economic issues of nature use cause social tension that inhibits a normal development of the natural resources sector. For example, part of the population constantly stands out against the idea of broadening the rights in natural resources (mainly forest and marine products) use, against the participation of foreign capital, and against poaching. The going on changes in the deployment of natural resource use capacities, their concentration in most economically developed areas, along the frontiers and near ports, raise social and environmental problems both in places where their use is reduced and in the places where their use is enlivened. A great concern of the population is caused by the fact that the land rent remains in the hands of the stakeholders. A widely spread illegal nature use and smuggling not only violate the ecologically justified norms and quotas, but also bring to moral losses and a bigger criminalization of the activities. Competent specialists are leaving the natural resources sector en masse. The system of retraining the personnel has cracked apart. The man labor contingent grows rapidly old. The social infrastructure of towns and villages is not properly maintained. On the other hand, a cheaper, often unskilled but well disciplined manpower is increasingly being recruited from abroad: from China, North Korea, Ukraine, Moldova and other areas. This intricate web of environmental and social problems in the region requires their jointly addressing, but no satisfactorily organized forms have yet been found for that.

3.5. Potentiality for cooperation of the Russian Far East natural resources sectors with the APR economies Owing to its great natural resources potentiality, exceeding the domestic needs of the region, the natural resources sector of the Far East area can’t help entering into cooperation with the economics of other regions. The transporteconomic remoteness of the RFE from the European regions of Russia hinders from tight cooperation of both Russian parts. Another hindering factor is availability of Siberia and Ural that are producing almost the same products as the RFE but are located closer to the European centers of the country. 72

3. Natural resources sector of the Far East economy: integration potential

Therefore, in order to maintain, let alone to increase its contribution to the development of the region, the natural resources sector must cooperate with the world market, primarily with the markets of the APR, and particularly of SEA. Otherwise, its development will come to a stop and the sector will begin to fade away. Consequently, the major task facing the natural resources sector of the Russian Far East is to increase supplies to foreign markets. These are the markets of the regions-consumers, as in the APR there are also many regions-suppliers of natural resources, similar or substituting for those produced in the Far East. In the medium-term perspective, the most competitive natural resources will be (in a decreasing order) gas, oil, timber, fish, coal, non-timber biological resources, and agricultural lands. For the long-term perspective, this order may be changed. The major consumers in the medium term perspective are the countries of NEA: China, Japan, and Republic of Korea. In case the cooperation will widen over the entire territory of the APR, the West Coast of the US could be the next in that list. China has become a special phenomenon in the APR’s natural resources market over the past ten years. A speedy growth of its economy requires bigger amounts of natural resources, primarily raw materials, and simultaneously enhances its capacities as of a buyer of such products. Today, the Chinese market of raw and semi-finished products has rapidly grown to become one of the dominating and to a considerable degree determining the demand-offer balance in the entire APR, and particularly in NEA. However, the Chinese market demand is a very specific combination of the two requirements: 1) satisfying the domestic needs of the population, and 2) provision for export-oriented industrial and partly agricultural outputs. Today, in the APR and NEA, the natural resources sector market’s offers considerably exceed the demand, although extraction and processing industrial capacities remain grossly underloaded. This causes a severe competition among the natural resources products suppliers. The prices for raw materials have been stabilized, their growth index lags behind the growth index of the prices for the output of processing industries. This situation can stay unchanged for a long time. Thus, the natural resources sector of the Russian Far East is destined to be oriented to international markets of NEA and the APR. However the latter two do not return a similar commitment, beyond their interest in the imports of Russian natural resources products for the following two reasons: 1) geographical proximity of the Russian Far East that makes transport expenses lower (in comparison, for instance, with the oilfields of the Middle East); and 2) plans for a diversification of the supply sources to guarantee economic security. 73

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Russia has experienced not once the outside direct attempts of restricting its cooperative efforts or even ousting it from foreign markets. However, the Russian Far East is an inherent player in the international process of exchanging natural resource products, especially such biological ones as wood, fish and furs. So far the natural resources Russia exports have been represented primarily by raw materials, which does not meet the interests of the regional economy. Normal cooperation should give opportunity to its players to not only sell the raw materials the natural resource potential of the region can provide, but also to use the relatively cheap and skilled manpower the local population can provide, and to manufacture value added products. Anyway, the strategic task the region faces in such cooperation is development of up-to-date manufacturing industries. Then the foreign partners will be receiving quality semi-finished and final products manufactured from the Far Eastern raw material, and in return they will be able to export their technologies and equipment. All this can be achieved with the help of heavy capital investments from the NEA countries (among other sources), it may require non-economic measures in managing exports, and probably the adoption of regulatory acts. The set of factors on which competitiveness depends, differs from industry to industry. So it is hardly possible to estimate the competitiveness of the natural resources sector as a whole, as it also changes depending on whether it is oriented to a domestic or to a foreign market. The key competitors of the Far East natural resources sector are outside the territory of Russia. However, a more severe competition is offered by Siberian and even Far Eastern companies. Even at intra-regional markets, the Far Eastern companies are forced to fiercely, and not always successfully, compete not only against foreign (mostly Chinese) companies, but also against the companies of the other regions of Russia. Natural-resource industries of the region today undergo today all the standard procedures or elements typical of market competition. Some of these elements, in the present day conditions of the region, act so far as constantly adverse factors. These are: •  relatively high input costs; •  poor quality of the bulk of the production and its unconformity with international standards; •  low profitability; •  unverifiability of the origin of the product and doubtfulness of its legitimacy; •  poor marketing provision of most exports operations especially in small and medium businesses, and insufficient experience of working at international market; •  quality of the products manufactured by outdated technologies and obsolete equipment; •  competitors’ refusal to cooperate. 74

3. Natural resources sector of the Far East economy: integration potential

Another set of factors has a beneficial impact on competitiveness of the Far Eastern industries: •  relatively low wages in comparison with the wages in the adjacent countries, such as Japan, the US, Canada and others; •  proximity of the NEA markets experiencing the lack of raw materials; •  uniqueness of certain resources. And, lastly, the set of factors with an ambiguous impact on competitiveness: •  quality of certain natural resources; •  traditional commercial ties and historically established links with certain markets; •  well established customs in the use of natural resource products, their amounts and structures; •  dependence on the size of the economic lebensraum; •  exclusive state control over the use of certain natural minerals and biologic resources (forest and fish). Changes in any of the above mentioned factors may enhance the competitiveness, but the biggest thrusts are found with the following four factors: labor productivity, transportation costs, power intensity, and resource intensity of the products. Unjustifiably high transport tariffs under the monopolistic control, especially railroad tariffs, that have been raised for exported goods, strongly influence on the competitiveness of the products of natural resource industries, the more so that these products for the most part are represented by great masses of products. Here a reasonable and mutually profitable compromise should be found by the carrier and the consignor. The solution of the issue of low profitability lies first of all in the updating of the industries, and in the replacing of outdated technologies and equipments with new ones, updated and modern, which would demand considerable investing. A relatively low level of prices for the majority of raw material products is called forth by considerable structural and technological changes in economies of developed countries. Companies begin to use power-efficient technologies, to utilize wastes, and to apply multiple processing to natural resources. Almost at all segments of the world raw material markets, low prices are going to remain in the foreseeable future. The consequences of this can be unpredictable for the regions that produce raw materials, the RFE area including. Realistic and long-standing enhancement of the competitiveness of the industries can be achieved only through stable work at a foreign market in combination with a steady development of the domestic market. In this context, competitiveness of the Far Eastern products must rest on the optimal combination of work at regional, national and international markets, as well as on the optimal combination of domestic and foreign capitals. 75

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3.6. Tools and mechanisms of integration of the Russian Far East natural resources sectors into the APR In nature use, there always exists a specific issue of the expediency, terms and degrees of commercialization of natural resources, as any resource can any moment be chosen for industrial use, or can be reserved for future needs. Those methods, instruments and mechanisms of integration that promote not the economic or the social sphere of the region, least of all its restructuring, but only more intensive use of natural resources, should be removed and replaced with methods, instruments and mechanisms more adequate to the objectives of the development. In the Far East a certain balance has been made out between intraregional, intra-national, interregional and international economic cooperation, international ties obviously predominating. Regulatory tools and mechanisms for the RFE natural resources sector’s development should, first of all, be directed to the optimization of this balance in favor of the general development of the entire region. One of the measures facilitating the attainment of such objectives is creation of a system of enhancing the competitiveness of natural resource industries and their output, and promotion of the conditions under which the identification and the use of such a measure would be profitable. This is also one way of realization of the RFE’s economy development concept, as is formulated in the federal targeted program. Some of these tasks can and should be undertaken by the region itself, but most of them (transport and power tariffs, customs regulation, taxation, etc.) should be undertaken by the authorities responsible for the favorable investment and entrepreneurial climate in Russia in general and in the Russian Far East in particular. Already today this cooperation is coming out in various forms that will certainly increase in number with time. A foreign trade, mostly in raw materials, is viewed so far as the most popular of such forms, although it is responsible for a number of social, economic and environmental issues, as was discussed above. From this point of view, a long-standing practice of regional nature use is a good source of both positive and negative experiences. Presently, various proposals and advices in regard to the strategy of the further use of the Far East area’s natural resources are being considered. Depending on the strategy chosen, certain mechanisms of cooperation with the other regions will be addressed. An idea to curtail or even to preclude the use of natural resources all over the Russian Far East or in its certain areas has been repeatedly suggested as an environment-friendly concept of nature use, but too revolutionary to be adopted. For instance, when in Primorskiy Krai, 2.3 million hectares of forests (20% of all the forests of the Krai) were assessed as “harmlessly damaged”, that 76

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fact served as the reason to demand that the logging operations be drastically reduced. In Kamchatskaya Oblast, alleging a great need in preservation of the peninsula’s nature and fish, it is proposed that extraction of gas, coal and precious metals be ceased. This approach is akin to the idea of reserving part of natural resources for future needs. The Russian Far East has sustained periods of discontinuity of natural resources use because of their depletion or for some other reasons, often far from economic. One such situation that occurred last was attributed to the crisis of the 1990s. Like any other, it entailed a lot of adverse economic, social and geopolitical consequences improvement of which requires considerable expenses. Moreover, the ecological rehabilitation of territories in such cases lasts for many years and many decades. Besides, numerous natural resources remain undeveloped due to their economic inexpediency (as a rule, their transportation inaccessibility). At the same time exhaustive nature use practice has been going on for nearly 150 years. This practice of nature use can help solve some tactical problems, but strategically it is meaningless as it inevitably results in curtailment of the primary products sector. Thus, a real way out is to diversify the use of natural resources and rationalize the process. Foreign experience has shown that it can be accomplished only if the bulk of primary raw material undergoes processing, if the resources to be used are subject to strict quantitative and qualitative normalization, if the resources are constantly regenerated, and secondary resources are exploited on a comprehensive basis. In such cases the part of the sector that is based on renewable resources can operate indefinitely long and yield the means for the development of secondary and tertiary sectors. The part of the sector based on non-renewable resources, can also operate long enough, providing the process is outstripped by discovery of new deposits. But transition from exhaustive methods to rational ones requires investments. Consequently, the supplying of semi-finished and even final products to other regions instead of raw materials is one of the prerequisites for the integration from the perspective of a long term regional development strategy. Today a rationalized nature use is customarily termed sustainable nature use, although the term gave rise to unfavorable comments because of its vagueness. Formally, all countries strive for sustainable nature use, as was acknowledged in Rio-de-Janeiro and Johannesburg. The main prerequisite for a transition to sustainable natural resources use is adopting a different policy of nature use, and different rules regulating the manufacturers’ and consumers’ behavior. Therefore the technologies, intended to modernize the natural resources sector of the Far East, should be assessed not only by its immediate economic effect, but also by social, environmental and economic consequences combined. 77

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Available mechanisms of cooperation. The following are the mechanisms of cooperation legally opened to the natural resources sector of the Far East: •  export of products processed to various degrees; •  import of machinery and equipment for extracting, storing and processing raw materials; •  ships repairing at foreign repair facilities; •  conjoint use of natural resources; •  leasing of natural resources; •  concessional leasing of natural resources under sharing agreements; •  attraction of credits for developing natural resources; •  attraction of direct foreign investments; •  recruitment of foreign manpower resources, primarily of working specialties; •  regulating of export and import flow structures through the sizes of customs dues. In addition to the above, a considerable share of illegal cooperation is known to exist: •  selling of raw materials for export, also outside the customs control zone during fishing seasons; •  extracting of the resources officially declared forbidden or under special environmental protection; •  performance of extracting and storing operations at the sites forbidden for commercial use; •  fronted (hidden) leasing; •  using the services of unregistered manpower; On the whole, these mechanisms are used in all the branches of economy, although some branches are characterized with specific features. The specificities of agricultural use of lands: •  unregistered renting of parcels from Russian agricultural entities by Chinese companies or organized groups under sharing agreements; •  hiring of Chinese workers, often organized in groups, by Russian agricultural firms on terms of paying in kind; •  formation of Chinese-Russian production zones. The latter form is viewed by the Chinese side as the most advanced one. The authorities of Heilongjiang province intended to create three Russiaoriented production zones in 2006: •  a zone for producing vegetables and fruit in the area of border check-points; •  a zone for producing grains and cattle in the RFE and Novosibirskaya Oblast, and; •  a zone for processing agricultural production for export, in cities located in the center of the province. The project is envisaged to use 50 thousand hectares of Chinese lands and 173 thousand hectares of Russian lands, to involve 18 thousand Chinese specialists and workers, and attract US$500 million. 78

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The specificities of the forest sector: •  selling of unprocessed wood to foreign middlemen, often on sites of logging; •  primary, the coarsest procession of wood for consequent exporting, performed at small facilities often registered as ownership of some dummy Russian national, but actually owned by foreigners (as a rule, to Chinese nationals); •  storing of non-timber forest resources, often in amounts exceeding allowed norms, without officially issued permits, and extracting of raw materials from biological species under a special environmental control (ginseng, tigers, et al.); •  a considerable number of investments already attracted and assumed to be attracted under large projects of timber storage and processing. The specificities of the fishing sector: •  selling of raw materials, extracted outside the customs control zone and without official permits, to foreign partners; •  fishing and catching marine products in amounts exceeding the permitted quotas. The specificity of the raw-mineral sector: •  attracting foreign investments to large projects related to extracting valuable mineral resources, primarily precious metals. Integration mechanisms under consideration. Thus, over years, some reliable mechanisms of forming a partnership between the Russian Far East and the neighboring countries have been established on the basis of the capacities of the natural resources use sector of the Far East. These mechanisms, with the exception of illegal ones, are awaiting being addressed, adjusted and complemented with new ones. Among the new mechanisms are: •  Building in the south Far East (evidently in the Nakhodka-VladivostokZarubino area) of an international exchange market of raw natural products, operating on the ruble currency basis. •  Elaboration and implementation of a project of developing processing industries in the region’s natural-resources sector that would recommend both economic and non-economic measures. Russia’s prospective entry into the WTO makes the customs dues regulating mechanism, effective now, unclear in the future. Therefore a set of other economic measures, like granting soft credits, preferential accessibility to natural resource deposits, regulation of payments for the use of resources, regulation of depreciable life, etc, is needed. Unavoidable is the use of non-economic measures, even substantial restriction or complete banning of exporting unprocessed raw materials and importing final products, as is common in some other countries. •  Amendments to be made in the regulatory basis to get it maximally match the relevant international laws and provide a normal legal regime for 79

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the operation of enterprises with partial or complete involvement of foreign capital in the natural resources sector of the Far East. Observance of nature protection requirements by all industries of the sector is today an obligatory condition for successful implementation of natural-resources projects. Taking into account the general state of the territory, the Russian Far Eastern natural-resource sector has possibilities to make the output of ecologically pure products its competitive advantage. The prior measure today is ecological certification of all industries and their output (received on a voluntary basis), and verification of their products’ origin. The mechanisms highlighted in the Kyoto Protocol (joint implementation and clean development projects) may become an additional means of advocating the environment-friendly industries and investing. To implement this task of the project it is expedient to work out a special program which would also include measures of updating technologies and equipments. •  Development of a ramified information network encompassing the partner-regions, and promoting the accumulation and the sedimentation of information on the condition and the dynamics of the natural resources basis and the nature-resources sector. •  Strict control exercised conjointly by the APR countries over illegal use of natural resources and international trade in illegally manufactured natural resource products. •  Intensification of scientific research in the fields of nature use, natural resource products manufacturing, and trade in them.

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4.1. Current trends of the power development In 2005, the net balance for primary energy imported to the Far East accounted for nearly 6.7 million tons of coal equivalent (million tce), with primary energy production estimated at 34.5 million tce, and gross primary energy consumption as high as around 39 million tce. Mainly due to the imports of oil, petroleum products, and coals delivered from Trans-Baikal and East Siberian areas, the aggregate volume of energy consumption in the Far East has not correlated, for a long time, with the amounts and with the structure of the primary energy production. The fuel and energy sector (FES) of the Far East does not operate as a unified technological unit. The spatial conditions for supply, and for fuel and energy use in the region are strictly differentiated. Relatively favorable prerequisites for producing fuels are found in the latitudinal zone of “South Yakutia – continental south of the Far East – Sakhalin” (“South Far East – Sakhalin” integration zone). Within the mainland bounds of the zone an electric power system is operating – Integrated Power Grid (IPG) “Vostok”. The South Far East 81

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– Sakhalin zone encompasses 77% of the population, produces 66% of the regional GDP, extracts over 70% of primary energy, and generates over 74% of electric power. Northern areas are provided with power by 18 to 20 autonomously operating power supply zones and about a hundred stations of local power supply services. Strategic priorities of the RFE FES have sustained some changes for the past 25 years. However, the macrostructure of the RFE FES is somewhat sluggish and hardly differs from the technological conditions of production, supply and use of fuels and energy, remaining practically unchanged from the time of the centralized economic system. The following are the major features of that macrostructure: •  a relatively small amount of energy consumption sparsely dispersed over a large territory; •  an outlying (confined) and localized character of energy supplying; •  too high energy production and supply costs; •  lack of a well-developed transit and distribution infrastructure; •  comparatively diversified structure of gross energy consumption; •  restricted options the customers may have in choosing the fuels; •  expediency of being involved in supplying fuels and energy to monopolistic businesses. According to the reference scenario of the RFE FES prospective development, the potential for restructuring the fuel and power supply system over the entire Far East is quite limited, mostly because the fuels and power supply system of the region is spatially confined to the points of final demand, and here the system repeats the spatial patterns of general economic activities and the populated localities distribution. For the past three or four years, the systemic dynamics of supplying the Far East with fuel and power has acquired new features, new structural peculiarities and strategic potentials. Against the backdrop of the enlivening of national and regional economies since 2002, the provision of the Far Eastern consumers with fuel and electric power has tended to stabilize. In comparison with the period of recession during the second half of the 1990s, the acute issues of non-payment for the use of fuel and power resources have noticeably slackened off.   ������������������������������������������������������������������������������������ For example, in the southern areas of the FE the annual primary energy consumption makes up only 15 tce per 1 sq km, while in the Central federal okrug it amounts to 280, the Privolzhskiy (Volga) federal okrug 200, provinces of north-east China 300, and Japan 1900 tce.   ������������������������������������������������������������������������������������������ The ratio of average production tariffs in the Far East and in Russia on average in 2004– 2005 accounted for 1.6 times for electric power, and 1.84 for central heating.   ��������������������������������������������������������������������������������� According to assessments made at the Economic Research Institute (RAS FEB), the primary energy sources, consumed in the Far East, included coal (44%), liquid fuel (38.1%), natural gas (10.9%), renewable resources (3.3%), and others (3.7%).

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In 2004–2005 the average electric power tariff growth index in the Far East, as a rule, kept pace with the rate of actual inflation and corresponded to the consumer price index (CPI). In 2002 to 2005, the average price for the major type of fuel, i.e. coal for generation, fluctuated within the ranges close to the CPI. The main pressing is made on the petroleum products prices that in 2002-–2005 were defined by a very high dynamics of the world prices for oil and petroleums, remaining practically irresponsive to internal prices of potentially competitive fuels (natural gas and coal). After a protracted structural crisis, the production and financial state of the major fuel industry in the Far East, the coal industry (which provides the region with 64% of the primary energy) is gradually stabilized. When particularly unprofitable coal mines in Primorskiy Krai, Sakhalinskaya and Magadanskaya Oblast were shut down, the share of undermine coal extracted in the Far East amounted to 10% (26.1% in 1991). In 2002–2005, coal production in the region increased by 2.6 million tons (by 8.6%). The further considerable growth of coal extracted in the region is tightly linked by investors with firm guarantees that the products will really be sold. In the FES of the region there are still not enough investments to enhance the updating of the equipment and the assuredness of fuel and electric power supplying to the industrial and social spheres. Nevertheless, in 2002–2005, 66.4 billion rubles were spent on the “Far East and Trans-Baikal areas” federal targeted program, 35 significant structural projects being under implementation nowadays. The most noticeable results have been achieved in the implementation of a capital intensive project of constructing the Bureya hydropower plant with an estimated capacity of 2 million kW (an average annual yield being 7.1 billion kWh per year). During the period of 2003-2005, nearly US$1 billion was invested to the construction of the Bureya hydroelectric station. The commissioning of the fourth hydroelectric unit of the Bureya station (335 MW) in November 2005, facilitated the exploitation of a half of the planned generation capacity, 1005 MW (3.5 billion kWh per year). For simultaneously transporting the power from the Bureya hydroelectric station, high voltage (500 kW) power transmission lines had been built to connect the Primorie thermal power station, the Bureya hydroelectric station, Khabarovsk, Khekhtsir-2 and Vladivostok substations. The implementation of the Bureya hydroelectric station project and the completion of the construction   � Kalashnikov, V.D. TEK Dalnego Vostoka: ot taktiki vyzhivaniya k strategicheskim resheniyam (Far East FEP sector: from the tactics of survival to strategic decision making) // Vestnik DVO RAN. 2005. No 5. Р. 12–22.   ����������������������������������������������������������������������������������������� Available are the rated data related to the Bureya hydroelectric station under construction. The Bureya hydroelectric power plant includes a Nizhne-Bureya station with a 320 MW capacity and an average generation of 1.6 billion kWh per year.

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of a 500 kW transit will ensure an economical supply of power and electricity to meet the domestic needs of the south Far East until 2010–2012. In 2003–2005, investment projects were intensively developed to build a production, transportation and processing infrastructural complex within the implementation of “Sakhalin-1” and “Skhalin-2” projects. In 2008, these two projects will guarantee a production of more than 15 billion cubic meters of natural gas, over 17 million tons of crude oil and thus will double the gross output of primary energy in the Far East (Fig. 4.1).

Fig.4.1. Natural gas (in billion cu m) and crude oil (million tons) as rated in “Sakhalin-1” and “Sakhalin-2” project

Under the program of the technical upgrading of the Komsomolsk and Khabarovsk oil refineries, in 2000–2004, over US$340 million were invested, and advanced equipment for oil secondary processing was put into operation: installations for catalytic reforming, gasoline light fractions isomerization, diesel fraction hydrofining and others. In 2002–2005, the construction of the following most important projects of gas-and-transportation infrastructure was underway: •  gas pipe-line “Srednevilyuisk gas-and-condensate field – Mastakh – Bergeh – Yakutsk, Line 3” (to be put into operation in 2008); •  gas pipe-line “Sakhalin – Komsomolsk-na-Amure – Khabarovsk” (put into operation in 2006). From the year 2000, the key operators of the Far East energy market have been subject to a mergence under a jurisdiction of large financial and industrial   ����������������������������������������������������������������������������������� According to assessment done by the RAO UES Russia company, the effective utilization of thermal power stations of the IPG “Vostok” and the generation of 6.3 billion kWh by the Bureya hydroelectric station in 2007, will make the weighted mean tariff on electric power in the IPG “Vostok” lower by 10-12% in real terms against the basic terms of 2004.    Output of hydrocarbons is prognosticated from the data at the Sakhalinskaya Oblast administration office.

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groups of Russian stakeholders with a powerful investment potential. On the other hand, the vertical integration-and-merger policy is being accompanied by a certain clarification of the structure of strategic companies-operators and of the frame-bound operation conditions of the basic fuel-and-power markets in the region. Markets for oil, petroleum products, coal, and electric power get increasingly monopolized, but the regimes of their operation remain nontransparent or at least indefinite. So far, the gasification, municipal electricity and heat supply services sectors have not been handed over to the powerful strategic operators. The most noticeable absorption, merging and vertical changes in the structure of the Russian Far East operators’ property are occurring or are likely to occur in coal and power industries, the latter presently are being reconstructed in a big way. Despite anticipations, the real growth of industrial production, the transportation freight turnover, and the regional GDP in the Far East does not result in a growth of energy consumption (Fig. 4.2). During 1998–2004, the real GDP increased by 35%, while the grosss consumption of electricity increased only by 14.9% (20.4% in the south). In 2005, the growth of the GDP exceeded 4%, although the electricity consumption the region was calculated to grow only by 1% (2.1% in the south). Consumption of central heat and of primary energy grew at still smaller rates.

Fig. 4.2. Regional GDP, industrial product, gross electricity consumption in the RFE, over 1998–2004 (1998 data = 100%)

Modest requirements in energy, at the period of a relative stabilization of the real dynamics of electric power tariffs and prices for the primary types of fuel (coal and natural gas), have substantially eased the burden of energy 85

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expenses in the structure of the costs assumed by the Far East end-users. For example, the share of fuel and power expenses incurred by industrial production customers of Khabarovskiy Krai accounted for 8.2% in 2004, against 15% in 1995. The balance of the primary fuels and electric power is generally being brought to equilibrium. The coal industry capacities, yet standing idle in the Trans-Baikal area and East Siberia, as well as the natural gas supplied from the Sakhalin shelf to the Khabarovskiy Krai market, secure the provision of the South Far East and Sakhalin with fuels. The northern and the autonomic areas of the Far East, on the whole, provide themselves with coal and bring in petroleum products from the oil refineries of Khabarovskiy Krai and East Siberia. The implementation of the most important structural projects of the FES, and the priorities of foreign and Russian industrial stakeholders (investing in fuel-and-power projects) give the Far East an opportunity to increase the output of primary energy resources in 2010-2011 to 83-84 million tce per year, to fundamentally restructure the balance of the primary energies in favor of the energy exports (i.e. to export oil, liquefied natural gas, coking coals, and electric power to the local industrial zones of China), and to simultaneously fulfill several economic and restructuring tasks. For the electric power industries of the region, primarily in the south (the IPG zone), the electric power balances look so far satisfactory. One may rest assured that in the upcoming five or seven years the Far East areas won’t be threatened by any balance deficit in fuels and electric power. The improvement of the current and medium-term conditions for energy supplies calls for the new accents and priorities in the energy policy that used to pursue the fulfillment of tactical tasks of surviving in the region, and now is to begin to address and solve the issues of eliminating the real serious bottlenecks and, which is more important, to derive strategic advantages from the implementation of large scale projects involving the development of the Far East and East Siberia energy sector.

4.2. Strategic problems and challenges Favorable energy geo-policy. Russia has always been noted for an extremely polarized character of the location of deposits and of the centers for production (extraction) of the basic primary fuels. During the economic transformations, the territorial concentration of primary energy production intensified. Tyumenskaya Oblast and the areas of the Siberian federal okrug secure 77–79% of the production (extraction) of the primary energy of Russia, while their own energy consumption constitutes about one fourth of the country’s consumption. 86

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Voluminous line hauls of fuel (natural gas, oil, coal) have always been, and still are some of the consequences of the geographical discrepancies between the deployment of major fuel bases and the location of the regions consuming the primary fuels. In the foreseeable future, their hauls will even increase. Here lies the reason why fuel and electric power supply costs in Russia differ from area to area. Since transporting natural gas and crude oil through pipe-lines costs less than carriage of coal by railway, preference to gas of all the primary energy consumption, as is observed in the developed European areas of the country, appears economically justified. This gas-based frugality allows the government to level down the spatial differences in energy supply costs over Russia through the regulation of prices for natural gas (as well as through the development of nuclear power in central, south and north-west Russia). The difference between the tariffs paid for electric and thermal power in the Far East and averagely across Russia will gradually reduce. This will come as an averaged effect of the relative rise of the real tariffs and of the rise of the regulated prices for natural gas in Russia, as the main consumers of gas are the European areas of Russia. From the perspective of the strategic provision of the country with fuel resources, the resource base of East Siberia and the Far East is one of the few ones in the Russian Federation that is capable to meet the future needs. These areas’ shares, in terms of total initial resources, account for 15.2% for oil, almost 19% for natural gas, 84% for coal, and 75.7% for hydropower. However, so far neither East Siberia nor the Far East are considered as national centers of energy resource production (extraction). Positively perspective for the region is the willingness of the RF to develop East Siberian and Far East energy resources, and to transport them to NEA where energy consumption has reached 20% of the world and whose dependence on the import of primary energy is getting stronger. Involvement in participating in large international export-oriented projects aimed at development of East Siberian and Far East energy resources has given rise to a new strategic initiative – “The eastern vector of the Russian energy policy”. During a relatively short period this “eastern vector” ceased to be an object of academic discussions and took a place among top priorities of the state. “The Eastern Vector of the Russian Energy Policy”. The material potential for the new “eastward” initiative is determined by several large-scale projects, designed to develop the raw energy resources basis, the infrastructure, and the electricity power basis, as well as by the following high profile undertakings: •  transcontinental oil pipe-line “East Siberia – Pacific Ocean” (ESPO Project);   Resources of oil and natural gas deposited in sea shelf are not included here.  � Khristenko, V. Proryv na Vostok (Eastward breakthrough). The Vedomosti. February 6. 2006. P. 4. 



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•  package of agreements about the terms for large scale deliveries of electric power from Russia to the PRC •  implementation of the project “Program of creating a common system of extraction, transportation and supply of gas in East Siberia and the Far East envisaging a likely export of gas to the markets of China and other countries of the Asia-Pacific Region” •  packaging of programmatic documents licensing the exploration and the development of hydrocarbon deposits in East Siberia and the Far East •  activating more intensively investing in coking coal deposits in South Yakutia. These projects now have reached the state of being tested for their technical, economic and investment feasibility, however they are poorly coordinated, the conditions and consequences of their implementation are not quite clear. The “eastward vector” initiative stresses the necessity of revealing and preparing the conditions and measures ensuring the maximization of the system effects of the development of the large-scale export-oriented projects in Eastern Russia. •  Creation of the infrastructure by way of building interstate gas and oil pipe-lines and power transmission lines will facilitate the integration of Russia’s eastern areas into the energy area of NEA, and promote a wider international economic cooperation of Pacific Russia. •  Various ways and forms for exporting natural gas, crude oil, and electric power from East Siberia and the Far East in the Pacific direction require a well-coordinated approach to their identification and concert actions at all the stages of their realization. Ensuring of effective demands for energy resources of the Russian Far East. The future character and dynamics of the FES of the Far East is principally determined by large scale energy resource and infrastructure projects, and the complex of political, institutional and economic resolutions made in the context of these projects. If the major energy resource export-oriented projects were combined into a long-range production plan, the development of the primary fuel production in the Far East could have reached in 2020 nearly 200 million tce, with the net output of electricity as large as 105 billion kWh (Fig. 4.3)   � Bushuyev, V.V. and Mastepanov, A.M. Vostochny vector energeticheskoi politiki Rossiyiv // Energeticheskaya politika Rossiyi na rubezhe vekov: v dvukh tomakh (The Eastern Vector of the Russian Power Generation Policy // Power Generation Policy in Russia on the turn of centuries: in 2 volumes) M.: Papirus PRO, 2001. Vol. 1; Prioritety energetichekoi politiki: ot energeticheskoi bezopasnosti – k energeticheskoi diplomatii (Priorities of power generation policy: from energy security to energy diplomacy). P. 631–637; Saneyev, B.G. Energeticheskaya kooperatsia Rossiyi i stran Severo-Vostochnoi Aziyi (Power engineering cooperation of Russia and Northeast Asia) // Region. 2004. No 1. P. 137–144.   ������������������������������������������������������������������������������������ Calculations made at the Economic Research Institute (RAS FEB) on the energy model.   ������������������������������������������������������������������������������������� Net output of electricity is the gross output minus the “own use” of power stations.

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Fig. 4.3. Production and consumption of primary energy and electricity in the RFE

However, such high figures can be reached only under special conditions. It is for a long time that the fuel and electric power supply sector in the Far East has actually been performing the “infrastructural” functions for the regional economy without noticeable attempts of export trade with other regions of Russia or countries. Due to a relatively small scale of the Far East economy, energies are not consumed in great amounts. The current gross consumption of primary energy in the region is estimated at about 3940 million tce, and that of electricity at 40 billion kWh; the consumers being dispersed over a vast territory. The small scale of the regional demand obstructs private investing in the development of fuel and power projects in the Far East. Calculations show that if a region is capable to produce 198 million tce of primary energy and to generate electric power at an amount of 105 billion kWh, big volumes of fuel and electricity will be required for export (Fig. 4.4).  ������������������������������������������������������������������������������������ Electric power supply in the Far East constitutes not less than 5% of Russian-wide.



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Thus 82% of the output of oil and petroleums, 67% of natural gas, 66% of coal, and about 40% of electric power should be directed to the NEA markets. On the whole, about 70% of the primary energy produced in the Far East is oriented to the Asian market. Of the entire fuels assortment, only crude oil is exported with no visible restrictions in demands or barriers, as interests in oil and a growing dependence on oil imports lie in the center of energy security policy of the NEA countries. As for the petroleum products, natural gas, coal and especially electric power, here market is not that boundless.

Fig. 4.4. Forecasted structure of demand on energy resources of RFE in 2020

The transformation of the Far East into a region of large-scale energy resources production and transit is conducive to the deployment here of energy-consuming users and facilities for processing oil, natural gas and coal. As a result, the gross energy consumption in the region can reach over 60 million tce in 2020 (a 1.5 time growth against the basic figures of 2005).

4.3. Assessment of the future development What actually is assessed is the progressing of the integration of the Far East and East Siberia into the energy sector of Northeast Asia, and the conversion of the Far East into the Russian Northeast Asian center of production and supply of fuel and power-generating resources. The strategy of the conversion of the Far East into the Russian Northeast 90

4. Fuel and power complex of the Russian Far East

Asian center of production and supply of fuel and power, in its turn, presupposes a package of initiatives designed to promote cooperation between Russia and NEA in the energy field, and particularly in the following undertakings: •  the “East Siberia – Pacific Ocean” oil pipe-line; •  development of the “Sakhalin-1, -2, -3 and -4” shelf projects and the organization of their implementation; •  cross-country gas pipe-lines from the Sakhalin shelf to the Korean Peninsula, Northeast China and, very likely, to Japan; •  powerful “Far East – China”, “Far East – DPRK” and “Sakhalin – Japan” electric power bridges; •  development of the rich Elgin bituminous coal deposit. The “South Far East – Sakhalin” zone may comprise large primary fuel and power producing bases of inter-regional and international significance: •  strippings and mines in South Yakutia (with annual capacity of more than 15 million tons of coal); •  Elgin deposit (the run-of-mine coal output is estimated at 20 million tons per year for 2015, and 30 million tons for 2020); •  projects for oil and natural gas extraction on the Sakhalin shelf and in West Yakutia with a gross output of over 110 million tce per year in 2020– 2025. The predictive appraisals of power generating resources are presented in Table 4.1. Table 4.1 Production of fuels in the RFE 2005 (����������� estimation�)

2010

2015

2020

Bituminous coal extraction (million tef)

13,4

17,9

34,9

41,6

Brown coal extraction (million tef)

6,5

6,2

7,0

5,8

Natural gas production (billion cubic meters)

3,6

21,3

33,9

60,4

Oil production (million tons)

5,2

21,8

35,2

49,5

Resource

Oil refining (million tons)

9,0

9,8

12,0

18,5

Primary energy production (million tce)

34,5

84,0

136,7

198,0

Source: Economic Research Institute (RAS FEB).

The natural growth of energy consumption, the development of energy processing industries in final energy consumption sector, the growth of electric power exported from the South Far East of Russia (IPG “Vostok” area), and the growth of its generation will bring to an intensive building up of the region’s domestic demand for primary energy: from 45.7 million tce in 2010 to 61 million tce in 2020 (Tab. 4.2). The packaging of resource and infrastructure energy projects will be conducive to turning the Far East into a region of production and transit of large 91

Part 2. FORMS AND STRUCTURE OF THE RUSSIAN FAR EAST AND THE APR INTEGRATION

volumes of hydrocarbons, electric power, and coking and power-generating coals transported in the direction of the major energy consuming centers of the NEA countries. The positive balance of trade in 2020 may reach about 130 million tce of primary energy, and over 30 billion kWh of electricity. Table 4.2 Consumption of primary energy in the Far East Resource

2005 (estimation)

2010

2015

2020

mln tce

%

mln tce

%

mln tce

%

mln tce

%

Petroleums

15,1

38,9

15,5

35,0

16,5

31,5

18,8

28,9

Coal

16,5

42,5

15,5

35,0

17,8

34,0

16

24,6

Natural gas

4,1

10,6

9,3

21,0

12,9

24,7

23

35,3

Hydro

1,6

4,1

2,4

5,4

2,7

5,2

4,6

7,1

Other

1,5

3,9

1,6

3,6

2,4

4,6

2,7

4,1

Electricity (balance of trade)

–0,1

–

–0,8

–

–1,3

–

–3,9

–

Total

38,6

100

43,7

100

51,3

100

61,2

100

Source: Economic Research Institute (RAS FEB).

The quality of the domestic use of primary resources in the RFE will improve and become diversified due to the building of a specialized infrastructure oriented to exports, and to the extending of its services to the Far East consumers. The energy consumption mix will be more or less equally made up of oil fuels (29% in 2020), coal resources (25%) and natural gas (35.3%). The “The Far East – NEA” joint projects of energy cooperation, as well as the coordination of priorities based on energy-efficiency, will promote the construction of the hydro-power stations in the South Far East (the series of Nizhne-zeya and Urgal hydropower stations, South-Yakut and Dalnerechensk hydropower projects, etc.), and the use of natural gas, that would be required also due to the new thermal power stations built on the basis of the steamand-gas installations technology in Khabarovskiy and Primorskiy Krais and on Sakhalin island. Electric power exports and the emergence of high power load consumers in the South Far East will require the capacities of nearly 24.2 million kW with the net output of nearly 105 billion kWh in 2020, while the hydropower stations’ net output will amount to nearly 37 billion kWh (35% of the Russian Far East power stations’ output) (Tab. 4.3). Thermal power stations will be mainly based on gas units. The consumption of natural gas by thermal power stations of the Far East may reach 43.2% in 2015 and over 60% in 2020. 92

4. Fuel and power complex of the Russian Far East

With the replacement of the obsolete equipment in the IPG “Vostok”, the new generating capacities additions in 2006-2020 are estimated to account for 15500 MW. This is a very tough challenge in the energy generation sphere. Table 4.3 Assessment of a perspective development of the Far East electric power sector 2005 (����������� estimation�)

2010

Installed capacity for the end of year (GW)

13,0

15,0

17,4

24,2

Electric net output*, billion kWh

33,2

49,1

60,5

105,0

   hydropower stations, billion kWh

12,5

19,4

21,8

36,9

Export of electricity (billion kWh)

0,8

6,6

10,4

40,0

Index

2015

2020

Power stations’ fuel balance structure, on the whole, %

100,0

   petroleums

10,4

100,0 100,0 100,0 7,0

5,3

4,4

   coal

74,9

57,3

51,5

33,4

   gas

14,8

35,8

43,2

62,2

* Gross output minus “own use” of power stations. Source: Economic Research Institute (RAS FEB).

The rounded up figures show that, taking into account the estimations made for the year 2030, the total gross investment put into industrial and infrastructural projects of the RFE FES in 2006-2030 can reach US$150 billion (Tab. 4.4). The major objects of investment are extraction and pipe-line transportation of oil and natural gas (52.5%) and electric power (28.6%). Table 4.4 Predictive appraisals of summarized investments in the RFE FES industries in 2006–2030 (in prices of the year 2004) FE������������ S����������� industries ����������

Investments million dollars

%

Coal extraction and processing

6828

4,4

Oil and gas extraction and transportation

80592

52,5

Oil refining

4917

3,2

Electricity generation industry�*

43929

28,6

Heat power industry��*

17264

11,2

FEP sector �������������� (total)

153530

100,0

* Including expenses on export electric power lines, minus investments in the distribution infrastructure for heat and electricity. Source: Economic Research Institute (RAS FEB).

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4.4. Initiatives of the Russian Federation in the development of the energy sector of East Siberia and the Far East with participation of international companies. Policy and major initiatives of Russian Government for the development of energy resources of East Siberia and the Far East For the past few years, the Russian Federation put forward and started developing several important initiatives that will determine the policy of developing the energy potential of East Siberia and the Far East. Enhancement of Pacific benchmarks in extraction and export of oil and natural gas The strategic priorities launched by the Russian Government envisage the following benchmarks for the year 2015: •  Russia will extract nearly 530 million tons of oil per year and export about 310 million tons •  The extraction of oil in recently developed oil-and-gas fields of East Siberia, Yakutia, and the Sakhalin shelf is estimated at an amount of about 70 million tons per year •  The Asian Pacific Region will provide 17–20% of the Russian crude oil export •  The extraction of natural gas will reach 740 billion cu m per year, with 75 billion to be extracted in eastern parts of the country. Enhancement of the eastern areas’ and the continental shelf’s roles in regeneration of national resources of oil and gas The Russian Federation is known to be rich in hydrocarbons. West Siberia and the Volga-Urals district are the major oil and gas bearing areas of the country. However, the structure and the quality of these resources are gradually deteriorating. Over 75% of oil and gas deposits have already been involved in the industrial development. The depletion of the major oil and gas bearing provinces constitutes 70–80% in the North Caucuses, 50–70% in the Urals and Volga areas, and over 45% in West Siberia. Since 1992, annual oil extraction in Russia has not been counterbalanced with the increase of the explored reserves. In 2005, the Russian Government endorsed “The long-range state program of exploration and regeneration of raw minerals, for a period of 2005–2020.” On the basis of this program and in connection with the implementation of the ESPO pipe-line project, in 2005, the Ministry of natural resources of Russia prepared “The program of geological exploration and licensing of the oil and gas fields in East Siberia”.   �������������������������������������������������������������������������������� ������������������������������������������������������������������������������� Strategija razvitija neftegazovogo kompleksa Rossii na period do 2010-2015. // Energeticheskaja politika: Prilozhenie k obshchestvenno-delovomu zhurnalu (Russian oil-andgas sector development strategy for the period until 2010-1015 // Energy Policies: Appendix to a socio-economic journal). M.: State enterprise of RF Ministry of Industry and energy, 2005.

94

4. Fuel and power complex of the Russian Far East

In 2006, the Ministry of natural resources of Russia elaborated “The strategy of exploration and development of the oil and gas of the continental shelf of the Russian Federation, for a period until 2020”. The following are the highlights of these documents: •  the areas of the Timano-Pechorskiy basin, East Siberia and Yakutia, and the shelves of the Barents Sea, the Kara Sea and the Sea of Okhotsk are acknowledged to be the most promising in producing oil and gas; •  the bulk of the geological exploration work over the promising areas is proposed to be done at the expense of private (also foreign) investors of the minerals. Improvement of the institutional regime of using mineral wealth Today, the Russian Government and the State Duma are preparing a new version of the federal law “On mineral wealth”. Here are the main points covered by that law: •  replacement of “vague-term” administration-issued licenses permitting to use mineral wealth, by contractual relations; •  an auction-like manner of transferring the mineral wealth use rights; •  express specification of mineral wealth use terms throughout the contract, and of the conditions under which the contract should be dissolved; •  conditions under which a commercial turnover of rights to mineral wealth use is admitted; •  express reservation of the first option right, i.e. the right of the mineral wealth user to development of deposits found untapped in the process of their geological prospecting exploration; •  definition of the category of the strategic deposits, and the legal identification of right of access to strategically important deposits for foreign investors. The Russian Government, and the concerned committees of the State Duma, plan to make amendments to the Tax Code of the Russian Federation in part of the differentiation of tax rates on the extraction of natural mineral resources (royalty) from oil and gas deposits of East Siberia and the continental shelf. In August 2006, the RF State Duma adopted the law on amendments to be made in the Tax Code, concerning the zero rate of the royalty for a number of deposits. The law determines a zero rate for portions of entrails located fully or partly in the East-Siberia oil-and-gas province (within the bounds of Sakha Republic (Yakutia), Irkutskaya Oblast, and Krasnoyarskiy Krai). The privilege is going to be valid until the accumulated volume of the extracted oil reaches 25 million tons. A separate bill is envisaged to be submitted, in which preferential rates on the royalty are proposed for geological prospecting and development of continental shelf deposits.   ������������������������������������������������������������������������������������������ In specified cases the competition-like procedures of transferring mineral wealth rights remain.

95

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Restructuring of the electric power sector. In 2003 a package of federal laws was adopted, with the priority given to the law “On Electric Power Sector”, which triggered the process of industrial restructuring. The effect of the restructuring of the electric power sector is mainly expected in the new structure of the industry, where competitiveness-oriented businesses would be developing on the basis of private investments, while monopolistic units would take into account the national security interests of the state. In 2004–2006, the vertically integrated energy companies were practically divided into natural-monopolistic (power transmission, dispatching management) and potentially competitiveness-oriented businesses (generation and sale of electric power, maintenance and repairing services). The energy generation industry has been transformed into 14 Territorial generating companies (TGC), six Wholesale generating companies (WGC), and one Hydro-WGC. Atomic power stations have been combined into a common state company “Ros-energo-atom”. The Hydro-WGC, the “Rosenergo-atom” company, power grid-operated and dispatching companies should remain under the state control (not less than 50% of capital stock). The law does not make provision for any restrictions for private (as well as foreign) investors’ strategic participation in TGCs and WGCs. The power systems of the Far East have not been found so far competitive enough. They continue to operate in the regime of monopolistic production and distribution of the electric power. The participation of private investors in the Far East companies may not exceed 50% of the capital stock. In September 2005, a plan of reforming the Far East electric power sector was endorsed The aim of the reformation is to create by the year 2007, in the south Far East, a unified holding “The Far East energy company” (FEEC joint-stock company) that would own the controlling state block of shares and later the shares of the emerging affiliated companies, each of which would specialize in one field of activity (generation, networks, sale). The electric power market in the IPG “Vostok” will be supplied by two vertically power generating companies – FEEC joint-stock company and the Hydro-WGC. Principles on which foreign companies may take part in prospecting and developing the oil and gas resources. In July 2006, during the St Petersburg G8 Summit, President Putin’s administration proposed to put the energy security issue on the agenda. A keyed up dialogue Russia and the European Union carried on in the past months of 2006 revealed the pragmatic essence of Russia’s approach to this   ���������������������������������������������������������������������������������������� Informatsionny bulleten o khode reformirovaniya elektroenergetiki Rossiskoi Federatsii v 2005 godu (The process of electric power sector reformation in the RF in 2005. Informational bulletin). M.: RAO “UES Rossiyi”, 2005.

96

4. Fuel and power complex of the Russian Far East

issue in the context of international interests. This approach is referred to as a concept of “assets swapping” between the producers and consumers of energy resources. Russia considers that the policy of diversification of energy consumption and energy supplies, prevailing today in the world, should be complemented by the strategy of diversification of concerted participation of the concerned countries-partners: suppliers and consumers of fuels. Russia is willing to develop her oil and gas deposits in concert with other countries, but considers that the countries-partners should render the Russian companies an access to the energy transmission and distribution infrastructure. The new version of the federal law “On mineral wealth”, now under elaboration, does not envisage any bans on the participation of foreign companies in auctions for the rights to minerals use. However the bill makes provision for a number of stipulations in regard to the participation of foreign companies in auctions for the rights of using the “strategically important” deposits. Thus, it is stipulated that only joint ventures with a foreign participation share not less than 50% of the authorized capital may be admitted to take part in auctions for “strategically important” deposits. The discussion on the categories of strategically important deposits is not yet over. According to the recent proposals of the Ministry of natural resources of Russia, concerning oil and gas resources, it is expedient to refer deposits of over 70 million tons of oil and 50 billion cu m of natural gas to “strategically important”. On the 5th of July, 2006, the RF State Duma adopted a federal law “On gas exports”. The law stipulates the guidelines of the state regulations for exporting gas, and grants an exclusive right to export gas to an organization which is the owner of a national gas supply system (or to its subsidiary company), in whose authorized capital the share of the owner of the national gas supply system accounts for 100%. The provisions of the law “On gas exports” apply to gas, extracted from all the kinds of gas deposits and transported in a pipe or liquefied state. Thus the law “On gas exports” identifies the regime of a “unified   ���������������������������������������������������������������������������������� The North-European gas pipe-line (NEGPL) can serve as a pilot project within the “assets swap concept”. In the frameworks of the NEGPL project, Russia agrees to admit German companies to the joint development of the South-Russia gas bearing field. In return, the “Gazprom” joint stock company receives a share of the German companies’ gas sharing assets. The development of the Shtokman deposit in the Barents Sea will give another opportunity to maintain the “asset swap concept”.   ����������������������������������������������������������������������������������������� There is a restrictions for the companies registered on the territory of Russia, if the foreign legal entities or individual persons have the right to a direct or indirect control over more than 50% of votes corresponding to the authorized capital. This restriction is not applied if such foreign legal entities are under the control of Russian individual persons or legal entities.   ��������������������������������������������������������������������������������������� The provisions of the law do not apply to production sharing agreements on the “Sakhalin-1” and “Sakhalin-2” projects.

97

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export channel” (a single agent purchasing natural gas extracted or in transit in Russia), whose functions are going to be performed by the “Gazprom” company or its subsidiary company. The most important investment and integration projects Among the large-scale projects aimed at investment cooperation in the sphere of exploration and development of oil, gas, and coal resources of East Siberia and the Far East, are the following: •  Chayandinsk gas and condensate bearing deposit in West Yakutia; •  “Sakhalin-3” project blocks; •  “Magadan-1”, “Magadan-2” and “Magadan-3” blocks in the Sea of Okhotsk; •  sections of the Yurubchenko-Tokhomsk zone in Krasnoyarskiy Krai; •  Elga bituminous coal deposit in South Yakutia. All the deposits to be developed within the projects have characteristics of strategically important deposits and can be transferred for use after the adoption of the new version of the federal law “On mineral wealth”. The best opportunities for all-encompassing cooperation of the Far East and the NEA countries are found within natural gas and electric power sectors. Program of creating a common system of extraction, transportation and supply of gas in East Siberia and the Far East envisaging a likely export of gas to the markets of China and other countries of the Asia-Pacific Region This project is a strategically important outcome of the RF Government’s decision (presented in the form of a Program) to elaborate a well-aligned and compact policy enabling the development of gas resources in East Siberia and the Far East, and the building of a gas transportation infrastructure here, good enough to provide not only the two areas, but also the markets of China and the other NEA countries with the gas. The developer of the Program is “Gazprom” company. The highest priorities of the Program are: •  building of an infrastructure for pipe-line gas supply in the East of Russia; •  a comprehensive approach to the designing and the implementation of projects related to development of gas deposits, building gas processing facilities, and creating the infrastructure for transportation and gasification of the vast territory of East Siberia and the Far East;   �������������������������������������������������������������������������������������� Based on: Programma sozdaniya v Vostovhnoi Sibiri I na Dalnem Vostoke edinoi sistemy dobychi, transportirovki gaza n gazosnabzheniya s uchyotom vozmozhnogo eksporta gaza na rynki Kitaya I drugikh stran Aziatsko-Tikho-okeanskogo regiona. Osnovnye polozheniya. OAO Gazprom (“Program of creating a common system of extraction, transportation and supply of gas in East Siberia and the Far East envisaging a likely export of gas to the markets of China and other countries of the Asia-Pacific Region”. Principle provisions. Gazprom joint-stock company). M., 2005

98

4. Fuel and power complex of the Russian Far East

•  centralization of the Program implementation management through designation of a single operator (“Gazprom” joint stock company); •  pursuing a policy of “a single export channel” in the Pacific direction. According to the Program, the resources of East Siberia and the Far East present an adequate basis for a creation here of a gas extraction center of national and international significance, with an estimated output of natural gas at 200 billion cu m per year. Taking into account the location of deposits, the Program assigns the following four centers of industrial extraction of gas: 1. Sakhalin – on the basis of the deposits of the island’s shelf (“Sakhalin1”, “Sakhalin-2”, and later with consequent accomplishments of “Sakhalin3” to -6 projects) 2. Yakutia – on the basis of the Chayandinsk deposit 3. Irkutsk – on the basis of the Kovykta gas-and-condensate deposit 4. Krasnoyarsk – on the basis of the Sobinsko-Paiginsk and YurubchenoTokhomsk deposits. In the preparation of the program proposals, the “Gazprom” examined 12 variants: six variants concerning production and gas transportation routes, with two variants concerning domestic needs (“development of gas chemistry” and “lack of gas chemistry”). In its Program draft report, Gasprom notes a higher efficiency of the “Vostok” variant. The latter envisages: •  orientation of the Irkutsk and Krasnoyarsk gas extraction centers to the needs of the Russian unified gas supply system (UGSS); •  development of the Sakhalin gas extraction center, independent of the UGSS and aimed at meeting the needs of Sakhalinskaya Oblast, and Khabarovskiy and Primorskiy Krais through the development of an effective export infrastructure for the pipe-line transportation of gas to Northeast China and the Korean Peninsula, and also through the development of the liquefied natural gas infrastructure in South Sakhalin. The Yakutia gas extraction center, according to the “Vostok” variant, is to meet only the domestic needs of the Sakha Republic (Yakutia). The Program envisages four stages of developing the gas resources of East Siberia and the Far East (until the year 2030). At the first stage (until 2010), the Sakhalin gas is to be supplied to gas consumers of Sakhalinskaya Oblast and Khabarovskiy Krai; a gas pipe-line is to begin to be constructed for exporting gas, by means of a trunk pipe line, from the Sakhalin shelf deposits on to the Korean Peninsula and, by means of a tee-shaped pipe-line, in the direction of the PRC. In all the scenarios of the “Vostok” variant, the industrial objects covered by the “Sakhalin-3” project are envisaged to be put into operation in 2012. Already in 2010, the Vladivostok area is envisaged to be provided with 3 billion cu m of gas. 99

Part 2. FORMS AND STRUCTURE OF THE RUSSIAN FAR EAST AND THE APR INTEGRATION

Extraction and distribution of natural gas, as is recommended by the Program draft for the Sakhalin gas extraction center, is shown in Table 4.5. Table 4.5 Extraction and distribution of natural gas of the Sakhalin gas extraction center, billion cu m Indices

2010

2015

2020

2030

Output������� , total �����

25,7

38,2

60,0

71,2

Export������� of ������ LNG

15,0

15,0

22,5

30,0

Export to PRC*

2,0

8,5

15,0

15,0

Export to Korea*

3,0

6,5

10,0

10,0

Resources for the domestic market

5,1

6,9

9,9

13,4

* Pipe-line transported gas. Source: Programma sozdaniya v Vostovhnoi Sibiri i na Dalnem Vostoke edinoi sistemy dobychi, transportirovki gaza i gazosnabzheniya s uchyotom vozmozhnogo eksporta gaza na rynki Kitaya i drugikh stran Aziatsko-Tikho-okeanskogo regiona. Osnovnye polozhenia. OAO “Gazprom” (Program of creating a common system of extraction, transportation and supply of gas in East Siberia and the Far East envisaging a likely export of gas to the markets of China and other countries of the Asia-Pacific Region. Principle provisions. “Gazprom” joint-stock company). M., 2005.

The main conclusions of the Program draft markedly change the structure of natural gas strategic flows in the East of the Russian Federation in comparison with the projects submitted in the past years by various oiland-gas operators and companies. The Program draft imposes a blockade on the concept of the international feasibility study of the Kovykta gas project envisaging the Kovykta gas pipe-line supply to China and Republic of Korea, by means of its West-orientation in the direction of the UGSS of Russia. The priorities of the Program noticeably enhance the significance of the Sakhalin oil- and-gas extraction center, especially for the pipe-line transported gas, and attach the greatest importance to the strategic direction of the trunk gas pipe-line on the “Sakhalin – Khabarovskiy Krai – Northeast China – Primorskiy Krai – Korean Peninsula” route. President of the RF commissioned the Russian Government to have specified and endorsed the “Program of creating a common system of extraction, transportation and supply of gas in East Siberia and the Far East envisaging a likely export of gas to the markets of China and other countries of the Asia-Pacific Region”, by the end of 2006.   ����������������������������������������������������������������������������������� The Kovykta feasibility study was accomplished jointly by “RUSIA Petroleum” jointstock company, the CNPC and the KoGas Companies in November 2003. The “Vostok” variant has a strong opponent in the person of “TNK-BP” company, the major owner of “RUSIA Petroleum” (over 62% of shares) and the licensed developer of the Kovytka gas-and-condensate field.

100

4. Fuel and power complex of the Russian Far East

Within the frameworks of this Program a joint initiative of Russia, Republic of Korea (with participation of DPRK), and PRC may be launched, that would envisage: •  formation of a consortium with “Gazprom” joint-stock company to take part in an auction for Sakhalin-3 project blocks; •  identification, with “Gazprom” joint-stock company, of principles and terms of “assets swapping”; •  elaboration, in concert with “Gazprom” joint-stock company, of a design for constructing the trunk gas pipe line “Sakhalin – Khabarovkiy Krai – Primorskiy krai – Korean Peninsula” with a tee shaped line to Northeast China; •  elaboration of proposals for investment cooperation in developing natural gas processing facilities. The Russia – China electric power bridge Chinese companies show real interest in the electric power sector of the Far East and East Siberia. At present, the IPG “Vostok” operates two inter-state power transmission lines along which electric power from the Amurskaya Oblast is delivered to border “load islands” of Northeast China. In 2005, the energy supplies to PRC reached 490 million kWh (in 2003, 162 million kWh). In 2003, a frame agreement was concluded between “InterRAO UES” company (the operator of the Russian export of electric power) and the Chinese “Sirius” company about delivering 13 billion kWh to the industrial zone of the city of Heihe within 10 years (2004–2013). In March, and then in July 2005, Agreements were concluded between “RAO UES Rossiyi” joint-stock company and the State power grid corporation (SPGC) of PRC, in compliance with which it was acknowledged expedient to address the complex issues of widening cooperation practice in the field of electricity. In March 2006, “RAO UES Rossiyi” and the SPGC of PRC concluded an Agreement about a comprehensive elaboration of a feasibility study of the project concerning electric power supply from Russia to China. The Agreement highlights the willingness of both sides to also conclude a long-range contract about the delivery of electric power from the Russian Federation to the PRC, supported by a large scale building of new generating and transmission lines over the territory of Russia (Far East, Trans-Baikal and East Siberia areas) and the territory of PRC. The Agreement envisages a feasibility study of electric power supply from Russia to PRC in the volume of nearly 60 billion kWh per year. The parties intend to elaborate, until October of 2006, a tentative feasibility study of the workability indices of the project. In the tentative feasibility study, target dates for the accomplishment of generating and transmission units, as well as the volumes of power supplies will be specified. After that, the parties will start working on a full-scale project feasibility study. 101

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The Far East – Korean Peninsula electric power bridge In 2001, the Ministry of electric engineering and coal industry of the DPRK, asked the Russian party to consider the technical and economical expediency of electric power supplies to the DPRK. The technical specifications for building a 500 kW AC power line for a transmission of 500 MW of power in transit (as much as 2.5 billion kWh per year) were considered several times within the period of 2001–2003. At several work meetings the negotiators decided to widen the format of the project with the aim to address the strategic issues of cooperation in the field of electricity within the bounds of “The Far East – DPRK – Republic of Korea” cooperation. Specialists from the Republic of Korea were involved in the project. Within the widened format, it was proposed to change the parameters of “The Far East – the Korean Peninsula” project, as it could include the construction of the “Vladivostok substation – Ch’ongjin” 500 kW AC power transmission line (380 km) with a transit power up to 500 mW, and the “Vladivostok – Seoul” +500–600 kW DC transmission line (900 km) delivering to the Seoul area 2000–3000 MW. To gain adequate output and profitability from capital-intensive and powerful inter-state electric power links between the Far East and the Korean Peninsula, large volumes of power supplies and exchange would be needed. New power stations, in this case, will have to be constructed in the IPG “Vostok”. For a number of valid reasons, the consideration of the “Far East – Korean Peninsula” power bridge project was suspended. The elaboration of the “Far East – Korean Peninsula” power bridge project has become an urgent undertaking because of the suspension of the KEDO project implementation. The projects, that involve cooperation in the gas and power generation fields on the “Far East – Korean Peninsula” direction, bring some advantages: •  there appears an opportunity to sell natural gas from the Sakhalin shelf in a pipe-line; •  the Sakhalin shelf gas, as a high-quality resource, becomes available to consumers of Khabarovskiy and Primorskiy krais, the DPRK, and the Republic of Korea; •  the development of cooperation in the electric power field conduces to building new power stations in the Far East, also on the basis of hydro power, to the handling of the energy crisis in the DPRK, and to the optimization of electricity consumption in Republic of Korea; •  a more realistic partnership will be established between Russia, DPRK, and the Republic of Korea;   ���������������������������������������������������������������������������������������� In August 2006, a Russian delegation visited the DPRK to enliven the works on the “Far East – Korean Peninsula” electric power bridge.

102

4. Fuel and power complex of the Russian Far East

•  DPRK will be able to be involved in projects as an economic partner; •  the projects will have positive political consequences.

4.5. Major principles of the energy cooperation between the Russian Far East and Northeast Asian countries On the whole, the contemporary policy of the RF Government evaluates favorably the Pacific orientation of the international cooperation in energy sector. The major projects of the cooperation in the spheres of oil, natural gas and electric power enjoy the governmental support on the part of the President Putin administration. The government stimulates a strategic participation on Asian markets of the state companies (Rosneft, Gazprom, and RAO EES Rossiyi joint stock companies). The NEA interested countries also assess the capacity of the Russian resources favorably. The general situation in the energy sphere does not appear to have ripened enough to palpably present its benefits, barriers and constraints. The following aspects, as well as the gains Russia and the Russian Far East area may have from the international cooperation with the Pacific areas in the field of energy, can be highlighted: •  enhanced interests of the NEA key countries in fuel and power resources from the Russia; •  Russia’s genuine desire to diversify her energy contents at world markets of fuel and power; •  geographical conditions for creating a joint energy infrastructure (particularly with the PRC and the Korean Peninsula); •  spare capitals the Asian partners have; •  Japan’s and South Korea’s traditions and technologies in manufacturing industries; •  a further development of East Siberia and the Far East, also on the basis of the projects of cooperation with the NEA countries in electricity and fuel fields; •  geopolitically, stabilization of the condition in Northeast Asia is a matter of mutual interest. At the same time, the dynamics and character of interrelations of the NEA countries in the field of energy is characterized by the following features: •  NEA consumes about 20% of the world energy, but has neither common fuel and power market system, nor joint institutions to organize cooperation in the field of electric power, or institutional agreements and unions, like the EU or the ASEAN. •  The NEA key players, Japan and the PRC, manifest only an outward interest in the energy-based cooperation in the region, and actually do not come forward with any noticeable joint initiatives, or with joint support to other initiatives. They openly show their preference of bilateral contacts with 103

Part 2. FORMS AND STRUCTURE OF THE RUSSIAN FAR EAST AND THE APR INTEGRATION

Russia to multilaterally working on the creation of the infrastructure for the energy-based cooperation and integration in Northeast Asia. •  Japan’s, Korea’s and the PRC’s attitudes towards the energy resources of East Siberia are of traditional “raw resource character”, which does not differ from the commercial policy of big world companies (Exxon Mobile, Shell, British Petroleum). So far, no marked remarkable bi- or multilateral initiatives, or complex master-plans for any cooperation between Russia and NEA in the field of energy have been observed. •  The North Korea issue is a separate and complicated element of the energy-based cooperation between Russia and the Korean Peninsula. The strategy of cooperation between the Russian Far East and Northeast Asia in the field of energy can be enhanced through an interconnected approach guided by the following principles: •  bilateral initiatives priority; •  a comprehensive format of cooperation involving addressing the issues concerning oil, natural gas, bituminous coal, electric power, processing of fuel resources, and regional development, in combination; •  formation of strategic alliances for joint prospecting and development of oil-and gas bearing deposits in East Siberia and the shelf of the Sea of Okhotsk; •  formation of joint engineering infrastructure for transporting energy resources; •  adherence to “assets swapping” principles; •  policy of multilaterally advocating the DPRK’s participation in the “Russia – Korean Peninsula” cooperation; •  joint participation in the regional Far East development projects, and, above all, in the projects envisaging new oil and gas processing facilities, power-efficient facilities, and energy efficiency increase; •  regional approach to a wider cooperation, including the forms of approval and support for the “Siberia, Far East, Northeast Asia” study centers, representative forums, conferences and mutual missions.

104

5 Foreign trade of the Russian Far East

The Russian Far East belongs to the number of country’s regions where economic development is obviously determined by their foreign economic relations scale and structure. On the modern stage the foreign trade is the main form of foreign economic cooperation of the region. During all the period after the beginning of radical economic reform the Far East has been increasing gradually its foreign trade turnover orienting naturally on countries of Asian-Pacific region and on Northeast Asia in particular. On the modern stage development of the Russian Far East foreign economic cooperation is characterized by sound positive dynamics. High concentration of the Far Eastern export on the limited bill of goods allowed to respond positively to the changes of price conjuncture of the world goods markets; and growth of interregional solvent demand, real income of population and investment activity caused the increase in physical and cost volumes of imported output. In 2005 the scale of the Far East foreign trade (according to the data of customs statistics) run up to 12,4 billion dollars (Fig. 5.1).   ������������������������������������������ Customs statistics doesn’t fix export of the region’s diamond complex production, foreign trade of services and also bunker fuel supplies.

105

Part 2. FORMS AND STRUCTURE OF THE RUSSIAN FAR EAST AND THE APR INTEGRATION

Fig. 5.1. Dynamics of the Russian Far East foreign trade, million dollars

The increase of regional foreign trade turnover volumes (almost 280% for 12 years) is much more impressive even than unrealizable dream of the Russian Federation president’s administration about GDP doubling for 10 years. However, the secret of such rise in the region’s foreign economic sphere is ordinary and it was described in the literature repeatedly. In the most common form the reason lay in the replacement of the internal demand (demand from internal regions of Russia and own interregional demand) by the external demand which dynamics’ regularities determined the dynamics of own foreign trade turnover of the region later on. Since the external demand was determined generally by permanently positive dynamics of Asian-Pacific region countries’ economies, foreign trade of the Far East has demonstrated such a positive general rise for the period from 1992 till 2005. However the dynamics had pronounced cyclic character. And the cycles were determined nearly only by institutional fluctuations in the Russian economy. Namely they determined the cyclicity of the regional foreign trade growth by means of laying on the monotonous growth of the external demand. The export growth in 1992–1993, which was due to liberalization and decentralization of the foreign trade in view of internal demand suppression, has been changed by the short-term downturn in 1994, the reasons of which were obstructionist politics of regional authorities concerning the foreign trade with China, excepting the decrease of external demand for re-export    See, for example: Minakir, Р. The Russian Far East: economic potential, 1999; V. Ishaev, P. Minakir. The Russian Far East: realities and opportunities of economic growth, 1998; P. Minakir. Regional economic policy. The Far Eastern region’s development strategy, 1997; P. Minakir, E. Devaeva. The Russian Far East and Transbaikalia: program of international economic cooperation // Problems of the Far East. 2002. №1.

106

5. Foreign trade of the Russian Far East

production of the region as a consequence of inflationary growth of production and transport costs. In 1995–1996 the export growth continued against the background of ruble exchange rate decrease. But since 1997 export began to decrease, that resulted in the real ruble exchange rate increase owing to the currency corridor fixation. The export decrease continued up to 1999. In 2000 export growth of the region was recommenced as a result of ruble devaluation effects’ realization and formation of favorable price conjuncture of the foreign markets. But in 2002 export decrease became clear again. Export could reach the level of 2002 only by 2004. And again the reason lay in the hidden ruble revaluation. More definite influence of internal institutional conditions may be seen in consideration of the dynamics of the Far East import. For the whole period of 1992–2004 only two relatively short periods of import volumes increase could be observed: 1995–1997 and 2001–2004. Both periods coincide with the periods of ruble exchange rate increase (except short period of 2001–2002). Thus, cyclic dynamics of the foreign trade turnover mainly determined by the export is characterized by the cycle step which coincides almost exactly with the step of institutional changes in Russia, whereas external conjuncture is a certain constant dynamic factor. Monotonous growth of foreign trade conjuncture is explained easily. Structure of the Far Eastern export not only became more diversified for the period of economic reforms, but, quite the contrary, became substantially heavier owing to the leading positions of oil and oil products.

5.1. Commodity composition of foreign trade Production of natural and resource sector of region’s economy dominates traditionally in the modern structure of the Far Eastern export. Aggregate value of raw material resources in the total volume of regional export is more than 60%. Among the most large-scale commodity positions of the Far Eastern export the fish one stands out especially (18.4%). According to the official statistics fresh frozen fish (over 60%) and sea products (15.3%) dominate in the commodity structure of fish production export. The most part of fish and sea products export is fulfilled beyond the bounds of 12-miles zone, fresh and frozen fish – about 50%, sea products – over 80%, in particular. Production of timber industry constitutes a substantial part (14.5%) in the region’s export along with the production of fishing complex. Industrial wood takes almost 90% in the structure of the Far Eastern timber export, whereas the quota of woodworking industry production is extremely insignificant (Tab. 5.1). 107

Part 2. FORMS AND STRUCTURE OF THE RUSSIAN FAR EAST AND THE APR INTEGRATION Table 5.1 Commodity structure of the Far Eastern timber export, 2005 Commodity position Timber and timber production, total, including:

Quantity

Cost, million dollars

%

 

952,8

100,0

Industrial wood, thousand cubic meters, including:

12 295,0

852,9

89,5

   softwood, thousand cubic meters

9 889,5

652,8

68,5

   hardwood, thousand cubic meters

2 405,5

200,1

21,0

103,1

3,6

0,4 0,0

Pulpchips, thousand tones Saw-timer, tones Fibreboard, thousand square meters Other commodity positions

258

0,3

3 287,3

1,3

0,1

– 

94,7

10,0

Source: calculated on basis of data of the Far Eastern customs agency of the Federal Customs Service of the Russian Federation.

Production of fuel and energy complex is an important item of the regional export (Yakut coal, Sakhalin crude oil, oil products produced on the petroleum refinery of Khabarovskiy Krai). Unit weight of this production in the commodity structure of region’s export is 46,2%, including oil products – 28,6%. Substantial growth of cost export volumes of fuel and energy complex production in last years is caused by the high level of world prices for crude oil and also by permanently increasing external demand for oil products. Export of oil-refining industry of the region is presented by such commodity positions as mazut, diesel oil and light distillates, which total supplies volume exceeded 1.8 billion dollars in 2005 (Tab. 5.2). Table 5.2 Commodity structure of the Far Eastern export of fuel and energy complex production, 2005 Commodity position Fuel and energy complex production, total, including: Coal Crude oil Oil products, including:    mazut    diesel oil    light distillates    other commodity positions Other

Quantity, thousand tones

Cost, million dollars

%

13 362,4 5 859,9 1 599,5 5 770,7 3 514,3 1 137,5 1 083,5 35,4 –

3 048,1 450,3 712,4 1 881,2 899,8 500,1 465,6 15,7 4,2

100,0 14,8 23,4 61,7 29,5 16,4 15,3 0,5 0,1

Source: calculated on basis of data of the Far Eastern customs agency of the Federal Customs Service of the Russian federation.

108

5. Foreign trade of the Russian Far East

Favorable conjuncture on the world market of ferrous metals provided high growth rates of cost export volumes of metal-roll and iron-and-steel scarp in 2005. Export dynamics of machine-technical production of the region is notable for instability in the last years. It is caused by politics of export orders placing on the Far Eastern enterprises of defense complex (Tab. 5.3). As for other export positions, their volumes are insufficient and are notable for instability. Table 5.3 Dynamics and structure of the Russian Far East export, million dollars 2002

2003

2004

2005

Total, including:

Commodity positions

3641,4

4121,8

4625,3

6581,1

Machinery, equipment, vehicles

571,7

289,2

269,6

323,9

Fuel, mineral, metals

1419,8

2034,4

2362,2

3899,7

oil and oil products

975,7

1431,0

1535,7

2593,5

coal

185,6

193,3

279,5

450,0

ferrous metals

163,5

286,8

460,5

744,7

nonferrous metals

64,4

95,4

42,7

30,2

Chemical goods

28,0

31,3

40,2

41,5

Raw materials and products of its processing

592,5

659,3

891,0

955,0

timber goods

592,4

658,9

890,0

954,6

Flavoring goods

920,7

1031,5

1010,3

1255,6

fish products

907,2

1000,8

962,8

1208,8

Manufactured goods of national consumption

60,0

51,2

40,5

24,6

Other

48,7

24,9

11,5

80,8

Source: calculated on basis of customs statistics data, data of statistic committees of krais and oblasts of the Far East.

Thus, at the present time over 90% of the Far East export falls to the share of only four commodity groups (fuel and energy complex production, ferrous metals, fish products and timber goods). In contrast to export which has rough nature to a great extent, production with a high share of added value predominates in the import structure of the region. Thus, in 2005 23.1% fell to the share of machine-technical production of investment purpose, 29.1% – to the share of vehicles, including 14.0% – to the share of passenger cars, 18.1% – to the share of customer demand goods (Tab. 5.4). In this case factor of high provision of the Russian Far East with the main 109

Part 2. FORMS AND STRUCTURE OF THE RUSSIAN FAR EAST AND THE APR INTEGRATION

types of natural and rough resources plays and played a double role in the process of interaction of the region with external market. On the one hand, availability of rich natural and resource potential is a competitive advantage of the region. On the other hand it is a definite limiter of wider participation of the region in the foreign trade cooperation, predetermining the foreign trade specialization of the Russian Far East. Under such conditions the role of rough materials supplier and finished products consumer is assigned to the region and, as a result, it leads to the deposition of its foreign economic turnover proportions. Table 5.4. Dynamics and structure of the Russian Far East import, million dollars Commodity positions

2002

2003

2004

2005

Total, including:

1463,1

1764,5

2988,9

5741,8

Machinery, equipment, vehicles, including:

539,4

774,9

1595,0

3397,6

machinery an equipment of investment meaning

260,8

340,0

536,0

1327,4

vehicles, including:

156,9

332,7

891,5

1670,2

passenger cars

18,5

107,5

626,2

805,8

Fuel, mineral, metals

138,3

202,9

455,8

801,3

Chemical goods

177,8

183,6

215,1

352,9

Building materials

19,6

33,0

84,0

87,9

Raw materials and products of its processing

17,8

25,9

32,0

53,9

Consumer goods

522,7

537,3

596,8

1041,6

manufactured goods

268,6

287,8

320,6

629,0

flavoring goods

254,1

249,5

276,2

412,6

47,5

6,9

10,2

6,6

Other

Source: calculated on basis of customs statistics data, data of statistic committees of krais and oblasts of the Far East.

5.2. Geographical structure of foreign trade Foreign trade of the Russian Far East, in contrast to the rest part of the country, is headed for countries of Asian-Pacific region (APR) to a greater extent. In the Far Eastern Federal Okrug (FEFO) almost 86% of foreign trade turnover of the region falls to the share of countries of Asian-Pacific Economic Cooperation, whereas in Siberian Federal Okrug – 32%, in federal okrugs of the European part of Russia – from 7 до 17%. Among APR countries the main trade partners of the Russian Far East are traditionally countries of Northeast Asia – Japan, China, the Republic of Korea (Tab. 5.5). 110

5. Foreign trade of the Russian Far East Table 5.5 Geographical structure of the Russian Far East foreign trade turnover 2002 Countries

million dollars

2003 %

million dollars

2004 %

million dollars

2005 %

million dollars

%

Total foreign trade turnover, including:

5082,0 100,0 5914,5 100,0 7635,7 100,0 12394,5 100,0

Countries of Asian-Pacific region, including:

4446,8 87,5 5009,6 84,7 6597,2 86,4 10584,9 85,4

China

1531,4 30,1 2003,5 33,9 2147,1 28,1 3350,5 27,0

the Republic of Korea

1082,3 21,3 1019,8 17,2 1163,9 15,2 2183,4 17,6

Japan

906,1

17,8 1286,8 21,8 2406,2 31,5 3499,5 28,2

USA

343,0

6,7

338,7

5,7

396,3

5,2

694,7

5,6

EU countries – 251

343,7

6,8

443,3

7,5

493,6

6,5

1071,4

8,6

Other countries

291,5

5,7

461,6

7,8

544,9

7,1

738,2

6,0

Source: calculated on database of the Far Eastern customs agency of the Federal Customs Service of the Russian Federation, database of statistic committees of krais and oblasts of the Far East.

The highest degree of orientation toward Northeast Asia countries’ market is typical for timber export of the Russian Far East. It is significant, that in the last years the increasing part of export flows in timber industry re-orientates on the Chinese market. If in 90s years of the past century the Japanese market was the main import market of timber production (over 80% of export), by the present time the share of Chinese People’s Republic in the structure of timber export of the region increased sharply (practically up to 60%). Export flows of fuel and energy complex production are also concentrated in the region of Northeast Asia (73,5%). The largest importer of Sakhalin oil is Japan, Nerungri coal is imported mainly by Japan and the Republic of Korea, oil products – by China and DPRK (Tab. 5.6). Geographical structure of export supplies of the Far Eastern fish products is the most diversified. Along with the Republic of Korea, Japan and China, which cover over 80% of regional export of fish products, fish and sea products are delivered in USA, CIS countries, Western and Eastern Europe. At the present time leading positions in foreign trade of the region belong to Japan. In 2005 volume of the Far Eastern export to this country amounted to 1,6 billion dollars, import is 1,9 billion dollars. 33.4% of regional import and 23.7% of regional export falls to the share of Japan. Growth of mutual trade volumes in the last years takes place both owing to export and import (Fig.5.2). 1 EU-25: Austria, Belgium, Great Britain, Germany, Greece, Denmark, Ireland, Spain, Italy, Luxemburg, the Netherlands, Portugal, Finland, France, Sweden, Hungary, Cyprus, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia, the Czech Republic, Estonia.

111

Part 2. FORMS AND STRUCTURE OF THE RUSSIAN FAR EAST AND THE APR INTEGRATION Table 5.6 Geographical structure of export of the Far Eastern production in 2005, in percentage terms Country Total export, including:

Coal

Crude Oil Ferrous Timber Fish and sea oil products metals goods products 100,0

100,0

100,0

100,0

China

100,0 100,0 1,7

–

48,7

31,3

58,5

20,2

Japan

62,8

89,9

3,0

0,5

28,6

18,7

The Republic of Korea

22,5

6,7

5,9

37,3

11,1

41,2

DPRK

0,0

–

6,5

0,1

0,3

–

Northeastern Asia countries, total

87,0

96,6

64,1

69,2

98,5

80,1

Source: calculated on basis of data of the Far Eastern customs agency of the Federal Customs Service of the Russian Federation, database of statistic committees of krais and oblasts of the Far East.

Fig. 5.2. Dynamics of the Far East foreign trade with Japan, million dollars

Japanese market continues to be one of the main consumers of traditional export goods of the region and the most important supplier of machinetechnical production. Commodity structure of trade with Japan which has been formed by the present time keeps highly specialized character. If import of the region with Japan is presented by machine-technical production for over 87%, 91.2% of export falls to rough goods. Crude oil, timber materials and fish products predominate in the structure of export goods flows of the region which are oriented on Japanese market (Tab. 5.7). 112

5. Foreign trade of the Russian Far East Table 5.7. Commodity structure of the Far East export to Japan, in percentage terms Commodity groups Total export, including:

2002

2003

2004

2005

100,0

100,0

100,0

100,0

Machinery, equipment, vehicles

0,2

0,0

0,6

1,4

Fuel, mineral, metals, including:

34,4

39,2

50,2

65,6

Coal

18,5

16,8

14,5

18,1

Oil

14,8

20,7

31,7

41,1

oil products

0,3

0,5

1,4

3,6

ferrous metals

0,1

0,0

0,1

0,3

non-ferrous metals

0,4

0,3

0,7

0,8

Chemical industry products

0,6

0,7

0,9

0,9

Raw materials and products of its processing, including:

28,5

27,8

30,0

17,5

28,5

27,8

30,0

17,5

Flavor goods, including:

35,9

31,6

18,3

14,6

fish and sea products

timbering

34,5

31,1

16,0

14,5

Manufactured goods of national consumption

0,0

0,0

0,0

0,0

Other

0,5

0,6

0,0

0,0

Source: calculated on basis of customs statistics data, data of statistic committees of krais and oblasts of the Far East.

Goods of investment purposes and vehicles take the largest unit weight in the commodity structure of the Russian Far East import from Japan (Tab. 5.8). Table 5.8. Commodity structure of the Russian Far East import from Japan, in percentage terms Commodity groups

2002

2003

2004

1

2

3

4

5

100,0

100,0

100,0

100,0

Machinery, equipment, vehicles, including:

79,2

71,8

80,3

87,8

Machinery and equipment of investment purposes

34,8

19,1

14,5

10,9

vehicles, including:

39,6

50,3

64,7

76,2

passenger cars

10,2

23,9

50,9

40,5

other

4,9

2,4

1,1

0,7

Fuel, mineral, metals

5,8

22,4

17,1

9,9

Chemical industry products

10,0

3,3

2,1

1,4

Total import, including:

2005

113

Part 2. FORMS AND STRUCTURE OF THE RUSSIAN FAR EAST AND THE APR INTEGRATION 2

3

4

5

Building materials

1

0,2

0,1

0,1

0,5

Raw materials and processing production

0,4

0,2

0,1

0,1

Goods of national consumption, including:

1,3

1,1

0,3

0,3 0,2

manufactured goods

0,6

0,6

0,2

flavor goods

0,7

0,5

0,1

0,1

3,0

1,2

0,0

0,0

Other

Source: calculated on basis of customs statistics data, data of statistic committees of krais and oblasts of the Far East.

China continues to be one of the largest trade partners of the Far East along with Japan. In 2005 32.9% of the Far Eastern export were directed to this country. Since 2003 stable growth of mutual trade turnover could be observed in the trade of the Russian Far East with China (Fig. 5.3). In 2003–2005 export flows to China were formed mainly due to production traditionally exported by the region. At the present time oil products, timber goods, fish and sea products predominate in the commodity structure of export to China (Tab. 5.9). Table 5.9 Commodity structure of the Russian Far East export to China, in percentage terms Commodity groups Total export, including:

2002

2003

2004

2005

100,0

100,0

100,0

100,0

Machinery, equipment, vehicles

31,2

12,6

5,8

3,0

Fuel, mineral, metals, including:

24,4

52,1

51,4

55,8 0,4

сoal

0,4

0,6

0,3

оil

8,7

12,8

2,9

 -

oil products

4,2

28,1

39,5

42,4

ferrous metals

4,7

5,4

6,7

10,8

non-ferrous metals

5,4

5,0

1,8

0,6

Chemical industry products

0,7

0,6

0,9

0,5

Raw materials and products of its processing, including:

27,6

22,7

28,4

25,9

27,6

22,7

28,4

25,8

Flavor goods, including:

11,5

7,0

12,6

12,0

fish and sea products

11,3

timbering

11,1

6,6

10,6

Manufactured goods of national consumption

0,0

0,0

0,1

0,0

Other

4,6

5,0

0,8

2,8

Source: calculated on basis of customs statistics data, data of statistic committees of territories and regions of the Far East.

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5. Foreign trade of the Russian Far East

Fig. 5.3. Dynamics of the Russian Far East foreign trade with China, million dollars

In contrast to export, stable positive dynamics is typical for import from China in the last years. Goods of national consumption and foodstuff continue to form the base of import from China (Tab. 5.10). Table 5.10 Commodity structure of the Russian Far East import from China, in percentage terms Commodity groups

2002

2003

2004

2005

100,0

100,0

100,0

100,0

Machinery, equipment, vehicles, including:

9,8

12,9

17,3

15,0

machinery and equipment of investment purposes

2,9

4,8

6,1

6,6

vehicles, including:

0,8

0,5

1,2

1,2

 -

0,0

0,0

0,0

Total import, including:

passenger cars other

6,1

7,6

10,1

7,1

Fuel, mineral, metals

2,4

3,0

7,0

8,4

Chemical industry products

4,1

5,1

7,4

7,3

Building materials

1,3

2,6

4,0

3,2

Raw materials and processing production

2,6

2,6

2,9

2,8

Goods of national consumption, including:

78,6

66,4

61,4

63,4

manufactured goods

45,3

38,9

39,3

45,8

flavor goods

33,3

27,5

22,1

17,6

1,1

7,3

0,0

0,0

Other

Source: calculated on basis of customs statistics data, data of statistic committees of krais and oblasts of the Far East.

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Among the Far Eastern subjects of Federation China fulfils more active trade and economic cooperation with Khabarovskiy and Primorskiy Krais. If Primorskiy Krai is the main importer of Chinese production in the region, enterprises of Khabarovskiy Krai provide over 60% of regional export to China. The availability of Russian-Chinese border which lies on the territory of a number of the Far Eastern subjects of Federation with admission points situated along the border predetermined geographical orientation of their foreign trade. Thus, the share of China in foreign trade turnover of Khabarovskiy and Primorskiy Krais is 38,1 и 44,2% accordingly, Amurskaya Oblast– over 80%, Yevreiskaya (Jewish) Autonomous Oblast – 92,4%, In spite of relative instability of mutual trade (Fig. 5.4), the Republic of Korea traditionally keeps leading positions in the geographical structure of foreign trade exchange of the Russian Far East (after Japan and China), thereby, playing an important role in the process of formation of the Far East foreign trade volumes. At the present time 19.4% of the Far Eastern export and 15.6% of the Far Eastern import falls to the share of the Republic of Korea.

Fig. 5.4. Dynamics of the Russian Far East foreign trade with the Republic of Korea, million dollars

Structure of export to the Republic of Korea is similar with the structure of supplies in Japan and partly in China to a great extent. At the present time fish and sea products, ferrous metals, oil and oil products, rough timber take the largest unit weight in the region’s export to the Republic of Korea (Tab. 5.11). Chemical industry products, ferrous and non-ferrous metals goods along with goods of investment purposes take the largest unit weight in the import from the Republic of Korea. (Tab. 5.12). 116

5. Foreign trade of the Russian Far East Table 5.11 Commodity structure of the Russian Far East export to the Republic of Korea, in percentage terms Commodity groups Total export, including:

2002

2003

2004

2005 100,0

100,0

100,0

100,0

Machinery, equipment, vehicles

1,8

1,8

8,9

9,2

Fuel, mineral, metals, including:

47,9

37,7

38,1

42,5

сoal

2,6

4,7

8,4

7,9

оil

38,4

19,7

0,9

3,7

oil products

0,8

2,8

4,9

8,8

ferrous metals

5,6

10,3

23,5

21,7

non-ferrous metals

0,0

0,0

0,0

0,1

Chemical industry products

1,6

1,3

1,1

0,7

Raw materials and products of its processing, including:

8,7

9,7

12,1

8,3

8,7

9,7

12,0

8,3

Flavor goods, including:

timbering

37,2

48,2

39,6

39,1

fish and sea products

39,0

36,3

48,0

37,1

Manufactured goods of national consumption

1,4

0,7

0,2

0,0

Other

1,4

0,6

0,0

0,2

Source: calculated on basis of customs statistics data, data of statistic committees of krais and oblasts of the Far East.

Table 5.12. Commodity structure of the Russian Far East import from the Republic of Korea, in percentage terms Commodity groups

2002

2003

2004

1

2

3

4

2005 5

Total import, including:

100,0

100,0

100,0

100,0

Machinery, equipment, vehicles, including:

17,6

17,8

30,4

50,5

machinery and equipment of investment purposes

7,9

9,7

16,4

30,0

vehicles, including:

4,7

5,6

10,1

5,6

passenger cars

0,3

0,3

2,8

1,4

other

5,1

2,6

3,9

14,9

Fuel, mineral, metals

4,9

8,4

13,5

21,1

Chemical industry products

35,8

30,1

20,9

14,7

Building materials

0,7

1,0

7,3

3,2

Raw materials and processing production

1,8

2,1

2,2

1,2

Goods of national consumption, including:

37,3

36,0

25,7

9,2

117

Part 2. FORMS AND STRUCTURE OF THE RUSSIAN FAR EAST AND THE APR INTEGRATION 2

3

4

5

manufactured goods

1

26,7

24,1

15,1

4,4

flavor goods

10,7

12,0

10,6

4,8

1,9

4,5

0,0

0,0

Other

Source: calculated on basis of customs statistics data, data of statistic committees of krais and oblasts of the Far East.

From the beginning of 90s trade and economic cooperation with USA became an alternative to cooperation of the Russian Far East with countries of Northeast Asia in a number of characteristics. The highest growth rates of mutual trade were typical for the first half of 90s. In 1995 the volume of region’s trade with USA reached 600 million dollars. Increase of trade turnover volume took place mainly due to the increase of import volumes. In this period USA along with China were the main suppliers of foodstuff for the Russian Far East. In future stable growth of import from USA ended; dynamics of mutual trade development was notable for instability. The role of USA in foreign trade of the Russian Far East decreased distinctly. In the current century the dynamics of two-way trade is mainly subject to the factor of current economic and political conjuncture and is characterized by presence of substantial instability elements (Fig. 5.5).

Fig. 5.5. Dynamics of the Russian Far east foreign trade with USA, million dollars

At the present time only 3.1% of the Far Eastern export and 8.4% of import falls to the share of USA. Tree commodity positions form the base of the Far Eastern export to USA: fish products (55,6%), oil products (22,9%) and manufactured goods of national consumption (clothes) (10,8%) (Tab. 5.13). 118

5. Foreign trade of the Russian Far East Table 5.13 Commodity structure of the Far Eastern export to USA, % Commodity groups Total export, including:

2002

2003

2004

2005

100,0

100,0

100,0

100,0

Machinery, equipment, vehicles

1,6

2,3

2,4

7,1

Fuel, mineral, metals, including:

0,0

12,4

17,8

24,0

oil and oil products

0,0

12,4

17,5

22,9

ferrous metals

–

0,0

0,2

1,0

non-ferrous metals

–

0,0

0,1

0,0

Chemical industry products

–

–

0,2

0,1

Raw materials and products of its processing, including:

0,1

0,1

0,0

1,7

0,1

0,1

0,0

1,7

Flavor goods, including.

64,3

58,9

61,0

56,2

fish and sea products

63,0

58,9

59,9

55,6

Manufactured goods of national consumption

32,4

24,4

18,5

10,8

Other

1,6

2,0

0,0

0,1

timbering

Source: calculated on basis of customs statistics data, data of statistic committees of krais and oblasts of the Far East.

In contrast to export, structure of import flows from USA is more diversified. Production of investment purposes (38,9%), metals and metal goods (20%), electric goods (11,5%), vehicles (excluding passenger cars) (8,0%), chemical industry products (7,9%), flavor goods (6,3%), and also manufactured goods of national consumption (3,8%) take the largest unit weight in the commodity structure of import (Tab. 5.14). Among the Far Eastern subjects of Federation Sakhalinskaya Oblast fulfils trade and economic cooperation with USA more actively. At the present time about 70% of total volume of the Far East import from USA is concentrated on the territory of Sakhalinskaya Oblast. It is related with works activation in the frameworks of the project “Sakhalin-1”, which operator and one of the main investors (30%) is the American company “Exxon Neftegaz Limited”. The basic volume of export flows in USA (68%) is formed in Khabarovskiy and Primorskiy Krais. Production of preliminary oil processing (in 2005 – 99.9 thousand tones for the amount of 47.2 million dollars) is supplied on the American market mainly by enterprises of Khabarovskiy Krai, fish products – by enterprises of Primorskiy Krai (10.4 thousand tones for the amount of 30.6 million dollars). In the last years positive dynamics is observed in trade of the Russian Far East with countries оf Northeast Asia. At the present time the Far Eastern export trade flows to the countries of Southeas Asia are formed mainly owing 119

Part 2. FORMS AND STRUCTURE OF THE RUSSIAN FAR EAST AND THE APR INTEGRATION

to production of oil processing (Singapore, Vietnam), ferrous metals (Taiwan, Thailand). Flavor goods (Thailand, Vietnam) and machine-technical production (Singapore, Taiwan) predominate in the structure of import flows. Table 5.14 Commodity structure of the Russian Far East import from USA, % 2002

2003

2004

2005

Total import, including:

Commodity groups

100,0

100,0

100,0

100,0

Machinery, equipment, vehicles, including:

53,5

59,6

61,0

59,1

machinery and equipment of investment purposes

40,8

39,7

41,1

38,9

vehicles, including:

5,2

14,0

8,0

8,7

passenger cars

0,1

0,3

0,6

0,7

other

7,4

5,9

11,9

11,5

Fuel, mineral, metals

17,6

14,1

17,7

20,2

Chemical industry products

4,9

4,4

8,0

7,9

Building materials

0,2

0,3

0,1

0,4

Raw materials and processing production

0,4

0,5

0,5

1,3

Goods of national consumption, including:

19,4

14,8

12,7

10,1

manufactured goods

8,7

3,7

3,7

3,8

flavor goods

10,6

11,1

8,9

6,3

4,0

6,3

0,0

1,0

Other

Source: calculated on basis of customs statistics data, data of statistic committees of krais and oblasts of the Far East.

In general, the level of foreign trade interactions of the Russian Far East achieved by the present time is an evidence of stable character of formed relations (though it is not optimal).

5.3. Problems and prospects for foreign trade development Prospective dynamics and scales of foreign trade interaction of the Russian Far East will be connected with realization of three main directions to a great extent: 1. Complex grounding and consistent realization of international rough and engineering-technical projects in sphere of oil, pipeline natural gas, electrical power systems, transnational transport-transit corridors servicing long-haul goods flows. Attraction of substantial investments volumes first of all into export oriented large-scale projects will allow to realize foreign economic potential of the Russian Far East fruitfully and noticeably. 120

5. Foreign trade of the Russian Far East

The main problems restraining realization of this direction: In energy sphere:   Unclear perspectives of crude oil rough base increasing in the East Siberia and the Far East, the lack of the program of state subsoil licensing for solving the questions of creation of the necessary resource base of petroleum production for realization of the projects of crude oil pipeline export.   The lack of programs and master-plans of cooperation development in sector of pipeline natural gas and electric-power sector worked over under the aegis of the Government of the Russian Federation.   Incompleteness of the Far Eastern electric-power industry restructuring. In transport sphere:   Limited opportunities of cargo handling volumes by the ports attached railway stations and sea ports.   The availability of “narrow” places (single-track bridge over the Amur river, Grodekhovo station in Primorskiy Krai) decreasing the capacity of highway of the Trans-Siberian Railroad.   The lack of development of admission points existing on the boundary zones (Russian-Chinese). During 1998-2004 the number of vehicles crossed the Russian-Chinese border through the Far Eastern admission points duplicated. In 2004 459 thousand vehicles went through the Russian-Chinese border. The majority of admission points on the Russian-Chinese border work in one-shift regime, and their technique is of relatively low level. 2. Formation of the contact production-cooperation and investment zones of boundary collaboration in forms of techno-parks, free trade area, special economic zones. Local zones creations is more preferable in boundary regions which are able to carry out mainly the functions of assistance to foreign economic activity of corresponding regions, their export potential development, in particular on basis of foreign capital formation, and also foreign labor power industrial intake, if necessary. The main problem constraining realization of this direction is the lack of adequate institutional base. 3. Activation of interregional interactions of the Far Eastern subjects of Federation with Chinese provinces Heilongjiang, Jilin and Liaoning in the context of realization of intended economic transformations on the NorthEast of China. It is supposed, that volumes dynamics and commodity structure of trade with China will be changed in the positive direction as the Russian Far East is included into realization of intended plans of the Northeastern provinces of China development. The efficiency of this direction realization is restricted by unsatisfactory condition of legislative base in sphere of boundary cooperation questions. As a result, many of trade interaction are realized beyond the bounds of the law field, creating thereby the conditions for corruption and illegal business development (especially in sphere of the Far Eastern rough resources export to China. 121

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Solving the problems in the frameworks of the above directions of foreign trade cooperation development will depend a lot on the carrying out purposeful state policy in this sphere aimed at favorable conditions creation for active the Russian Far East inclusion in the economic cooperation with foreign countries. Owing to the number of objective reasons of economic-geographical manner, opportunities of the Russian Far East foreign economic potential realization are traditionally connected with the Northeast Asia region. The level of economic interactions of the Russian Far East with the countries of Northeast Asia achieved by the present time is an evidence of stable (but not optimal) character of formed relations and, first of all, of tradeeconomic ones. In the perspective scales, dynamics and structure of foreign economic cooperation of the Russian Far East will be determined by the presence of effective external demand from separate countries of the Northeast Asia and by their strategic interests in sphere of promotion into economic of eastern regions of Russia and also by the priorities of its foreign economic policy in the Pacific direction. On the modern stage Chinese direction continues to be the main one in Asian policy of Russia. Maintenance of high growth rates of Chinese economy, including Northeastern provinces, will promote objectively the increase of China importance for the Far Eastern export. Analysis of Russian-Chinese economic cooperation development in the last decade has shown, that the strategy of China promotion into the Far East economy ha a systemic character and is notable for large flexibility. Basing on the achieved level of strategic Russian-Chinese economic cooperation it is possible to single out three main directions of China promotion into the Far East economy. The first direction is energy vector of cooperation. Energy resources (oil) trade and realization of joint projects of oil and natural gas supplies to China, connected with construction of manufacturing infrastructure, are strategically important spheres of economic cooperation between Russia and China. At the present time China is the second large world oil importer after USA, and its companies of power sector carry out offensive policy in contracts conclusion and in providing with access to oilfields all over the world aspiring to the diversification of oil and gas supplies sources for the country. According to the estimations of International Energy Agency (IEA), China imports about 2 million barrels of oil per day. At the same time the volume of internal mining is about 3,4 million barrels per day. According to estimations of Chinese and also international power organizations, existing and predictable relatively high dynamics of power consumption in China (over 5% per year) couldn’t be provided by own oil reserves. According to strategic analysis, total volume of oil consumption in China will amount to 300 million – 320 million tones by 2010; and by 2030 China will consume 122

5. Foreign trade of the Russian Far East

about 10 million barrels of foreign oil per day. USA imports exactly the same quantity. Oil disbalance and needs for oil stock import diversification, policy of qualitative optimization of fuel-energy resources usage structure (at the present time of the coal one abundantly) open objective perspectives for large scale supplies of Russian oil (and also oil products), natural gas to China, first of all from fields of East Siberia and the Far East. Along with it, there are strategic opportunities in sphere of increase of electric power export volumes to China from the existing power stations of the Joint Eastern power system and newly built ones. Along with oil, natural gas will be in increasing demand in China. It is due to the fact, that it is planned to realize a number of measures aimed at natural gas consumption rate increase in the structure of power supply in China – from 2% to 5%. Expected reserves of natural gas available on the territory of the country are estimated in the volume of 3,80 trillion cubic meters, 1,05 trillion cubic meters of which could be involved in the field development. But at the present time total volume of proven and approved fields stocks are only 155 billion cubic meters. The second direction of mutual cooperation is connected with supplies of the Far Eastern timber resources on Chinese market. It is due to the following reasons. Firstly, it is owing to timber felling decrease in China as a result of introduction of national prohibition for deforestation in the frameworks of forests saving program. Secondly, it is due to import tariffs decrease owing to WTO joining. Thirdly, it is due to the increase of internal demand for timbering caused by the beginning of large projects construction (at the present time China provides about 40% of internal timber consumption thanks to import supplies). Fourthly, it is owing to modernization woodworking industry on the North-East of China. Chinese market is disposed to import of timber requiring reworking and transformation to more expensive production, i.e. that one allowing to use cheap labor force for added value creation. China imports large volumes of timber from all East Asia, and at the same time it re-exports saw-timber and other processing goods in Japan, and sends the furniture practically in all developed countries. At the present time China is one of the largest timber importers in the world. Over 60% of industrial wood imported by China are provided by supplies from Russia. Neighborhood of Chinese market with the Russian Far East makes it more profitable in transport costs that Japanese and South Korean ones. China consumes a wider range timber assortments, makes high demand of hardwood, which prices are 1,5–2,5 times higher than prices for softwood on average.   �������������������������������������������������������������������������������� ������������������������������������������������������������������������������� Prirodopol’zovanie Dal’nego Vostoka Rossii i Severo-Vostochnoj Azii: potencial integracii i ustojchivogo razvitija (Natural resources using in the Russian Far East and NEA: integration and sustainable development potential). Vladivostok; Khabarovsk: DVO RAN, 2005.

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Realization of stated directions is closely connected with perspectives of mutual collaboration on the inter-regional level (between boundary subjects of Federation of the Pacific Russia and Northeastern provinces of China). At the present time China carries out active policy in sphere of structural reconstruction of North-East China economy, in particular, owing to modernization of old industries and development of new ones. At the same time accent in economic policy is done on the creation of modern export oriented enterprises, taking into account existing advantages in branch development of each of three provinces. It is expected, that realization of planned economic transformations on the North-East of China will create prerequisites for activation of tradeeconomic cooperation of the Russian Far East with China and will allow to change modern structure of mutual trade in positive way. The third direction is connected with increase of volumes of Chinese export to the Far Eastern market. At the present time China takes a definite niche in international division of labor – large-scale manufacture of cheap consumer goods. But for high export rates maintenance the entrance to the external markets with more technological goods is necessary. Entrance of China into WTO has created real prerequisites for it. According to international experts’ estimations, in the nearest time China may become one of the largest exporters of production of high readiness, with high rate of added value and technical contents. It will allow China to get a wider access on the market of the Russian Far East. Obviously, expected with the entrance of China into WTO growth of competitiveness of Chinese production of customer demand and development of inter-regional cooperation is able to create real obstacle on the way of promotion of goods from other countries of Northeast Asia to the Far Eastern market. Thus, at the present time South Korean export of consumer demand goods on the Far East is substituted by Chinese goods to great extent. Perspectives of economic cooperation of the Russian Far East with Japan are mainly based on Japan’s concernment in getting wide access to natural resources of the Far Eastern region, first of all: energy, forest and fish ones, which rate in the structure of demand of Japanese market is on stable high level. Japan is deprived of sufficient natural sources of energy. Modern level of natural fuel-energy resources manufacture in Japan has a symbolic meaning in comparison with consumption scales. Net import of energy resources in 2002 exceeded 80% of gross power consumption. Dependence of Japan on coal and crude oil supplies is over 99%, on natural gas is over 96% of these energy resources consumption. Concernment of Japan in development of cooperation with the Russian Far East in energy sphere is due to the following reasons: •  political instability in the Middle-East region; •  aspiration to increase the reliability of energy supply by means of diversification both of geographical directions (sources) of energy carriers supply and their types; 124

5. Foreign trade of the Russian Far East

•  increasing natural gas consumption in Japan. In spite of tendency of oil consumption decrease began in the last years, which is coursed by replacement of this type of energy raw products by natural gas, the share of oil in consumption of Japan will continue to be rather important and will amount to about 45% concerning other fuel types, according to the forecast of Natural Resources and Energy Agency of the country. At the same time, according to the Government forecast, needs for CNG import will have raised substantially up to 57.1 million tones per year by 2010. Specialists of Tokyo Institute of Economics and Energy (IEEJ) estimate them higher – in 66,15 million. Such a substantial dispersion in forecast estimations is mainly connected with uncertainty regarding nuclear power engineering growth rates in Japan, and also with uncertainty of environmental regulations tendencies in this country. Reliable channel of energy resources supply from the Pacific Russia is opened for Japan by successful realization of Sakhalin shelf project “Sakhalin-1” and “Sakhalin-2”, thank to which Japan will import oil and gas directly and it will not depend on transit through third countries. Japan is also one of the key players on the world coal market. According to the data of Japanese Ministry of Economics, Trade and Industry, import of coal to Japan in 2003 was estimated in 6.4 milliard dollars. Power station coals predominate in the structure of coal imported by Japan (58%). 39% and 3% accordingly fall to the share of coking coal and anthracite. Beginning from April of 2002 five-year program of coal production technologies’ transfer to China, Indonesia and Vietnam takes place in Japan, that allows to consider Vietnam as one of perspective suppliers of solid fuel to the Japanese market. Growth of coking coal import from Russia is also possible, as increased transportation cost force Japanese manufactures of electric power to search geographically closer suppliers. Opportunities of increase of the Far Eastern black coal export to Japan may be connected with Elga field development, which coals have necessary technological and price characteristics for sale on the Japanese market. Existing supplies of Nerungri coking coal and coking concentrate to Japan can be maintained on the stable level. Along with energy resources, Japanese economy feels a large deficit in timber, as forest sector of the country covers only one fifth of internal needs for this raw material. At the present time Japan imports timber from all over the world. The share of round wood in timber import of Japan in 2003 amounted to 49,3%. Now Russia takes place the first place among importers in Japan (39,2%) for industrial wood. Over 90% of supplied Russian timber are presented by softwood, providing up to 25% of raw materials for Japanese plants manufacturing coniferous plywood. Among countries of Northeast Asia, Japan is notable for stronger dependence on fish and sea products import. Year consumption of sea products 125

Part 2. FORMS AND STRUCTURE OF THE RUSSIAN FAR EAST AND THE APR INTEGRATION

in Japan taking import into account is 8,5 million tones. Japan also takes the second place in the world in the volume of fish industry production (after China). But, in spite of the developed national fishing industrial complex, almost the fourth part of Japanese population’s need for fishing production is satisfied owing to import, which reached the record level of 3.8 million tones (14.2 milliard dollars) in physical volume in 2001 that makes up 26% of the worldwide sea products trade. Taking into account, that high rate of raw materials will be remain in the structure of demand in the leading countries of Northeast Asia in short-term perspective, forest, fish and sea products, coal and metals, in particular, the opportunities of rising the volumes of the Far Eastern export to Japan will depend on prices level correlation on the markets of these countries. Along with import of the Far Eastern natural and rough resources, definite interests of Japan are connected with rise of Japanese export volumes on the market of the Russian Far East due to the increase of consumers’ demand goods in it (manufactured goods of national consumption, including domestic appliances and electronics). Perspectives of development of economic cooperation between the Far East and the Republic of Korea are connected with tendency of stable economic growth outlined in this country. At the present time the level of industrial enterprises capacity rises, needs for raw materials and fuel grow in the Republic of Korea that, in its turn, may have positive impact on the increase of export supplies from the territory of the Far East to this country in short-term perspective. Among the countries of Northeast Asia the Republic of Korea is characterized by the lowest provision with natural fuel and energy resources. Lacking in own stocks of energy resources, the Republic of Korea has to satisfy its need for them thanks to import supplies. In 2003 dependence of the country on energy resources import amounted to 96,8%. Today South Korea, along with Japan and China, is one of the largest oil importers taking the fourth place in the world. Korea imports about 70% of oil from the Middle East. Due to the lack of own oil fields and also owing to the economic growth recommenced in 2002, in the nearest perspective oil import volumes in Korea will grow. It is expected, that in 20 years South Korea will import up to 85% of oil from the Middle East. But owing to the high political risks in this region Russia may become one of alternative suppliers of this type of energy carriers. In the last years demand for CNG began to grow again in the Republic of Korea, and, as expected, the volume of CNG consumption in the country will amount to 26 million tones per year by 2010 (in contrast to 17 million tones on the border of 2000s). Before the present time the coal continues to be an important energy source for the Republic of Korea (20% of the total consumption of primary energy in the country). Taking into account, that only low-energy coals used 126

5. Foreign trade of the Russian Far East

for small boiler furnace and house heating are extracted in the Republic of Korea, about 95% of the country’s need for coal (of all types) are covered by import. In 2003 the Republic of Korea imported 70,2 million tones of coal for the amount of 2,4 milliard dollars, including 40.2% from China, 38.5% from Australia, 9.9% from Indonesia, 4.1% from Russia. In perspective, as the coal project are realized on the Far East (Sakha Republic (Yakutia)), the need of the Republic of Korea in solid fuel may be compensated partly by Russian export supplies. At the present time the Republic of Korea enters into the first ten of forest importers of the world. South Korean forest market depends on import for 95%. Annual import of round wood is 1-2 million cubic meters; sawtimber import is 1-2 million cubic meters; wood chips import is 8-9 million cubic meters. He last years as a result of Japanese and Chinese markets movement import of Russian rough wood in the Republic of Korea slightly fell. Besides, as a result of shipping freight rates changing Russian forest and, first of all, the Far Eastern one became less competitive in comparison with Malaysian forest. In perspective South Korean forest market can be a consumer of timber used on the internal Russian market, including third quality timber. It creates real prerequisites for expansion of Russian timbering export to the Republic of Korea. Fish industry is an important and socially significant branch of economy in the Republic of Korea. During current decade the Republic of Korea permanently increases fish and sea products import. Large part of imported sea fishery products falls on China, Russia, USA and Japan. Perspectives of raising the volumes of the Far Eastern fish products export to the Republic of Korea are mainly connected with the introduction of measures for toughening the control for fish and sea products import from Russia in Japan. It is supposed, that realization of such measures will allow to decrease sharply illegal catch and export of specially valuable types of fish and sea products, and to increase thereby the volumes of their export to the Republic of Korea on the legal base. As for DPRK and Mongolia, in view of small scales of their economy and relative provision with basic natural resources the possibilities of activation of economic collaboration with the Russian Far East remain uncertain in the nearest perspective. Based on the current and perspective dynamics of conjuncture of Northeast Asia countries’ markets, perspectives of increase of the Russian Far East foreign trade volumes will be closely connected with traditional goods of region’s export. Development of scaled and capital-intensive projects “Sakhalin-1”, “Sakhalin-2” by 2010 will increase sharply oil component of export flows of the Russian Far East to the countries of Northeast Asia, in particular, in Japan (up to 60%), the Republic of Korea and China. Realization of China’s strategic trends in energy sphere is also able to sharpen the existing competition 127

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between the Republic of Korea, Japan and China and to introduce certain instability into energy resources trade. Opportunities of increase of hydrocarbon raw materials export from eastern regions of Russia will be determined by the pressure of geopolitical factors of energy character in the triangle “Russia – China – Japan”. Despite the fact that resources of oil and gas fields of eastern region are substantial, nevertheless, they will not be able to satisfy combined needs for energy resources import of China, Japan and the Republic of Korea in future. Liquefied gas export in the frameworks of these projects realization will be also oriented on the countries of Northeast Asia, mainly on the Japanese market, and on the Republic of Korea and China to a lesser extent. Perspective of increase of region’s foreign trade volumes can be connected with export of finished oil products. Large investment programs for fundamental modernization of the Far Eastern oil plants admitted to realization will allow to strengthen existing competitive advantages of finished oil products. Taking into account expected dynamics and ecological requirements of oil products marked of Northeast Asia countries, oil products may be sold first of all, in China. Perspectives of coal production export from the Far East are objectively located on black coal fields of South-Yakut basin. Substantial growth of black coal export from South Yakutia may be connected with the development of Elga field which has the opportunities (technological and price) for sale on the Japanese and also Korean markets. Existing supplies of Nerungri power station coal and coking concentrate to Japan and the Republic of Korea can be maintained on the stable level. As for the Far Eastern market of power energy, it could be hardly opened for wide energy trade by 2010. At the same time it is possible to forecast limited supplies of electricity to separate provinces of north-east of China and also in DPRK. Modern situation formed on timbering market of Northeast Asia countries gives a ground to suppose, that by 2010 volumes of timber goods (industrial wood) export from the Russian Far East can increase noticeably. At the present time total annual need of Japan, the Republic of Korea, and China exceeds 420 million cubic meters, 220 (52.0%) million cubic meters of which are imported. It is expected, that by 2010 total annual need of these countries for timber import will grow almost to 280 million cubic meters. The Russian Far East will continue to take stable niche of the Japanese and South Korean markets. At the same time more favorable perspectives for the Far Eastern export of forest resources are connected with China.   �������������������������������������������������������������������������������������������� It is worth noting, that construction of powerful transnational oil pipeline “Eastern Siberia – Pacific Ocean” (with possible turn-off on Datsin, China) may have strong influence on the perspective distribution of export positions on the oil market of North-East Asia.   �������������������������������������������������������������������������������������� Lesnoj ������������������������������������������������������������������������������������� kompleks Dal’nego Vostoka Rossii: analiticheskij obzor (Forest complex of the Russian Far East: anlysis). Vladivostok; Khabarovsk: DVO RAN, 2005.�

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Perspectives of raising the volumes of the Far Eastern export of fish and sea products, on the one hand, are connected with traditions in sea products consumption in Japan, China and the Republic of Korea, with growth of their economics, with geographical closeness to the Russian economic zone borders. On the other hand it is connected with potential opportunities of rough base of the Russian Far East, which allow to increase the volume of fish catch up to 3,3-3,8 million tones, non-fish objects – up to 0,5-0,9 million tones, according to the estimations of North-Eastern Interdisciplinary Research Institute of the Far Eastern Branch of Russian Academy of Sciences. At that, the basic catch volume will be provided by the own economic zones. In general, taking into account the above projects, the volume of the Russian Far East export to Northeast Asia countries by 2010 (without defense and industrial complex production and diamond complex production) may rise up to 15,8 milliards dollars (Tab. 5.17). Table 5.17 Perspective estimations of the Far Eastern production export to Northeast Asia countries, million dollars (in prices of 2005) Country

Crude oil Oil products

CNG

Coal

Timbering

Fish and sea products

2005 20101 2005 2010 2005 20101 2005 20102 2005 2010 2005 2010 Total export, including

712,4 8463 1881,2 1956

–

4032 450,3 484 952,8 1170 1209,7 1355

Northeast Asia countries, including

688,0 7636 1205,9 1474

–

3906 391,6 467 937,6 1157

969

1135

Japan

640,3 5801

–

3024 282,8 305 272,2 299

226

298

China The Republic of Korea DPRK Northeast Asia countries share, %

–

56,6

64

957

916,1 1160

–

252

16 557,5 700

245

281

47,7 878

111,8 116

–

630 101,1 146 105,5 155

498

556

121,4 134

–

–

–

64,1

–

80,1

83,8

–

–

96,6 90,5

75,4

–

7,7

0,0

–

2,4

2,6

96,9 87,0 96,5 98,4 99,0

taking into account realization of projects “Sakhalin-1” and “Sakhalin-2” excluding project estimations of Elga field Source: calculated on basis of data of the Far Eastern customs agency of the Federal Customs Service of the Russian Federation, data of statistic committees of krais and oblasts of the Far East, using the estimations of Economic Research Institute of the Far Eastern Branch of Russian Academy of Sciences. 1

2

Got estimations are the evidence, that in medium-term perspective (before 2010) dynamics of the Russian Far East foreign trade will be mainly determined by the volumes of fuel and energy complex production export of 129

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the region. At the same time strengthening of foreign trade flows orientation on Northeast Asia countries’ markets will take place. Japan, China and the Republic of Korea will continue to be the main importers of the Far Eastern production. At the same time, definite changes regarding separate Northeast Asia countries as foreign trade partners of the region are possible. Maintenance of high rates of Chinese economic growth, including Northeastern provinces, will promote objectively rising of China importance for the Far Eastern export. In long-term perspective, the Russian Far East has real opportunities of foreign trade scales increase as its foreign economic potential is realized, together with maintenance of demand for production of basic resource branches in Japan, China and the Republic of Korea. It will be possible to realize productively and noticeably the existing potential of trade and economic cooperation of the Russian Far East trough the attraction of substantial investment volumes, first of all, in export oriented large-scale projects in resource sector of region’s economy.

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INSTITUTIONAL BASIS FOR THE INTERNATIONAL INTEGRATION 6. The external integration environment: problems and prospects of economic integration in Northeast Asia 7. Stages and mechanisms of integration into the APR

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6 The external integration environment: problems and prospects for economic integration in Northeast Asia

Issues of economic integration among the countries of Northeast Asia in the beginning of the 21st century acquired great importance. Countries of the sub-region used to attract and keep attracting scientists’ attention by demonstrating bright examples of unprecedented economic success often called “Asian wonderful breakthrough”. On the other hand some countries of Northeast Asia became the victims of unprecedented economic crises that had a significant impact on all international mutual links. Today it is absolutely obvious that this subregion is developing at faster rates than world’s average and takes more and more noticeable place in the world economy. The second half of the 20th century witnessed not only high rates of the economic development of the sub-region, but also the economic leadership frequently and alternately taken by various countries. In the 1960s and 1970s, it was taken by Japan, in the 1980s by Korea (one of the most prominent new industrial states of East Asia), and at the turn of the 20th and 21st centuries the leading position was unconditionally taken by the People’s Republic of China. The sub-region is also the home of the Deep South states (DPRK and Mongolia) whose 133

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involvement into the international labor division processes in Northeast Asia presents a complicated theoretical and practical task. One can’t help noting that here lie a number of countries leading in modern information technologies. According to the 2005 World Economic Forum rating, Japan ranks fourth among the 115 countries surveyed, Taiwan seventh, Hong Kong eleventh, the Republic of Korea fourteenth. Meanwhile, the PRC had fallen down to the 50th place (having lost in 9 positions), and Russia to the 72nd place (a 10 position loss). At the same time, the events that are taking place in politics and economics of the whole Asian-Pacific region over recent years give evidence of the tendency directed on diminishing the independent status of the subregion with its simultaneous involvement into commercial, economic and financial cooperation in the region of East Asia. Presently, the development of economic ties between the NEA countries cannot be viewed apart from the general development of these ties within the bounds of the entire East Asian area. And it is the NEA countries that most actively participate in the integration processes going on in East Asia. Today we can speak about three factors which determine a growing status of East Asian countries in the world as a whole and the economy of this region within the world economy particularly, and an increase of the involvement of this sub- region of Northeast Asia into a complex entity which is called East Asian Community. The first factor is a very significant increase of the economy in this gigantic region which pioneers in the world economic growth. In 2005 with the world GDP growing by 3.2%, the GDP in China increased by 9.9%, in Russia by 6.4%, and in the Republic of Korea by 4.7%. The region includes seven countries with the biggest gold reserves in the world economy. Ironically, this is the area with the highest proportion of population whose income is less than $1 per day. East Asian population amounts to over a half world population. This fact identifies the area as the one with a very high concentration of human labor. According to certain data, it is over one third of the world manpower resources. The second factor is a significant growth of the importance of inner regional economic ties in the development of the economies within this region. The data shows that the index of interdependence of the countries of East Asia grew from 22.35% to 45.37% in 1999, which is quite close to the indicator for the European Union. By 2003, the volume of mutual trade between the ten most developed states of East Asia (Japan, the four NIC, China, and four ASEAN countries (Indonesia, Malaysia, Thailand and Philippines) had reached 51.8%, while  ��������������������������� The Economist. 01.04.2006.  ������������������������������������������������������������������������������������ The Eurasian space/ Far more than two continents/ Edited by Wim Stockhof, Paul van der Velde, Yeo Lay Hwee. International Institute for Asian Studies, The Netherlands, Institute of Southeast Studies. Singapore, 2004. ������������� Р.����� ������� 125. 



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the trade between the European Union countries accounted for 61%, and the NAFTA members 45.8%. The flow of direct foreign investments is also acquiring inner regional nature. In China, for example, the share of import into\from Japan, Hong Kong, Taiwan and Singapore in 1990 was 54%, in 1996- 58%, 1999- 61%, in 2005- over 70%. The share of Asian countries in 1994 was 27.8% of Japanese direct foreign investments and in 1996 this figure mounted to 52.7%. Over the period from 1995 to 2002 Japanese investments into the countries of East Asia leveled at 7.5 trln Japanese yen. Foreign direct investments of the Republic of Korea are also moving from the US market onto Asian markets. China is also starting to invest abroad. Thus, in 1999 Chinese capital investments in South East Asia mounted to 72 mln US dollars, and in 2000- 108 mln US dollars. At the same time it is necessary to point out the fact is that in the region there are not only leaders of the world economy but also deep outsiders, such as Korean People’s Democratic Republic, Mongolia, Myanmar, Cambodia. Of curse, it is not underdevelopment of these countries that cause our interest , but opportunities of mineral and labor resources in these countries which may be employed for the development of the whole region. Finally, the third factor is the decisions adopted in December 2005 by the governments of East Asian countries about the creation of East Asian Community (EAC) and transaction unit ACU. This factor is very important, because there are all grounds to believe that the period of separate economic development of each of the countries in East Asia which was characterized by fast steps forward in economic and social development of this or that country during certain periods in the second half of the XX century is coming to an end. Globalization tendencies that have embraced this region put a very important issue about the necessity to build effective economic cooperation among the countries located in this region. The decision about the creation of EAC and ACU can be viewed as the most important step on the way to solve the above mentioned issue. The signing on December, 14, 2005 of the declaration about the purposes of the EAC by the leaders of 16 states of East Asia is an important step of tradeeconomic cooperation among the countries of this region. According to Wen Jiabao, Premier of the Sate Council of China, and Chinese representative at this summit, “the creation of EAC should activate the cooperation in East Asia in a wider range of spheres and increase the level of cooperation to a higher level”. The idea of creation of EAC was put forward as early as in 1990 by the then Prime Minister of Malaysia Mahathir Mohammad who offered to create East Asian European Group or East Asian Economic Council. However, this   Masahiro, Kohara. East Asian Community. Tokyo, 2005. P. 67 (Jap.).  ������������� Ibid. ������������ P. 35.   ��������������������������������������� Mainity �������������������������������������� Simbun. 2005. Dec. 15 (Jap.). 



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idea together with an idea of Asian Monetary Fund was blocked by The USA and IMF. The creation of EAC in its present format is a successful step of ASEAN group formed not by the most powerful and richest countries of this region. This step allowed them to make their more powerful Asian neighbors ( total GDP of three North Asian countries- Japan, China and the Republic of Korea is 13 times higher than GDP of 10 ASEAN countries)into “satellites” holding negotiations with them about the conditions of entering this “Club of The Chosen”. This also means that the issues of development of integration ties only among the countries of Northeast Asia are acquiring secondary character within the frames of EAC. The group is formed at the moment when the regional economic interdependence grows. Its creation reflects general wish of the countries in the region to avoid future crises that can be provoked by probable financial instabilities, pandemics, acts of terrorism and natural disasters. In the light of these trends there are sufficient grounds to suppose that a period of a separatist economic development of each of the East Asian countries (known for their occasional individual and spontaneous acts of vigorousness to advance their economic and social development now and again over the second half of the 20th century) is coming to an end. The processes of globalization and integration the region faces today made the issues of rapidly establishing and developing effective interaction between the region’s nations an urgent challenge. These processes have already reached certain stages in the relations between Japan, the Republic of Korea and the People’s Republic of China, as well as between the NE-Asian and SE-Asian countries. DPRK, Mongolia, Myanmar, Laos, and Cambodia so far are outside these processes, although the authorities of these countries are applying certain efforts to get involved into them. The Russian Federation and first of all the constituents of its Far East Federal District (Okrug), also, during the past few years have been making steps in enlivening the economic ties with the states of the region. In fact, in 2000–2006, commercial and economic relations between Russian and all the states of eastern Asia had a clearly visible tendency to grow. The process of establishing a full scale economic cooperation between the countries of East Asia is hampered by a number of serious political obstacles. The countries of this region have for several decades been in the state of direct military or/and political confrontation. East Asia, from the early 20th century, had been an arena of fierce domestic conflicts, and acute hostilities of the two socio-economic systems known for their antagonism during the “cold war” time. All this caused not only a gap in the economic development levels of the countries of the sub-region, but also a deep mistrust in the peoples of China and Korea towards the population of Japan, feelings of apprehension in Japan towards Russia, and mutually confusing feelings in the North Korea’s and South Korea’s populations. Similar attitudes, if to somewhat less explicit degree, are observed in the Southeast Asian states. 136

6. The external integration environment: problems and prospects of economic integration in Northeast Asia

Such disagreeable moods among the nations of East Asia affect their political and economic orientations. Even now, such acts of strictly domestic protocol arrangement as a visitation of the Shintoist temple of Yasukuni by the Japanese government members causes a negative reaction of the Chinese and Korean general public, and such facts cannot be ignored by the countries’ top political and business authorities in forming their attitudes towards Japan. In turn, the attempts made by the leaders of the DPRK to conceal the facts of kidnapping Japan citizens by North-Korean special services in the 1970s to 1980s provoke grave discontent in Japan. Thus, according to the results of the public opinion survey conducted by the Iomiuri Shimbun on the 11th and 12th of December, 2004, 74% of those questioned seconded the introduction of economic sanctions against North Korea in connection with the circumstances mentioned above. There is also no denying that the “territorial jurisdiction problem” lingering in the interrelations between Japan and the USSR (later the Russian Federation) has an adverse impact on the condition and development of the Russo-Japanese economic ties. The outstanding of the issue of territoriality of Takeshima and Senkaku isles is quite detrimental to the relationship between Japan on the one hand, and the Republic of Korea and the PRC, on the other, as well as a similar questionable status of the Paracel Islands is not conducive to the relations between China and the ASEAN countries. Nor conducive to an effective economic closeness of the region’s countries is the policy pursued by the leadership of the Democratic People’s Republic of Korea. A cold war relict, frozen in its development, this country today is a serious hindrance for the development of economic interaction of the Northeast Asian countries. In the recent years this has been especially evident from the obstructionist position the North-Korean leadership took at the sixsided negotiations on the North Korea nuclear program which has a clearly military direction and is viewed by many adjacent countries as grave peril. The nuclear tests conducted by the DPRK on October 9th, 2006, have caused an especially acute adverse reaction in nearly all the East Asian countries. The factors mentioned above considerably nullify the effect of a cultural commonness of the region, built up mainly on the basis of ancient Chinese mentality and common religious teachings (Buddhism and Confucianism). Nevertheless, it is quite obvious that, even with the above mentioned factors detrimental to integration processes, the countries of Northeast Asia, and first of all the three of them – Japan, the Republic of Korea, and the People’s Republic of China – have already started efficiently using the tools of interstate interaction – a multi-positional economic cooperation, the account of the partner’s business, political and social interests, and the coordination of each other’s positions both on NEA and world markets. A wide integration experience has been gathered by the ASEAN countries.  ������������������������������� Iomiuri Shimbun. 2004. Dec.14.



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In some aspects their integration practice has gone far bigger lengths than the NEA countries’. Integration processes in East Asia differ from the ones in other parts of the world. First of all, it is important to mention the absence here of the system of interstate agreements on the issues of economic ties. Nowadays the basics of interstate economic cooperation in East Asia are the contracts among business spheres of the states in the region, and these are not intergovernmental agreements. The creation of EAC gives evidence about the world tendency: in the short term perspective economic and political competition among the national states will be developing in the form of competing regional integration projects (EC, CIS, SOC, ASEAN, EAC etc.). Secondly, these projects are able to determine “the nature and format” of the future multipolar world and will be powerful political- economic poles which will compete for the right to make the world leadership of the only superpower – the USA. Third, the success of integration project, the selection of the most powerful and most able will depend on speed and depth of integration. It should be mentioned that the process of integration in the region is only realized in the economic sphere and to greater extend is provided by market incentives, rather than by institutional integration which the states should complete. The processes of institutional integration vividly go behind the rates of economic cooperation development. They are still realized in the form of informal and semi- formal ties and also through mechanisms of getting to consensus. This goes at the time when economic integration is being completed at more systematic rates. Regionalism as a realized policy of East Asian governments directed at coordination of economic activity up to the beginning of the 21st century looked non-defined and abstract. There are numerous reasons which are well-known to scientists and politicians. However, despite any obstacles the network of integration ties is getting wider. Such an objective moment as correlation of production factors influence the acceleration of integration processes. From the point of view of allotment with factors of production in the region we can distinguish three groups of countries: •  Capital and technologically saturated, such as Japan and Korea; •  Labor saturated, such as China, Vietnam, Indonesia, Thailand and to some extend People’s Democratic Republic of Korea; •  Resource saturated, such as Russia, Mongolia, Malaysia, Indonesia. The situation of uneven allotment of production factors in the region creates objective conditions for stable multilateral economic ties in the form of commodity trade and exchange of production factors. Although, as it will be mentioned below, the significance of this factor has a tendency to diminish. In the past the model of economic development in East Asia was often described as flock of geese flying, according to which there is a leader in the region (leader of the flock) and after this leader depending on the level of 138

6. The external integration environment: problems and prospects of economic integration in Northeast Asia

economic development of each member of the “flock”, go other countries of the region. Japan was the first to start its economic growth in the region. In the second end it was followed by Korea, Taiwan, Hong Kong and Singapore, which managed to change the status of their economies from developing to new industrial countries. The third end is represented by the economies of ASEAN – Thailand, Malaysia, Indonesia and Philippines. As a result of interdependence which was built up by developing of investments and trade regional circle of economic mechanism was formed, which bound all the economies of Northeast and Southeast Asia and provided sustainable and stable economic growth of regional economy over two decades. However the different speeds at which the different countries of the region adjusted themselves to the new economic environment, as well as the difference in the rates at which structural reforms met the challenges caused by globalization and the IT revolution, resulted in disintegration of the longexisting economic order of the region. This became especially conspicuous after the Asian financial crisis. The processes of globalization and revolution of information technologies led to the fact that the model of “geese flock” became less applicable, which the fact was, in particular, admitted by the patriarch of the Japanese political world, ex-prime minister Yasuhiro Nakasone, who, in his report “Road to EastAsian Community” (the Global Asia), specifically emphasized that the model having become obsolete, all the countries of the region have to resume flying as one unified flock. The industrial development according to “geese flock” model has two characteristics: consistent traditional development of individual industrial structures which embraced full cycle of production, and a new organization of trans-border industrial networks through direct foreign investments. In conditions of intensifying integration in the world economy the presence of a full cycle of production loses its importance, and network components are becoming predominant. The model of development that is being formed in East Asia, according to a number of experts, is characterized by the creation of regional industrial clusters when there is a new breakthrough in technology. These clusters are directed on manufacturing certain types of products and include the economies which function on various stages of development and located in this region of the states. This circumstance contributed to the fact that the model of economic development, at which one large and the most developed leads the whole “geese flock” (other regional economies), gives up the place to a new model which is based on appearance of different leaders for each technological cluster. Thus, South Korea, makes a good example to Japan in manufacturing large integral RAM type memory chips, Taiwan has concentrated the manufacturing of personal computers and their major   Global Asia. Vol. 1. No 1. Sept. 2006. Р. 16.



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components, such as liquid-crystalline display screens, in its territory, while China has turned into a manufacturer of labor and capital intensive kinds of products. Regional model of economic development, based on network principles, develops on the basis of direct foreign investments and usage of information technologies and bases on the usage of comparative advantages of each economy. The differences in comparative advantages have a tendency of supporting the model of consistent development similar to the type of “geese flock” if industrial changes accumulate in time and in certain, settled order. However, on the other hand, the differences in comparative advantages, contrast to the difference in comparative advantages do not generate this obvious in the past model of development. These differences originate from many factors, such as market and regulating frames, taxation schemes, level of infrastructure development, development of industrial clusters and external nature of international networks. The comparative advantages to a growing extend depend on the choice of policy and methods of its realization, as well as on network activity of corporations. At the same time, comparative advantages to a far lower extend depend on the allotment with factors of production. This new reality represents a sign of anxiety for all ASEAN economies. If these economies turn to be unable to provide improvement of state and corporate management in order to make the process of decision making more transparent, transparent, predictable and efficient, their comparative advantages resulting in the allotment with factors of production, will have less and less economic value. For the governments of ASEAN countries it is vital to make economic regimes in these countries and make the process of political decision making more efficient, and reduce transaction costs in the production of goods and services. East Asian economies need reorganization and restructuring to withstand the challenges of globalization, revolution of information technologies, regionalization of network production. In order to be competitive in this situation these economies need to have flexible and productive labor force, efficient social and corporate management and industrial structures, which understand the importance of information technologies and realize that the period of information technologies is going away. This paradigm shift of industrial and system models enforces structural changes in the economy of East Asia in the system of interstate mutual relations. First of all, this paradigm shift accelerates the transfer of new industrial production technologies from more developed economies into less developed ones in the region. The perspective of forming competitive advantages, based on low costs, gives a powerful impulse for the transfer of modern production technologies through the mechanism of direct foreign investments. Typical example that reflects this situation is the flow of Japanese investments into Southeast Asia and China in the middle of 1980s, which were followed by the investments in similar directions from new industrial countries. 140

6. The external integration environment: problems and prospects of economic integration in Northeast Asia

Secondly, the transfer from industrial to information technologies increased the share of the industry of information technology in the economies of East Asia. However, the rates of this process in Japan, Korea, Taiwan and Hong Kong significantly differ from the similar indicators in some of the ASEAN economies. Third, the transfer to information technologies increases the share of knowledge in the production process as long as the information replaces labor force and capital. This is observed in rapidly growing need in high qualified intellectual labor force. Changes in the production process take the ability to innovate to the first place, shifting the ability to absorb knowledge to the second place. In the latter thing the countries of East Asian economies were a success. In edition to the above, the shift to the information technologies in the production process also requires changes in the organization of industrial enterprises. Globalization of the world economy and implementation of information technologies reduce competitiveness of large vertically integrated production organizations, which built up the basis of East Asian economies in the near past. Network enterprises, using outsourcing and network supplies, are more adjusted to the new environment of international technologies, than internally oriented organizations similar to Korean chebol and Japanese keiretsu and other industrial agglomerates of ASEAN countries. Other fundamental changes take place in the sphere of liberalization and deregulation. These measures are directed on the increase of industrial efficiency through elimination of distortion in resource distribution. However, liberalization and deregulation embraced not all sectors of East Asian economies, especially ASEAN. Nearly across the entire region, the sector of services remains a closed sphere and that is the reason of its lower competitiveness in comparison with the industrial sector. The reform of state enterprises and development of the private sector are the central aim of the government in China in the goal of transformation of its economy into market economy. State monopolies still dominate in Thailand, Indonesia, Malaysia, Philippines and even Singapore. Slow rates of regulative reforms in Japan and Korea distort international competitiveness of Japanese and Korean industries due to holding back of the process of increasing the abilities to innovate and work efficiently. In the conditions of rapidly changing international and internal economic environment the governments of East Asian countries have to pay more attention to the issues of accelerating regional cooperation on multilateral and bilateral basis. In this questions they base on the principles of WTO, but taking into account the tendencies to the growth of regional communities NAFTA and EU they pay more and more attention to regional and bilateral ties in the issues of liberalization of trade and investment regimes. Some researchers of economic processes in the region believe that East Asia may be an interesting laboratory for verifying the idea whether the 141

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cooperation in monetary and financial sectors may take place to a greater extend than trade and investments and serve as the principal engine of regional economic integration. The European experience offers consistency, in which trade cooperation would precede the monetary and financial ones. Arguments in favor of this belief represent results of research, which show that benefits from monetary and financial cooperation increase with the increase of the level of trade integration. These arguments are confirmed by the research which shows that the trade among the countries, which use the same currency may three times exceed the trade among the countries using different currencies. The supporters of the priority of monetary and financial cooperation put forward an argument that this type of cooperation doesn’t require using socio- political measures which are typical for traditional forms of regionalism and are followed by social instability. They also believe that in this case every economy benefits because this cooperation is not followed by the elimination of one of the competitors, as it happens in the case of cooperation in trade and investments. Some researchers, particularly Higgot, state that the East Asia with its “new monetary regionalism” may become the first area where the process of forming the group may be based to a greater extend on the cooperation in the monetary and financial spheres, rather than in the spheres of inner regional trade cooperation. The idea of new monetary realism in the East Asia became widely spread during the debates devoted to the formation of Asian Monetary Fund in 1997 and through the text of the agreement signed by the 10 ASEAN countries, on the one hand, and China, Japan and Korea, on the other, regarding the Chiang Mai Initiative. Before Asian Financial crisis, the economic integration in the region based mainly on the priority of trade. After the crisis measures of political nature appeared on the primary place and were directed on the acceleration of the process of deepening economic integration in the region. It is absolutely obvious that the crisis served as the accelerator for the search of institutional identity by East Asia. According to Stabbs, the crisis added to the feeling of common history to the countries of the region. In fact, each government in East Asia felt the consequences of the crisis and had to work on overcoming this crisis. The crisis also showed inefficiency of ATES and ASEAN which turned to be unable to help to the countries which suffered the most during the crisis. It can also be mentioned that recommendations and acts of IMF based on the ideas of the US government were unable to make anything more but just soften the situation. In these conditions, the counties of the region undertook a more aggressive promotion of regional commercial agreements. As to date, East   ������������������������������������������������������������������������������������ Passed in 2000 by ASEAN countries, Japan, Korea and China, the agreement, stipulating in cases of necessity swap purchases of the currencies of this agreement.

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Asia is an area with the least number of regional commercial agreements signed, and the lest number of notification of submitted to the WTO between 1991 and 2006, while during this same period, the WTO was notified of eleven Regional Trade Agreements concluded by the East Asian countries and areas. The agreements differ considerably in terms of membership, structure, efficiency in functioning, and results achieved, which is explained by the heterogeneity of policies and economies of the region’s member-countries. The only provision that remains multilateral is the agreement on creation of the ASEAN-AFTA free trade zone (January, 1992), with Brunei, Vietnam, Indonesia, Cambodia, Laos, Malaysia, Myanmar, Singapore, Thailand, and Philippines as its constituents. Singapore is leading in the number of signed agreements (five RTAs). China is a partner of also five agreements, but shares them with Hong Kong (2) and Macao (2). The regional trade agreements concluded during the recent years, have been directed to the creation of free trade zones at the expense of high tariffs and other trade barriers. Many of the agreements aim at the coordination of commercial and administrative practices, procedures and standards, as well as at the creation of comprehensive investment zones. The trial runs of RTAs showed that they enable the countries of the region to carry out liberalization faster than under multilateral agreements of global dimension, and make considerable contribution to economy through updating the industries and selling goods in the region. They also contribute to the implementation of economic reforms. On the other hand, the more are the RTAs (these days, negotiations are going on on concluding similar agreements between the ASEAN countries and Japan, the ASEAN countries and the Republic of Korea, Japan and Republic of Korea, Japan and Indonesia, Japan and Malaysia, PRC and Singapore, Japan and Philippines, Japan and Thailand), the greater are parallelisms and disagreements in the partners’ commitments that turn into a tangle of contradictions, especially where tariffs and the promotion of goods are subject to different regulations in different countries. In other words, the issue is whether or not these agreements can enable the tariffs become lower and whether or not they can contribute to conditions complementing and strengthening a non-discriminating multilateral approach to the liberalization of commerce. So far, as is seen from the practice of implementation of those agreements, the question whether or not these agreements can be economically more gainful than the region-wide ones, remains to be answered. But there are hopes that when superimposed or intersected, bilateral agreements may ultimately result in a more rational and centralized system of integration, and these hopes are widely spread as guidelines for the East Asian economies. On the whole, the formation of an East Asian integration group, with its geographical, political and economic peculiarities taken into account, appears to be a far reaching prospect. Meanwhile, the leveling of the countries’ 143

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economies, and the consolidation of the integration processes within the bounds of certain sub-regions (particularly, NEA) will gradually form up the conditions for a deeper integration, on the general, region-wide level. The progressing of the integration process in East Asia graphically demonstrates the complicated nature of the process. A network of regional agreements is being formed up slowly, not in concert, and in great dependence on the position not only of the leading countries of the region, Japan and China, but also the US. According to certain Russian experts, the formation of a free trade zone with elements of a common market is to be expected, at best, by 2020. That zone will also assume a role of an integration bridge between Asia and America, and will serve as a “negotiatory club”, a trade and economy problems discussion lounge. The issue of further enlargement of integration ties among the countries of East Asia crucially depend on the economic policy which the government and business circles of each country of the region implement and also on the extend to which this policy is directed on using the opportunities of interstate cooperation within the region. The ideas of the creation of an East Asian economic group widely circulated in Japan yet in the 1970s. One of their ardent proponents was Prime Minister M. Ohira. It is significant that at that time it was only a question of an alliance between Japan and the SEA countries. Even in theory, a question of establishing cooperative ties with South Korea (let alone with China) was not ever brought up, as neither economies of the countries at that time, nor their recent histories gave any grounds for that. Yet, with the PRC’s economy developing and consolidating, and the Republic of Korea turning into a new industrial country, these two countries were becoming increasingly important partners for Japan in trade and economy. In the context of these changes, these NE Asian countries were included into the sphere of interests as another two areas that could join Japan to form up a common economic group. But until the beginning of the 21st century, neither the PRC, nor the Republic of Korea were considered as serious economic competitors. Therefore, within the bounds of East Asian integration group concepts, they were featured as rank-and-file members, like the Southeast Asian countries, with Japan an unquestionable leader. The situation has drastically changed over the past decade. During this period, due to the exceptionally high growth rates, Chinese economy became the second in the region after Japanese, while China turned into Japan’s keen competitor in the fight for the influence in East Asia. An impetuous growth of the PRC’s economy resulted in reducing to zero Japan’s chances to become the only group-forming agent in the region. Under the new conditions, the former concept of an integration group in this region with Japan at the head, had to be abandoned, and a new scenario began to be sought with China reconsidered as an equal partner. Moreover, a fierce rivalry arose between the two Asiatic giants over the influence in the region, which particularly distinctly 144

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manifested itself in undisguised terms, during the December Summit in Kuala Lumpur (2005). The period of China’s impetuous economic and political elevation in the world and in the region, coincided with a deep decline of Japanese economy. The recession period that lasted practically all over the 1990s was also the time when the economy underwent profound structural changes. Although the reformation has not yet been over, the new economy’s features are distinctly seen. Globalization in the Japanese economy also leads to changing correlation between the material and non-material comforts, with the latter prevailing. During the last 20 years the minor share of initial industries decreased even more, from 3.1% in 1980 to 1.5% in 2000; the share of the secondary industries decreased from 24.1% to 22.3%. The Japanese Economic Research Center forecasts that by 2010 up to 70% of GDP will come from the production of non-material welfare. The transferring of Japanese production abroad is becoming more intense. The process is going on especially fast in the four manufacturing industries – electrical industry, production of transport facilities, general and precision engineering. 60% of those productive capacities were taken abroad in the late nineties. For an instance, such a well-known company as Sanyo created 40 branches in the East Asia only. According to the findings of the Ministry of the Economy and Industry the share of the Japan’s overseas manufacturing industry was 12.9%, which is 4 times higher than 10 years earlier. During the period of 1990–2000, the number of Japanese enterprises registered overseas increased by 2.4 times (from 2,862 to 6,919), with 46% sited in East Asia. It is worth mentioning that the production transfer has recently shifted from the SEA and NIC countries to the People’s Republic of China. Thus, the number of Japanese companies located in PRC, grew over that decade from 150 to 1712 (an 11.4 time growth), those located in the USA, from 2287 to 3316 (a 1.4 time growth), and those in EEC, from 1673 to 2682 (a 1.6 time growth). The transfer of Japanese productive capacities to the Eastern Asia countries was accompanied by export of technologies. In 1993-1995 the export of technologies from Japan to Asian countries was 67.8%, the import 1.4 against 18% and 79.9% for the North-American Countries and13% and 18.3% for countries of the European Union correspondingly. The back side of the process is that Japan increased imports of goods  �������������������������������������������������������������� The ������������������������������������������������������������� White Book on Economy – 2003. Tokyo, 2004. P. 115 (Jap.).  � Masahiro, Kohara. East Asian Community. Tokyo, 2005. P. 66 (Jap.).   ������ Ibid.   ������ Ibid.   � Bybennikov, A.N., Bybennikov, A.A. Japonija na poroge 21 veka: tehnologicheskij, informacionnyj vyzov (Japan on the verge of the 21st century: technological and information challenge) // Problemy Dal’nego Vostoka. 1999. No 6. P. 76. 



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produced at the Japanese owned plants located in the Pacific Rim countries. About 20–25% of the goods imported by Japanese companies are return import. According to the Japan External Trade Organization (JETRO) the foreign share in the total production volume of the Japanese companies is expected to rise from 18.4% to 26.8% by 2000. The processes of globalization and internationalization of the Japanese economy are beginning to change even such traditionally conservative sphere as recruitment of foreign labor force. Although the proportion of foreigners in the country is very slow to increase and it was a bit more than 1% of the population in the beginning of the 21st century, the foreign staff in the services sector and manufacturing industry is beginning to increase. The number of the foreign staff in Japan grew from 850.5 thousand people to 1.78 million people from 1992 to 2002. In the political, business and scientific circles the necessity of bringing more foreign staff into the country is being discussed in the political, business and scientific circles. And it is quite obvious that the Korean Peninsular and China will supply Japan with more workers as the proportion of Chinese and Koreans among the foreign workers amounted to nearly 70% in 1993, and 60% in 2001. Thus, there are all grounds to say that one of prerequisites for an integration group, i.e. free movement of man power, has begun to be observed in Japan, a country considered to be conservative in this respect. In spite of the fact that the Japan’s economy has had a lot of problems in the last ten years, the economic and financial power gained during the postwar decades can ensure that the country will overcome those difficulties and develop successfully. The building up of scientific and technical rigging of the economic sphere to a certain extent made up for the relatively low rates of the GDP growth in Japan in the recent years. Almost every long-term forecast made by different international economic and political organizations says that Japan will rank among the first five most developed countries in the nearest 30 to 50 years. The health of Japanese economy, which is second in the world, is very important for economic growth of the East Asia. It is absolutely clear that unless the Japanese economy is viable and stable, it is impossible to provide the stable development of the East Asia. In addition, practically all the countries had some foreboding regarding China’s growing into an economic giant, in which connection political and business circles of these countries regard Japan as a counterpoise to the Chinese intentions in the region. Despite all the problems Japan is the largest economy in the East Asia  � Bybennikov, A.N., Bybennikov, A.A. Japonija na poroge 21 veka. P. 76.  ��������������������������������������������������������������� The �������������������������������������������������������������� White Book on Economy – 2003. Tokyo, 2004. P. 130 (Jap.).   ������ Ibid. ����� 



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and 3 or 4 times surpasses the Chinese one. Presently, China, due to its fast development, has turned into the vehicle of economic growth in the East Asia. However, the Japan’s official help, investments and transfer of technologies support development of Chinese economy. These three factors boost the development of the ASEAN countries economies as well. All these circumstances contribute to the fact that the part of the leader of the integration processes both in Northeast Asia and Southeast Asia is reserved to Japan The defiant character of China’s competitive attitude was expected to encourage Japan to seek more effective ways of cooperating with the regional economies. In the medium-term, China will be occupied with solving its internal economic and social problems. So it is Japan that is to boost and develop the regional economies. It could become the catalyst of the East Asia economic development, as it has the requisite technologies and money. It is already clear that Japan will not be the only regional leader, but it has the minimum economic and industrial potential to transform the East Asia economies. At the same time, economic development and dynamism of the East Asia should ensure efficient mechanism for sustainable development of Japanese economy. This is a mutually beneficial formula for both Japan and the region. The problem is that they should establish the mechanisms to take the advantages. Japan continues to render assistance to economic cooperation in the East Asia. One of the recent proofs to this is the decision of the Japan’s government to contribute nearly $60 million to the regional integration of the ASEAN countries at the end of 2005. (Russian Informational Agency – Novosti, December 15th 2005). At the same time the growing competition with China to be the regional leader can turn into a significant obstruction to the development of economic cooperation in the East Asia. It is crucial for the perspective integration processes in the region to find ways to master the existing antagonisms between the two countries. Many researchers comparing the integration processes in the East Asia and Europe point at the fact that overcoming the historical antagonisms between two countries dominating European integration – Germany and France – was the basis for the development of the integration processes in the Western Europe. Increasing competition between Japan and the PRC has not influenced their economic relations yet. However, it is unlikely that such a situation will last long. A serious circumstance that can be detrimental to the relations of Japan with the NE and SE countries is seen in the increasingly active involvement of Japan in the US policy of military and political containment of China. Japan’s participation in integration links being formed in this region and its role in these links formation could considerably shrink away. It is unlikely  ���������������������������� RIA-Novosti. 2005. Dec. 15.



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that the USA could ever compensate for that shrinkage. Therefore seeking for a well-balanced course towards the development of the relations with both the East Asian countries and the USA is a complex and important task the Japanese leadership face on the way of East-Asian economic group formation. The Republic of Korea is taking an increasingly active part in the integration processes in the East Asia as well. The financial and economic crisis in 1997 badly influenced the national economy but at the same time it was the crisis that encouraged Korea to implement the reforms and take more active part in the regional economy. Having the experience of the last five years on how to meet the crisis, the government of the Republic of Korea in its economic policy places the emphasis on raising its competitive ability on the international market and continues implementing economic reforms aimed at reorganization the leading sectors of the national economy. They plan to follow flexible monetary and financial policy and increase budgetary provisions to stimulate the economic development. Special emphasis is put to boost the competitive ability in the field of the information technologies, biotechnologies and nanotechnologies by means of investments into the industries and encouraging exports. The government of the Republic of Korea pays attention to improvement of the investment situation in the country and making it attractive for foreign partners, including those from the East Asia. High domestic demand and diversified economic structure make the South Korean economy more attractive for investors. So, in 1997 foreign investments were more than double on the previous year and amounted to $6.2bln, in 1998 – $8.3bln, in 1999 – $15.8bln, in 2000 – $15.9bln, however, they fell to $11.95bln in 2001. At the same time it is necessary to point out that financial collaboration among the East Asian countries in general, and the Republic of Korea and other countries of the region is the least advanced. This is the reason for the USA to be the leader among the foreign investors in the South Korea for many years. Although Japan ranks second in the sphere, its share tends to decrease after the peak amounting to $1bln in 1999 and to less than $800mln in 2001. The government of the Republic of Korea gives priority to attracting investment to science intensive industries. In 2002 there were 124 foreign research institutes (in the sphere of information technologies, electronics and bioengineering) in operation. American investments for the period were 38.7%, European – 37.1%, Japanese – 16%. Although this field has not yet become an important trend of the intraregional cooperation for the Republic of Korea.   Promotion of Japanese-Chinese-Korean direct investments. Tokyo, 2003. P. 80 (Jap.).  ������ Ibid. �����





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As does the Japan’s government, the leaders of the Republic of Korea consider to be important lines of development with the neighboring countries such sectors as electronic and motor-car construction industries. Of special interest is the experience the Republic of Korea has accumulated in establishing relations with such an intricate neighbor as the People’s Republic of China. Incommensurable as any socio-economic characteristics of the two countries are, South Korea, following the ancient Korean rule “to learn how to get along with a potential rival”, has learned how to comfortably cuddle in the shadow of its great neighbor. A big portion of the experience gained by this country in building mutually beneficial trade and economic ties could be taken into account by the other countries of the region for the cause of their economic integration. China has turned into the leading foreign trade partner of the Republic of Korea. From 1991 to 2004, the volume of their mutual trade increased from $4.4 billion to $79.4 billion. China’s share in South-Korean exports grew from 9% in 1998 to 20% in 2004 (while the US share decreased from 21% to 17% during the same period). Over 27 thousand South-Korean companies are involved in the trade with China. South Korea has been building up its investment capacities for China. Until 2000, this process was less vigorous than the exporting of goods, and the volume of the accumulated investments reached $4.64 billion, which made PRC the second center of attracting South-Korean investments next to the US. However, a real South-Korean investment boom began in 2001. Over four years the volume of investments increased by three times, from $2.15 billion to $6.25 billion with its total amounting to nearly $20 billion. The quantity of investing companies in China grew from 650 in 1992 to five thousand in 2003. The economic thrust into China is headed by the largest South-Korean corporations: Hundai motors (motor-cars), Samsung and LG (electric machine building), SK Corp. (petrochemical), and POSCO (metallurgical). The policy pursued by the South-Korean big business and Government concerning China has proved its high efficiency. Sacrificing part of light and some other labor intensive industries to the neighbor, South-Korean capital has occupied well-secured niches on Chinese markets of information technologies, motorcars, and steel and high quality petrochemical products. South-Korean companies have chosen such branches of China’s economy, the policy of cooperation with which meet both national and provincial development plans of China. Besides, the South-Korean businessprojects are being implemented in the format acceptable and understandable  ������������������������������������������������������������������������������������� Promotion ������������������������������������������������������������������������������������ of Japanese-Chinese-Korean direct investments. Tokyo, 2003. P. 113 (Jap.).   Ibid. P. 80.   � Cheong, Yong-Rok. Korea’s Option for Facing China’s Economic Challenge // Korea Focus. 2002. Vol. 10. No 6. P. 123.   ������������������������������ Korea ����������������������������� Now. 05.02.2005. P. 12. 



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for the Chinese. In many respects, this is explained by the fact that the South-Korean business, that has always received powerful backing from the government, knows when, how and what to say during negotiations with the oriental bureaucracy handling economic processes. The projects offered by South Korea provide not only the acceptable level of technological solutions and the widening of business ties to global scales, but also a system of business and labor relations management which is close to the Chinese social and cultural milieu. Being well aware of a potential threat posed by Chinese competition, the leaders of the Korean state and private companies made use of the economic growth of the neighboring state in the interests of their own business development. Experienced in creating competitive business entities, they turned the manpower, material and R&D resources of the PRC to their own advantage. It was the concerted activities of the state and the business of the two countries, based on the mutual and long-term interests, that have resulted in a dynamic growth of bilateral economic ties built on a steadily widening and increasingly sophisticated system of exchanges in commercial, investment, trained personnel, and R&D spheres. Thus, the nature of the interrelationship between the South-Korean big business and Chinese state and private entities calls forth deep quality changes in the system of economic relations between the two countries and guarantees the extension of integration trends. The practice of establishing and developing trade and economic, investment and integration ties between the Republic of Korea and the People’s Republic of China can be used during the formation of integration groups both in the sub-region of Northeast Asia and in the region of East Asia. The People’s Republic of China can certainly be placed among those East Asian countries which are not only involved in the integration processes, but have increasing influence upon them. One can absolutely agree with Takahashi Katsusige, who thinks that “now the development of the global economy depends much on which policy the Chinese economy will follow”. The fact that the Chinese economy is becoming a part of the economic ties in the East Asia through integration processes is of much interest as the result of China’s becoming a member of the WTO, and in connection with large-scale social and economic transformations in the country. China’s joining the world trade organization led to a new situation in the economic ties of the PRC with the East Asian countries, particularly with ASEAN members. On one hand, competition with Chinese manufacturers intensified due to joining the WTO, on the other hand, the countries of the group obtained access to the Chinese domestic market after reduction of import duties on agricultural products.   ������������������������������������������������������������������������������������� The Global Economy: contrasts between efficiency and inequality, prosperity and poverty. Tokyo, 2001. Р. 242.

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One of the evidence of the market transformation in the Chinese economy is the increase in the share of the private sector in GDP. Foreign experts suppose that private enterprises produce 25% to 75% of the country’s GDP. So, Gordon G. Chang in his paper “The Coming Collapse of China” says that “at least 45% of the country’s GDP for the non-agricultural sector is produced by private enterprises”. The process of drop in importance of the national enterprises is more visible in industry. Before the reforms in 1978 the proportion of the stateowned enterprises in the overall volume of industrial production was 77.6%, by 1985 it was 64.9%, by 2000 – 28.2%. This drop in the proportion of the state-owned enterprises in the national industry is connected, first of all, with their small efficiency. The number of unprofitable enterprises is growing. In 1985 6749 enterprises were officially declared unprofitable, in 1998 the figure increased to 27104, although the number fell to 17072 by 2001. The decrease in the number is closely connected with the government’s passing the program to reduce the unprofitability of large and medium stateowned enterprises within 3 years. Although at 9-1 session of the 4th convocation of the People’s Social Party of China in March 2001 it was announced that “in general the goals of the program were reached”, in fact the number was not reduced even to a half. Still, the Chinese government continues to finance the state-owned enterprises first of all owing to social reasons. The role of the private sector in Chinese economy is growing as is seen in the investment sphere. During the 1990s, the investment structure considerably changed. While in 1980, the state investments in the economy constituted over 80%, by 2001 they fell to 47.3%. During the same period, foreign investments and the so called “other investments” (as termed in Chinese statistics) considerably increased. First registered at a level of 10.3% in 1993, by 2001 they grew to 23.9% and ranked second after state investments. The growth of joint and private investments during the entire decade was negligent, private investments exceeding the joint ones in the first half of the 1990s and yielding to them in the second half lowering down to 18% by 2001. Foreign investments play a special role in today’s Chinese economy. Their increase and their use effectiveness growth are viewed by China’s leadership as priority tasks the fulfilling of which will be conducive to the settlement of such country’s economy issues as development of economy under the scantiness of domestic funds, transference of national economy to market relations, upgrading of economy by introducing advanced equipment and technology, integration of China’s economy into world economy, and rise of life and employment standards.  � Gordon, G. Chang. The Coming Collaps of China. 2002. P. 147.  �������������������������������������������������������������� ������������������������������������������������������������� The White Book on Economy – 2003. Tokyo, 2004. P. 21 (Jap.).   ������� ������ Ibid.   ��������������������������������������������������������������������������������� The �������������������������������������������������������������������������������� White Book on Economy of the NEA –2003. Niigata: ERINA, 2003 (Jap.). P. 17.   ������ Ibid. 



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Over the years of the reforms, the total amount of foreign contract investments reached $828.06 bln, with $447.97 bln of actually used ones. All in all, on the territory of China there are 424,196 enterprises using foreign investments. These investments are coming to China from 170 countries and areas, with 97% of investments coming from 10 sources, among which are Hong Kong (36%), Virgin Islands (10.8%), the USA (10.4%), Japan (9.8%), Taiwan (6.7%), South Korea (5%), and Singapore (4.8%). The major foreign investors are transnational corporations, international financial and banking units, including IMF, the Asian Development Bank, and the overseas Chinese diaspora. The biggest portion of foreign investments (66%) is funneled to processing industries, 11% to real estate transactions, 5% to the infrastructure area providing the country with electric power, gas and water. Aimed at the intensification of economic foreign ties, and in the first place at more foreign investments, special administrative-and-economic entities with preferential treatment have been formed in China. Among them, ranking first in importance, are the five special economic zones: Shantou, Shenzhen, Zhuhai (Province Guangdong), Xiamen (Province Fujiang), Hainan (Province Hainan) and Pudong Region (Shanghai) equaled to them in status; the 32 zones of economic and technologic development in the cities of Beijing, Shanghai, Guangzhou, Tianjin, Dalian, Harbin, Urumqi, Uhan, Chongqing, Hangzhou, Shenyang, Changchun, Yinkou; and 14 border cooperation zones in the cities of Dangdong, Heihe, Suifenhe (Province Heilongjiang), Mangzhouli, Erlian (IMAR), Hunchun (Province Jilin), Yining, Bole, Tacheng (SUAR), Pingsiang, Dongxing (GCAR), Ruili, Wangtin, Hekou (Province Yunnan). A special role in the processes of linking the Chinese economy to the world economy is played by specific administrative areas of Hong Kong (reverted to Chinese rule in 1997) and Macao (in 1999). Both areas have preserved their market economies and enjoyed a high degree of their autonomy (thus, Hong Kong as a separate customs territory, secures its membership in WTO and in a number of other international organizations, for instance, in АPEC). Having preserved its market economy, and, what is more important, its status of an independent world financial center, Hong Kong comes out as a guide for elements of market economy to the territory of China. It is particularly clearly seen in the way the business ties are developed between Hong Kong and the special economic zones of the province of Guangdong Zhuhai and particularly Shenzhen that has actually become Hong Kong’s subsidiary company. In fact, the province of Guangdong’s and other areas’ FEZs, that are market economy enclaves on the territory of China, are becoming the tools of introducing the principles of market economy in the internal areas of the  ���������������� Delovoj ��������������� Kitaj. Т. ������������������������������������������������������ III. (Business China . Vol. III). М., 2004. P. 33.  �������������������������������������������������������������������������������� The ������������������������������������������������������������������������������� White Book on Economy of the NEA –2003. Niigata: ERINA, 2003 (Jap.). P. 38.   ������������� Ibid. ������������ P. 39. 



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country. It is clear not only because in these zones the ways of opening the Chinese economy to the world are being elaborated, but also because it is in these zones that millions of workers and dozens of thousands of businessmen and managers are being trained to become skilled in market-oriented practices. Moving on over the internal areas of the country, they act not only as bearers of new knowledge and skills, but also as contributors of their experience to enterprises and companies all over China. The socio-economic reforms that have been going on in the province of Guangdong during the past 30 years to create here the most efficient special economic zones, resulted in imparting to this area the most globalized economy in the People’s Republic of China, providing it with the most advanced and most powerful industry in the country. The province leads in development of foreign economy ties and in participation in cluster integration processes. In 2001, 37.4% of Chinese color TV-sets, 38.5% of air-conditioners, 25% of refrigerators, and 25.4% of personal computers were manufactured here. The province firmly holds the first place among the other Chinese provinces in the GRP production: 966.2bln yuan in 2000 (10.6% against 858.2bln in the province of Jangsu, and 854.2bln yuan in the province of Shantung); in the total of investment assets: 10.5%; in retail volume: 11.9%; in exports: 36.9%; and in foreign investments actually used: 35.7%. In this respect, the north-eastern provinces of China present a striking contrast with the province of Guangdong. In 1978 north-eastern China produced 15% of the country’s GDP, but since the 1980s the economy of the provinces declined, due to which the area’s share in the country’s GDP diminished to 11.6% by the end of the 1990s. The proportion of the investments in NE China’s fixed capital amounts to 9.6%, which is smaller than 12.7% of the GDP and 10.2% of the population. But the share of state investments here is bigger. In fact, it is over 50% in each of the provinces. The investment boom, begun in 1995 in eastern and southern provinces, practically had no effect on the investing practice in North-East, where it was less active than on the whole over the country during the entire second half of the 1990s. It was only in the most recent years that as a result of the measures taken by the central government, the development rate gap began to get slightly bridged. In 2001, the share of NE China and IMAR amounted to 12.7%, with Liaoning 5.2%, Jilin 2.1%, Heilongjiang 3.7%, and Inner Mongolia 1.6%. These measures appear to have been insufficient, and in October 2003, the    Doklad o vypolnenii plana ekonomicheskogo i social’nogo razvitija za 2001 god i proekte plana na 2002 god (The report on the fulfillment of the socio-economic development plan over 2001 and a draft plan for 2002). – http://china.org.cn/russian/33231.htm.   ������ Ibid.    The White Book on Economy of the NEA –2003. Niigata: ERINA, 2003 (Jap.). P. 16.   ������������ Ibid. P.18   ������������� Ibid. ������������ P. 16.

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CCP CC adopted a special Decree “On Renovation of the Industrial Basis in the North-East”, which, among other things, envisaged measures of more active application of market economy elements to the economies of these provinces. The enlivening of processes of integration into Northeast Asian states, as is viewed by the Chinese leadership, should favor the improvement of the economies in these provinces, and pull them out to the level of the maritime and southern provinces. While pursuing the policy of the enlivening of integration ties with the neighboring countries, the leadership of PRC have to take into account the internal developments that hamper the progressing of that process. In all areas of domestic life there are a great number of acute contradictions. Under the project “Challenges to China in the 21st Century”, an opinion poll was conducted among one hundred prominent researchers of China. According to it, during the period until 2010, the following six social issues should be viewed as “extremely important”: employment (66% of the poll respondents); relationships between different walks of life (64%); corruption (62%); ecology and resources (56%); population (54%); and stagnation in socio-political system reform (52%). At the end of 2002, the population of PRC exceeded 1,284 million people. About 933 million people lived in rural areas, of which 150 to 200 million are viewed as redundant manpower. About 90 million contrive to earn additionally in towns; from 60 to 110 million cannot find any job. The mass of the poverty-stricken steadily grows. While in the 1980s one per cent of the GDP growth was accompanied with creation of 2.4 million jobs, in the 1990s there were only 700 thousand to 1.1 million jobs. This explosive material of social unrest whish is accumulated in China together with a gigantic potential for immigration formed up there, cannot help causing concern in the states adjacent to China. It is not accidental that the professor of the Singapore Institute of Southeast Asian Research, K.S.Nathan expressed foreboding with regard to the rapid growth of Chinese economy. He fears the effect of a Chinese soap bubble that can ruin millions of people, cause a wave of discontented immigrants, and have an adverse impact on the adjacent countries, the ASEAN countries including. Over the recent decade the Chinese leadership’s standpoint regarding the economy integration processes going on in the East Asia has become completely opposite. At the beginning of and in the mid-nineties, the ideas of the integration of the region were implicitly rejected, as it was the period when Japan’s leadership in the process was unquestionable. But by the end of the 1990s with China appearing on foreign markets, its interests in integrating with the region had quickened. At the beginning of the 21st century China has    Gelbras, V.G. Perspektivy kitaiskoi migratsiyi na Dalnem Vostoke (Perspectives of Chinese migration in the Far East) // Otechestvennye zapiski. 2004. No 4.   ������ Ibid.   ���������������������������� MEIMO. ��������������������������� 2006. No 10. P. 119.

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become a full-fledged player on this field and even an adequate rival for Japan in issues of integration with the East Asia. Stirring up the integration processes with the East Asian countries, in the Chinese leaders’ view, is to ensure better economic situation in the country and minimize adverse consequences of the economic boom. Mongolia is much less than the other NEA countries involved in the integration processes of the sub-region and in the world economy in general. Nevertheless its economic ties with the neighboring countries begin to play more important role in the national economy. At present this results in the fact that fluctuations of the world price have negative influence on general social and economic situation in the country. So, the collapse of world price on copper, fluff and wool almost led Mongolia to financial and economic crisis. In general we can say that Mongolia has done a good job realizing market transformation in the country. Despite the process is far from completion, considerable part of the state-owned enterprises and other property are privatized and market tendencies increasingly stimulate the major industries to work. The country managed to diversify its foreign ties and now its main external economic partners are Northeastern Asia countries. At present Mongolia is much more engaged in the international policy than ten years ago. At the same time market transformations produced domestic social and economic problems. The well-being, very low even up to the socialist standards, fell even more. The country faced the problems of unemployment and poverty. For a long time the financial situation verged upon crisis. In general, Mongolia can be classified as the so-called “falling state”, which suffer from globalization most and, as many western experts think, will not be able to improve their economic situation and abandon the group in the years to come. However, the increasing engagement of Mongolia in the integration processes among the Northeast Asian countries can positively affect the country’s economy and ensure its collaboration within East Asian countries. The most isolated from the integration processes both in the Northeast Asia and in the East Asia in general is the People’s Democratic Republic of Korea. The country’s economy is in depression lasting for a long time. Its main reasons are structural degradation of the basic industries (power industry, ferrous metallurgy, engineering industry, transport) caused by constant lack of raw materials and equipment, lack of national foreign currency, and acute financial deficit due to huge military expenses and financing programs to create nuclear-missile weapons. Nevertheless, the government recently took certain measures to change the economic policy. They cannot be defined as market ones, although they were aimed at improving the system of business management and increasing the labor productivity. The most important of them was to turn most of the enterprises into commercial ones, their management was authorized to plan 155

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the production and find consumers for their production, have the right to keep up to 30% of their profit. State subsidies were cancelled. All the measures given above can be defined as improvements in the economic functioning within the limits of planned distributive and command economy. The engagement of the People’s Democratic Republic of Korea in international economic ties is limited to the foreign trade, with its volume constantly decreasing during the 90ies. Only 1999 witnessed insignificant growth, which is still continuing. In 2002 the foreign trade amounted to $2.45bln. The major foreign trade partners are the PRC – up to 30% of total turnover, the Republic of Korea – 23.7%, the European Union countries – 14%, Japan – 14.5, Russia – 5%. Although the government promises to expand the external economic ties and stir to activity the North Korean foreign enterprises adaptation to the situation on the world market, they do not put these declarations into practice. The heads of the corresponding ministries and state committees of the PDRK, coming to Russia to conduct trade negotiations in 2000-2003, ere absolutely unaware of the market economy, competition and used mainly the terms of “brother’s help”. However, the situation is not so hopeless. Thus, North-Korean students of the Moscow State Institute for International Relations, demonstrate good results in the market economy basic course. The leaders of North-Korean companies, collaborating with Chinese companies within the Rajin-Sonbon special economic zone, also show that they do favor the principles of market economy and know how to work in market oriented conditions. In general, we can say that the People’s Republic of Korea continues to ignore the processes of the world economy and the economy within the East and Northeast Asia. The measures taken in the last years are within the limits of the social and economic system existing in the country. Efforts to stir up the external economic ties, attract foreign investments are still targeted at reaching primary social and political goals without significant economic improvements, not at implementing any even small social and economic changes in the country. Although the government took certain efforts directed to establish ties with the neighboring countries of the Northeast Asia, they did not go beyond declaring their interest in development of the ties during repeated visits of the leader of the country Kim Jong Il to Russia and the PRC. At the same time the economic crisis, particularly in the field of power engineering and transport, makes the government look for ways to collaborate with the neighbouring countries and work out joint projects on obtaining electric power from Russia and China and transport modernization. In this situation the PDRK can become more involved in the integration processes in the NEA. Historically, the Russian Federation plays the most important geopolitical and geo-strategic roles in the region, its sea borders coming out onto the crossroads of trade routes and financial flow ways. Consolidation, and, 156

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what is more important, diversification of the economies in the region not only meet the current needs of the country, but also correlate with the tasks of the country’s development. Its active involvement in the integration processes going on in the East Asia is expected to conduce to the development of its own areas, such as Siberia and the Far East. The harmonization of the solution of domestic socio-economic problems with Russia’s international cooperation practice is an issue of current importance. The case in point is that Russia is to participate in building an economy regionalism and in using the tools that elicit a synergistic effect from the coordinating of various groups of states, thus purporting to achieve mutually beneficial aims. However, it is also necessary to admit that neither in practice nor even in theory, the region’s specialists in economy have ever considered the issue of including Russia into the process of international division of labor whether in the Northeast Asia in particular, or in the East Asia in general. This fact was confirmed once more by researchers of the Economy Research Institute (Far Eastern Branch of Russian Academy of Sciences) during their field work program conducted in the fall of 2005. Their familiarization with the works of research institutions of the Republic of Korea, Singapore and Thailand revealed an absolute absence of any information related to this issue in Singapore and Thailand. In the proceedings of research institutions of the Republic of Korea, everything regarding Russia has a sectoral character and is mentioned mainly in connection with the prospects of Russian energy carriers and of certain variants of railway transport corridors linking the countries of the East Asia and the Western Europe. Japanese research institutions (first of all the Economic Research Institute for Northeast Asia) give slightly more attention to Russia. As to Chinese research institutions and higher schools, it is mainly Northeast provinces that focus their attention on the problems of bi-lateral Sino-Russian commercial and economic relations. This situation manifests, on the one hand, a cameo part played by the Russian Federation in trade and economic relations and in the integration processes going on in north-eastern and eastern Asia, and, on the other hand, the traditional idea the states of that region have of Russia as a country economically favoring the states of the European continent. The aggravation of the energy problem in the region made the Russian Federation an attractive source of energy resources, the more so that the Russians themselves began to talk about the necessity to strengthen the eastern vector of the country’s power supply strategy. However, only in China the issue of power cooperation with Russia has acquired a practical approach, which is quite understandable in the light of the growing needs for energy carriers in China. The other countries of the region consider this issue predominantly as hypothetical. It is not accidental that at the Economic Conference on Northeast Asia in Niigata, in the spring of 2005, the representative of the Ministry of Foreign Affairs of Japan stated that so far none in the country had bothered to ponder on how the situation could change on the Far Eastern 157

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petrol market after the completion of the East Siberia – Pacific Ocean oilpipe line. In the early 90ies the Russian Federation became engaged in the international economic ties in the East Asia mainly through foreign trade with the help of the Russian Far East subjects. Being located close to the East Asia countries (and primarily to the countries of Northeast Asia), having rich natural potential helped the Far Eastern territories to rearrange their interregional ties quite quickly to match more effective external markets. That was the reason why by the end of the 1990s the share of the Russian domestic market had become considerably smaller than those of north-eastern and eastern Asian markets. However, the involvement of Russia into the economic system of Northeast Asia in the 1990s was not so much the result of the Federal Government’s policy (although the Russian Government members repeatedly proclaimed the importance of the Pacific direction in the Russian foreign policy and in the foreign economic relations), as the result of forced reorientation of the economies of the Far Eastern areas to the markets of the NE Asian countries, because of the traditional business links with the central areas of Russia and the CIS states (former Union republics) had been cut off. Thus, while in the early 1990s the trade with the other areas of the country amounted to 75% of the RFE regional output, the intraregional barter to 19% and the exports to only 6%, the trade with the other areas of the country by 2002 had totaled 4.3%, intraregional barter had grown to 77%, and the exports to 18,2%. Timber and fish industries, metal production and production of goods from them, transport and communication became the major industries involved in external economic ties due to structural peculiarities of the Russian Far East economy. As the analysis of the development of trade and economic relations of Russia and the states of Northeast and East Asia shows, the current format of these relations has practically exhausted its potentialities. The further broadening and deepening of the relations with the region’s states can only go on by way of integrating. Taking into account favorable, on the whole, short- and long-term prognoses for the economic development of the East Asia, involvement in the economic cooperation with that region’s countries is likely to be the most effective opportunity for Russia to get integrated into the regional and world trade (and further into the world economy), which would contribute to the overcoming those unfavorable conditions in which the USSR found itself in the last years of its existence, and which have not disappeared after the disintegration of the USSR (industrial output low    Ishaev, V.I. Rossiya v globalnom mire (Russia in the wide world). Khabarovsk, 2003. P. 176-177.

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competitiveness on world markets, excessive orientation of exports, and technologic backwardness). Changes in the current situation and breakthroughs in the condition of the Russian foreign economic ties in the East Asia can be effected not only by the traditional forms of the state incentive, but also through the diversification of foreign economic ties. In other words, the optimal model of economic cooperation with the region’s countries should combine trade with industrial, technical and investment cooperation. The situation is that it is very difficult for Russia to define its position in the modern global economy in general and in the NEA in particular. Russia’s limited economic potentialities pose a grave obstacle on the way of making its ties with the countries of that region stronger. Nevertheless, in a short- and long-term perspectives the relationship between Russia and the East Asia will be predominantly economic and based on the contacts between the Russia Far East and the East Asia, which may serve as an impulse for the diversification of the market and for the strengthening of transportation capacity of the Northeast and East Asia in the decades to come. It is quite clear that the USA and China are now, and will be in the future, the dominators of the world economy. The USA continues evolving from production of hi-tech commodities to production of hi-tech services and they will probably keep the first place in the field, especially in view of the digital revolution. China is increasingly becoming the world’s giant workshop. Russia is unable to compete with it in the market of manufactured goods and appliances, except for highly specialized niches. According to the UNO, the average costs per capita in China are 48 times as less as in the USA, 30 – as in Japan, 20 – as in Taiwan, and 14 – as in South Korea. They are also less than in Mexico, Turkey, Philippines, India and Indonesia. This is the reason why many countries relocate their industries to China. Russia will have to completely alter the mentality of Russian business-communities who had been persistently persuading China to buy Russian goods. The world practice shows that China buys from other countries only the products it needs, and even then not during a long time. Some industries of East Siberia and the Far East of Russia produce goods that are of lower quality in comparison with the Chinese ones. The destiny of these goods is obvious, they won’t defy the competition and their production will close down. It is more profitable for Russia to use the Chinese industries for legally providing Russian markets with the necessary products and gradually curtailing the shuttle service trade (“people’s trade”). A full scale mutually beneficial and equitable involvement of Russia into the economic integration and international labor division processes in the    Gelbras, V.G. Perspektivy kitaiskoi migratsiyi na Dalnem Vostoke (Perspectives of Chinese migration in the Far East) // Otechestvennye zapiski. 2004. No 4.

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Northeast Asia, and in the East Asia as a whole, can be effected through the coordination of strictly commercial transactions and the big power, industrial and transportation projects under implementation in Siberia and the Far East. Under existing conditions, the most evident way through which Russia is able to enter the integration milieu of the East Asia is cooperation in energy power field, particularly through cooperating in developing hydrocarbon containing resources of Siberia and the Far East. Countries of the Northeast Asia will only import hydrocarbon resources. The problem of power sources availability is growing more and more important for these countries. Taking into account that the Middle East becomes politically unstable Russia becomes the most reliable supplier of energy. Oil and gas amount to nearly 20% of Russia’s GDP and 55% of its export revenue. No other national industry can compare to the hydrocarbon one concerning its global competitiveness, level of development and profitability. So despite the leaders’ rhetoric the sector will prevail in the country’s economy. The implementation of any other Russia’s industrial policy directed to the development of hi-tech production will face great difficulties. Russia cannot match the Chinese economy with its low costs, entrepreneurial spirit, growing population and increasing labor productivity. Russia is also unlikely to be competitive in the high-tech services, particularly in programming as there is continuing “brain drain” and the education system fails with the best schools disappearing. Besides, there are many obstacles in the way of small business, which is requisite to develop the sector. One cannot define the modern oil and gas industry as “traditional”. It is intimately connected with the high-tech industry and develops towards increasing use of the technologies in the future. It requires skilled labor force, modern management and development of adjacent highly technological fields. Russia has always been and will be one of the major exporters of the fuel and energy resources. In this connection its Far Eastern regions also have the opportunity to become the major energy and fuel suppliers along with the traditional for the NEA exporters such as Australia, Indonesia, Iraq, Iran and others. At the same time Russia has yet at its disposal good opportunities to develop its trade and economic ties with the East-Asian countries not only in fuel and power sphere, but also through raising the proportion of its finished articles and technologies for sale, consolidating its production cooperation, creating joint ventures, arranging industrial parks, etc. It has been estimated that Russia is able to successfully compete, in at least 10 to 15 important directions of Hi-Tech production and service, such as electric power, aircraft building, and space, nuclear, medical and biological technologies. The EA markets can favor these opportunities by turning to an increasingly popular practice of building “growth zones” on bilateral or multilateral bases, in whose bounds business cooperation, among other activities, is effected. 160

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In conclusion it is worthwhile noting that: •  the process of economic integration of the countries of the Northeast Asia today has virtually become a component part of the process of economic integration of the states of East Asia, but it is the states of NEA that remain the most active components of the process; •  integration processes will take a long time, but anyway they may result in the formation of a third integration group, next to EU and NAFTA; •  the involvement of the Russian Federation in these processes will take still a longer time, which is for the most part explained by the restricted potentialities of Russia. Russia’s membership in WTO can incite this process to go faster; •  principally, the involvement of Russia in the region’s labor division process will be effected on a bilateral basis; a Chinese direction here is expected to be built the soonest; South Korea and the nations of the ASEAN will follow; •  in terms of separate industries, what appears to be the most promising for Russia is its cooperation with the countries of the sub-region of Northeast Asia and the region of East Asia in the energy power field (here it is advisable to be cautious not to lower down to the position of an average deliverer of crude oil and natural gas), and transportation, during which a fierce competition should be defied from the sea transport companies of Japan, the Republic of Korea and China; •  Russia’s aggressive participation in integration processes in the region demands both a firmer standpoint of the Russian leadership in relevant questions, and a favorable attitude from the leadership of the region’s countries; one may have noticed that for the recent years such an offer has been extended by Russia, with no similar response from the opposite direction; in this context the role of scientists that are responsible for submitting relevant recommendations to the leaderships of their countries is growing; •  the cooperation between the region’s countries in currency and financial spheres, becomes more active, which is testified by coining a common unit of currency ACU; however, Russia’s point of view has not been considered to this account (although Russia is the world fourth holder of gold currency reserves), nor Russia’s participation in any negotiations is included so far in future plans; •  the integration processes will go on the backdrop of an aggravating combat over the leadership between Japan and PRC, which makes Russia and ASEAN countries more important as counterbalances; •  the development of integration processes in the region are expected to soften the political contradictions apparent there; right now they have been stopped from further unfurling. The further progressive development of the NEA countries is possible only on the road of a more intimate economic integration, the more so that the recent has evidenced a considerable progress achieved in this very direction. 161

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7.1. The goal of the integration. Challenges and opportunities of the integration The primary goal of the integration for Russia is organic involvement in the cooperation processes in the Northeastern and the East Asia in general, and thus turning Russia into an active and efficient player both for itself and for the partners in the pacific field of the global economic game. To reach the goal it is important to estimate both the challenges for Russia and the Russian Far East and the real opportunities to meet the challenge. In other words, we mean the choice of optimal strategy, making it possible to realize the principle of “mutual benefit”, when the balance of wins and losses is positive for every partner involved in the integration. Awareness of the challenge and sober assessment of the necessary measures to stir up the opportunities are the basis for a true cooperation in the Russian Far East as well as in the national economy of the NEA and Pacific Rim countries in general. As the only alternative Russia might become one of the sources of raw materials for the East Asia countries.

7. Stages and mechanisms of integration into the APR

The alternative for the Russian Far East is to be taken over in economy and trade by the united market of the Northeast Asia as its transport and raw materials component. Challenge One. The Northeast Asia is not a single economic or political sub-region. It is an economic and political complex. At present we can say that the Northeast Asia was divided into two parts. On the one hand there is the “big three” (NEA-3: Japan, China, and the Republic of Korea), on the other hand Russia with its Far East, Mongolia and the PDRK – “the vague outskirts”. In 2003 the Japan – China turnover amounted to $132 bln ($89.3 bln in 2001). The volume of trade between the PRC and Korea rose from $35.9 to $63.2 bln during the period. The Japan – South Korea volume of trade was $51.4 bln ($42.7 bln in 2001). Although if compared to the European Union or NAFTA, the importance of intraregional trade in the NEA is not big yet and is 24-30%, within “the big three”, it constantly limits the economic collaboration to these two economies. At the same time Russian share in the Northeast Asia turnover is less than 1%. Russia should strive for becoming a full partner in this integration game, and not the “third country” for this group. Only in this case both Russia and the Northeast Asia countries will have maximum benefit from the economic integration. Thus, one of the priorities is to search and analyze the arguments and reasons both for Russia and for the NEA-3 countries to include Russia into the process of creating the free trade zone and the following stages of the economic integration of the Northeast Asia. Challenge Two. The Far East economy paradox is that due to high cost per unit only extraction or initial processing of raw materials is profitable, and the export of crude raw materials undermines the future of the economy. As a result there are resources in the region and in the country but their profitable extraction and processing and taking mutual advantages on the international market oppose one another. Challenge Three. A new version of the Russian Far East development scheme is taking shape now. The idea is to export a large-scale energy resources transportation services on based on the advances in the infrastructure. It means to build main lines to transfer Russian energy resources and production to the Pacific Rim and Northeast Asia countries and transit European and Asian production. The most acute question is how this new field of specialization will assist to develop economic and social system of the region itself, to what degree it will ensure Russia’s full partnership in the integration groups of the Northeast Asia and Pacific Rim countries. Challenge Four ensues from the fact that cooperation between the APR    Minakir, P.A. Ekonomika regionov. Dal’nij Vostok (The regional economy. Far East). M.: Ekonomika, 2006. P. 633.   ���������������������������������������������������������������������������������� ��������������������������������������������������������������������������������� Rossijskij Dal’nij Vostok v Aziatsko-Tikhookeanskom regione. Materialy vyezdnykh issledovanij 24 oktjabrja – 5 nojabrja 2005 (Russian Far East in Asia Pacific Region. The materials of the on-site research October 24th – November 5th 2005). Khabarovsk: RIOTIP, 2006. P. 47.�

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countries depends in many respects on the situation evolved in the Korean Peninsula, on the solution of the North-Korean nuclear-missile weaponry problem, and on the interrelations between the Republic of Korea and the DPRK. The unification of the two Koreas could strike the Korean Peninsula out of the list of the explosive areas of the APR. However, this is a long term outlook. The opportunities to meet these challenges are as follows: Opportunity One. To use as a resource for regional development the scale effect while exploiting the available hydrocarbon resources (in the eastern regions) owing to demand for energy in the Pacific Rim and NEA countries, as well as the infrastructural rent for the usage of the transport and energy transcontinental corridors. It is the virtual transport rent that must become a potential booster of the regional development. Opportunity Two. To establish a fare and, the most important, efficient, i.e. stimulating, system of distribution of revenues from the border cooperation. This should liven up the bordering regions and the regions possessing real absolute and relative advantages as well as potentially high estimates of the system competitiveness on the NEA markets and stir up the foreign trade and investments. Opportunity Three. The state authorities should begin to politically and economically lobby the Russian Far East joining the East Asian integration group. And one of the main tasks is to lobby the importance for Russia as well as for the “big three” of the Northeast Asia (Japan, China, and the Republic of Korea) to be engaged in the process of establishing the free trade zone and the following stages of the economic integration of the northeastern Asia. This geopolitical strategy should become the main idea for the diplomatic, economic, military and political initiatives of Russia in the East Asia. Opportunity Four is connected with the realization of a compound and multifaceted approach to the solution of the inter-Korean issue. Russia, more than any other world power, is interested in the reunification of Korea into a peace loving democracy capable to independently deal with the world-wide issues. As a consequence, the Russian Federation’s political standpoints concerning the Korean issue should be based on the following main principles: •  the ensuring of peace and stability, non-admission of tension growth, and the decrease of the military confrontation on the peninsula; •  securing non-proliferation of mass destruction weapons, nuclear weapon including; •  comprehensive development of cooperation with the Republic of Korea as an APR important partner in economy and politics; • developing relations with the DPRK on the mutually beneficial basis, assisting it in solving its urgent social and economic issues;    Rossija i mezhkorejskie otnoshenija: doklad (Russia and inter-Korean relations: Report). M.: Gorbachev-Foundation, 2003.

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•  the according of top priority to the tripartite economic cooperation between the RF, the Republic of Korea, and the DPRK (with other countries as potential partners) in solving the issues of fuel, power, raw-material, communication and other fields; •  coordinating the efforts made to the solution of the Korean issues in cooperation with all the interested partners, and assisting in the normalization of relations between the DPRK on the one hand and the US and Japan on the other.

7.2. Possible scenarios for establishing the integration mechanisms The primary goal of the economic integration of the Russian Far East into the Pacific Rim was defined as to create in the future a united economic zone with the economies of the neighboring countries and East Asian territories. It could ensure more efficient distribution and usage of the available production, financial and technological resources so that the Russian Far East could have stable economic development and thus increase the people’s well-being. The problem is that the mechanism of the Russian Far East integration into the Pacific Rim economy should be set up. And we should assume that the approach aimed at search and securing by the Russian Far East certain commodity niches on the regional markets is not sufficient. Scenario One. Orientation toward the export expansion based on mass production of certain competitive commodities proved to be historically limited, take, for instance Japan and new industrial East Asian countries. The existing limits are very important for the Russian Far East with its single specialization in raw materials. Besides, the majority of countries now face slower economic growth and painful structural reforms of economy, which makes perspectives for the heavy demand for the raw materials very improbable. And, finally, the most of the Russian Far East supplies can be quite easily replaced with the same products from other Pacific Rim countries. Scenario Two. Establishment of healthy investment climate in the Russian Far East and attracting foreign investment on the large scale to the traditional raw material industries, manufacturing industry and services should be declared unreal. It is obvious that concerning investment into the extractive industry the Russian Far East is condemned to be the raw materials appendix of the Pacific Rim economies. In the field of foreign investment into manufacturing   ����������������������������������������������������������������������������������������� ���������������������������������������������������������������������������������������� Korejskij vopros i integracionnye processy v Severo-Vostochnoj Azii: doklad (The Korean issue and integration processes in Northeast Asia: Report of the International Foundation for social, economic and political research). M.: Gorbachev-Fond, 2005. P. 14.    Minakir, P.A. Integracija rossijskogo Dal’nego Vostoka v ATR i SVA: vozmozhnosti i real’nosti (Russian Far East integration to APR and NEA: possibilities and reality). – http:// www.carnegie.ru/ru/pubs/books/volume/48311.htm.

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industry Russia and the Russian Far East cannot match China and other East Asian countries. During the 1990ies the foreign investment into the Far East countries (China, Taiwan, the PDRK, the Republic of Korea, Japan) increased five times. At the time the major amount of the foreign investment was into the “Big China”, Makao, Hong Kong, Taiwan, and Singapore. In 2000 the foreign investment in the countries totaled $116.5 bln, i.e. 85% of the total investment into the South, East and Southeast Asia. Even the Republic of Korea (which area is 1.67 times smaller than Primorskiy Krai, which is not large according to Russian standards) had foreign investment amounting to over $10 bln, i.e. 3.8 times more than into the whole big Russia. The fact that the central and east Europe including Russia received only $25.4 bln of foreign investment makes it clear that the investors’ interests “shifted” to the Pacific Rim countries. The situation is intensified by extremely low density of population on a vast territory of the Russian Far East, which requires extra costs both in the manufacturing, infrastructure and in the social sphere. Thus, the Russian Far East opportunities to develop according to the “flying geese” pattern, when certain production after losing its competitive ability in one country (Japan, for instance) was first transferred to the “new industrial countries”, and then to the ASEAN countries and China, are very improbable. Scenario Three. The economic integration within the NEA-3, when Russia is an energy base for the regional integration, as connecting area between the NEA and the European Community (the transport lines) and, within the limits of the possible, as the scientific and technical donor of the region. So Russia must take into account that today the NEA really needs to put together economic resources of Japan, China and the South Korea to reach the mutual goal of maintaining high economic growth with the most efficient means and securing the best position on the global markets with the increasing influence of the American economy and European integration. The China’s fast adaptation to the market economy first in the history of the East Asia gives real basis for the regional integration cooperation and uniting, it as well can be a catalyst for the integration ties between Russia and the PRC.

7.3. Integration mechanisms. Major political and economic integration formats For Russian Far East the integration mechanism into Asia-Pacific Region should possess 2 features: •  the relations with the federal center in the issue of organizing institutional integrating space with Asia-Pacific Region countries •  the specific integration formats of Russia and Russian Far East into Asia-Pacific Region. On behalf of the federal center the complex approach to realizing the aims of integrating the Far East with Asia-Pacific Region means providing 166

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the Far Eastern regions of the Russian Federation with a definite economic autonomy while retaining Russia’s political sovereignty over this territory. The situation demands new and creative application of the Far Eastern Republic’s experience, which used to exist from 1918 to 1922. Despite that the available international experience in the field of functioning of different special economic zones does not presently have any precedents of using specific customs and economic regime for such a huge part of national territory as Russian Far East, modern international integration processes described above allow to come to a conclusion that such an approach can be economically and politically justified. This is especially applied to Russia which due to its big size and a vast diversity of natural , geographical and economic conditions can not immediately enter the world economic system. In this connection the proposal to provide the Russian Far East with a special economic status which can suppose the region’s customs autonomy and creating other favorable prerequisites for its inclusion into the sole economic area with the border regions of other countries is to some extent based on the experience of making the Chinese economy open to the world. In addition a relatively small share of the Far East in population and industrial production of the Russian Federation allows, to our mind, to separate this region to the territory with a special economic status. The specific measures for the Russian government should be introducing the simplified border and customs regime in the regions bordering China, Japan and the USA. In the future the free trade zones will be formed here and thus the regime will be transmitted to the whole territory of the Russian Far East. Creating the favorable customs and investments regime in the territory of the Russian Far East will also allow to attract Russian capital and free finance of the population to the Russian Far East (even if in the beginning it happens under the name of foreign investment0 as it happens in free economic zones of China and in eastern Chinese provinces as a whole. As further steps for forming the sole economic area of Russian Far East and bordering territories we can offer gradual reducing of restrictions for free movement of the capital, services, technologies and labor resources, integration of the systems of energy , transport and others. Although in practice the idea of East Asia integration is accepted (as the example of EU seems intriguing), however there is no clear understanding in the issue of ways and stages the idea of integration can be practically realized in the region. For each stage of the integration process in Asia-Pacific Region there are specific political and economic integration formats that started to be formed in early or mid 1990s. In the common regional stage in Asia-Pacific Region the following can be referred to the official political and economic formats:    Dal’nij Vostok Rossii: ekonomicheskij potencial (Russian Far East: Economic Potential). – Vladivostok: Dal’nauka, 1999. P. 60–76.

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•  Asia-Pacific Economic community forum, practically serving mostly as a field for discussing urgent economic and political problems and security in APR by the countries’ leaders , not as a real engine of economic integration; •  ASEM (Asia – Europe) forum uniting 15 countries of EU and 10 countries of Asia including China but without Russia and the USA , acting as a kind of intellectual bridge for building transcontinental cooperation between East Asia and Europe; •  ASEAN regional forum uniting the countries of Asia, Europe America including the USA , Russia and China and focusing on discussing the problems of regional security , but at the same time not possessing real military and political structures for their decision. Besides, from early 1990s there act informal economic and political forums in East Asia 9 mostly in its Northeastern part): •  Northeast Asia economic forum and economic conference initiated by the Japanese and American private business and discussing the problems of regional economic cooperation at the level of business and expert elite representatives. One of the main forum’s projects – The Bank for Northeast Asia development. •  The Baikal economic forum initiated in 2000 by Russia. Unfortunately after a good start when a concept of integration of Russia, APR and NEA was stated, this forum later began to focus on useful but not urgent issues for the Far Eastern and Eastern Siberian economy of Russia, such as youth sports and tourism. As a result it started to lose attraction for strategists of EastAsian business and politics. Trade formats of integration In 2002 a free trade zone was formed which included the 6 founders of ASEAN (ASEAN-4 plus Singapore and Brunei). Although it does not have a full-range character both geographically and in goods nomenclature. The aim of creating a geographically sound free trade zone (including new countries – ASEAN members0 is postponed till 2010 and the creation of a sound free trade zone be EU type is shifted to 2020. As mentioned above there are also plans for forming ASEAN free trade zone with China (up to 2010) and with Japan (up to 2012). The integration ideas in the beginning of a new millennium are stimulated more and more actively by different economic calculations demonstrating how the countries will benefit if they go at least to the first integration level – the creation of the regional free trade zone. The existing calculations completed by the ASEAN secretariat show that the creation of a free trade zone between China and ASEAN will increase China’s GDP by 0,3 % and GDP of ASEAN – by 0,9 %. A considerable geopolitical effect can be achieved by creating Japan-China-South Korea free trade zone    Mikheev, V. Vostochno-Aziatskoe soobshhestvo: kitajskij faktor i vyvody dlja Rossii (EastAsian community: Chinese factor and the conclusions for Russia) // Rabochie materially. M.: Moskovskij centr Karnegi. 2004. No 1.

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which thus will also reduce the influence of the USA and East Asia. According to the calculations of the Chinese, Japanese and South Korean experts we see that forming a tree- sided free trade zone in the format NEA-3 will give an extra 0,6 % of the overall GDP to NEA, 0,2 % – to GDP of Japan, 1,3 – to China, 3,2 % – to South Korea. But China and Japan are strategic competitors in the production of semiconductors, steel industry and some other industries, so the introduction of new markets can lead to negative consequences for China’s economy. Japan and Korea are also separated by considerable disagreements. Both countries want to protect their ineffective agriculture and fishing from cheap imports. There are also some old political disagreements between China, Korea and Japan that have not been settled so far. The Hong Kong experts believe that the creation of free trade zone in the format NEA-3 is not real yet because the future partners are too much afraid of each other. Thus, East Asia has three possible ways to form the agreements for free trade zones. The first – the most ideal, is the immediate beginning of negotiations for creating the regional free trade zone. But such result is not very much realistic. The second way is to form a three- sided free trade zone (China, Japan, Republic of Korea). But in this case we face a difficulty that China avoids making up trilateral agreements although it offered such idea in 2003. The situation can become even more difficult if Taiwan joins this process. The third way is via bilateral agreement between the ASEAN countries and Northeast Asia states. China and Japan are actively working in this direction now. They are seeking to make up free trade agreements with ASEAN countries which will allow them to expand the markets of these countries for their goods. The Republic of Korea wouldn’t like to be among the countriesoutsiders in this chase. For this reason Korea has already made up a free trade agreement with Chile and Singapore. Presently the government is actively working at the questions of making up similar agreements with ASEAN countries. The Republic of Korea has long been standing for making up a free trade agreement with both China and Japan. During the last years the Korean government has been studying these questions and conducting the necessary preparations. But it is not an easy task and there are a lot of obstacles on the way to the free trade agreement with these countries.  ����������������������������������������������� The ���������������������������������������������� Journal of East Asian Affairs. 2003. No 2.  ������������������������������������������������������������������������������������������ ����������������������������������������������������������������������������������������� Leonov S.N., Shejngauz A.S. Sostojanie i perspektivy ekonomicheskikh svjazej rossijskogo Dal’nego Vostoka i stran Vostochnoj Azii: ocenki zarubezhnykh ekspertov (The condition and perspectives of economic connections of Russian Far East and East Asian countries: foreign experts’ estimates) // Prostranstvennaja ekonomika. 2006. No 3.�   ���������������������������������������������������������������������������������� ��������������������������������������������������������������������������������� Rossijskij Dal’nij Vostok v Aziatsko-Tikhookeanskom regione. Materialy vyezdnykh issledovanij 24 oktjabrja – 5 nojabrja 2005 (Russian Far East in Asia Pacific Region. The materials of the on-site research October 24th – November 5th 2005). Khabarovsk: RIOTIP, 2006. P. 16. 



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The Republic of Korea is a relatively small country compared with Japan and China and besides it is situated between them. If a free trade agreement is made up with China the Korean agrarian sector can suffer considerably, and if with Japan the Korean manufacturing industry can be under strike. That is why both in political and economic sectors there are many difficulties which are to be solved before the Republic of Korea can finally make up the free trade agreements with these two neighbor countries. Overall such model of forming a free trade zone can also appear to be rather complex if bilateral free trade agreements are not in the prospective oriented to the convergence . All this demands the development of a number of common principles for the region which can be in perspective applied to the whole world. For the Russian federation and the Russian Far East this way can appear to be the most favorable. Thus, Korean experts think that for Korea it is necessary to make up as many free trade agreements as possible not restricting them solely to Japan and China. At present there is a preparation being held for making up such an agreement with the USA. In the future Korea is going to consider the perspectives of making up such agreements with Russia but now the stumbling block for this agreement is a fact that Russia is not a WTO member yet. However after its official entering the WTO the issue will become urgent and both parties should conduct all the necessary preparations and joint studies. Financial formats of integration In fact the financial interaction of the East Asia countries started in early 1990s. Its first result was the REPO agreement signed between the central banks of 11 countries according to which a country in case of financial crises could exchange the available financial securities of the American treasury to the USA dollars in the Central Bank of the other country – this agreement’s participant. Overall in 1990s there were made up 7 agreements of this type in multilateral and bilateral formats: •  Indonesia, Malaysia, Thailand, Hong Kong, Australia (1995); •  Singapore and Indonesia (1995); •  Hong Kong and The Philippines (1996); •  China and Hong Kong (1996); •  Japan, Australia, Hong Kong , Indonesia, Malaysia, The Philippines, Singapore and Thailand (1996); •  South Korea, Australia, Japan, Hong Kong and Singapore (January 1997); •  Hong Kong and New Zealand (March 1997). At the same time the ASEAN countries took an effort to create another regional protection mechanism against international currency frauds’ attacks.  ����������������������������������������������������������� The Journal of East Asian Affairs. 2003. No ����������������� 1. �������������� Р. 123-124.



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In March 1997 just before a Thai bat default (in July 1997), Indonesia, Malaysia, Singapore and Thailand made a “ Swap agreement” ( ASA – ASEAN Swap Agreement), according to which the Central Bank of the country that was in crises could exchange in the Central bank of the other country – the agreement participant – the national currency to the USA dollars with an obligation to buy its currency out some time later. This mechanism , however, couldn’t have been tried out in practice at the moment of Asian financial crises because ASEAN countries could together mobilize only 200 million dollars under a “Swap agreement’ which appeared to be insufficient for improving the financial situation demanding multi-billion expenses. Another, more pragmatic approach of financial integration , referring to the Northeastern Asian sub-region , is the search of sources for financing big infrastructures and energy projects. Unlike the ASEAN countries, which borrow from the Asian bank of development, for the Northeast Asia economy this bank’s resources are not enough. In such conditions in 1989 there appeared an idea to establish in NEA a specialized financial organization. This idea was first discussed in the international seminar in Beijing which was organized by the Institute of Asia-Pacific problems in China and the American scientific “East-West” Center (Honolulu). In September 1991 at the 2nd Northeast Asia Economic Forum of in Tianjin, China, the ex-Prime Minister of the Korean government Duck Woo Nam made a specific proposal to establish the Development Bank which got a name “Northeast Asian Development Bank”(NEADB). For working out its feasibility study the “East-West” Center made up a research group headed by ex-chief economist of the Asian Development Bank Burnham O.Campbell and the professor of the International University of Japan Hiroshi Kakazu. The project was financed by the United scientific and industrial Association of Korea. The preliminary results were announced in 1993 at the 4th Northeast Asia economic forum in Yongpyeong, South Korea. Later, after B.Campbell died, the project was headed by Stanley Katz, a former ADB Vice-president who proposed a detailed project of the NEADB. Based on the project a temporary international committee for forming NEADB was established. NEA Development Bank must take long-term credits from the world financial markets by issuing bonds and give the collected finance in the form of long-term credits first of all for the needs of transport and oil and gas projects.   � Campbell Burnham O. Financial Cooperation in Northeast Asia: An Overview of the Case for a Northeast Asian Development Bank // Regional Economic Cooperation in Northeast Asia. Proceed. of the Yongpyeong Conference, 26–28 September 1993. South Korea. P. 40–54.    Katz, Stanley S. The Role of a Northeast Asian Development Bank in Northeast Asia ‘s Future Development// Regional Economic Cooperation in Northeast Asia. Proceed. Of the Ninth meeting of the Northeast Asia Economic forum, 26-29 October 1999. Ulan-Baatar, 1999.

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The bank’s stock capital, according to S. Katz’s project, should be 20 billion dollars (50% – paid within 5 years and the same amount – a guaranteed or called capital). This could allow to direct 2–3 billion dollars a year to the loans and investments To determine the stock capital amount they used the same method when ADB was formed – 0,5 % of the region’s countries’ national income. The same year ADB’s capital equaled 23 billion dollars and the capital of the African Development Bank was 21 billion dollars. It was proposed to outline 3 parts in the structure of the stock capital – 40% for 6 NEA countries, 20% – to the other Asian countries and 40% – to the other countries. Japan was to become the biggest shareholder( 15% or 3 billion dollars), China (10%), Russia (7%), South Korea (5%), North Korea (2%) and Mongolia (1%). USA’s participation was supposed to be in the amount of 10%, similar to the European Bank for Reconstruction and Development. The aim of Northeast Asia Development Bank’s activities – assisting the economic growth of the countries and regions of Northeast Asia on the basis of the mutual cooperation. The bank operates on the commercial base. The projects of the Bank are of interest for more than two countries and supposes investing, giving credits and guarantees for the development and expansion of inner regional trade. As a rule, the projects are offered by private enterprises and are directed to forming material, intellectual, financial and other bases of the private sector activity ( including the creation of infrastructure subject to positive recoupment). The priority is given to realizing the projects in the joint of the private and public sectors of the economy. The activities of NEADB are oriented to 3 Northeastern Chinese provinces and the Chinese district of Inner Mongolia, North Korea, a part of the territory of Mongolia which is situated to the east of Mongolia railway, Zabaikalie and Russian Far East. When realizing the transport and energy projects of great international importance the activity sphere can be expanded within the whole territory of Mongolia, East and West Siberia, South Korea and Japan. NEADB can offer several kinds of unique services. First, financing the private sector projects in Northeast Asia (The World Bank and Asian Development Bank don’t unite all the countries of Northeast Asia, don’t pay enough attention to financing the sub-region and, at last, work mostly in the public center of the economy and thus don’t have the necessary experience for realizing the private projects). Second, taking a part of the risk in projects which are not realized by the private sector due to some vague commercial perspectives (in a number of cases using limited resources of the development bank gives the opportunity to attract huge private investments).    Belov, A.V. K sozdaniju banka razvitija Severo-Vostochnoj Azii: vozmozhnye puti reshenija problemy (To the Creation of NEADB : Possible Ways of Solving the Problem) // Problemy sovremennoj ekonomiki. 2002. No 3–4. P. 23–31.

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Third, realizing the joint projects by the enterprises of private and public sectors (the role of the NEADB is to organize the interaction of two spheres of economy, searching state support resources, developing the financial schemes for using the state funds meant to make the project commercially attractive for private enterprises). Fourth, providing the coordination of the project and the policy of NEA development ( forming a multilateral international organization was stumbled for political reasons and the bank will allow to avoid this restriction). Creating the Northeast Asia Development Bank will allow to form a unique financial organization the main economic result of which will be the multiplication of the sub-region development effect at the expense of: 1) making the projects at the border of private and public sectors of the economy, 2) attracting the private capital in much greater amounts than own bank resources, 3) coordinating the work of the existing international and national, bilateral and multilateral, private and public institutions. The idea of creating the bank was paid attention to by the private financial institutions of the USA, Japan and South Korea. However, they need a kind of political signal from the NEA countries. For Russia it is especially important that Northeast Asia Development Bank unlike many other multilateral East Asian projects presupposes its participation, because a considerable part of the finance is supposed to be invested in Russian natural resources and infrastructure. Russian Federation should first of all give political support to the NEA integration in general and particularly to the idea of creating the Northeast Asia Development Bank. It is necessary to form an active national working group including the participation of the President’s Administration representatives, the Government, the Federal Sobranie, the Far Eastern region and the professional scientific and research institutes, as well as making up feasibility study and business plans in the frames of the supposed Russia’s participation and using the measures necessary for including its share into the bank’s stock capital. Energy integration formats Currently in Northeast Asia and among all the countries of East Asia in general they more actively consider the possibilities of forming energy security on the base of the regional cooperation system in the oil and natural gas markets, other transportable energy resources markets, in the sphere of developing new technologies and renewable energy equipped with in-built stabilizers : diversified and interchangeable trans-border connections , powers, resources, flexible infrastructure. Russia in the name of the Far Eastern region and Siberia could play the role of a factor of strategic reliability and security for the energy resources supply to Northeast Asia. The idea of multilateral energy cooperation in NEA , preferably on the basis of creating the NEADB, looks rather natural. In order to make it come true the idea needs forming necessary institutions which just like in the sphere of financial 173

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integration would provide the formation of the agreed conditions, stages, financial funds and mechanisms for realizing the energy projects in East Asia. On of such institutions could be the Strategic reserve oil fund of NEA with participation of Russia, China, Japan and South Korea. The idea of this fund is as follows: Japan, South Korea and China by investing the development of oil and gas deposits of Siberia and Russian Far East will create together with Russia the strategic oil reserves which are to be used in case of sudden changes in world oil production and prices for oil in the world market. By this Russia’s neighbors in NEA protect themselves from unpredictable political events in the Middle East and Russia gets a possibility to attract strategic longterm investments into the Asian part of its economy. Transport and production integration formats Prospects for economic growth of the Russia Far East are coupled with the strengthening of the part it plays in the Russian economy, its more intensive inclusion into the integration processes over the Asia-Pacific region, and the implementation of a number of large scale projects concerning the development of the regional transport infrastructure. The largest project is the one of a transcontinental bridgeway connecting NEA with Europe across the territory of Russia. The starting key point of this project must be the reunification of the trans-Korean railway and its joining the Trans-Siberian Railway. The transcontinental railway communication will have indubitable economic privileges over the southern seas route along which over 12 mln cargo containers (in 20 feet units) are carried annually from East Asia to Western Europe and back. The shipment time is expected to shrink by one third and correspondingly transport costs will decrease. The grave political situation in the Middle East has an adverse impact on the prestige of the southern sea way. Large Asiatic companies are seriously worried about the safety of sea shipping and are interested in seeking for alternative routes. The unification of the Trans-Korean railway and its joining the Russian Trans-Siberian Railway is not only an economic, but also a political issue. Its solution depends on the conditions of the relations between the two Koreas, and in turn can influence favorably in the development of these relations. One of the scenarios of reconstruction of the trans-Korean railway and its joining the Trans-Sib (the Western Route) assumes the direction from Pusan through Seoul and Pyongyang to Shenyang (China) and on to join the TransSib in the Chita area. The Eastern Route runs along the eastern coastline of the Korean Peninsula from Pusan till the Radjin-Sonbong free economic    Mikheev, V. Vostochno-Aziatskoe soobshhestvo: kitajskij faktor i vyvody dlja Rossii (EastAsian community: Chinese factor and the conclusions for Russia) // Rabochie materially. M.: Moskovskij centr Karnegi. 2004. No 1.

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zone (DPRK), crosses the Russian border in the Khasan area at the point of joining the Trans-Sib. Both scenarios assume a fundamental reconstruction of the adjoining motor roads and of the entire infrastructure on the Korean Peninsula, in Russia (and in China for the former scenario). The countries will have conjointly elaborate agreements on transit tariffs, cargo insurance tariffs, and international railway transportation operations. The western scenario of the transportation bridge-way from the APR to Western Europe is cheaper and more competitive as far as transit transportations are concerned. However there are also weighty arguments for the eastern scenario: a lesser number of state borders needed to be crossed and procedures connected with that, the widening of utilization of the transcontinental bridge-way to its capacity due to a better exploitation of the port facilities in the Russian Far East. But, what is more important is that the eastern variant fits better the general context of the economic integration processes in the APR and the development of the huge natural resources of the Russia Far East. The updating and the development of the transportation infrastructure of the subregion could facilitate this process which is in the interests of not only Russia alone, but also al the contiguous countries. Also worthy of notice is a more comprehensive view of the West-East Eurasian bridge-way propounded by a number of researches. They suggest a comprehensive utilization of Russia’s land, air and cosmic space, as well as the North Sea Route, to create an up-to-date communication system with a well-developed infrastructure on the Eurasian continent. Not only European countries, but also the countries of the entire Asian-Pacific region cannot help being interested in this project. In order to create the conditions for “catching” a part of extra incomes from Northeast Asia partners, that is to redistribute the multiplying effect in favor of Russian Far East, it is necessary to supplement the concept of transport and energy ways with the concept of forming industrial and service ways in the southern part of pacific Russia (Fig. 7.1). In fact, they mean the fulfillment of an old concept about creating an economic “contact zone“ in the pacific coast of Russia with the particular economies of Northeast Asia. Such ways geographically are based on powerful industrial and logistic and service knots: Blagoveschensk, Khabarovsk, Komsomolsk-na-Amure, Ussurijsk, Vladivostok, Nakhodka. These ways are the natural geographic axis for placing the local free economy zones.   ����������������������������������������������������������������������������������������� ���������������������������������������������������������������������������������������� Korejskij vopros i integracionnye processy v Severo-Vostochnoj Azii: doklad (The Korean issue and integration processes in Northeast Asia: Report of the International Foundation for social, economic and political research). M.: Gorbachev-Fond, 2005. P. 23–25.   �� Minakir, P.A. Tikhookeanskaja Rossija v ATR i SVA: vyzovy i vozmozhnosti (Pacific Russia in APR and NEA: challenges and opportunities) // Prostranstvennaja ekonomika. 2005. No 4. P. 5–20.

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Subject to creating the comfortable institutional atmosphere and the effective institutes system there will appear a real possibility to turn these industrial and service ways into some kind of filter which will be put on the way of transport and energy flows. This filter will transform a part of export flows into the products and services which will be , in their turn, mostly exported to Northeast Asia, bringing increased income in the region.

Fig. 7.1. Industrial-Service Arcs Concept

Thus it will be possible to use the common idea of forming transport and energy infrastructure for international economic cooperation for increasing the accumulative fund in the region. In this case huge investments in creating 176

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and supporting the infrastructure in the east of Russia will give return not only to big corporations in Russia and their Asian partners , but also to the eastern subjects of the Russian Federation who will get a real powerful stimulus for development. Creating a fair and effective system of incomes distribution from border cooperation. This should stimulate the border regions and the regions having absolute and comparative advantage, as well as potentially high estimates of system competitiveness in the markets of Northeast Asia, activate the foreign trade and investments flows, create in the centers of industrial and transport ways and in free economy zones the “institutional traps” by giving luring investment conditions, creating legally guaranteed zones for tourism and entertainment development. It is important to see the final goal – accumulating the incomes in the regions. It is also important not to get into the trap of deep pseudo- national discussions like “it is forbidden, because there no law or there is something contradicting it”. Here we mean the creation of the situational legislative base oriented not to abstract liberal values but to particular problems of a particular region and specific national interests of Russia’s integration and its biggest Far Eastern region into AsiaPacific region.

7.4. Organizational issues of integration It is necessary to emphasize several urgent political and organizational decisions that are to be taken for activating the process of Russian Far East’s integration into Asia-Pacific region. 1) Creating a consultant Committee “Northeast Four” (Japan, China, Republic of Korea, Russia) for determining a format and conditions of Russia’s participation in integration procedures and agreements in NEA with the final aim of creating a common economic area (primarily – a zone of free trade with its further expansion to the common market of four countries). 2) Creating a transnational structure for making and developing the common financial infrastructure in NEA in the part of realizing the idea of the economic development bank for Northeast Asia for providing coordination of macroeconomic and financial policy of the region’s countries. 3) Creating a transnational Committee for developing conditions and mechanisms of making up integrated markets of energy resources ,electricity, basic kinds of biological and mineral resources in the region . 4) A special institute for developing resources and transport infrastructure for integration in NEA working in coordination with the Northeast Asia Development Bank could exist in the form of a Council for developing the NEA transport. NEA Council for sub-regional scientific and technical policy is to be made similarly. 5) The creation of the regional Council for managing the labor resources 177

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in NEA responds to the aims of institutionalizing the migration policy. This body would work out the rules and quotas of labor migration within NEA and would exercise control over illegal migrations. 6) Creating the transnational committee whose aim would be to estimate the condition and to work out the proposals for forming the common investment area in Northeast Asia subject to obligatory agreement of institutional conditions and functioning of entrepreneurship in membercountries. Later on the named institutes could become the basis for forming the common integration area in Northeast Asia and based on it via involving the most prepared ASEAN countries – East Asian community. Working with the principles of mobilizing the global resources for solving the regional problems the community would avoid the possibility of turning this group into a connected union depriving the interests of the other global economy participants.

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List of references

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