Russian Far East – Trade and Integration

KHABAROVSK - The Russian Far East’s size, mineral riches and economic potential are enormous. The Far East Okrug accounts for more than a third of the territory of the Russian Federation. The proven gas reserves at the Kovykta in the neighboring Irkutsk region are one of the largest in the world – 2 trillion cubic meters– with other large oil reserves in Chukotka, Kamchatka and Sakhalin.
Yet despite this wealth, the living standards of the Far East’s 6.5 million people have not yet reflected this huge, potential wealth.  The average income in the Far East is higher than the Russian average due to resource rich regions but the Far East also has some of the poorest regions. Average life expectancy in the Okrug is the lowest in Russia, a full three years lower than Russian average of 66.6 years.

So why, then, is there this gap between resource wealth and social outcomes?  The main reason is poor market access.  The issue is not just about movement of people but of commodities and services. There is enormous potential in the Okrug to increase production of metals, gas and coal and other resources, as well as enhance trade in services – if there is better availability of reliable transportation to the largest market centers.

The good news is that geography is not destiny – it can also be an opportunity. The Russian Far East is well placed at the geographic nexus of the countries of the Asia-Pacific Economic Cooperation (APEC) – one of the largest international trade and economic cooperation organizations in the world.  Its 21 member countries account for 2.5 billion people with a combined GDP of $19 trillion.   With a neighborhood like that, it is clear that the economic potential for the Russian Far East clearly lies with expanded trade and integration with its neighbors, buttressed by the right investments in transport links, social services and environmental protection.

The Russian Far East can exploit these opportunities, boost its growth and achieve high standards of living for its people if it uses trade to overcome major geographic obstacles.  Every major development success story involved a sustained expansion of trade facilitated by logistics and interconnectivity with its neighbors and larger markets.  This is especially the case with countries with difficult geographic disadvantages – such as Australia, Canada, Sweden, and countries in Central Asia.

Political support for the emergence of the Russian Far East is there.  The government is planning several infrastructure projects in the areas of air traffic, roads, and railways.  These are the right priorities.  To be done well, this admirable effort will require financing and technical assistance that the Far East should not have to bear alone.  According to the transport strategy of the Ministry of Transport, upgrading rail, air, road, marine transport (including improving connectivity with other regions) would cost USD 15.5 billion equivalent of 387.5 billion Rubles in the region for 2010 to 2015 alone.

Two points are critical.  First, fostering inter-connectivity between people and trade within the Okrug and with neighboring markets, especially China, is of critical importance.  In order to grow, the Far East must integrate—via infrastructure and trade—both internally and with the nearest internal markets of China, Japan and Korea, which will hugely expand its potential trade and growth opportunities.  Second, improving social services for the people of the Far East is pivotal for its population and to attract new residents.

As the Russian Far East develops, the World Bank stands ready to help – after all, we are very familiar with the neighborhood and have been active here for a long time.  One may not think of Japan as an erstwhile World Bank client, but I can attest to the important role the World Bank played in my own country to address issues of density and distance. Almost half a century ago,  in 1961, a loan from the World Bank to the Japanese National Railways helped finance one of the most technically advanced railway projects in the world – the New Tokaido Line between Tokyo and Osaka that carries the famous Bullet Trains.  Importantly, the Shinkansen and the successive expansion of this network virtually shrank distances and integrated markets.  Similar process has been underway Western Europe with the construction of high-speed railway network.

In the Northeastern Province of Liaoning in China, the World Bank is supporting three projects aimed at improving urban transport, water supply, wastewater and solid waste services, as well as updating inefficient, polluting and outdated central heating systems.  And in Kazakhstan, the World Bank is currently preparing a $2.2 billion loan, the largest ever for project finance, to finance the Kazakh leg of the Western Europe-Western China International Transit Corridor.  While the goal is to improve market access and transport efficiency, the operation is part of a broader dialogue among countries in the region to remove non-physical barriers to trade and transit across borders.

The World Bank has enjoyed a long partnership with Russia.  Our current lending portfolio of $1.7 billion, financing 17 projects from judicial and customs reform to health, education and infrastructure development, is touching every corner of this vast country.  However, since 2000, the Russian Federation has sustained high growth and presently does not need external financing at the federal level.

Yet like all countries, it still faces social and economic challenges.  Whether in Moscow or in regions across Russia, public officials are availing themselves of the global experience and expertise of the World Bank Group.  In Petropalovsk-Kamchatky, the World Bank Group’s first sub-national loan in the Russian Far East was made directly to the municipality without a federal guarantee to support vital municipal services for this capital city.  Across Russia, the Bank advised the Government to orient the educational system to the modern learning needs of the global information society and supported the establishment of 40 teachers’ support centers.  In the area of climate change, a Hydromet project is giving Russia a faster response time to natural disasters caused by changing weather patterns.  And the World Bank is also an active partner in supporting Russia’s successful efforts to save the Amur tiger, a rare example of how coordinated action can really work.

Clearly, the Russian Far East has great potential, and the world will witness this at the 2012 APEC meeting in Vladivostok.  We at the World Bank see the Russian Far East as a gateway to the wider Pacific region, not only as the border of Russia and Asia.   In 2012, as the Far East welcomes its APEC neighbors, it will demonstrate in spirit how geography is indeed opportunity, and how trade and economic integration are key to a brighter, more prosperous tomorrow for the entire region. 

The author is World Bank Vice-President for Europe and Central Asia.  This oped is based on remarks delivered at the Far Eastern International Economic Forum in Khabarovsk.