Russia's Far East in search of tomorrow

PUBLISHED : Thursday, 12 June, 2003, 12:00am
UPDATED : Thursday, 12 June, 2003, 12:00am

The Russian Far East is a vast sprawling territory of 6.2 million sq km. Although it is about one-third the size of the United States, it has less than 3 per cent of the US population. Largely neglected by the national government, unemployment remains high; more than 40 per cent of residents live in poverty.

But if authorities in Moscow appear indifferent to the fate of the region, its neighbours are not. They have a keen interest in its abundant natural resources. Tapping those riches is the obvious solution to the region's economic woes - and the process is already under way

Days before I arrived in Yuzhno-Sakhalinsk, the capital of Sakhalin region, developers announced the launch of phase two of the Sakhalin-2 project, which will produce 9.6 million tonnes of liquified national gas (LNG) annually. On May 15, Sakhalin Energy (SEIC) signed a 24-year deal with Tokyo Gas to supply 1.1 million tonnes of LNG annually. Four days later, SEIC signed an agreement with Tokyo Electric Power to provide 1.2 million tonnes a year for 22 years.

Sakhalin-2 aims to unleash the economic potential of the Russian Far East. Philip Watts, chairman of Royal/Dutch Shell, which holds 55 per cent of SEIC, anticipates that Sakhalin-2 'will unlock the vast energy reserves of the Russian Federation'. Japanese partners see Sakhalin energy resources as an alternative to those of the Middle East, considerably closer and much more stable. The Sakhalin fields are estimated to have 160 million tonnes of oil and 500 billion cubic metres of natural gas.

While just about everyone in the region has high hopes for the multibillion-dollar project, the 700 students at the Institute of Economics and Oriental Studies (where I was speaking) are especially eager to see it succeed. The students are preparing for the region's integration with Northeast Asia. After studying English for several years in secondary school, many are now mastering Japanese or Korean. Their focus reflects economic trends. South Korea invested in 55 projects in the region between 1990 and 1999, with a cumulative value of US$69 million - about 59 per cent of all South Korean investment in Russia.

While Japanese investment has been slow - at the end of 2000, Japanese direct investment in Russia totalled just US$372 million, ranking it 10th - Japan is the Russian Far East's largest trading partner, taking one-third of its US$3.7 billion of exports.

As for China, trade is not keeping pace with promises. In 1996, the Russian and Chinese governments pledged to increase trade to US$20 billion by 2000; by 2001, bilateral trade reached only US$8 billion. The biggest player in the Russian Far East is the US. American companies have put up more than 80 per cent of the region's total investment.

The takeoff of the Sahkalin projects is a welcome development, but sustained growth in the Russian Far East will depend on the creation of a regional economic framework. Northeast Asia is one of the few parts of the world that has no such creature.

While bilateral economic relationships have developed in Northeast Asia, historical antagonisms and competition for influence have blocked more ambitious initiatives. Russia and Japan have not yet signed a peace treaty for the second world war and the prospects for an agreement, once bright, have dimmed. Relations between Japan and North Korea are even worse. And while Japan has healthy economic relations with South Korea and China, strained political ties brake the momentum towards more extensive projects.

Nonetheless, Northeast Asia and the Russian Far East could be ready for a breakthrough. The focus of the North Korean crisis has been its suspected nuclear weapons programme. The North will only surrender that programme in exchange for security guarantees. But the North is also demanding economic and diplomatic support. North Korea has maintained all along that its nuclear programme was intended to solve the country's energy crisis.

The most obvious source for those energy supplies is North Korea's neighbours, and there is already talk of pipelines that would originate in Russia and run to the Pacific coast. This is in addition to the pipelines that will carry Sahkalin's LNG to Japan.

The size of each of those projects demands a multilateral initiative. The additional objective of integrating them into the broader North Korean solution would seem to demand a co-ordinating mechanism. This institution, which would oversee the implementation of the diplomatic settlement, could serve as the cornerstone of a Northeast Asian economic organisation.

Residents of the Russian Far East have already begun to see the region take the first tentative steps towards economic integration. Their future depends on the continuation of that process; unfortunately, they have little influence over its course and progress.

Brad Glosserman is director of research at Pacific Forum CSIS, a Honolulu-based think-tank.