A long overlooked hinterland, Russia’s vast eastern territory is now being prioritised for development by President Vladimir Putin. At the Eastern Economic Forum in Vladivostok this month, Mr Putin stressed the large untapped potential of Russia’s Far East and appealed to neighbouring East Asian countries to help develop new high-technology production facilities, finance infrastructure projects and advance the economy.

Mr Putin does seem to have their attention. Korea’s President Park Geun-hye and Japan’s Prime Minister Shinzo Abe were in attendance at the forum and the three leaders appeared together in a panel on economic co-operation.

Too far removed from most big business centres to be readily on the radar of very many inward investors and remote even within Russia itself — Vladivostok is more than eight hours by plane and seven time zones from Moscow — the region does enjoy a proximity to East Asia that could be exploited. Seoul and Tokyo are both roughly two-and-a-half hours away by plane.

All three leaders were keen to talk the talk of co-operation, and there are some synergies between the resources and low costs found in Russia’s Far East, and the expertise, technical capabilities and huge markets of East Asia. A number of agreements and investment deals were signed at the forum with great fanfare.

Japan has put its money where its mouth is: it is the number one source country for greenfield investment into Russia’s Far East, investing $4.2bn in 32 greenfield projects since 2003, according to fDi Markets, a Financial Times data service. China follows, investing $1.7bn in 19 projects; and Korea is fourth, with $992m in seven projects.

Diversifying away from primary sectors and moving up the value chain will be a steep challenge. Inward investment has been largely in the resources sectors, with metals accounting for $7.1bn of the total $17bn in greenfield investment the region has attracted since 2003, and coal, oil and natural gas capturing $4.3bn. The only non-resources sector to have broken the million-dollar mark during this time period is automotives, with $1.1bn in greenfield investment.

Russia’s Far East: sources of greenfield investment, January 2003 to July 2016
Country Projects Capex $m*
Japan 32 4,163
China 19 1,739
UK 14 1,664
United States 11 1,046
South Korea 7 992
Canada 5 522
Denmark 5 126
Netherlands 4 579
France 3 82
Germany 3 47
     
     
Total all countries 131 16,994
Source: fDi Markets *includes estimates

Energy supply and inadequate infrastructure are significant constraints to attracting investment in productive sectors but they also present clear opportunities for players in these two base-level sectors. A Far East Development Fund has been created, offering cheap financing; land is being given away free for development; and there are subsidies for the construction of infrastructure.

But the biggest constraint is manpower. Of the 66 cities within the Far Eastern Federal District, only a dozen of them have a population over 75,000. As pointed out by former Australian Prime Minister Kevin Rudd, who moderated the Putin-Park-Abe panel in Vladivostok, the region is the size of Australia in terms of land mass but has a population on a par with tiny Singapore.

Russia’s Far East: greenfield investment sectors, January 2003 to July 2016
Industry sector Projects Capex $m*
Metals 23 7,066
Coal, Oil and Natural Gas 20 4,287
Automotive OEM 7 1,085
Real Estate 5 875
Transportation 18 832
Wood Products 9 608
Food & Tobacco 8 399
Financial Services 11 338
Hotels & Tourism 3 218
Aerospace 1 200
 Source: fDi Markets *includes estimates

And then there is politics. After showering the host with effusive praise and rhapsodising about the warm relations between Japan and Russia, Mr Abe pressed the case in Vladivostok for a final peace agreement between the two countries, lacking since the conclusion of the second world war, as well as for resolution of territorial disputes over the Kuril Islands. But Mr Putin was unmoved. The only prism with which he would view either issue was national interest, he said bluntly, and he will not trade territory for economic deals.

Courtney Fingar is head of content at fDi Intelligence, an FT data division.

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