Moscow Approves New Funding to Develop Far Eastern Regions

The Russian federal government approved a series of blueprints to develop the country’s Far Eastern regions, as well as new tax incentives. These programs included promises of unprecedented financial inflows into these remote areas.

On April 4, the Russian federal government released a final decision to adopt the regional development program entitled “Social and Economic Development of the Far East and the Baikal region” for the period 2014–2025. It includes the main program, a plan to develop the Kuril Islands, as well as 12 sector-specific sub-programs (The Russian Governmental Press Service statement, April 4).

Two days earlier, Prime Minister Dmitry Medvedev had traveled eastward and chaired a top-level cabinet meeting in Yakutsk to discuss plans to develop the country’s Far East and the Baikal region. He urged renovating regional energy, transportation and social infrastructure. Medvedev said that the regional transportation system’s upgrade would focus on the Baikal-Amur Mainline (BAM) and Trans-Siberian railways at an estimated cost to the federal budget of 260 billion rubles ($8.4 billion) in 2013–2017, as well as a new bridge near Yakutsk across the Lena River that would cost 80 billion rubles ($2.5 billion).

Medvedev also noted that the cabinet approved tax breaks to new companies created in the Far Eastern regions, including a profit tax exemption for up to five years (The Russian Governmental Press Service statement, April 2). The government-sponsored draft legislation would exempt new companies created in the Far East regions from profit tax for up to five years, and allow them a preferential 10-percent profit tax for the ensuing five years. The exemption would apply to investment projects started between 2014 and 2023 (The Russian Governmental Press Service statement, March 29).

Subsequently, one cabinet minister disclosed that the expected financial inflows exceeded the planned federal funding. Andrei Belousov, Russia’s Economic Development Minister, clarified that the projects to renovate the BAM and Trans-Siberian railways would actually cost a total of 980 billion rubles ($31.6 billion) in 2013–2017, including the 260 billion rubles from federal funds. Another program to modernize regional airports would cost 100 billion rubles ($3.2 billion), he said. Overall, infrastructure development programs would require 100 billion rubles per year in federal funding in 2013–2017, Belousov said (The Russian Governmental Press Service statement, April 2).

Last month, the government disclosed ambitious plans for huge financial inflows into the Far East regions. On March 21, Medvedev said the regional development programs would cost up to 10 trillion rubles ($316 billion), including federal funding, borrowing and private investment. He also suggested creating a special economic zone in the Far East to attract Russian capital from Cyprus and other off-shore tax havens (The Russian Governmental Press Service statement, March 21).

Regional officials readily echoed Medvedev’s bold vision. Russia’s Far Eastern Development Minister and the presidential envoy to the region, Viktor Ishayev, argued that the implementation of the 10-trillion-ruble program could generate up to 20 trillion rubles ($632 billion) in terms of regional economic growth by 2025 (The Russian Governmental Press Service statement, April 2).

However, another cabinet minister confirmed that the planned federal funding would amount to a fraction of the expected financial inflows. Energy Minister Alexander Novak said federal funding to finance 19 priority projects reached 71 billion rubles ($2.2 billion) since 2008. But by his estimations, total investments into the energy sector would reach 700 billion rubles ($22 billion) in 2014–2018, including just 46 billion rubles ($1.4 billion) in federal funding (The Russian Governmental Press Service statement, April 2).

Furthermore, Finance Minister Anton Siluanov made it clear that even relatively modest plans of federal funding could prove to be difficult to implement. He described 100 billion rubles per year in federal funding as an “ambitious task.” According to the finance ministry’s estimates, 40 billion rubles ($1.3 billion) per year appeared to be a more realistic objective, he said (The Russian Governmental Press Service statement, April 2).

Since 2008, the authorities have already disbursed 1 trillion rubles ($31.6 billion) to finance the federal programs aimed at the economic and social development of the Far East (see EDM, October 19, 2012).

The Kremlin has insisted that earlier showcase projects served to accelerate regional development. In October 2012, Medvedev voiced confidence that projects, which were designed to prepare for the Asia-Pacific Economic Community (APEC) summit meeting held the previous month in Vladivostok, contributed to the economic development of the region (The Russian Governmental Press Service statement, October 15, 2012; see EDM, October 19, 2012).

But projects associated with the APEC summit meeting also entailed a series of graft scandals. Indeed, on April 3, Oleg Bukalov, former official of the Far Eastern Development Ministry, was arrested on charges of embezzling 93 million rubles ($2.9 million) ahead of the APEC summit in Vladivostok (The Russian Governmental Press Service statement, April 3).

By approving the regional development blueprints, the Kremlin clearly believes that money is a solution for all problems related to the development of Russia’s Far East. However, the ambitious plans apparently rely on sources of funding beyond the government’s direct control, such as borrowing and private investment. Therefore, official pledges of unprecedented financial inflows into these remote regions may prove to be detached from reality.