Publications
Executive Summary
In the early 1990s, Pacific Russia emerged as a slow-moving blip on East
Asia's economic radar screen. Images were created of a potential new regional
partner for the power-house North East Asian economies. Companies in Japan,
the Republic of Korea (ROK) and the USA developed ambitious plans for the
exploitation of Pacific Russia's rich resource potential.
However, in early 1996 this promise has yet to materialise. Pacific
Russia's economy still faces enormous systemic and structural problems. Many
obstacles to foreign investment and trade remain. In some respects the region
resembles a depressed zone in the new Russian Federation. Nevertheless,
Pacific Russia remains a subject of keen interest, particularly within North
East Asia.
TRANSITION OR CRISIS?
Pacific Russia, with a total population of around 7.6 million, comprises seven
administrative sub-regions: Primorsky, Khabarovsk, Sakha, Amur, Kamchatka,
Magadan and Sakhalin. A considerable proportion of Russia's resource wealth is
concentrated in the region and its ports represent a gateway to European
Russian markets as well as those of the other Newly-lndependent States.
For decades, Pacific Russia's economic growth was based largely on Moscow's
desire to develop the region for defence and strategic reasons. A wide range
of subsidies and other forms of economic support were provided by Moscow to
develop industries and attract personnel to the region. When these supports
were removed by reforms and the collapse of the USSR, Pacific Russia's economy
was virtually cut adrift. As in other parts of the country, incomplete and
inconsistent regulatory changes created confusion and undermined some of the
potential benefits of market-oriented reform. In 1995, Pacific Russia was
still performing worse than the national economy. The population is shrinking
as people migrate back to European parts of Russia.
However, the painful process of economic restructuring has begun to produce
the rudiments of a market economy, particularly in main population centres.
Some areas of local commerce are flourishing: a small-scale service sector is
developing; the process of privatising former state-owned enterprises is well
underway; a stock exchange is operating in Vladivostok; and the financial
sector is expanding rapidly.
Future economic prospects depend heavily on political settings. Confusion
over the distribution of power between local authorities and Moscow is a
continuing constraint on economic progress. Despite the signing of a
Federation Treaty in 1992 and introduction of a new Russian Constitution in
1993, the most hotly debated issues between the central authorities and the
administrations in Pacific Russia are control over resources wealth, the
allocation of tax revenue and subsidies and the high cost of transport
services and energy in the region.
The national political situation and the climate for further economic
reform are also crucial factors determining Pacific Russia's prospects. The
outlook for reform remains uncertain in the wake of the strong showing by the
Communists and Nationalists in the December 1995 national legislative
elections. Presidential elections in mid-1996 will have a decisive impact on
future directions in national policy
In the context of economic and political uncertainty, the commercial
environment in Pacific Russia is difficult, particularly for foreign
businesses. Legislation is often unclear and the legal enforcement of property
rights and contractual obligations is inconsistent. Connections are important,
making Russian business practice more akin to that of North East and South
East Asian countries than to Australia or most European countries. New laws on
foreign investment and privatisation have still not provided foreign business
with clear guidelines.
Other potential deterrents to investors include Pacific Russia's reputation
for lawlessness: organised crime has reportedly made considerable inroads into
the business and financial landscape.
AUSTRALIAN BUSINESS INVOLVEMENT
Several Australian companies have established themselves in Pacific Russia but
the market is relatively small - around 7.6 million people in an area the size
of Australia, with relatively low and declining incomes. The Russian
Federation as a whole received only 0.4 per cent of Australian exports in
1994. Australian food products have been the major export item to Pacific
Russia. Some Australian companies have been involved in infrastructure and
mining development.
A large proportion of Australian trade with Russia, including exports of
alumina destined for Siberian smelters, transits Pacific Russian ports. In
1994, an estimated A$70-90 million of alumina was exported to Russia in this
manner.
PACIFIC RUSSIA'S ROLE IN THE ASIA-PACIFIC
A sea change in Moscow's orientation toward the Asia-Pacific was signalled in
a 1986 speech by Mikhail Gorbachev calling for closer economic and cultural
links with the region. Development of Pacific Russia was seen as an obvious
focus of this strategy. Russia has maintained a steady momentum of high level
exchanges with key Asian countries. Although the USA and Europe continue to
take priority in Russia's broader foreign relations, commerce with North Asia,
much of it conducted through Pacific Russian ports, has grown rapidly.
Russia has sought to step up its involvement in Asia-Pacific regional
forums, in 1992 becoming a member of the Pacific Economic Cooperation
Conference (PECC) and since that year attending annual ASEAN post-ministerial
conferences. Russia has also registered its desire to join the Asia-Pacific
Economic Cooperation (APEC) forum.
The national political situation and the climate for further economic
reform are also crucial factors determining Pacific Russia's prospects. The
outlook for reform remains uncertain in the wake of the strong showing by the
Communists and Nationalists in the December 1995 national legislative
elections. Presidential elections in mid-1996 will have a decisive impact on
future directions in national policy.
In the context of economic and political uncertainty, the commercial
environment in Pacific Russia is difficult, particularly for foreign
businesses. Legislation is often unclear and the legal enforcement of property
rights and contractual obligations is inconsistent. Connections are important,
making Russian business practice more akin to that of North East and South
East Asian countries than to Australia or most European countries. New laws on
foreign investment and privatisation have still not provided foreign business
with clear guidelines.
Other potential deterrents to investors include Pacific Russia's reputation
for lawlessness: organised crime has reportedly made considerable inroads into
the business and financial landscape.
AUSTRALIAN BUSINESS INVOLVEMENT
Several Australian companies have established themselves in Pacific Russia but
the market is relatively small - around 7.6 million people in an area the size
of Australia, with relatively low and declining incomes. The Russian
Federation as a whole received only 0.4 per cent of Australian exports in
1994. Australian food products have been the major export item to Pacific
Russia. Some Australian companies have been involved in infrastructure and
mining development.
A large proportion of Australian trade with Russia, including exports of
alumina destined for Siberian smelters, transits Pacific Russian ports. In
1994, an estimated A$70-90 million of alumina was exported to Russia in this
manner.
PACIFIC RUSSIA'S ROLE IN THE ASIA-PACIFIC
A sea change in Moscow's orientation toward the Asia-Pacific was signalled in
a 1986 speech by Mikhail Gorbachev calling for closer economic and cultural
links with the region. Development of Pacific Russia was seen as an obvious
focus of this strategy. Russia has maintained a steady momentum of high level
exchanges with key Asian countries. Although the USA and Europe continue to
take priority in Russia's broader foreign relations, commerce with North Asia,
much of it conducted through Pacific Russian ports, has grown rapidly.
Russia has sought to step up its involvement in Asia-Pacific regional
forums, in 1992 becoming a member of the Pacific Economic Cooperation
Conference (PECC) and since that year attending annual ASEAN post-ministerial
conferences. Russia has also registered its desire to join the Asia-Pacific
Economic Cooperation (APEC) forum.
In the longer term, the resources sector represents the major potential
growth sector for Pacific Russia. However, investment prospects are affected
by the need for developers to undertake negotiations with various levels of
government. Moscow wants a leading role in the development of resources and
sets the all important legislative environment. Also, some sub-regional
officials are wary of Pacific Russia becoming a 'raw materials appendage' to
Asia; popular fear of foreign exploitation runs deep.
COMPETITION BETWEEN PACIFIC RUSSIA AND AUSTRALIA
The progressive integration of Pacific Russia with other North East Asian
economies will present challenges for Australia as well as opportunities. At
issue is the extent to which Pacific Russia could displace some of Australia's
commodity exports to our key North East Asian markets: Japan, China and the
ROK. If Pacific Russia's long term promise as a major energy exporter is
realised, Australia could face serious competition.
However, Russia's current internal difficulties mean that Pacific Russia is
unlikely to develop rapidly enough to threaten Australian exports in the short
to medium term. In the longer term, the prospect of its doing so is balanced
by the projected rise in demand for those exports as the North East Asian
economies expand. Competition by itself will not necessarily damage our
interests. Moreover, the integration of Pacific Russia into the region could
have a dynamic impact on regional growth, which will increase demand for
imports from Australia.
CONCLUSIONS
Pacific Russia is unlikely to be a major destination for Australian exports
or investment in the near future. The market is too small and too difficult.
Goods and services, particularly processed foods and alcoholic beverages, are
likely to continue to be the major area of export potential.
In the longer term, Pacific Russia's mining sector is likely to be the main
target for Australian investment, provided Moscow is willing to encourage
foreign participation in resources extraction.
Future commercial prospects in Pacific Russia will depend on national
economic policies, which will in turn depend on political developments in
Moscow. Current indications are that the transformation of the Russian economy
to a market-based model will be slow at best.
This suggests a significant divergence in short and long-term commercial
prospects in Pacific Russia. In the short-term, successful enterprises in
Pacific Russia are likely to be those in niche markets which have good
contacts, business partners and information on opportunities.
In the longer term as the policy environment stabilises and living
standards rise, larger Australian mining companies and mainstream exporters
may find profitable investment and export market opportunities. Such companies
will need to monitor carefully trends in the economic and political
environment and the investment commitments of major foreign investors in the
Pacific Russian region.