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Massive FDI in Russia's free port

Massive FDI in Russias free port

Opening up its economy, right from exploring the natural resources to processing industries, the Russian government has started offering tax breaks, special economic zones and other incentives to investors in the Far East areas of the country that share a border with some of the most noted developing economies of the world. The Far East region has always been considered as Russia's resource base – with an abundance of oil and gas mines along with approximately half of Russia's gold and silver reserves. Russia would also expand its simplified visa regime to eight airports in the Far East region by the end of this year, reflecting a drive by Moscow to further open up the vast resourced areas adjacent to the Pacific coast, to attract more investors and tourists. President Vladimir Putin is also backing for the new Far East economic policy which created the special economic zone known as the Free Port of Vladivostok in 2015.

This opening up policy has some instant impact: Providing smoother visa applications online for stamping on arrival has also generated a significant rise in tourists to Vladivostok, including thousands of visitors from China and Korea, who share a significant stretch of border with the area. It had also attracted 37 billion USD of private investment to the area. As it is not a one-off action and the government now seems committed to providing the infrastructure support needed for development, by the end of this year, the figure might rise to 67 billion USD. Investment took off in the Far East from early last decade, when projects based on oil and gas reserves in the Sakhalin Oblast area attracted nearly 96 per cent of foreign direct investment.

And, from that very stage, Russia had been exporting oil and liquefied natural gas (LNG) to the Asia-Pacific nations. The private players had also been mining ores, including zinc, coal, iron, titanium, platinum, and manganese. Keeping in mind that larger deposits of these ores are yet to be explored as they are located in hard-to-reach areas with inadequate transport and energy infrastructure, the state is ready to build roads, add energy sources and other necessary engineering and utility infrastructure for the mining projects. On the other hand, many other territories of the Far East are working on the creation of logistics centres and construction of specialised terminals in seaports and airports, attracting investment from Japan, Korea, and Singapore. While many value-added industries had been kicked off to crop up in aircraft and shipbuilding in the Primorsky and the Khabarovsk territory, an aerospace cluster is being formed in the Amur territory. A number of foreign investors had found promising niches, breakthrough technologies, launching projects and making profit in these areas.

While Beijing was the first to bet on the new strategy for the Far East with 23 of the new projects involving companies from China in farming, manufacturing, energy, transport, and logistics, six South Korean investors had also taken advantage of relaxed regulations in the region to move forward with projects worth 67 million USD. Besides, Japanese investors are also pulling up their socks for their involvement in coal terminals and production of electric vehicles, after the economic cooperation agreements were signed with Tokyo last year. Apart from the avenues in natural resources in the Far East, the region also has a vast stretch of unused arable land and a climate suitable for growing soybeans, corn, barley, and feed for livestock. As a result, investors are now also eying this potential.

Surprisingly, with more than 800 projects at different stages, one can also think that agriculture had been more popular than mining in the Far East. Notably, the biggest advantage with this reason is its proximity to export markets of neighbouring China that imports food worth approximately 250 billion USD every year. Perhaps, it was the reason behind the establishment of the Russian-Chinese Fund for Agro-Industrial Development in the Far East to provide financing and technology for farm projects. Also, apart from expanding the visa system to more regions of Russia's Far East and for more nationalities, President Putin has authorised funding for construction of new border crossing points in the region. Even the complicated procedures for hiring foreign personnel in the Vladivostok Free Port have been simplified. For investors, the port had offered a zero-tax rate for five years on land and property and income tax had been set at a maximum five per cent. However, it can't be ruled out that the success of the projects depend on adapting business models to Russia and learning to work with local officials and complicated financial legislation.

Foreign investors need to properly study Russian legislation before filling out any documentation, in context with the tax exposure. And, in the case of disputes – Russia must also set up specialised financial courts for investors in the Vladivostok Free Port, much on the lines of China's model of improving legal conditions in special economic zones. Nevertheless, as the Free Port of Vladivostok appears to be the first truly successful example of major social and economic development in post-Soviet Russia, it is all set to become a true locomotive for its economy.


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