Russia’s Far East Open for More Investments - 25 December, 2002

Sakhalin governor demands “a taxation paradise” for investors and alludes to China

Yesterday governor of the Sakhalin region Igor Farhutdinov held a press-conference to deliver a speech on foreign investment attraction. The governor cited the Sakhalin region as an example for the whole of Russia, however he demands more preferential conditions for foreign investors in Russia. Otherwise, he says, all investments may go to the neighbor, to China.

Igor Farkutdinov said: “This year Russia and the USA established a dialogue in the energy sphere. This is a very important fact for the Far East, as well as for the whole of the world community. Saudi Arabia is currently the world’s number one in oil production, then go Russia and the USA. Saudi Arabia and Russia export a great bulk of the produced oil. The USA, being the largest oil producer, also imports oil from Saudi Arabia and other Arab countries. Now, when the energy dialogue is established between Russia and the USA, our country has got a chance to become an oil supplier for the USA. This means good profits for Russia, fixed prices, high and reliable paying capacity. In this very connection, Sakhalin emerges in the forefront: it has rich oil fields on the Sakhalin shelf, it’s situated closer to the USA than any other regions, which is certainly very convenient for oil transportation. It’s quite natural that those investors who are already operating on the shelf and those who are still to come, will get the biggest profits.

People in the Far East understand perfectly well that our region is a wonderful source of raw materials. Russia’s Far East has no highly developed manufacture and a great number of manpower that China and Korea have; we don’t have large capitals like in Japan and Singapore. But our raw stock is vast. It’s currently very important to use it reasonably. We can take Australia for a model: for many years already, the country has been supplying coal and other raw materials to Japan and other countries of the Asia-Pacific region. Its partnership with the neighbors is very effective which helps to develop economy of the country. And when economists in Moscow say that trading in raw materials is unprofitable for the state, they are not right: amount of profits depends upon organization of the whole of the business.

Will Sakhalin and Russia’s Far East breakthrough? Is it possible that the region will be successfully developing, and the industrial potential, the standard of the people’s living will increase? This is possible if investors come to the region.

The Far East covers almost 40% of the whole of Russia’s territory, but only 8 million people live on this territory; the density of population in the Far East is just a bit more than one man per one square kilometer. The figure for Russia on the whole is 8.5 people per one square kilometer. It is a tremendous difference! Besides, our neighbor China with its 1.5 billion population demonstrates the highest rates of economic development. In 2001, foreign investments in China reached 50 billion dollars for the first time over the whole history of the country; 47 billion of the sum are direct investments in the economy. Second, as compared with 2000, investments in China’s economy increased by 15% in 2001. Just to compare: investments in the USA reduced two times in 2001 as compared with 2000. So, China currently demonstrates unbelievable success in foreign investment attraction. How do they manage to be so successful? First of all, the success is due to a thoroughly considered taxation policy and an adequate tax burden for investors. The tax burden makes up 40% in Russia, the figure is much less in China; moreover, several free economic areas situated quite close to Russia have the tax burden only at the rate of 8%. So, even people not experienced in economy understand that Japanese capitals rush to China, not Russia’s Primorye.

I heard some officials say that when we conclude an amicable treaty with Japan, Japanese capitals will flow like water to Russia. Japan’s capitals are enormous and the money must be invested somewhere. However, money is invested only to the spheres that guarantee repayment and fixed profits, in China and its free economic zones. It is not just Japan that invests in China; the 8% tax burden attracts many countries. This is the explanation why China may soon pass ahead of Japan and the USA regarding the GDP volume. If we don’t want to awfully lag behind and get stuck in the problems, all levels of the authority must work on development of effective instruments for investment attraction.”

“I was told several times already that hydrocarbon production on terms of the production division agreement is unprofitable for Russia. What is in fact going on in Sakhalin? The Sakhalin region has been among Russia’s ten leading regions in attraction of foreign investments for several years already. This year the sum of foreign investments will reach 500 million dollars here, next year we plan to attract more than a billion. These are mostly investments in the project “Sakhalin.” Today, in accordance with the program for development of the Far East and the Baikal region (I say once again it covers 40% of Russia’s territory), 1.200 billion rubles are planned to be invested. It’s clear that the sum is not enough for realization of the whole of the program. We must find new sources and attract more investors. Sakhalin’s hydrocarbon exploration and production need investments urgently. Currently, almost 70% of the investment go to the oil industry and up to 20% went to geological prospecting this year.

In the economic activity, we must follow the example of those countries that get high profits and wonderful results every year; it’s not a shame to learn from our neighbors, especially those that are successful enough. It’s time to develop laws capable to create a favorable climate for investment attraction.” The information was provided by RusEnergy.

Ahtyam Ahtyrov

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Author`s name Michael Simpson