Resource-based development in the Russian Far East: Problems and prospects

Geoforum, Vol. 29, No. 4, pp. 375392,199s 0 1998 Elsevier Science Ltd. All tights reserved Printed in Great Britain 0016-7185/98 $19.00+0.00

Pergamon PII: SOO16.7185(98)00021-9

Resource-Based Development in the Russian Far East: Problems and Prospects*

MICHAEL J. BRADSHAWt$

and NICHOLAS J. LYNN$

t School of Geography and EnvironmentalSciences, University of Birmingham, Edgbaston, Birmingham B15 2’lT, UK 5 Department of Geography, University of Edinburgh,Drummond Street,

EdinburghEH8 9XP, Scotland, UK

(Received 4 September 1997; and in revised form 30 April 1998)

Abstract: The paper examines the prospects for resource-based development in the Russian Far East. It adopts a critical perspective on the potential for resource-based development by examining problems with Far East resource industries, specifically by looking at the experience of the other resource economies more generally. In particular, it highlights the new geo-economic context for resource development in the Far East of Russia as the world economy approaches the much touted, and now questioned, ‘Pacific Century’. 8 1998 Elsevier Science Ltd. All rights reserved. Key words: Russia; Asia; Resource base; Regional development

Introduction This paper critically assesses the prospects for resource-based development in the Russian Far East. It argues against the claim that the Russian Far East has a tremendous resource ‘potential’ by analysing both the problems affecting Far East resource industries specifically and the problems faced by ‘developing’ resource economies generally. In particular, it examines the argument that ‘developing’ economies may face difficulties in achieving sustainable economic growth if they are well endowed with natural resources (Auty, 1985,1988, 1990, 1993). A changing geo-economic context means that the Russian Far East has the potential to

play a more important role in the supply of resources to the Asia Pacific; the potential for achieving sustainable economic is limited by infrastructure, political and environmental problems. This case study serves to highlight further the problems faced by resource-dependent countries and regions in achieving stable economic growth, as well as the more specific difficulties that regions in the former Soviet Union are encountering during the current period of post-socialist transformation. Russia and its far eastern region

The term ‘Far East’ (Dal’niy Vostok) is used in Russia in an administrative sense. Officially it refers to the ten administrative territories that con*This paper is based on research supported by ESRC grant stituted the Soviet planning region of the same L324253005. name (see Figure 1 and Table 1) and which, follow$ Corresponding author. E-mail: [email protected] 375

Michael J. Bradshaw and Nicholas J. Lynn

376

PetropavlovskKamchatskiv

\

Sakhalinsk

TV

Vladiwstok piGiiGq

0

-

Main Roads

Main Railways Kilortletres

Administrative Centres

-

Main Rivers

OW

1000

Figure 1. The Russian Far East

ing the dissolution of the USSR, are collectively known as the Russian Far East (hereafter RFE). The region covers an area of 6 million km* (36.4% of the territory of Russia) and stretches from the Arctic in the north to Russia’s borders with China, North Korea and Japan in the south. Historically, the region has played an important role in the Russian national psyche as a ‘gateway’ with cultures and economies to the east (Bassin, 1991). In the twentieth century, even though Far Eastern borders were closed, the idea of the Far East ‘frontier’ remained an essential aspect of political and social life in the region (Stephan, 1994). The borderland nature of the region was emphasised by a Soviet leadership that encouraged a ‘siege mentality’ and for whom

Far Eastern border controls were seen as a vital protection against external threats. In economic terms, the Far East played a peripheral role in both the Tsarist and Soviet empires. It acted as a resource colony, at first for furs and later for precious metals, ores, timber and fish. Thus, the region has been locked into a ‘centre-periphery’ type of economic relationship with European Russia over a long period of time. The term ‘centreperiphery’ is used here in a general sense, to refer to relationships characterised by unequal distributions of social and economic power and authority. In the USSR the Far East was dependent upon subsidies and credits that were issued solely at the discretion of the centre (Dienes, 1987). The economic subsidy

Resource-based development in the Russian Far East: problems and prospects

377

Table 1. Basic characteristics of the Russian Far East Territory (,OOOkm*) Russia RFE South Amur Jewish Khabarovsk Primorskiy North Sakha Magadan Chukotka Oceanic Kamchatka Koryak Sakhalin

17,075.4 6215.9 1354.2 363.7 36 788.6 165.9 4302.3 3103.2 461.4 737.7 559.4 170.8 301.5 87.1

% of Russia 100 36.4 7.9 2.1 0.2 4.6 1.0 20.9 18.2 2.7 4.3 3.3 1.0 1.8 0.5

% of RFE

Pop. 1996 (,OOO)

% of Russia

147,501 7423 5034 1032 207 1556 2239 1354 1016 251 87 1035 370 33 632

;1: 5:9 0.6 12.7 2.7 57.3 49.9 7.4 11.9 9.0 2.7 4.9 1.4

100 5.0 3.4 0.7 0.1 1.1 1.5 0.9 0.7 0.2 z*: 0:3 0.0 0.4

% of RFE

100 67.8 13.9 2.8 21.0 30.2 18.2 13.7 3.4 1.2 13.9 5.0 0.4 8.5

NMP1993 (,ooO Rbls)

% of Russia

% of RFE

131331 8815 3679 910

100 6.7 2.8 0.7

100 41.7 10.3

14:: 1313 29 2288 634

1:: 1.0 222.2 1.7 0.5

16:; 14.9 33.1 26.0 7.2

12:: 510

1:: 0.4

14n: 5.8

7::

0::

s::

NMP=Net Material Product a Soviet-style calculation of the value of economic activity. SourcexTetritory: Goskomstat Rossii (1995). Population: Heleniak (1997). NMP: Goskomstat Rossii (1994).

of the region was justified on strategic grounds, both in terms of the need to protect the Sine-Soviet border and as a base for the projection of Soviet power in the Pacific (Swearingen, 1987; Zagorsky, 1997). The Far East also acted as a resource colony. The region’s mineral wealth was crucial to the Soviet strategy of maximum self-sufficiency in the production of strategic resources. Its resources were developed in order to serve domestic needs and to export abroad for hard currency desperately required by the Soviet regime. In the USSR control over foreign trade lay in the hands of bureaucrats in Moscow rather than in the regions themselves (Bradshaw, 1991). Consequently, the local administrations in the Soviet Far East had very little influence over the development and exploitation of their

region’s natural resources. The Soviet Far East remained largely undeveloped and quite isolated from the European economic core of the USSR. Workers in the Soviet Far East received bonus payments as an incentive to work in such a remote region (Helgeson, 1990). The region as a whole only has a population of 7.6 million (5% of the total population of the Russian Federation) and its population has been falling since the late 1980s (see Table 2). The fragility of Russian settlement is made all the more apparent by the fact that the population of the three northern Chinese provinces (Heilongjiang, Jilin and Liaoning) in 1991 was greater than 100 million (Kerr, 1996, p. 935). In 1991 the average population density in those three provinces was 129.2 persons/km*, compared to 3.7

Table 2. Population change in the Russian Far East: 1989-96 Region

Russia Far East Sakha Jewish Chukotka Primorskiy Khabarovsk Amur Kamchatka Koryak Magadan Sakhalin

Total population 1989 147,401 7941 1081 216 157 2258 1609 1058 466 39 386 710

Source: Heleniak (1997).

Total population 1996 147,501 7421 1016 207 22:: 1556 1032 403 33 251 632

Percent change 1989-96 0.1 -6.5 -6.0 -4.3 -44.3 -0.9 -3.3 -2.5 -13.6 -15.9 -34.9 -11.0

Total migration

1.7 -8.1 -13.0 -6.3 -48.3 a.9 -3.7 a.1 -15.3 -18.7 -36.8 -11.0

Nat. increase

-1.6 1.6 7.0 2.0 4.0 0.1 0.4 1.6 1.6 2.8 1.8 0.0

Absolute change 1989-96 101 -520 -65 -9 -70 -19 -54 -26 -64 -6 -135 -78

Total migration

2510 -646 -141 -14 -76 -21 -60 43 -71 -7 -142 -78

Nat. increase

-2409 126 76 4 6 2 6 17 8 1 7 0

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Michael J. Bradshaw and Nicholas J. Lynn

persons in the southern zone of the RFE.

fish-processing industries. Thus, one cannot speak of a single Far Eastern region, nor a single Far Eastern future.

The Far East is also far from being a coherent political-economic unit. Its definition is mainly administrative, its borders have changed over time and it lacks a clear regional identity (Tumov, 1993). The Economic crisis and resource-based ten constituent territories of the RFE have very dif- development ferent perspectives, aims and associations. Moreover, the territories themselves are also far from The economy of the RFE has been in a state of homogeneous. As well as a general contrast crisis since the collapse of the USSR and total between urban and rural communities, different industrial production has fell by 54% between 1990 groups and different districts (rayon) within and 1995 (Goskomstat Rossii, 1996b, p. 969). This administrative territories have very different polit- collapse is a result of the fact that the Soviet Far ical and social aspirations (Rozman, 1997). East was highly dependent upon central subsidies Although a number of regional associations have and state support. With the disintegration of the been established since 1991, in order to try and administrative-command system these subsidies unite the different territories of the RFE in common have been gradually replaced by more market-oripolitical action, their achievements have been lim- ented mechanisms. Economic transition has ited and they have been unable to establish a united brought economic crisis to the RFE. A rapid regional front. In fact, there is a sharp contrast increase in transportation costs has cut the regions between the territories in the north, the south and economies off from traditional sources of supply the oceanic regions of the RFE. The environment of and markets in European Russia. The initial the north (tundra and permafrost) makes construc- response of the region was to increase exports; tion difficult and limits economic activity. The however, stockpiles have been exhausted and the north of the RFE (the Republic of Sakha-Yakutia, region’s enterprises are in dire need of working capKamchatka and Magadan obZusts) is therefore only ital. A growing non-payments problem and an very sparsely settled by indigenous groups (Sakha, energy crisis have aggravated the situation (BradEver&i, Chukchi, etc.) and by isolated mining and shaw and Kirkow, 1998). The decline of the forestry settlements, many of which have closed region’s industrial base is placing added pressure on down. As a consequence, the region is experiencing the resource sectors to finance recovery. Because of substantial out-migration (Table 2). The southern the fiscal problem facing the Federal Government, regions, by contrast, (Amur oblust, Primorskiy and many regions in the Far East have not received the Khabarovsk krays) contain 67.8% of the total Far federal funds owing to them. Because the region East population and are the most important indus- remains heavily militarised, the Federal authorities trial regions. While the northern regions are are a major source of the non-payments problems. dependent upon capital extensive extractive indus- In the face of these changing conditions politicians, tries, the southern regions have more diversified economists and administrators both inside and outeconomies (North, 1978; Bradshaw, 1988; Minakir, side the Far East have tried to find new ways of 1993; de Souza, 1997; Kovrigin, 1997). In the promoting regional economic development. The Republic of Sakha (Yakutia) mineral extraction most commonly proposed solution to the region’s (diamonds and gold) accounts for over 90% of economic problems has been the further developindustrial production, while in Primorskiy kray ment of the resource sector: machine building and the production of construcThe economic development and well being of the Far East must be based on available natural resources. Nowation materials accounts for almost 20% of industrial days, this sector is entering the market system with great production and the production of food accounts (the difficulties but not hopelessly. The many kinds of local fishing industry) for nearly 50% of total production resources, both explored and untapped, are of great and (Goskomstat Rossii, 1996a). Primorskiy and Khapossibly increasing value for the region and for Russia, as well as for the economies of the major Asia-Pacific counbarovsk krays have also inherited significant militries (Kovrigin, 1997, p. 84). tary-industrial production and now face the extra costs involved in conversion. The oceanic regions The rationale behind these claims is simple. of the RFE, Kamchatka and Sakhalin Oblasts, are Resource production is by far the most important different again, being dominated by the fishing and sector of the Far East economv. accounting for 45%

Resource-based development in the Russian Far East: problems and prospects of total industrial production (Minakir and Freeze, 1994). More than the other industrial sector of the region’s economy, resource production also provides a way of attracting much needed foreign investment and holds out the promise of earning valuable hard currency. The RFE is said to be fortunate that, because of its proximity to the AsiaPacific region, it has an available export market for its raw materials. New resource development projects could both improve the economic situation in the region and consolidate Russia’s political and economic position in Northeast Asia. It is just such an argument that is behind the 1996 Federal Programme for the ‘economic and social development of the Far East and the Transbaykal’. However, there are many obstacles to such a resource-based strategy for economic ‘recovery’ in the RFE. Not least of which is the fact that the Federal Govemment lacks the funds to implement its development programme. Others include political, infrastructure and environmental problems that are considered in greater detail below. Furthermore, an initial problem affecting any assessment of the potential for resource-based development in the RFE lies in just how that resource wealth is measured in the first place. The recent economic crisis in Asia also calls into question the extent of future demand for resources in the region (The Economist, 1998). Already economic decline has depressed energy consumption and potential investors, such as South Korea, are no longer able to finance large-scale resource development projects (Lee and Bradshaw, 1997). Resource definitions

Resource definition infers a judgement about worth and utility and it reflects a need. Something is not a resource because it physically exists, but because it has a value: there is both the ability to use it and a demand to be satisfied (Rees, 1990, p. 12 and Jones and Hollier, 1997, p. 20). It is in the very nature of resources that they are functional and dynamic. Their definition varies over time and space, responding to changes in technology and knowledge. Given the nature of resources, they are clearly difficult things to measure and record. Most classifications of stock resources (resources that, in human terms, are limited in supply) differentiate between resource types on the basis of demand, price and technological ‘know-how’ (Chapman, 1989; Rees, 1990). First, there are ‘proven/current’

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reserves: deposits already discovered and known to be economically extractable under current levels of demand, price and technological conditions. Second, there are ‘conditional/probable’ reserves: deposits already discovered but not economically viable to extract under current levels of demand and price and with available extraction technology. Third, there are ‘hypothetical reserves’: deposits that have not yet been discovered but that can be expected to be found in the future in areas that have only been partially explored. Finally, there are speculative reserves: deposits that may be found in previously unexplored areas with favourable geological conditions. The four-fold classification presented above broadly follows the US government’s system of reserve categorisation (proven, probable, inferred, hypothetical and speculative). There is a different system for measuring reserves in Russia, however, that was originally established for Soviet long-term planning purposes. The Soviet system employed a multiple scale: A-B-Cl-C2-Dl, etc. In the Russian (Soviet) scale A+B+Cl are deposits that have been investigated in detail (detulnayu ruzvedku) and C2+Dl, etc. are deposits that have only been subject to a preliminary investigation (poiskovo-ruzvedochnuyu studiya) (Thornton, 1983, p. 608). Unfortunately the Soviet ‘explored’ category (A+B+Cl) is more inclusive than the US ‘proven’ category and the two systems cannot be directly equated. But in rough terms, ‘proven’ reserves are A+some B, ‘conditional’ reserves are the rest of B+some Cl, ‘probable’ reserves are the rest of Cl+C2 and ‘hypothetical’ reserves are Dl+D2 (Grace et al., 1993; Levine, 1993, p. 288). The different classifications reveal that the development of resources not only depends upon cost (and its relation to the price at which they can be sold), but also on a whole range of variables including the level of information that is attained by exploration, the level of technological development, and social and political conditions. This means that as well as distinguishing, between undiscovered and explored reserves, or proven and conditional reserves, resources can change categories over time. That is, conditional reserves may become ‘proven/current’ reserves with ‘favourable’ changes in certain variables, and also proven/current reserves may revert to being ‘conditional/probable’ with ‘unfavourable’ changes in circumstances. This has important implications for assessing the potential for resource-

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based development in the post-Soviet Far East. Reserves categorised in the Soviet period now face a different judgement, as the political, social and economic conditions affecting their classification have changed radically with economic transition. These factors are not only internal, changes in external market conditions affect the level of demand and price of resource exports. In a very real sense, the resource base of Far East has shrunk with the collapse of the Soviet Union. The reason for the current exodus from the Russian North is in large part the fact that the Russian State can no longer afford to subsidise resource production, thus there is a retreat from regions that are proving to be highcost producers in the emerging market economy.

Natural resources and regional development Resource definition clearly poses a difficulty in terms of assessing the potential for economic development in the post-Soviet Far East. A further difficulty arises in trying to combine an understanding of that resource wealth with the idea of a ‘potential’ for regional development. It has become commonplace in economics and economic geography to emphasise the difficulties that ‘developing’ countries face if they are well endowed with natural resources (see, for example: The Economist, 1995). This argument stems from studies that have shown the relatively poor economic achievements of mineral economies (Gelb, 1988; Roemer, 1995; Wheeler, 1983). It is the claim of the ‘resource curse thesis’ that natural resource abundance, if not adequately managed, can actually undermine a country’s ability to sustain a prolonged period of economic growth. While one might question the extent to which such concepts can be applied to regions within countries, this approach clearly has implications for any assessment of future economic development of the RFE. All the more so since the RFE is increasingly isolated from the rest of the Russian economy and has been forced to seek local solutions to economic problems. Policy makers in Moscow and in the Far East claim that the natural resource potential of the region could fuel tremendous economic growth, especially as the region could supply the mineral and energy requirements of the Asia-Pacific economies (Manezhev, 1993; Pavlyatenko, 1995). With the decentralisation of foreign trade activity that has accompanied Soviet

collapse, enterprises in the RFE are now able to trade directly with the Asia-Pacific region (Bradshaw, 1992). Some writers have claimed that the region can benefit from its comparative advantage in natural resources (Bakulin and Shishmakov, 1993; Campbell, 1995; Dorian, 1997). However, the resource curse thesis suggests that the further development of the region’s natural resource base provides no guarantee for long-term sustainable economic development in the region. Indeed, rather than seeing natural resource production as an ‘engine for economic growth’ Auty (1993, p. 10) argues that: The mineral sector should only be regarded as a bonus with which to promote competitive economic diversification rather than as the backbone of the economy.

At first glance, economies that have an abundance of natural resources may appear to have advantages over less well endowed economies. Not only do they have a potential source of foreign exchange, but also an alternative strategy for industrialisation (raw material processing rather than import substitution, for example). However, the resource curse thesis highlights the disadvantages that such economies face in achieving long-term growth rather than their advantages. In particular mineral economies face two potential and interrelated problems: the volatility of raw material prices and ‘Dutch Disease’. The volatility of raw materialprices

A fundamental problem for resource based development arises from the volatility of raw material prices in the world economy. Studies have shown that economies have great difficulty in coping with booms and down-swings in mineral prices (Wheeler, 1983; Gelb, 1988; Sachs and Warner, 1995). In times of high prices (and so higher rents) governments misallocate windfall profits, and during price down-swings governments are late readjusting to new patterns of expenditure. In a study of oil producing economies, Gelb (1988) highlighted four critical management problems: a lack of saving during booms; the establishment of unsustainable patterns of consumption and investment during booms; the neglect of the competitiveness of other industrial sectors (especially agriculture and manufacturing) during the booms; and late adjustment to down-swings. Following the recent economic crisis in Asia, world oil prices have been at an all-time low. Falling oil prices and increasing

Resource-based development in the Russian Far East: problems and prospects production costs are already squeezing the profit margins of Russian oil producers. It maybe that in the short term the very possibility of resource-based developed will be dashed by a short-term downswing in demand for the region’s resource exports. ‘Dutch Disease’ and resource-based

development

The phrase ‘Dutch Disease’ originally referred to

the experience of Netherlands in the 1950s after the discovery of large natural gas reserves. It describes the process by which investment in natural resource production leads to shrinkage of an economy’s agricultural and manufacturing sectors. Problems arise because investment in natural resource production is often very costly (and leads to a diversion of capital away from productive investment) and also because a rise in resource exports (or a cut in resource imports) leads to an exchange-rate appreciation that undermines the competitiveness of traded goods. According to Auty (1993, p. 15) this can also lead to an over-subsidising of agriculture and manufacturing sectors during periods of price booms, which causes particular difficulties during periods of price down-swings: The resulting insulation of a large segment of the nonmining tradable from import competition then makes it difficult to generate the foreign exchange and tax revenues needed to substitute for those lost from mining during a mineral down-swing.

The resource curse thesis and the Russian Far East The resource curse thesis, then, paints a potentially

gloomy picture of the prospects for successful longterm economic growth in natural resource dependent economies. Perhaps it even overplays the difficulties that mineral and other resource economies face at the neglect of these countries’ ‘natural’ advantages (for a recent discussion of this in the context of Russia, see Russian Economic Trends, 1997). In the case of the RFE, it is a region within a larger economy and therefore less vulnerable to ‘Dutch Disease’. However, it was the case that in the late-Soviet period the Soviet State squandered windfall profits from oil and gas imports. Given Russia’s continued reliance on resource exports [in 1994 fuels and minerals and metals and precious stones together accounted for 69.8% of Russian exports (EIU, 1997, p. 47)], the national economy itself could be susceptible to ‘Dutch Disease’. Nevertheless, careful economic management can serve to reduce the problems caused by the booms

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and downswings in raw material prices. There have been some notable attempts to create mechanisms to cope with the volatility of mineral prices in ‘developing’ countries. Perhaps the best example is provided by the Chilean copper stabilisation fund. The stabilisation fund was established in 1987, after pressure from the International Monetary Fund, and sets a reference price each year for copper in order to balance out some of the risks investors face in undertaking resource development projects (Mikesell, 1987, 1988). There is already an example of the creation of a special fund on the Island of Sakhalin in the RFE. Bonus payments and other funds from oil and gas exploration projects are being paid into the Sakhalin Development Fund which is to be used by the local administration to develop and improve the social and economic infrastructure on Sakhalin Island (Bradshaw, 1997). However, funds are also being used to support the administration’s budget and thus subsidise inefficient sectors of the Island’s economy. At present, in the RFE, and other resource rich regions of the former USSR, the disadvantages of natural resource production are outweighed by the far greater problems caused by post-Soviet economic collapse. So far, resource rich regions have fared better than many other ‘types’ of regional economies during ‘systemic transformation’ (Sutherland and Hanson, 1996). In fact, resource-based development has provided a ‘survival strategy’ for those regions that are able to develop their natural resource base during ‘transformation’. During this period, those regions with significant natural resource production are more able to ‘develop’ their economies than regions, which lack the same natural resource wealth. However, whether this will be a short-, medium- or long-term benefit can only be a matter for speculation at the present time. It may be the case that resource wealth has led enterprise managers and regional administrators to put-off needed economic restructuring, preferring to use resources revenues to prop up failing economic activities and to fund pet projects of political significance. It is certainly the case that most of the pro-reform regions in Russia are not endowed with substantial resource wealth. This suggests a somewhat different interpretation of the resource curse thesis within the context of transition economies, one where resource wealth delays the introduction of much-needed market reforms.

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The new gee-economic context for Far East resource development Regional development in the RFE has to be seen within a changing geo-economic context. Firstly, it has to be seen within the context of the increasing role of regional (sub-state and supranational) actors in the Asia-Pa&c region and in the world economy more generally (Thrift and Amin, 1994). A key point for the transformation of the RFE is the growth of regional trading and political blocs, which some writers have claimed challenge the raison d’ttre of the national-state (Horsman and Marshall, 1994; Yamazawa, 1998, pp. 168-169). An important factor in the Far East’s development within the Asia-Pacific region will be Russia’s, and the region’s, relationship with APEC (Asia Pacific Economic Co-operation Forum), ASEAN (the Association of South East Asian Nations) and other supra-national and regional (including non-govemmental) organisations. However, thus far, the Russian Federation has only played a minimal role in Asia-Pacific regional institutions. Although a member of the Pacific Economic Co-operation Conference since 1992, Russia has had very little contact with the Asian Development Bank and has only been an observer at ASEAN ministerial conferences. Initial attempts to join APEC where unsuccessful, mainly due to the lack of Japanese support. However, in November 1997, following the summit meeting between President Yeltsin and Japan’s Prime Minister Hashimoto at Krasnoyarsk in East Siberia, Japan agreed to support Russia’s application. Later that same month, during the APEC Summit in Vancouver, Canada, Russia was admitted into APEC. Nevertheless, there is much work to be done before Russia is accepted as a true economic partner in the Asia-Pacific Region. President Yeltsin and then Prime Minister Hashimoto met again in late April 1998. In the wake of the Asian economic crisis, the Japanese side was far less generous about the prospects of large-scale economic assistance for the Russian Far East (Moodgal, 1998). Russia’s lack of involvement in Asia-Pacific regional institutions is more than just a commentary on the economic crisis in the Far East. Despite the pleas of both Mikhail Gorbachev and Boris Yeltsin, Russia has seldom been perceived as a Pacific state. While the Soviet Far East was an important military force in the Pacific, economically and politically it was isolated from the wider region (Bradshaw,

1988). The regionalisation of economic decisionmaking following the collapse of the Soviet Union has only just begun to create an environment within which politicians and business people in the Far East have a direct say in foreign economic activity. Even this new situation remains very confused and unstable. At the same time, within Russia itself, there have long been debates between ‘Atlanticists’ and ‘Eurasians’ on Russia’s ‘position’ within Asia, in both socio-cultural (Hauner, 1990; Bassin, 1991; Kerr, 1996), political (Segal, 1993) and economic terms (Granberg, 1988; Schiffer, 1989; Kiselyova et al., 1996). Secondly, regional development in the RFE has to be seen within the context of the increasing globalisation of economic activity in the world economy. Here globalisation is taken to mean two changes that have had a significant impact on the structure of global economic relations: the increasing importance of multinational corporations and new communication technologies. Although the idea of globalisation is much disputed, in this sense it describes a phase of capitalist relations that is characterised by an increased intemationalisation of economic activity and a restructuring (deregulation) of state activity (McGrew, 1992; van der Knapp and Le Heron, 1995). This is important for the RFE because the collapse of the USSR’s administrativecommand system meant the collapse of the distinctive socialist system in the world economy (Bradshaw and Lynn, 1994). The collapse of the Soviet system has meant not only the construction of new economic relations between the post-Soviet republics, but also their incorporation into a global economy. The processes of regional economic development in the RFE have thus undergone dramatic change. The reduction of Moscow’s political and economic influence has created an environment within which politicians and ‘entrepreneurs’ in the Far East see their future economic prosperity as being tied to increased economic interaction with the Asia-Pacific and the world economy. Finally, the economic development of the RFE needs to be seen within the context of the shifting global economic order. In particular, the region’s economic development needs to be seen within the context of the growing economic importance of the Asia-Pacific region in the global economic system. Some writers have referred to the process of economic dynamism in East Asia in global economic terms as the beginning of the ‘Pacific Century’

Resource-based development in the Russian Far East: problems and prospects (Bergsten and Noland, 1993; Das, 1996; Thompson, 1998). That is, the rate of economic growth in the so-called tiger economies of East Asia has led to a recalculation of economic priorities at the end of the twentieth century, which will determine a new economic order for the twenty-first century. It remains to be seen if the region’s financial problems at the end of 1997 are symptoms of a deeper structural weakness in the ‘Asian Model’ of developed capitalism. Nonetheless, the RFE sees its role in this new order as a supplier of natural resources (minerals, energy, timber and fish) to the industrialising countries of Northeast Asia. The economic future of the RFE is thus tied to the continued prosperity in Northeast Asia. Optimism in the Far East is based upon the perceived trade complementarily. Japan, in particular, has capital and technology but lacks natural resources, while the RFE has significant resources but is desperately short of capital and technology. In the 1970s this led to a number of compensation agreements between the USSR and Japan over Far Eastern coal and forest resources. In the 1990s foreign interest has been renewed and Japanese companies, as well as parties from South Korea, China and the US, are investigating how to include the RFE in the resource supply system of the Asia Pacific. Despite the persistence of a number of international territorial disputes between Russia and its neighbours, over the Kurile islands/ Northern Territories with Japan and islands in the River Amur with China, there are new attempts at international economic co-operation in Northeast Asia. The Tumen River Area Development Project, supported by the United Nations Development Program and involving co-operation between North Korea, China, Russia and Japan, highlights the emergence of a new ‘soft regionalism’ in Northeast Asia and a new geo-economic context for Far East resource development projects (Marton et al., 1995; Freebeme, 1993; Campbell, 1995; Clay-Moltz, 1996).

dation for economic recovery (Tsvemkov, 1993). Too many analyses of the potential for resourcebased development in the RFE have simply repeated Soviet estimates without taking into consideration the new political, social and economic conditions affecting resource development in the region. Before it is possible to examine generally problems affecting resource development in the region, therefore, it is first necessary to detail the potential resource base in the light of these changes. The reserves of the most important Far East resources are summarised in Table 3, and their locations are marked in Figure 2. Minerals The Far East contains more than 70 different types

of mineral resources and RFE mineral extraction features prominently in the structure of the Russian mineral industry. The region is estimated to contain around 90% of Russia’s ‘total reserves’ of antinomy, boron, tin and diamonds, for example (Minakir and Freeze, 1994, p. 17), and Far East mineral production accounted for 16% of all Russian mineral production in 1990 (Goskomstat RSFSR, 1991). It is possible to identify different types of resource producing regions in the Far East. Dorian (1997, p. 93), for example, divides RFE mineral production into four different ‘mining zones’: a southern zone incorporating most of Khabarovsk kray and Amur oblast and producing tin and gold; a Pacific zone including Primorskiy hay and Sakhalin and Kamchatka obkzsts, producing polymetallic ores and tungsten; a central zone including SakhaYakutia, Magadan oblast and part of Khabarovsk hay, producing precious metals and non-ferrous metals, diamonds and iron ore; and a far north zone including Chukotka autonomous okrug, producing non-ferrous metals, gold and diamonds. In terms of the key mineral resources, then, the RFE contains significant quantities of: . Tin: The

The resource base of the FIFE Despite the existence of a more favourable geoeconomic context for Far East resource development projects, many questions remain concerning the prospects for successful resource based development in the RFE. The most fundamental of these questions is whether .the Far East actually has a resource base that is capable of providing a foun-

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Far East was the leading regional producer of tin in the USSR. Significant tin production only began in 1960s as the Soviet Union tried (and failed) to achieve self-sufficiency. The RFE contains 95% of Russia’s proven and conditional tin reserves. The largest deposits are located in Khabarovsk kray, Magadan oblast and the Republic of Sakha (Yakutia). The most important tin-producing district is the Solechniy deposit in the mountains to the west of Komsomol’sk-naAmur. This region has deposits with an average

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Table 3. L..ocation of major mineral and energy resources in the Russian Far East Resource type Tin (T) Tin Tin Tin Iron ore (I) Iron ore Iron ore Iron ore Diamonds (D) Diamonds Gold (G) Gold Gold Coal (C) Coal Coal Coal Oil and gas (0) Oil and gas Oil and gas

District

Region

Komsomol’sk-na-Amur Deputatskiy Kavalerovo Iul’tin-Pevek Chara-Tokkonsk Aldan Gar Khingansk Mirniy Udachniy, Aikhaliskiy, Anabar Aldan, Tommot Tokur Kolyma (Karamken, Dukat, etc.) Neryungri (see Figure 2) Svobodny Sredniy Urgal Artem Sakhalin onshore (Okha) Sakhalin offshore (I,II,III,IV) Vilyuisk (see Figure 2)

Khavarovsk Sakha Primorskiy Chukotka Sakha Sakha Amur Jewish Sakha Sakha Sakha Amur Magadan Sakha Amur Khabarovsk Primorskiy Sakhalin Sakhalin Sakha

tin content of between 0.4 and 0.6% and ‘aggregate reserves’ exceeding 140,000 tons (Levine and Bond, 1994). Although construction of a tin smelter began at Solechniy in the 197Os, the project was never completed and the Far East’s tin concentrate is transported by rail to Novosibirsk in West Siberia for further processing. Iron-ore: The Far East has proven reserves of around 3000 million tons, conditional reserves of up to 4000 million tons and hypothetical reserves of up to 4600 million tons (Misko and ZumBrunnen, 1983; ZumBrunnen, 1990; Minakir and Freeze, 1994). The largest deposits are located in four major districts in the Republic of SakhaYakutia (2), Amur obluti and Evreyskaya (Jewish) autonomous &last. However, these deposits accounted for only 3% of the total conditional iron-ore reserves of the former USSR and were not exploited in the Soviet period. Diamonds and gold: The Republic of Sakha (Yakutia) dominates Russian diamond production. In 1993 the republic accounted for 99% of total Russian diamond production, and during 1993 Russia exported a total of 1.13 billion US$ in uncut diamonds which made it the second largest diamond producer in the world (Delovoy Mir, 1994). Information on diamond reserves are closed, but new sources of diamonds are regularly found, and most reliable estimates suggest that the main pipe at Mirniy will remain productive for at least another 5-6 vears. that Dines at

Udachny and Aikhalskiy will remain active for 10-15 years, and that pipes at Anabar could remain active for 25 years (Segodnya, 1994). Data on Russian gold reserves are also limited. However, the Far East is clearly a significant producer-region. In 1980 the Far East accounted for 59% of total Soviet primary gold production (Kaser, 1983) and in 1995 Far East gold (82.7 tons) accounted for 68% of Russia’s total production @FE, 1996). The total gold production in the region has been declining since 1991 along with the RFE’s share of total Russian production. The most important gold mines are located in the Republic of Sakha (Yakutia), Magadan and Amur oblasts. Sakha-Yakutia was the largest Russian producer of gold in 1995 (28.8 tons of gold in 1995) accounting for 24% of total Russian production on its own. The RFE’s gold resources are still largely unexplored, although geological structures suggest that the region has great potential. The Far East also produces significant quantities of tungsten (24% of Russia’s proven reserves and 37% of production in 1993), lead (8% of reserves and 49% of production in 1993), zinc (4% of reserves and 14% of production in 1993) and fluorspar (41% of reserves and 91% of production in 1993). In total, the proven mineral reserves of the RFE account for about 5% of the total value of Russian mineral resources - and in many cases there are further development opportunities.

Resource-based development in the Russian Far East: problems and prospects Energy resources The RFE also has significant energy resources. Not

only fossil fuels, but also the potential to tap hydroelectric power, tidal power and geothermal energy. However, with reference to the potential for regional resource-based development within the Asia-Pacific, this paper will concentrate on the RFE’s reserves of coal, oil and natural gas. l

Coal: Although more than 100 different coal

deposits have been explored in the Far East, many of the region’s reserves have yet to be investigated because they are located in remote and difficult northern districts. Proven and conditional coal reserves in the RFE are estimated at around 12,000 million tons, of which about 65% is lignite (Minakir and Freeze, 1994, p. 16; Rodgers, 1983, p. 201). Nearly half of the proven and con-

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ditional coal reserves are located in the Republic of Sakha (Yakutia). The largest operation Yakutugal’ produced 12 million tons of coal in 1995, mainly from Neryungri (Goskomstat Rossii, 1996a). A significant proportion of this open-cast production, 3 million tons, was exported to Japan (to Nippon Steel and Sumitomo) as a continuation of a former Soviet compensatory agreement (Mote, 1990; Shabad, 1986; Sagers, 1988). Other coal mining production in the Far East takes place in Primorskiy and Khabarovsk hays and in Amur oblast. Despite the level of coal mining activity in the Far East the region relies on the import of coal from West Siberia, and increasingly China, for its energy needs (coal-fired generators produce more than three-quarters of the RFE’s heat and power). Most recently the Far East has been suffering a severe energy shortage as economic crisis has

YVladivostok

Figure 2. Location of the major mineral and energy resources of the Russian Far East (see Table 3 for key).

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generated a circuit of non-payment whereby bankrupt enterprises and cash-short local administrations have been unable to pay electricity generators for power. They, in turn, have been unable to pay the coalmines for deliveries of coal and production has ceased, resulting in power cuts (Bradshaw and Kirkow, 1998). Oil: As with coal, the RFE’s oil reserves are largely unexplored and subject to intense speculations. Around 60 oil fields have been discovered in the RFE. The majority of them are located in Sakhalin oblast, but there are also fields in the Republic of Sakha (Yakutia) and Magadan oblast. Proven and conditional reserves have been estimated at around 330 million tons, and hypothetical reserves have been estimated at up to 8200 million tons (Khartukov, 1994). Despite the existence of these reserves oil production in the RFE is modest and is concentrated almost entirely in northern Sakhalin and in the Vilyui river basin in Sakha-Yakutia. Oil production has been falling since the mid-1980s and the RFE faces a chronic shortage of both crude oil and oil products. In I985 the Far East prodticed 2.6 million tons of crude oil, by 1991 this total had fallen to 1.9 million tons, and in 1996 total RFE crude production was only 1.7 million tons (Minakir, 1995, p. 405 and Sakhalin Oil and Gas, 1997). The region’s two main refineries (at Komsomol’sk-na-Amur and Khabarovsk) supply less that half the RFE’s needs and the region relies on the import of oil from West Siberia. Current exploration and development is focused on the Sakhalin shelf, it is hoped that offshore oil and gas production will be piped to the mainland, thus solving the region’s energy problems. Gas: Gas production is seen to be vital to the development of the RFE economy and has progressed at a faster rate than oil development. The proven and conditional natural gas reserves of the RFE have been estimated at around 1,600 billion cubic metres and hypothetical reserves have been estimated at over 24,000 billion m3 (Khartukov, 1994). Gas reserves are also concentrated in Sakhalin oblast and the Republic of Sakha (Yakutia). There are more than 90 gas fields in the RFE, of which 30 are in Sakha-Yakutia and 55 are in Sakhalin oblast. There are also gas fields in Kamchatka and Magadan oblasts and Khabarovsk bay. The Republic of Sakha (Yakutia) produced 1624 million m3 of natural gas in 1996 and Sakhalin oblast produced 1782 million m3

(Sakhalin Oil and Gas, 1997). Natural gas in Sakha-Yakutia and Sakhalin is used for domestic supply (but not on Sakhalin itself) and there are ambitious plans to pipe natural gas to South Korea, Japan and China. In addition the development programme for the Sakhalin oil and gas projects (known as SakhaIinl and Sakhalin 2) envisage the construction of an LNG export terminal in the south of Sakhalin Island. Timber

Forests occupy almost half the land surface of the RFE (280.7 million ha). The largest forests are found in the Republic of Sakha (Yakutia), Khabarovsk and Primorskiy krays and Amur oblast, and many of them (40%) are mountainous (Barr and Braden, 1988; Barr, 1990). The greatest concentration of trees is found in the south and east. In more northern regions the most common trees are larch (61%), birch (7%) and spruce (6%). However, in southern woodlands there are also more valuable cedar, oak and ash. The forests of the RFE are not particularly dense. The average for the RFE as a whole is o,nly 76 m3/ha, although in southern cedar and broad-leaved forests the density can reach 220 m3/ha. Past exploitation of cedar forests means that less than 3.5 million ha remain, and many of these woodlands have been awarded special protective status. Furthermore, the forests contain many mature trees and annual growth rates are not very large. Even in the south, timber growth only averages about 1.5 m3/ha per annum (Minakir and Freeze, 1994). Timber production has fallen dramatically since the mid-1980s (in 1993 the Far East produced less than half the volume of timber felled in 1985) and inefficient management techniques and clear-cutting have caused environmental problems (Barr and Braden, 1988). Tree conservation is important for preserving the fragile environment of the boreal forest and for protecting river and soil systems. The forests are also the traditional homes of indigenous peoples, such as the Udege in the upper Bikin river basin (Vakhtin, 1992).

Problems faced by Far East resource industries Estimates of the proven, conditional and hypothetical reserves of Far East resources can support a false view of the potential for regional develop-

Resource-based development in the Russian Far East: problems and prospects ment. There are fundamental problems with resource exploitation in the Far East, many of which have intensified with the transitional recession that has hit the region following the collapse of the USSR (Kovrigin, 1997). Resource production in the Far East faces problems because of the hostile environment, ageing equipment, a chronic shortage of capital, poor transport, inadequate infrastructure, inefficient management practices and labour disputes. On top of this, Soviet collapse has also changed the conditions (social, political and economic) that surround resource development in Russia. This means that reserves that were seen as ‘proven/current’ under the Soviet planning system are now no longer ‘profitable’ to extract. Enterprises exploiting the different resource types, analysed above, therefore face many difficulties in the post-Soviet Far East. Structural change

In the Soviet period, for strategic reasons, mineral production was highly subsidised, allowing production to take place in remote and costly northern locations. Under the Soviet system, mining enterprises received state-funded credits at the beginning of each year, which were repaid after the mining season ended. These credits allowed the repair and upgrading of mining equipment in time for the new season. However, following the collapse of the USSR, there has been a consistent shortfall in the issuing of credits to mining enterprises. Moreover, since 1991, enterprises have faced an even greater ‘fiscal squeeze’ as energy prices, transport tariffs and tax rates have all soared. The stabilisation of the Rouble has also reduced cost advantages that were the result of the weakness of the Rouble relative to the US$. These factors have forced something of a restructuring of economic activity in the gold mining industry, for example. In the Soviet period gold production was carried out by large state-run organisations, which took orders directly from ministries in Moscow (Kaser, 1983). One of the most important parts of these pyramid-like organisations was the ore dressing kombines (GOKs). These kombines supported whole mining towns and were responsible for complete mining operations. Associated with GOKs, but not controlled by them, were independent prospecting and mining teams (artels). They worked outside of the GOK system, operating relatively freely and exploiting smaller deposits. Their overall share of total Soviet Far East

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gold production in the early 1980s was only around one-third. With the end of central planning, the GOKs have been crippled by debt crises and have struggled to meet their social costs, while the smaller and ‘leaner’ artels have dramatically increased their share of production, accounting for more than half (51%) of the gold produced in 1995 (RFE, 1996). Post-Soviet reforms have also caused difficulties for other mining industries. There have been problems with maintaining the level of output of tin, for example, because of the way the Novosibirsk tin smelting plant (Russia’s largest) was privatised in 1992. The plant’s privatisation was declared illegal in 1993 because it had underestimated the value of its capital stock. But problems were mainly caused by the changes the plant made to the way that it paid mining enterprises for the supply of tin concentrate. Instead of paying mining enterprises in cash, the plant returned the finished metal product to their suppliers (less 20%) for them to market directly themselves. Yet the mining enterprises calculated that smelting actually accounted for less that 10% of the value-added (Levine and Bond, 1994). Their 10% loss coupled with the increase in transport tariffs for the journey to Novosibirsk led to increasing debt and a fall in tin production in the Far East. Moreover, this kind of problem is indicative of the disintegration of economic linkages that has occurred since 1991 and that has affected industrial production in Russia more generally (Bradshaw, 1993; Sutherland and Hanson, 1996). Environmental

problems

On top of the many commercial problems, the Far East’s resource industries face strong environmental limitations on production (Strand, 1995; Newell and Wilson, 1996). In terms of the timber industry, for example, environmental problems have resulted because Far East forests tend to be mountainous, remote and prone to fires, and because logging generally takes place in a manner that pays very little attention to environmental considerations. In the Soviet period, planners saw little reason for conservation or for managing timber production efficiently. Unfortunately, poor environmental management has continued since 1991, although it is practised by different institutions. In 1993 and 1994, for example, international attention was focused on the Svetlaya Russian-South Korean joint venture. The Korean industrial conglomerate

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Hyundai began operation of its joint venture with the Soviet organisation Primorsklesprom in 1991. The original plan was to harvest one million cubic metres of timber per year for export to Japan and the total investment was reported to be 70 million US$ (Russia in Asia, 1993). However, the project was highlighted by local and international environmental groups (including Greenpeace) because of the large scale clear-cutting, the absence of any replanting and the failure by Hyundai to invest in local community facilities (schools, health centres and transport infrastructure). Hyundai’s plans were also opposed by the Udege minority who inhabit the Upper B&in River Basin in Primorskiy buy and who successfully defended their right to ‘traditional nature use’ in the Russian supreme court (Shnirelman, 1993; Russian Economic Trends, 1995a). In 1995, after several years of wrangling over licenses and taxes with local administrations, the joint venture was producing less than one-third of the timber originally projected (Russian Economic Trends, 1995b). Now environmental groups are turning their attention to the oil and gas projects offshore of Sakhalin. Friends of the Earth International protested at the EBRD’s decision to finance the Sakhalin 2 project on the grounds that the environmental impact statement was inadequate and that insufficient measures had been taken to insure community participation. Disputes over the ownership of natural resources: the Republic of Sakha (yakutia) The issue of the ownership of natural resources in

Russia has been dealt with by various, often contradictory, pieces of legislation passed at the local, regional and federal levels. In the first instance, many of the republics of the Russian Federation have declared their ownership of the natural resources located in their territory. The Republic of Sakha (Yakutia), for example, declared its ‘sovereignty’ on 27 September 1990 after being dissatisfied with the progress on a new union treaty for the USSR. The declaration of sovereignty formed the basis of the republic’s post-Soviet constitution, established in April 1992, which stated that the natural resources located in the republic are the ‘inalienable property’ of the people of the republic (Article 5). This right was also a key part of a bilateral treaty signed between the republic and the Russian Federation in ‘1995. This bilateral agreement, which is only one of several signed between

the Russian Federation and constituent regions and republics, established specific principles in relation to the ownership and control of different natural resources in the Republic of Sakha (Yakutia). Most importantly, it established the principle of the joint control of natural resources by both the federal and republican governments (Respublika Sakha, 1995). According to the agreement, 26% of the diamonds and 30% of the gold mined in the republic will be retained by Sakha-Yakutia, allowing it to develop its own processing industries and to build up capital reserves for important infrastructure projects (Moskovskie Novosti, 1995). The 1992 Law on Mineral Deposits was designed to provide a comprehensive legal framework for the exploration and development of mineral resources in Russia. The law made significant concessions to the regions of Russia and established a procedure for the allocation of special licences (their sale through tenders and auctions) (Kryukov, 1995). The law also sought to establish systems for payment (to regional and federal budgets) and for foreign investment. in practice, however, tne law failed to establish clear and consistent rules for the development of natural resources. Details varied from region to region and project to project, and the law was amended in 1995. In both the 1992 Federal Treaty and the 1993 Russian Constitution the question of the ownership of natural resources was left as coming under the ‘joint jurisdiction’ of both the central government and the units of the Russian Federation (Rossiiskaya Gazeta, 1993). On top of this, four republics (Chechnya, Tatarstan, Bashkortostan and SakhaYakutia) refused to sign the Federal Treaty as written. Bashkortostan and Sakha-Yakutia insisted on additional protocols before signing, Tatarstan eventually signed a bilateral treaty in 1995 and Chechnya refused to sign any agreement with Russia. Article 1 of the Sakha-Yakutia protocol on ‘Mutual relations between the governments of the Russian Federation and Sakha (Yakutia)’ agreed that: The sides [Sakha-Yakutia and the Russian Federation] affirm that the land, its minerals, waters, forests, natural environment, and other natural resources on the territory of the Republic of Sakha (Yakutia) are the property of the republic and inalienable property of the peoples of the Republic of Sakha (Yakutia) (Nikolaev, 1994, p. 96).

Resource-based development in the Russian Far East: problems and prospects Negotiations between the Republic of Sakha (Yakutia), the only republic in the Far East, and Moscow over the ownership and control of natural resources has been particularly intense. This is largely due to the tremendous resource wealth of the republic, but also because the development of its most important resource, diamonds, involves a third party in negotiations-the De Beers international diamond cartel (Kempton and Levine, 1995). Negotiations between Sakha-Yakutia and the Russian Federation, over the 1992 Federal Treaty and the 1995 Bilateral Agreement, have secured for the republic the right to utilise a significant share of its diamond and gold reserves for its own benefit. Legislative problems: SaWlalin and product sharing agreements (PSA)

Other disputes have arisen between central and regional administrations over agreeing on an appropriate legislative procedure for the development of Far East resources. This has led to legal problems that have delayed foreign investment in oil and gas projects in Sakhalin oblast, which are the largest in the Far East (estimated at 25 billion US$). Foreign interest in oil and gas development in the RFE has been concentrated on the Sakhalin shelf, even though this is a location with a long and troubled history of proposed projects (for details see Paik, 1995; Sagers, 1995 and Bradshaw, 1997). Because of the lack of an established legal framework for resource development projects in post-Soviet Russia, the Sakhalin oil and gas projects have faced problems and uncertainty. Although technical and economic feasibility studies have been carried out for both the Sakhalin-1 and -2 projects, further development studies were delayed by both centreregion disputes and legislative procedures. In the case of the Sakhalin-2 project, the Sakhalin oblast administration were unhappy with the award of the tender and argued that other foreign companies should also be consulted in order to see whether their plans would benefit the people of the island more. The projects have also faced difficulties because of the lack of Russian legislation on Product Sharing Agreements (PSAs) which remain stalled in the Duma. (On the establishment of PSA legislation in Russia, see Nelson, 1996). The PSAs governing Sakhalin-1 and -2 have already come into conflict with current Russian taxation laws and customs regimes. Despite these limitations, the

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establishment of PSA legislation has facilitated further progress on the Sakhalin projects. Sakhalin3 is now being developed and Sakhalin-4 and -5 may soon be awarded. However, the kind of multibillion dollar investments required at the production stage of Sakhalin-1 and -2 will require further amendments to the PSA and related legislation. Sakhalin is, therefore, very much the test case for resource-based development in the RFE and for Russia as a whole.

Conclusions: resource frontier for the Pacific century? This paper has presented a critical analysis of the problems and prospects for resource-based development in the RFE. Our analysis casts doubt on the conventional wisdom that the RFE has a substantial resource base that can provide the basis for economic recovery and sustained economic growth. Firstly, the current extent of the region’s resource base is questionable and requires reassessment. Secondly, international experience suggests that a resource-based development strategy by itself may not deliver the economic benefits hoped for. Thirdly, resource-based projects in the RFE face numerous problems that are serving to slow the pace of development and put-off potential investors, both foreign and domestic. Finally, the current economic situation in Asia may serve to dampen demand for resources and investor interest in resource development projects. The collapse of the Soviet system and post-Soviet transitional recession has substantially constrained the Far East’s current resource base. Resources that were developed during the Soviet period are no longer viable in the emerging Russian market economy. In more remote regions resource production is becoming conditional upon higher domestic and world prices or reduced production costs. However, domestic enterprises lack the capital necessary to modemise their’operations to remain profitable. At the same time, increasing energy and transportation costs are further reducing their profitability. Elsewhere, conditional resources are likely to remain so because of the problems faced by potential investors, both domestic and foreign. Thus, the resource base of the region is likely to be confined to the more accessible mineral and energy resources and the forestry and fishing industries.

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Given the questionable nature of the region’s resource base, the wisdom of a resource-based economic development strategy may be a nonissue. However, the region has little alternative than to develop its natural resource potential. International experience suggests that a more comprehensive economic development strategy is required to manage the potential benefits of resource development. Put another way, revenues generated by resource development should be used in such a way as to diversify the region’s economy. Only such an approach can provide the basis for sustainable economic development. Planners and politicians in Moscow and in the Far East are well aware of the need to diversify and the capture greater value-added from the exploitation of their resource wealth, but at present they lack the capital to fund the federal development programme. The ultimate irony may be that the successful marketisation of the economy will make it more difficult implement an economic strategy aimed at diversification and sustainability. Individual enterprises will be more concerned with their own short-term profitability than with the long-term economic viability of the region as a whole. At present, in the absence of substantial domestic investment, the RFE finds itself increasingly held hostage to the whims of foreign investors and the international commodity markets. As a result the region is in danger of a transition from being a peripheral region in Russia (and previously the Soviet Union) to being a peripheral regional in the global economy. The arrival of foreign capital seems essential if the region is to even start to benefit from its supposed natural resource wealth. Ultimately increased economic interaction with Northeast Asia may free the region from its dependence upon Moscow; however, the price for that independence maybe a loss of control to the multinationals and international commodity markets. Equally, reliance on resource exports to Northeast Asia now ties the region to an uncertain economic future. To many in the Russian Far East it must seem a case of ‘out of the frying pan into the fire’. References Amy, R.M., 1985. Multinational resource corporations, nationalisation and diminished viability Caribbean plantations, mines and oilfields in the seventies. In: DrakakisSmith. D., Watts, H. (Eds), Multinational Corporations and the Third World. Croom Helm, London, pp. 160-187.

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