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Why Siberia could be the secret economic weapon of Russia
Material posted: Publication date: 24-08-2013

Infamous during the tsarist and the Stalinist era, as a place of exile from which no one returns, Siberia is now being touted by government as a storage room for future growth. It is in the East and not the West, according to the Russian government, lies the potential for the development of the country.

Rich in minerals and metals of Siberia has become the center of oil, diamonds, gas and coal. In April 2013, Russia announced a billion-dollar investment in the region. Prime Minister of Russia Dmitry Medvedev instructed the government to develop "the Program of Development of the Far East" for a total of $ 16 billion for the development of Siberia and its environs by 2018. Medvedev said that this project is a priority for Russia.
"The funds invested in Siberia will pay off," said Medvedev during his visit to the region in April, predicting the return of trillions of rubles of profit in the Russian economy.

As stated in the April report by RIA Novosti, the Russian government will concentrate the work on increase of the capacity of the TRANS-Siberian railway, the development of regional aviation, airports and seaports;and construction of roads and the development of already established energy sector.

Although the government openly links its planay to invest in Siberia with the growth rate of China, Russian energy companies are building pipelines to China have already benefited from the program's potential. In March, local in China's state energy group CNPC signed a number of billion-dollar deals with Russian oil companies Rosneft and Gazprom amid plans for the development of pipelines and infrastructure to transport resources from Siberia to China.

Artem Volynets, CEO of En + Group, mining and energy holding, controlled by Oleg Deripaska, told CNBC that the proximity of Siberia to the growing Asian markets has become the basis for Russian investments into the region.

"Eastern Siberia is located in a great location close to China and Asia, which become the center of economic activity. If you look at the map - flight from Irkutsk, center of East Siberia, to Beijing takes only 2 hours," he told CNBC.

"Proximity to Asia and wealth of resources in Eastern Siberia, will allow Russia to benefit from growing demand in Asian countries and to ensure economic growth in the region," he added.

Currently China imports main minralnoy resources from Australia, Brazil and South Africa. But the Siberian resources are in greater proximity - said Volynets. Transportation from Brazil to Shanghai by sea takes 35 days, from South Africa - 20 days, and from Australia about 14 days, while from the Vanino port in Siberia it takes only 4 days.

"Transporting by rail from Eastern Siberia across Mongolia will take only one day. At the time, as oil prices rise higher and higher, the cost of transporting resources will increase and this will make the Siberian resources more competitive in the long term," he said.

"We believe that now is the time [for the development of Siberia], but the government must act rather quickly," he said.

However, among experts and investors, there is no consensus about how feasible investment in the region.

Lilit Gevorgyan, analyst for economic and financial research and development firm IHS Global Insight said that the initiative of the government of Russia lies only in the marketing of raw materials in Asian markets.
"It's not news that Siberia is desperately in need of investment and incentives for economic growth. Welfare has always been important for Moscow, but the problem for a long time is the lack of a strategy to turn the vast and largely inhospitable but rich in natural resources of the earth from simple raw material supplier to a key player in the economy of Russia and further in the Asia-Pacific region ", said Gevorgyan.

She said that the driving force was the search for Russia's key strategic and economic role in the Asia-Pacific region as it seeks to diversify its energy markets away from Europe and its financial problems.

"Russia seeks to develop not only as European, but as an Asian country. The Eurozone's debt crisis, as well as the changing situation in the energy markets with the advent of shale gas has prompted the Russian authorities to take a more active role in diversifying energy exports to other markets, in particular Asian. The construction of the oil pipeline Eastern Siberia - the Pacific ocean is already helping Russia to achieve the goal of energy diversification of export routes, " she added.

Neil shearing, chief expert on emerging markets at Capital Economics, which deals with macro-ekonomicheskii research, told CNBC that investment in Siberia reveal a growing structural problem that Russia needs to solve urgently.

"Investing in Siberia is just the tip of the iceberg in relation to the Russian structural problems. Russia's economy has slowed significantly over the last twelve months, and its growth was based on high oil prices. The big problem now is that there are more structural problems, and the country needs to find other opportunities for growth."

Siberia contains a little less than 80 per cent of oil deposits in Russia according to the government. In Siberia there are about 85 percent of Russia's natural gas, 80 percent of coal, and similar quantities of precious metals and diamonds. It contains slightly more than 40 percent of the timber resources of the country. This makes it a favourable place for exploitation of these and other resources.

"True, Siberia has more natural wealth than any other place in the world. But it also has obvious shortcomings, such as cold and remoteness," Clifford Gaddy, an economist at the American research center Brookings Institution told CNBC.

He highlighted the particular problem with which stalkivaetsya the Russian government: the reduction of the workforce. Vast territory of Siberia is home to just 6 million people of the total population of Russia is 142 million. Gevorgyan of IHS Global has agreed that, without the availability of sufficient labour force mighty plans for economic development are unlikely to materialize.

"The most serious problem of Russia in the next 20-30 years is to reduce the size of the workforce. In these circumstances, it makes no sense to pursue policies to attract more people to Siberia - it weakens the national economy," he told CNBC.

The author of the book "the Siberian curse", Gaddi considers it unlikely that the industry of Siberia will be extended further than resource extraction, and firmly believe that the plans to develop the region were foolish.
"Putin wants to spend tens and hundreds of billions of dollars to subsidize manufacturing, high tech, or build infrastructure or something in Siberia contrary to common sense and to the detriment of national economic welfare of Russia", said gadde.

The profitability of the project will depend on the will (and resources) of government to subsidize the East of the country, he said Gaddi. This issue is still controversial, given that the source of funding for the development of Siberia has not been found yet. Medvedev has proposed to use the funds of the Pension Fund of Russia to Finance the program, which also provides for the use of credit and private investment and public financing, "the Russian state will have to continue to be strong enough to direct resources for these purposes. This leads to the question of the strength of the Putin regime and / or the likelihood that the next government will continue the former line of the distribution of profits from the sale of oil and gas (sources of wealth) to subsidize Siberia, " said Gaddi.

The original article: http://www.cnbc.com/id/100823089

The translation was prepared by Sergey Sokolov


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