Last month’s Eastern Economic Forum in Vladivostok made headlines globally, but Vladimir Putin’s annual occasion to brag about his achievements in the Russian Far East was doubly newsworthy this year: it was timed to coincide with the massive and spectacular Vostok 2018 military exercises.

In the conference hall, Putin surprised Japanese Prime Minister Shinzo Abe with a sudden proposal for a World War II peace treaty, but also found time to laud the importance of Russia’s Pacific rim territory. “The new role of the Far East as a locomotive of the domestic economy, innovations, and culture in the coming years will gain momentum”, he said.

Yet just days later, Putin’s candidates failed to win gubernatorial elections in the two largest administrative regions of the Far Eastern Federal District: the Maritime Territory and Khabarovsk Region.

This sends a clear signal to the Kremlin.

Despite massive political attention, state subsidies and high profile investments including spaceports and shipyards, Moscow has failed to effectively address multiple socio-economic problems affecting the region.

The Russian Far East lies in close proximity to economic powerhouses China, Japan and South Korea, but continues to suffer population drain, high levels of corruption, poor infrastructure and a standard of living that is among the lowest in the country.

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Moscow’s men humiliated in surprise electoral defeats

“I think everything will be fine,” is what Putin told his candidate Andrey Tarasenko, as he prepared to run against Communist Andrey Ishchenko for the gubernatorial post of the Maritime Territory, the district’s largest region.

Things turned out differently. With 95% of the vote counted, Ischenko was clearly ahead. Tarasenko came out the winner in the final result, but only due to to a display of election rigging so blatant that it was unacceptable even by Russian standards. The Central Election Committee was left with no choice but to invalidate the election.

In Khabarovsk, an even more straightforward failure awaited United Russia candidate and sitting Governor Vyacheslav Shport. He lost to Sergei Frugal of the Liberal Democrats.

Communists and Liberal Democrats are the two main constituents of the “systemic opposition” which give Russia the appearance of a functioning democracy without posing a real threat to the hegemonic rule of the pro-Putin United Russia party.

The fact that Putin’s candidates lost against representatives of the systemic opposition is interpreted by many as a consequence of the highly unpopular pension reform promoted by United Russia.

But others warn that grievances about the rise of the retirement age are adding up to a pre-existing, much deeper discontent about how Moscow has been administering the country’s remotest region.

Big promises, failed investments, outdated policies

Putin claimed that the development of the Far East should be among Russia’s premier priorities in the 21st century and a major component of Russia’s “Pivot to East” at a time of deteriorating relations with the West. Putin has pursued this goal by setting up tax-free zones and free ports, while compelling state corporations to invest in the region.

However, many Kremlin-sponsored infrastructure projects have failed to meet expectations. Vladivostok airport is operating at only 60% of capacity. The US$4 billion Vostochny Spaceport has realized only three launches since opening in 2016. The ambitious Zvezda Shipyard, built to boost the competitiveness of Russia’s shipbuilding industry, had received orders for only fourteen vessels by 2017.

The impact these flagship projects have had on the Russian Far East’s share of the country’s total GDP has been minimal. In 2016, its share was 5,7% , which is barely changed since the early 2000s, when it was 5.4%.

The main obstacle to development is the critical scarcity of human capital. Though making up 36% of  Russia’s vast territory, the Far East is the country’s most sparsely populated region. Low salaries, high living costs and lack of opportunities are the main reasons why people have been steadily leaving the Russian Far East since the collapse of the Soviet Union. According to Rostata, between 1991 and 2010, the region lost 1.8 million people, or 22% of its population. In the last eight years, the exodus continued, albeit at a slower pace, lowering the population from 6.44 million down to 6.16 million.

To stimulate migration, a new law was introduced in 2016, which grants one hectare of land to every citizen moving to the Far East. But as pointed out by Natalia Zubarevich, professor of socio economic geography at Moscow State University, the “Far Eastern Hectare” law might have been effective in early 20th century Russia, when 85% of the population were farmers. But today, 74% of Russians are urbanites, and the free land gift looks to be a century out of date.

Add the issues of poor infrastructure, particularly a bad road network, and it is no surprise that the policy has been unsuccessful in increasing migration: as of now, two-thirds of the 122,000 land requests were made by existing residents of the Far East.

According to Vladislav Inozemtsev, Director at the Center for Post-Industrial Society Studies, the economic backwardness of the Far East is explained by its historic isolation from the rest of Russia. For most of the 20th century it was a heavily militarized “geopolitical outpost.” It still serves as a theater for power-projection, as evidenced by last month’s Vostok military drills.

As Minister for the Economic Development of the Far East Aleksandr Kozlov recently pointed out, geopolitical goals are not sustainable without real economic growth: “The development of the Far East during a certain – probably long period – will be determined primarily by geostrategic considerations, but for full geopolitics, a full-fledged geo-economy is needed”.

Moscow’s goals of attracting substantial foreign investments from Russia’s eastern neighbors have mostly failed. Due to high levels of risk, companies are reluctant to invest in the Russian Far East, except in the case of large-scale government-sponsored projects.

“So far, successful risk management was achieved exclusively in the case of investment projects carried out by major companies with the Kremlin’s political support,” Kozlov admitted. “This is clearly not enough for full-fledged economic growth, especially given the need to develop medium-sized business.”

Over-reliance on natural resources,  minimal diversification

It seems evident that the socio-economic problems of the Russian Far East mirror the structural problems affecting Russia’s economy as a whole: over-dependence on raw material exports, and a lack of diversification.

Some 60% of the industrial production of the Far East is concentrated in Sakhalin and Yakutia, the district’s only two resource-rich regions. Because of an abundance of gas and oil (as well as diamonds and coal in Yakutia), the two regions attract more than a half of the total investments directed to the region.

Meanwhile, the more heavily populated Maritime Territory and Khabarovsk Region generate only one-fourth of the overall industrial production.

While similar problems are shared by other Russian regions, they are particularly problematic in the Far East, given the already strained socio-economic situation. This explains the unexpected results of the last gubernatorial elections.

“It is becoming clear again what was forgotten in the 2000s: a raw materials economy cannot ensure the well-being of a country of the scale of Russia”, said Inozemtsev. “The resulting revenue is insufficient to generate top-down growth, but also kills the chances for development from below.”