Russian Arctic awaiting investments

Russia taking first steps in development of the Arctic zone. 


Russia taking first steps in development of the Arctic zone. 

Last autumn the Russian Government approved large-scale program of social and economic development of the Russian Arctic Zone. It is based on the Arctic Strategy of Russian Federation signed by the President in February last year and 2014 should become the first year of this plan execution. The text of this program is not officially published but it is known that it contains 60 important measures. The specially established working group coincidentally also consisted of 60 experts will once a year make a special report summed up the results of realization of the Arctic Strategy and present it to the President of Russia. The first report was promised to be prepared this week. 

New breath for the High North
As it follows from the volumetric text of the Strategy the coming 7 years period is going to become a turning point for the area of 9 million sq. km. and its 2, 5 million inhabitants. The bold and ambitious program calls for realization of a number of huge investments projects in the Arctic Zone. Its authors want to cover the Arctic areas with the global systems of transport, energy, information and communication networks, to establish mechanisms of environmental safety and monitoring, to secure military safety and protection of the state border in the region. The Arctic Strategy of Russia romantically describes how this huge territory will be pierced by new transport corridors. New oil and gas provinces and hydrocarbon offshore fields will be developed, mining complex, fishing industry, and agricultural sector will be innovatively modernized according to the Strategy. Old sea ports will be renovated and several new and modern ports will be built along the Northern Sea Route. Common telecommunication network will tie all coastal settlements into one “Electronic Arctic”. Significant part of the document is devoted to intensive development of international cooperation with neighboring countries in the Arctic which is seen as one of the driving forces of the program realization. 

List of the lucky
The borders of the Arctic Zone of Russia are not yet legally defined. This is to be soon approved by the deputies of the State Duma. It was expected that the law on the borders of the Arctic zone will be adopted before the end of the last year but Russian parliamentarians decided to postpone it to the next session. As for today the Arctic zone of Russia includes Murmansk oblast, Nenets autonomous okrug, Yamalo-Nenets autonomous okrug,  Chukotsky autonomous okrug and part of municipalities of Arkhangelsk oblast, Krasnoyarsky krai and Sakha republic. Probably the list of the arctic territories is not final. Komi republic for example is arguing to include polar city Vorkuta to this sacramental list. 

Vorkuta inhabitants have something to fight for. The state program envisages massive state investments amounting 623,3 billion rubles (€13,8 billion).  Total volume of promised investments in the Arctic regions together with private allocations estimates 1,793 billion rubles (almost €45 billion) during coming 7 years. This sum for example exceeds all Russian investments for preparation of Sochi Olympics which are today so hardly criticized for wastefulness. 

Time to count
Russia will be very rather difficult to find this money. The federal budget recently experiences hard challenges. Its deficit made 310 billion rubles last year. Current year is going to be even more difficult. Today it is not quite clear where Russian government expects to find the money for realization of such an ambitious program. There are no funding for this program even mentioned in the federal budget-2014 as well as in the budgets of 2015 and 2016. Theoretically the arctic projects can be financed from the Russian National Wealth Funds split into Reserve Fund and the National Wealth Fund. But it is unlikely that in the nearest future their resources will come to the Arctic areas. The amount of the Reserve Fund today makes 2 859 billion rubles (87,38 billion USD) or 4,3% of National GDP. But according to the budget rule its amount should first reach the level of 7% of National GDP to be legally allowed for investments in infrastructural projects.  In summer last year the Government came up with the initiative of broader use of resources of another part of national reserves - the National Wealth Fund (88,6 billion USD) for financing the infrastructural projects. But arctic issues today are not among the few offered to be funded from this fund. Instead the President suggested to use the National Wealth Fund for funding the central beltway around Moscow and modernization of Trans-Siberian railroad. 

If for example the federal government will decide to unpack the Fund of National Welfare to invest in realization of the Arctic Strategy it may estimate almost 1/3 of its amount. 

One more source of investments in realization of the Arctic development program could be the Russian Direct Investments Fund established by Russian Government in 2011 with a capital of $10 billion in order to make investments in equity in the Russian economy. The Fund is oriented to high-yield investments to be made together with global co-investors. In this context an ability of this fund to make investments in heavy infrastructural and social projects in the Arctic which do not promise fast returns will most likely be limited. In addition the Ministry of finances recently came up with the initiative to make changes in the rules of investing the projects by RDIF which can make it unattractive for global investors. 

Separate bill, please!
The Russian authorities obviously expect that the major part of investments in the Arctic program will be made by the biggest corporations, first of all state owned Gazprom and Rosneft who have most extensive plans and ambitions connected to this area. Both majors have huge plans of development and so far do not intend to skimp in their investments program even despite of the recent governmental decision to freeze tariffs of natural monopolies in 2014. Of course their plans are not only connected to the Arctic. The investments program of Gazprom in 2013 amounted a bit more than 1 trillion rubles (app. $29 billion)  - 30% more than it was basically planned. The main target areas there are the projects on Yamal peninsula and South Stream gas pipeline. Complex development of Yamal gas province will cost Gazprom $170 billion till the year 2030. The cost of South Stream is estimated in $34 billion. This year the investments budget of Gazprom is planned as 800 billion rubles (app. $23 billion). 

The investments program of another Russian major Rosneft made $15,4 billion in 2012. The company’s overall investments till 2022 should make 9,5 trillion rubles (over $270 billion) and 4/5 of this amount will go to the oil fields development on the Arctic shelf and in Eastern Siberia. 

The Federal Ministry of economic development however expects that during the next three years the investments programs of two Russian gas and oil monopolies will be sufficiently cut. Will in this situation the oil and gas majors put up in the infrastructural, social and environmental projects in the Arctic having own huge investments plans? They will hardly do it voluntarily but it is well-known that in Russia the most decisive argument is the word of President which is able to trigger off even most sluggish state and business structures. 

21st century belongs to Siberia
The President surprisingly did not say a word about Arctic program in his annual address to the Federal Council in December last year although the Arctic was one of his favorite topics here, there and everywhere. But in his program speech to Russian parliamentarians Vladimir Putin noted a strong necessity to realize a program of development of Siberia and Far East and stressed that developing of these vast territories should become a priority of Russia for the whole 21 century. The Government by the way has already adopted the program of development of Siberia and Far East for 2014-2025 and its cost estimated in 10 trillion rubles ($285 billion). Many experts however pointed out that this program is rather unrealistic and their expectations seem to come true. 

Nevertheless when it comes to the federal mega-projects of that kind the geopolitical reflections always prevail over economic values and from this point of view Siberia and Far East could in the eyes of the federal authorities seem even more vulnerable to outer and inner challenges than the Arctic. According to statistics for example the population of eastern territories of Russia is decreasing significantly faster that the northern European areas and the government fears that someday it may be gradually substituted by migrants from the East.  

National security on the forefront
In the meantime the projects related to the Arctic are rather suspended than being developed. Recently the Ministry of finances has actually stopped the program “World Ocean” that supported research studies connected to Arctic and Antarctic. The budget-2014 envisages only financing of ice drifting stations but the volume of support as it was reported makes only 1/5 of necessary amount. 

Even such rich Russian region as Yamal had to refuse from some of its ambitious projects of 2014. The regional administration of Yamalo-Nenets okrug decided to stop the project of construction of Arctic scientific innovation complex “Arctic-Expo” in Salekhard.  Subsequently Yamal will not hold the large exhibition “Expo-Arctica” which was planned for 2015. 

Russia experiences more and more serious challenges connected to deficit of investments resources and currently the Russian arctic region can hardly expect promised investments from the Strategy of Arctic zone development. The volume of investments in Russia dropped down by almost 1,5% for 9 months of 2013. Withal the fall of investments in the areas of the Arctic zone was much more significant than average in the country. For example in Chukotka the volume of investments dropped down by nearly 20%, in Sakha republic  - by almost 14%, in Yamalo-Nenets okrug – by 15%, Arkhangelsk oblast – by over 10%. 

Despite of obvious lack of investments for infrastructural projects Russian government is extremely active in improvement of the arctic borders of the country and increasing of military presence in the region. Vladimir Putin ordered the Ministry of Defense to start deployment of military infrastructure in the Arctic. Sergey Shoigu, the Minister of Defense announced that Russian military forces return to Subarctic region after the remarkable arrival of a task group of 10 warships to Kotelny Island of Novosibirsk archipelago in September 2013. The task group was headed by the flagship of the Northern Fleet “Peter the Great”. 

Another group of military research vessels has reached the Rudolf Island of Franz-Jozef Land to make hydrographic studies in the area. Shoigu also reported that formation of military compound in the Arctic will be completed in 2014. In autumn 2013 there was started a reconstruction of military airfield “Temp” on Kotelny. “Temp” airfield is expected to become a main logistic hub for the Russia’s Air Forces in the eastern part of the Arctic and after modernization will be able to receive heavy cargo planes like AN-72 and AN-74. Russia also starts reactivation of the airfield on Graham Bell Island in Franz-Jozef archipelago which in the future will likely become a base for MIG-31supersonic interceptors. There are also plans to reactivate the airfields in Tiksi, Narjan-Mar, Alikel, Amderma, Anadyr, Rogachevo and Nagurskaya. Last year the Far Eastern Military High School in Blagoveschensk opened a new specialty aimed at training the officers who will command the subdivisions in severe arctic conditions. The first group amounts 35 cadets. The Airborne Troops Commander General-Lieutenant Vladimir Shamanov followed the tendency and announced that the year 2014 will be the first when the airborne forces will make wide scale exercises in the harsh conditions of the Arctic region.  

The issues of national security by no accident stand at the forefront of Russian arctic policy. Russia has 22 thousand kilometers of weakly protected state borders in the High North on a background of globally growing interest to this region and obvious deficit of own resources for its complex development. This explains why Russian government is now more concerned by demonstrative delineation of outer contours of own national interests and then practical execution of long-term tasks connected to social and economic development of Russian Arctic.