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Russia's Development of Siberia: What is to be Done?

Russian Prime Minister Dmitry Medvedev at a coal pit in Siberia

Russians are famous for their “eternal questions.” “Who is to blame?” and “What is to be done?” are the best-known. Another of the timeless quandaries seems to be, “What is the future of Siberia?” In 2003 Fiona Hill and I wrote a book about the legacy of Soviet-era development of Siberia for today’s Russia, The Siberian Curse: How Communist Planners Left Russia Out in the Cold. Ten years later, people still ask us the Siberian question. Last week I received an inquiry from a journalist who had been tasked to write about Russia’s new plans for Siberian development. My replies to a couple of her questions might be of interest.

Could Siberia be Russia's secret economic weapon?

It is interesting that you entertain the thesis that Siberia could be "Russia's secret economic weapon." My view is pretty different. It’s the same that Fiona Hill and I expressed in our book. I recently had a chance to restate it directly to a Russian audience.

This past February I was invited to Krasnoyarsk for the annual Krasnoyarsk Economic Forum. At a breakout session moderated by Russian Prime Minister Dmitry Medvedev, economist Vladislav Inozemtsev and I debated the governor of Krasnoyarsk Kray, Lev Kuznetsov, and the aluminum oligarch Oleg Deripaska, about policies for Siberian development. My basic points were as follows:

  • First, Siberia is part of Russia. That means Siberian development has to be viewed as a national problem, not a local one. Second, even though there are important noneconomic reasons - national security, culture, history - why one might prefer one or another path for Siberian development, one needs to know the economic costs and benefits. Taken together, these two points mean that the question has to be: Does this or that plan for Siberia reflect the best use of Russia’s resources for the nation’s well-being? Specifically, as far as regional policy is concerned, the general rule should be: "Locate economic activity in Siberia only if it cannot be done more efficiently (at lower cost) elsewhere."
  • The Siberian dilemma is that, while Siberia has more natural wealth than any other place in the world, it also has unequaled disadvantages of cold and remoteness. Siberia's main activity will continue to be resource extraction. (This is not the same as low-tech. Resource industries do not have to be low-tech.) Siberia does not have a comparative advantage in manufacturing. The share of manufacturing and other industry in Siberia should be relatively small. It should be businesses that primarily serve the local region. In the future, large-scale manufacturing plants should not be located to Siberia.
  • In the past, (largely in the Soviet period, although to some extent even before that) this rule of efficient economic location was violated. It may or may not have been justified for non-economic reasons. That does not matter today. Russia today is burdened with massive amounts of physical and human capital that is handicapped by location. Today, the point is to remove the handicaps if possible, and most important, avoid unnecessary ones in the future. Merely compensating for the disadvantages through subsidies, artificially low rail and electricity tariffs, and the like, is not enough. That is still costly. (Russia’s handicapped capital is the theme of my new book with Barry Ickes, Bear Traps on Russia’s Road to Modernization.)
  • The issue of Siberian development must also consider the particular problem Russia now faces with its population. Russia's most critical bottleneck in the next 20-30 years is its shrinking labor force. Under those circumstances it makes no sense to have policies intended to attract more people to Siberia. They would be less productive there than elsewhere, and that would weaken the national economy. In the future, Siberia must be developed by a different approach than in the past. Massive concentrated investments to build and support large cities was the past approach. Now, Russia needs to find ways to develop its resources with the fewest number of people possible. So-called Canadian methods — temporary stationing of work teams for resource development at the point of extraction, and so on — would be more important for Russia than Canada.

Why Russia has been late to develop its eastern territory further?

You ask why Russia has been late in developing its eastern regions. I'd say it's just the opposite: its East is far over-developed. Consider the contrast between Russia, on the one hand, and the US and Canada, on the other. In terms of relative shares of total national population and territory, Eastern Siberia and the Russian Far East are roughly 15 times more densely populated than Alaska and Canada's northern territories. Alaska has only 710,000 residents; Canada's Northwest Territory and Yukon Territory together have 79,000. Russians complain about the "depopulation" of the East. But if Eastern Siberia and the Russian Far East had followed the American and Canadian patterns, they would in total have barely 1 million residents instead of their current 15 million.

But if your focus is on Siberia as a target for international investment, then all that matters is whether these investments can be profitable for the investor. If Mr. Putin wants to defy sound economics and damage Russia’s national economic health by spending tens or hundreds of billions of dollars to subsidize manufacturing, high-tech, or build infrastructure in Siberia, it may still represent an opportunity for a business that jumps on that bandwagon. But then the profitability of the venture will depend on the continued commitment (and resources) from the government to subsidize the East. The Russian state will have to continue to be strong enough to channel resources to that end. This gets to the question of the durability of the Putin regime and/or the likelihood that any successor government will share his same commitment and ability to distribute oil and gas rents to subsidize Siberia.

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