CHINESE INVESTMENT IN ECONOMIC DEVELOPMENT OF BAIKAL REGION OF RUSSIA *

Transcription

1 Journal of Business Management and Research (JBMR) ISSN(P): ; ISSN(E): Applied Vol. 5, Issue 1, Jun 2015, TJPRC Pvt. Ltd. CHINESE INVESTMENT IN ECONOMIC DEVELOPMENT OF BAIKAL REGION OF RUSSIA * TATIANA VLADIMIROVNA KOLPAKOVA Associate Professor, Department of Oriental Studies, Transbaikal State University, Russia ABSTRACT The paper presents an analysis of the role and place of Chinese investment in the social-economic development of Baikal region of Russia. It is noted that the region is characterized by low investment attractiveness due to the following factors: high level of investment risk, corruption, bureaucratic component, high credit and tax rates, significant level of economic crime, the lack of readily achievable investment projects, low level of socio-economic development of the region. Moreover, among the subjects of Baikal region the most favorable investment climate formed in the Irkutsk region, much worse situation in the Republic of Buryatia, Transbaikal region demonstrates the lowest position. It concludes that currently the role of Chinese investment in the economic development of Baikal region is negligible, but the development of investment cooperation between China and Baikal region, the increase of Chinese investments will be crucial for its future development. KEYWORDS: Investment, Baikal Region, China, Russian-Chinese Cooperation, Investment Attraction, Social and Economic Development INTRODUCTION In modern conditions of transformation of the world order, accompanied by the intensification of the contradictions between the Russian Federation and Western partners, international competition becomes more severe. Developed countries as well as developing countries compete in the fields of natural resources, expanding markets and, of course, in attracting of financial resources. For most countries in the world one of the most urgent tasks today is to engage into the national economy foreign direct investment, as well as their effective use. Moreover, this task is included into list of strategic directions of economic policy of any modern state. Today China is one of the world leaders in attracting foreign direct investment (the second in the world after the United States, excluding investments in the Hong Kong). Effective investment policy had become one of the determining factors of unprecedented economic development of China for the past 30 years. Currently, however, in China the volume of foreign investment coming into the country is reducing, and outbound investment is growing. So at the end of September 2014, according to the Financial Times newspaper, Chinese outbound investment increased by 26 % compared to the same period in 2013, thus at the end of 2014 the figure for the first time exceeded the incoming foreign investment in China. The rapid growth of foreign investment in China over the last ten years ( billion US dollars, billion US dollars) became possible due to such factors as: the need to exchange a huge mass of accumulated dollars and * The paper was prepared as part of scientific research, held by the Council for the RF Presidential grant MK

2 34 Tatiana Vladimirovna Kolpakova Euros in tangible assets because of fears for US and European economies; direction to the internationalization of the RMB; China's desire to buy a stake in energy companies around the world to gain access to oil, gas and even coal; the struggle for markets in countries with high requirements to the level of localization of production. China's investment policy is of great interest for Russia. Firstly, we are talking about borrowing the Chinese experience in attracting foreign capital into the country, and, secondly, about increasing of Chinese investments into the Russian economy. According to UNCTAD (United Nations Conference on Trade and Development), published in «World Investment Report» 2014, the volume of direct foreign investments in Russia in was the third in the world ( billion US dollars, billion US dollars). But in 2014 this figure fell twice. For three quarters of 2014, foreign direct investment in Russia amounted to only 21.2 billion US dollars, approaching to a minimum of 2005 (18.4 billion US dollars for the first three quarters). The main negative factors of reducing the volume of foreign investments in Russia are: The general trend of decline in investment in connection with the completion of a number of major investment projects; High level of corruption and misuse of funds; The complexity of doing business due to low level of investor protection, high credit and tax rates, a great number of contradictory laws, a high level of economic crime, etc.; Anti-Russian sanctions of US and EU, which had the greatest negative effect. In these circumstances, strengthening of the Asian vector of Russian foreign policy becomes logical. Particularly important in this case is to further strengthen the strategic partnership with China, which rapidly develops and strengthens its position in the international arena. Signing in May 2014 of a number of economic agreements and memorandums outputs Russia and China into a new phase of their comprehensive strategic partnership and cooperation. However, despite the positive development of Russian-Chinese relations, cooperation in the field of investment to date is weak. This fact can be confirmed by the following figures. In the case of the optimistic scenario investment cooperation between Russia and China, by 2020 the volume of Chinese direct investment in the Russian economy will be $ 12 billion. But the estimated volume of Beijing foreign investment in 2014 was about US $ 500 billion, that is, in the case of realization of the forecast already in 2014, Russia's share in the total Chinese investment activity amounted to only 2.5 %. In addition, it is important to emphasize that more than 90 % of Chinese investment into Russia - are loans to Russian energy companies ("Rosneft", "Transneft") in exchange for the construction of the pipeline "Eastern Siberia - Pacific Ocean", while the number of large investment projects is very small. According to Chinese experts, for increase investment in Russia it is necessary to increase the transparency of economic legislation and improve the investment climate for the Chinese investment. In addition, in China they suppose that distrust of Russian companies and regional authorities to Chinese investors and a relatively small number of their attempts to attract funds from the PRC are one more cause of low investment activity in Russia. China argues that In the case of improvement of the investment climate in general, he is interested in investing projects in Russia. Thus, China intends to accelerate the pace of investment in the Russian economy. First of all, Beijing is

3 Chinese Investment in Economic Development of Baikal Region of Russia 35 interested in investing in agriculture, in the sphere of high technologies, in the production of medicines, etc. In addition, very promising for Chinese side is the creation of technology parks and industrial parks in Russia. During the general deterioration of the investment climate in Russia against the background of the sanctions imposed by the US and EU, even less optimistic is the situation in the distribution of foreign direct investment in some Russian regions. According to the ranking of investment attractiveness of Russian regions in 2014, Moscow and St. Petersburg are on the top, other 8 regions (Leningrad and Moscow region, Sakhalin and the Tyumen region, Tatarstan, Krasnoyarsk, Samara and Belgorod region) have high investment attractiveness. However, more than half of all Russian regions on their investment attractiveness occupy a position below the national average. Baikal region, which is composed of Irkutsk region, Buryatia and Transbaikal region, is one of them. In terms of strategic importance, Baikal region, as a part of the Russian-Chinese transboundary area, is of great importance for sustainable socio-economic development of Russia, to implement its geopolitical interests, national security, to attract national and transnational corporations, to promote their interests in the international arena, etc. The Baikal region has many competitive advantages which are necessary for the full progressive development: an advantageous geographical and geopolitical position; rich reserves of valuable and strategically important natural resources; unique recreational resources; favorable transport and geographical location. However, despite all the advantages, the region is characterized by an inefficient structure of the economy; low socio-economic development. The collection of all the above factors leads to very low investment attractiveness of the region. According to the rating of investment attractiveness of regions 2013, Irkutsk region is rated 2B ("average potential - moderate risk"). Among the subjects of the Russian Federation on investment risk region occupies 29th place, the investment potential - 17th place. The smallest investment risk - financial, greatest - environmental. The greatest potential - natural resources. Republic of Buryatia is rated 3B1 ("reduced potential - moderate risk"). Among the subjects of the Russian Federation on investment risk region occupies 67th place, the investment potential - 49th place. The smallest investment risk - economic, the largest - social. The greatest potential - natural resources. Transaikal region is rated 3S1 ("reduced potential - high risk"). Among the subjects of the Russian Federation on investment risk region occupies 72nd place, on the investment potential - 51 th place. The smallest investment risk - management, the greatest - criminal. The greatest potential - natural resources. Thus, among three parts of Baikal region, the most favorable investment climate is formed in Irkutsk region. In 2013 the region received foreign investment of 169 million US dollars, accounting for 72.9% by China, United States and Japan are the major foreign investors, which accounted for over 60% of the total foreign trade turnover of the region. At the same time, according to the Ranking of Russia's regions in terms of accumulated foreign direct investment in per capita terms, China's share of foreign direct investment in Irkutsk region in 2013 was 59.84%. However, even in the Irkutsk region, which is characterized by a relatively favorable investment climate, the level of investment cooperation with China is estimated as very low, especially in comparison with the amount of investment that each year China is investing into other regions of the world. The principal activities of investment companies are small-scale commerce, services, forestry and timber production, construction, development and mining, the restaurant business. During the presentation of the Irkutsk region, held November 27, 2014 in Beijing, the following were identified promising areas of investment cooperation:

4 36 Tatiana Vladimirovna Kolpakova Establishment of Sino-Russian transport corridors and strengthen cooperation in the field of air transport; Creation of transport and logistics complex of international level in the Irkutsk region in the development of Russian-Chinese cargo; Creation of high-tech enterprises of mechanical engineering; Development of tourism; Energy and infrastructure projects. During the presentation some of the most interesting investment projects were also presented for Chinese investors. It were projects in such spheres as machine-building, oil and gas chemical and pharmaceutical clusters, chemical complex, medical tourism, the creation of the Russian-Chinese Research Institute in Irkutsk. With regard to the Republic of Buryatia, according to the rating of investment attractiveness, its position is considerably inferior to the Irkutsk region, but still slightly better than the position of Transbaikal region. In general, the republic is characterized by low investment potential, occupying only 49th position in the all-russian rating. The main investor in Buryatia in 2013 was Japan, which accounted for 95.71% of all foreign investments in Buryatia. Despite the geographical proximity and relatively high level of foreign trade cooperation with China (53.5% of the total foreign trade turnover in 2013), investment cooperation with China is very poorly developed. So, in 2013, the volume of Chinese investment in the Buryatia, amounted to only US $ 3.6 million, the main areas of investment were construction of steel manufacturing. By the end of 2013 there were only 19 enterprises with the share of the Chinese capital in the republic. The basis of cooperation is the agreement between the governments of the regions of Russia and China on trade, economic, scientific-technical and cultural cooperation. Buryatia has enormous potential of development of cooperation with China. Primarily, this is due to the involvement of Chinese investment into the construction of tourist infrastructure of the special economic zone of tourist-recreational type "Baikal harbor" and the creation of joint ventures for Housing, deep processing of wood, agricultural products. Currently, for Buryatia it is particularly important to develop and to implement effective measures to increase the investment attractiveness of the region. It is also very important to increase foreign direct investment, including Chinese, because it would accelerate the pace of socio-economic development in whole. According to the head of the republic V. Nogovitsyn, the priority areas of the region are: mining and processing of minerals; agribusiness; timber industry; tourism; small business and large-scale industry; transport and logistics complex. In order to attract investment into these areas in the republic regulatory support of investment activity is developed, the main purposes of which are investment protection, government support for investment projects, tax incentives for investors. From May 2009 on the territory of Buryatia, the law "On state support of investment activity in Buryatia" was passed, this law determines the form of the state support of investors, including non-financial. From the point of view of the advantages of geo-economic position, Transbaikal region, directly bordering with China, potentially is the most promising subject of Baikal region to attract foreign, especially Chinese, investments. However, the low level of socio-economic development, sparsely populated, lack of infrastructure, high levels of criminality and a number of other factors are the reason of the fact that Transbaikal region (51 place in the investment attractiveness and 72 place in the ranking of investment risk) lags of the Irkutsk region ( 34! and 43! positions,

5 Chinese Investment in Economic Development of Baikal Region of Russia 37 respectively), and the Republic of Buriatia (2 and 5 positions, respectively). However, despite such a low position in the ranking, foreign investment is still coming into the Transbaikal region. Thus, according to the data given in the Decision of the Government of Transbaikal region "On approval of the state program of Transbaikal region" Development of international, foreign economic activity and tourism in Transbaikal region ( years)","the total amount of foreign direct investments attracted to the economy of the region, in 2013 amounted to about US $ 150 million or 69.7% from At the same time, the share of investment directly channeled into the real sector of the regional economy is less than a half. Thus, we should recognize that today the investment potential of the Transbaikal region is implemented poorly. Another proof of this fact is that in spite of the obvious interest of the Chinese side to investment projects in Transbaikalia, as well as in other regions of the Baikal region, only a few actually funded. For example, negotiations between the Transbaikal region and Manzhouli about opening on the base of the Darasunsky mining equipment plant Manufacture of machinery for mining industry have not been successful. Another similar example is the industrial park "Mogoytuy", which was completed with the construction of one office building. The only successful investment project today is CPC "Polar". It is assumed that the pulp and industrial plant will be launched in 2016, and after a couple of years will reach its design capacity of 240 thousand tons of pulp per year. Despite the significance of the Far East and the Baikal region, we should recognize that measures, which are taken today, are not effective enough. Neither the establishment of the Ministry for the development of the Far East, or the establishment of investment funds (Fund for the Development of the Far East and the Baikal region, the Russian-Chinese investment fund, etc.), nor the passing of the law on the establishment of priority development areas not currently have any positive impact on the region. This situation is primarily due to the reluctance of both Russian business and government agencies to invest huge amounts of money into projects that will not be able to make a profit in either the short or even medium term. Under these conditions, one of the most promising sources of investment is China. Accumulated excess volume in the country's gold reserves allows China to invest in projects that will pay dividends still very long. The Chinese side understands that the presence of the communication infrastructure, cheap energy is beneficial not only Russia but also China itself. The development of the Baikal and Far East regions will allow increase the supply from the western part of Russia to the Asia-Pacific region, and, at the same time, thanks to the excellent transport routes will expand the opportunities for promotion of Chinese products to Europe. To summarize, it should be noted that to date the role of Chinese investment in social and economic development of the Baikal region is negligible, even despite the fact that China is one of the main investors in the region. The overall level of foreign direct investment coming into the Baikal region, currently very low, the number of actual ongoing investment projects is also small. However, it should be recognized and that without attracting Chinese investment into the region, its future development is not very promising. In such circumstances, particularly important is to strengthen efforts to improve the investment attractiveness and reduce the level of investment risk in the Baikal region, which in turn implies a reduction in tax rates, the weakening of the bureaucratic component, providing state support of investors, the formation of the overall positive image of the region.

6 38 Tatiana Vladimirovna Kolpakova REFERENCES 1. The paper was prepared as part of scientific research, held by the Council for the RF Presidential grant MK