Vladivostok – Once More a Free Port

After a lot of talking and legislating, Vladivostok and most of the populated areas of Primorskiy Krai will now be granted ‘free port’ status for 70 years, promising tax benefits, a reduction in bureaucracy and paperwork, and visa free possibilities for tourists, amongst other things. The changes won’t happen immediately – it’ll likely come into force from 2016 – but local politicians and ministers are excited about the possibilities, with talk of a threefold increase in regional GDP and an end to the continued – albeit now at a relative trickle – of outward emigration if all goes to plan. In this article I’ll take a closer look at the announcement, and discuss whether this is the huge boost for the region that it is portrayed to be.

First up though, a little bit of history. The initiative isn’t a new one for Vladivostok; over 100 years ago the city had a bustling port connecting Russia to Asia and beyond. Legislation in the early 1860s had given Vladivostok the status of porto franco, though for Vladivostok it was not simply in the sense of supplying the region with foods and materials, but also as a transit point for goods to enter and leave the rest of Russia. This continued until the turn of the century, at which point the construction of the Trans-Siberian railroad, and political desires to keep Vladivostok closer to European Russian markets, saw this status rescinded. The status was reinstated in 1904, but once again was removed in 1909 to reduce the strong economic influence Japan had been gaining in the region. Delegates from the east continued to push for even just a ‘free port’ status rather than a full-blown porto franco, but the beginning of WW1 put an end to those discussions, and the Soviet era saw a complete closing off of the city. In some regards then Vladivostok isn’t embarking on a new initiative, it’s reverting closer to what was its natural status for half a century. I say closer because it’s not quite the same, and doesn’t go as far as the two earlier periods of porto franco. This is one of the clever perceptions given out by recent announcements, as there is the impression that Vladivostok will now be a completely open market, whereas in reality there are restrictions and technicalities that come into play. For example, companies which want to take advantage of these benefits must go through a long administrative process to be approved as resident, and they can’t already be taking part in regional investment projects, nor can they be based in or hold offices in other regions. On the positive side, bureaucracy will be handled by one solitary government agency, which will do any legwork with other agencies that you need beyond their services, and being a resident will offer further legal protections and representations than before. This is one aspect we’ll really need to give time to see if it performs to the benefit of residents.

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But what other concrete benefits will there be? Companies operating in the zone will pay a flat rate of tax at 5% instead of 20% for the first five years, and in the next five years at 12% (or no less than 10%). Payment taxes to non-budgetary funds will be reduced down to 7.6% from the current rate of 30%, property tax will be exempted, and direct state aid can be sought for infrastructure investment if the majority of funds come from the company themselves. These are all positive steps for the promotion of business development and investment, but it remains to be seen if encouragement is given on top of this to native companies and start-ups, rather than just a carrot dangled in front of foreign companies.

The port will also have five very distinct zones with each focusing on certain goals; a port and airport zone, an industrial zone, a scientific zone, a tourist-recreational zone and of course the impending gaming zone. The focus appears to be on developing shipbuilding and repairs, manufacturing, export-oriented and import-substituting industries, some agriculture, and of course tourism. This makes it look a lot closer to the parallel plans for areas of advanced development, or TOP, than as a free port. There’s no doubt that the region could do with a boost to its shipyards considering the pressure put on them by the good work done in places like Korea, but it should ensure support is available for all industries, not just a select few. A further promise that ties in with these zones is that of greater infrastructure investment by the government. If you’ve been to the region, you’ll know it needs it. The better they can connect the parts of the region together, and to neighbouring regions, the more companies will be able to utilise a larger distribution area, something that is lacking at the moment.

One very positive development that should give a boost to the tourist and gaming industries is the announcement that visitors arriving in the region will be eligible for an eight-day visa-on-arrival. Up until now visitors from most countries were required to obtain a visa in advance at a relatively expensive cost. In particular the gaming zone needed this to be effective, as no one is going to get a Russian visa just to visit a casino for the weekend. For potential visitors from Asia and beyond, having basically a week to see Vladivostok at short notice, or do a few days there and onwards to other cities or up to Khabarovsk, is a real step forward by Russia. Previously you could enter visa-free for 72 hours if you arrived by boat, but extending this to all entry points is great. I’ll wait to see full details on the pricing scheme and whether it restricts the visitors to just Primorskiy Krai, but so far its promising. If this ties in with further investment in the tourism industry and making the city a bit more welcoming to non-Russian speakers (restaurants and cafes should really be making more Chinese-language menus as one example) it’ll make the city a lot more attractive to visitors and foreign investors. In saying that, they might need a few more hotels to finally be built if tourist numbers rise…

A final promise in the law that caught my eye is that a special ‘Freeport’ area will be set up the region. Not to be confused with ‘free port’, this is basically an area where goods can be sold duty-free, expensive and luxury items can be stored for use in presentation to potential clients and investors, and generally a contained area for getting around some of the aforementioned restrictions placed on the ‘free port’ status. It seems to work well in various countries in the world, and will probably be a popular destination when the law kicks in.

It would be prudent however to highlight that Nakhodka had already been given a special economic status for a number of years now, so in some ways the region has already had contemporary experience of a ‘free port’ area. Whilst Nakhodka is one of the better cities in the region, it isn’t an economic miracle nor is the administrative process superior to the rest of the country, not to mention previous contemporary Russian experience with special economic zones has hardly been positive. In the past it would almost seem that Russia created these zones and expected the magic to happen by itself –like they’d seen ‘Field of Dreams’ one night and took it literally when Joe glances towards home plate and says “If you build it, he will come.” For this reason it is hoped that the planners and politicians have done a bit more homework than in the past. Yuri Trutnev has said they’ve worked on this for a long time, visiting many Asian free ports, learning from their legislative and bureaucratic changes, and generally educating themselves about how to get the most out of a free port. They still have some months to iron out any wrinkles in the plans, meaning they really have no excuse for not being prepared and giving the project the best chance of success. Hopefully Nakhodka will also finally benefit from a ‘free port’.

Overall the plans given out already are a bit on the vague side, but for the money men there will be opportunities to get more familiar with the processes. Between the 3rd and 5th of September the Eastern Economic Forum will be held in Vladivostok, at which there will be meetings with potential investors to go over the plans in further detail. It’s only after occasions like these we’ll really get to hear the feedback and thoughts of the people who can make or break the plans for the city. Needless to say, progress will also be monitored closely by the federal powers back in Moscow; a lot of money and leeway has been afforded to Primorskiy for this initiative, and any failure will see a few of those at the top lose their position.

But in the end, can the ‘free port’ be all that Primorskiy hope it can? I asked some residents for their views on it, with opinion varying. A few aren’t particularly interested in the proposals or don’t see it as making any difference to their business situation, but for others there’s hope. One resident lamented that local business likely won’t see much benefit and that this is firmly aimed at foreign investors, but despite this would still produce more jobs for people, something important for retaining residents instead of seeing them move away. Another recognised the positives and negatives; it doesn’t reach the porto franco status many would want, but at the same time it’s a change and a breath of fresh air, a chance to experiment and either succeed or learn from the mistakes. Others simply wait with an open mind to see the implementation and reality rather than speculate on how it will play out. And one final comment opens up some potential negatives for areas outside of the city of Vladivostok – a free port means more military ships moved from the city to smaller towns nearby, potentially polluting beaches and swimming areas beloved by locals. It remains to be seen whether the hope and optimism is a good thing, or setting themselves up for another disappointment.

And what do I think of it all? There are free ports in almost every sea-facing country in the world, and for every success there is an underwhelming case story. However, I don’t think Vladivostok should try to become the Russian version of San Francisco or anywhere else – it just needs to be a better and more successful Vladivostok. The city has always had a love of the sea; it’s a core part of the culture and identity of the people who live there, a real feeling in their hearts. Invoking that history of a time when Vladivostok was a world-renowned port will inspire a large group of people and give them a vision for the future of the region. On the other hand, those dreams don’t take into account something that more famous port cities have taken advantage of, something that Primorskiy doesn’t really have in this day and age – favourable geography and a prime location on natural trade routes. Places like Suez and Panama are world-famous, and territories such as Singapore, Hong Kong, Busan, Macau and Tokyo do very well for themselves. Gibraltar, Lebanon and Monaco are not to be sniffed at either, and up until the western world got involved, Libya enjoyed many benefits from its free port area in Misrata. All of these had those natural benefits of location, whilst Vladivostok’s selling point in recent years is as a starting point for the Trans-Siberian railway, or the Northern Passage, both of which are not looking as popular for freight as they had seemed a number of years ago. For these reasons, Vladivostok will have to find other ways to stand out and create a compelling narrative if it wants to make a real success of the restored ‘free port’ status.

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Land Reform in the Russian Far East

One of the developments that caught my eye recently was a proposal by Yuri Trutnev to Vladimir Putin on the 19th of January, in which he suggested that the government offer a free hectare of land to anyone willing to move to the Russian Far East. Putin was open to the idea and suggested putting forward a concrete proposal, as at this stage it was a very basic outline. Below I’ll set out the basics of it, and discuss the prospect further. If you want to read a follow-up interview with Trutnev on the issue first, check out this link. (Russian language)

What is the proposal?

In short, Trutnev has proposed that any Russian citizen should be entitled to receive one hectare of land free of charge for up to five years, possibly for three, after which time they can buy that piece of land at a concessionary price if the government/relevant authority deems they have used it properly. He proposes barring foreign citizens from taking part in this venture, or from sub-letting the land out once it has been allocated to a native. As an added bonus, he suggests that applicants can choose which exact hectare they receive using an online system. In a follow-up story, the governor of Magadan jumped on the idea and suggested his region offer five hectares, but since the proposal is at the drafting stage, these proposals await more concrete details. More importantly, people can use this land to engage not only in agriculture, but also in forestry, tourism, industry, hunting…any operation within the law basically. As noted at the start of this article, Putin supports the idea in principle, noting that previous initiatives have been employed in Siberia in the past.

Where will the land be available?

Everywhere in the Far Eastern Federal District, on government-owned land which is not currently in use. This includes the border areas with China along the Amur river, and presumably also the areas close to North Korea. However he does precludes areas situated directly around cities as he feels that ownership of land so close to large companies, transport and infrastructure networks, and prime land is too open to corruption. In saying that, only 1.18% of the available land falls into this category, leaving a lot of land available for the scheme. To put this in perspective, the government land holdings of various categories in the Far East amounts to about 614 million hectares.

What if the land is rented or sold on to foreigners?

In the interview, I’ve translated his response to this question as partially accepting that corruption is a high possibility, but that it would be of limited value since no substantial development could ever take place on the land as it would never be approved by the regional authorities.

What are his reasons for suggesting this initiative?

Trutnev believes that a lot of land is simply lying unproductive in the region, and is essentially wasted economic potential. The state is doing nothing with it, so he feels that others should get a chance to make a go of it. It sounds like he also thinks it may attract more able-bodied citizens to the region, noting that the population in the region rose slightly at the last count around the end of 2014 and as such it is becoming more attractive. Finally, he sees it as an experiment that could be useful in preparing for something similar to be rolled out across the whole of Russia, noting that even Western Russia has far too much unused land.

Background

One thing that stood out in some of the basic news stories was that Putin mentioned that major reforms had been carried out before in Siberia.  I don’t think he would have been trying to invoke any particular movement, and I translated his response as very cautious, but there is a general memory in Russia that major land reforms and developments have occured before. For those of you who aren’t familiar with the history, I’ve laid out a brief summary below.

Russia pressed forward into Siberia by the 16th century, but periods of internal strife in the country delayed any mass civilian movements east until the end of the century. Peasants started making their way into Siberia in the hope of settling on new lands and enjoying greater freedoms, particularly as the best lands were already monopolised in Western Russia. Tales of fertile soil had spread and families took the chance to claim it and make a bit more money for themselves. Perhaps just as enticing, the Tsar had set a far more generous tax system in Siberia, having permission to work five acres of land for every one acre they worked to pay the Tsar, and getting a 10-year tax-break to boot.

This situation petered out for a while as the best lands in Siberia started to become full, but when the Trans-Siberian Railway and other branch lines were completed near the end of the 19th century, migration to Siberia once again increased, with up to 10 million peasants making the journey east. This was encouraged by Tsar Nicholas II and his commissions, occuring during the period of the Stolypin reforms, and are perhaps the most remembered of Russian agricultural reforms by the modern world. Essentially those who were willing to go east were offered various benefits, receiving about 16 hectares of land per person. As with previous migrations they received small sums of money, tax-breaks, and help with their initial resettlement.

The next major reforms were during the Stalin era, carrying out dekulakisation and collectivisation. Not only did this take land mostly out of private hands, and turn the countryside into mass state-controlled farms, it also resulted in the death or exile of many skilled farmers. Agricultural potential and efficiency suffered due to this, but after the death of Stalin, another of the most famous reforms was carried out by Khrushchev; the ‘Virgin Lands’ campaign to settle and farm areas in Southern Russia, Southern Siberia and Northern Kazakhstan. This wasn’t really a reform in the traditional sense, as peasants weren’t given benefits and incentives to move east, it relied on the enthusiasm of Soviet youth to head out and settle these areas as part of the great drive to build the future in the present day. A few hundred thousand volunteers headed south and east resulting in early gains in output, but with time the campaign petered out, soil was overused, and eventually it was considered a failure.

Although later Soviet years didn’t see any substantial agricultural reforms, the economic focus on the city helped the nearby rural areas in unintended ways. Those farming areas close enough to growing and prospering cities were able to develop transport and trading links to the cities, resulting in benefits to both sides and an expansion in agricultural output in those areas. Unfortunately for these areas, the economic decline in Russia throughout the 1980s saw the agricultural areas also suffer as cities began to see a downturn in fortune. By the 1990s agricultural areas continued to collapse in productivity due to the structural problems and car-crash economics that followed the end of the Soviet Union and the beginning of Russia under Yeltsin. It highlighted just how dependent the rural areas had become on thriving urban centres, and perhaps in that lies a seed of a lesson for the contemporary attempts to develop the Russian Far East.

Will the current proposals work?

Until final proposals are put forward, it’s difficult to say for certain, but based on the ideas Trutnev discussed in the interview I linked to at the start of this article, I’m very sceptical on the plans and I think they’re highly unlikely to succeed. For one, the overwhelming majority of people in central and western russia have no intention of moving to the Russian Far East, and they certainly don’t harbour dreams of moving east to become a farmer or a hunter. Most of the able-bodied generation in contemporary Russia enjoy the comforts of modern life, living inside or in close proximity to cities and amenities, and in general they may well be ill-prepared and inexperienced for such a venture. The fact that the proposals restrict the offer to one hectare, and preclude offering land in the areas closest to the city which would be beneficial for production and supplying finished goods to the cities, is likely to be a major drawback. Even for those who don’t need to be close to a city, there would be major logistical and transport issues around the coldest parts of the year when roads are not always safe or available.

Compounding the issue of getting people to move east is plain and simple economics. It’s one thing to get the land for free, but you also need capital to invest in it and get it started. You might need to build a home on the land, and at the very least you’ll need to buy storage facilities and security measures if you don’t live there. You’ll likely need some mechanised equipment to make efficient use of the land, and even if you want to get into a non-agriculture industry you’ll still have numerous start-up costs. Without an accompanying grant, tax-break and financial support this will be a prohibitive venture. Those who are making money aren’t generally going to take a punt on one hectare of land, and those with no money can’t afford to take the chance. Given the current financial restrictions in Russia, low-income citizens aren’t likely to get large loans from a bank either.

On the issue of corruption, although foreigners are prohibited from taking advantage of this offer, it’s not difficult to see that areas close to China could be rented illegally from natives by individual Chinese farmers or collectives, farmed, and the products then sold in Russia or China. The China Daily has already speculated on this, and whilst any meaningful development on each hectare is still unlikely through corruption, most of the fertile areas are close enough to the border that it could still undermine the initiative. Whatever Trutnev puts forward in a concrete proposal is really going to have to have some plans to minimise this possibility. (Note, this is in no way suggestive of a Chinese invasion and annexation of the Russian Far East. That myth has been debunked enough times that I’ve no intention of addressing it here)

The only positive way I could see this idea playing out is if the 1.18% of available land close enough to cities is included in the initiative, as the vast majority of the suitable land is located in the south of the region, around the Amur, Khabarovsk, Primorsky and Jewish Autonomous Oblast regions. This is important for the reasons I alluded to a bit further up, where Russian agricultural areas received a boost when the cities they were close to also developed. It is vital that the cities develop in the Russian Far East if the agricultural side is to prosper as well. Good ideas shouldn’t be discouraged, but until the major cities of Vladivostok and Khabarovsk develop and start to thrive, the areas around it will continue to struggle. Develop the cities, and the agriculture will develop with it, even if it’s through foreign investors rather than native Russians. Where there is demand, supply will surely follow.