Chief Executive Officer of the Far East Development Fund tells about the region’s prospects in mining, logistics, agriculture, fishing, and tourism and projects currently implemented by the fund.
The Far East Development Fund is virtually of the same age as the Russian Direct Investment Fund (RDIF): it was created in 2011. However, things turned out differently for them: RDIF developed fast, while the Far East Development Fund was idle for the first three years. According to Aleksey Chekunkov, CEO, this was due to the abundance of conflicting circumstances: the rules created for the fund, made it unable to invest money; in the meantime, the bank that established the Fund (VEB) was on the verge of collapse. In 2013, President Putin made his well-known statement about the bank portraying it as a “dump for bad debts”.
Aleksey Chekunkov took command of the fund in 2014 at the behest of Yuri Trutnev, Vice Prime Minister and Presidential Envoy to the Far Eastern Federal District. He was tasked with ensuring full-fledged operation of the fund. “We had to support those pioneers who gave credence to the new policy in the Russian Far East”, Chekunkov says. The fund is supporting investors by providing then with affordable loans at 5% per annum. Over four years, the fund has invested around RUB 38 bn in projects over RUB 170 bn in total worth in the Russian Far East.
— Today, multiple entities are engaged in the development of the Russian Far East. We have the Far East Development Corporation, the Far East Development Fund, the Ministry for the Development of the Russian Far East, a government commission. What is your fund’s mission?
— The Russian Far East makes one third of our country’s area and is home to virtually a half of its natural resources. It borders the key nations of Asia. It is integration with the largest and most dynamic markets of East and Southeast Asia that the Russian Far East should secure in order to fulfil its potential. This should be similar to Canada’s strategy: this country secured an impressive development level thanks to the orientation of its economy towards the U.S. markets. However, one ministry and four development institutions are not enough to implement this scenario. The task of finding a niche in the Asian value chains requires a concerted effort of big business and the state. The business is supposed to launch projects and the state must create the conditions and infrastructure to ensure their competitiveness. The system created over the last 5 years is in fact reconnaissance by fire. Our task is to launch the growth mechanisms. The government creates special conditions (such as Advanced Special Economic Zones, ASEZ), the corporation creates free infrastructure for projects, and the fund provides financing on preferential terms.
— Who is eligible to receive financing from the fund and what are the terms?
— Investors appreciate direct financial participation of the state in the project so that the state shares the risk and succeeds together with the investor. Over the last three years, we have acted as the financial partner on the part of the state. The fund provides affordable long loans at 5% per annum, the longest loan has been issued for 23 years.
— However, there won’t be enough loans to accommodate all investors?
— That’s right. Even if we had much more resources available for loans, such loans alone will not be enough to have a significant effect on the economy of the Russian Far East. This is why the primary task of the fund in its capacity of investment institution is to raise money. The projects that we implement are pretty large in scale, some of them are RUB 40-50 bn worth. In essence, business people are provided with unprecedented conditions of doing business. A special legal framework has been created, including the enactment of over 30 new laws, ASEZ and the Free Port of Vladivostok offering tax benefits for business have been created, infrastructure has been brought to the relevant facilities, and investor services have been launched. Ultimately, we gave financial support to all the first major projects launched in the Russian Far East. Thus, for instance, we invested 45% of our funds in the projects in ASEZ. We have a capital of RUB 38 bn at our disposal and hope that the fund will be replenished by around RUB 10 bn every year.
— Why do we need a fund when we already have a development institution, namely VEB? It can deal with major investments on its own. And if we are talking about local investments, local authorities should deal with them.
— Local authorities cannot raise investments, they should encourage and protect investors by creating favourable conditions for them. Alongside with the task of investing and raising such investments, we have yet another task — solving problems. This is due to the fact that any new project, especially in such a remote area, encounters all kinds of problems, including administrative issues. Interaction with the fund helps to solve such problems.
In our case, management of the Russian Far East’s development provides for the creation of conditions — laws, services, and direct support measures, such as investments on preferential terms provided by our fund. In the meantime, the possibility to promptly solve the problems that projects encounter at different levels of government is crucial, as every project at this stage is a model project. Whatever works out will be replicated multiple times. Whatever doesn’t work should be adjusted to make it work.
— How efficient are such instruments as ASEZ or the Free Port of Vladivostok?
— They definitely enjoy high demand. Virtually all serious businesses in the Russian Far East have already jointed ASEZ or become residents of the Free Port. Over 1,300 projects are implemented in ASEZ and the Free Port of Vladivostok.
Strong Performers’ Attention
— How do you find projects?
— The investors in need of money on preferential terms know that we offer such money for 5% per annum. All those who implement more or less significant projects in the Russian Far East contact us.
After these four years, the first entrepreneurs who gave credence to the fund come in mind. I remember an energetic man looking and talking lie a military who came to our old office on Sadovnicheskaya Embankment. He put a large photo of Yakutia’s tundra on the desk and said: “You should invest here — we will restore the coal industry we had during the Soviet era there. We will produce 6 m tonnes of coal per year. He talked very informally, without conventional niceties. Unfortunately, we were unable to support this man of action at that point... However, 2.5 years later, the fund invested RUB 4 bn in a facility of Kolmar owned by Sergey Evgenyevich Tsivilev. He proved to be so enthusiastic, that he was ultimately charged with governing a very complex coal province — the Kemerovo Region.
— Why did the fund refuse to support him at that point?
— I was engaged in managing mining investments and had a pretty good idea of what it took to go all the way from deposits in the ground up to a working enterprise and to the market and knew all the risks of this endeavour. And the risks are high. Still we managed to relaunch the fund under relatively tough requirements to the money protection and rate of return. This is why the bad debt accounts for mere 0.1% of our portfolio, while the market average is 3—5%.
At this point, Kolmar’s mining and processing complex is about to reach the indicators that figured in the plans. Moreover, it is setting even more ambitious targets — to expand the enterprise so that it produced 24 million tonnes. This plan pulls new port facilities. And not in Yakutia, but in the Khabarovsk Territory, which will be facilitated by the increased capacity of the Baikal-Amur Mainline and Trans-Siberian Railway. It is this kind of projects that the state strives to support by investing RUB 0.5 trillion in the reconstruction of this crucial transport corridor. Coal is primarily intended for the Asian markets. Kolmar produces some of the best coking coals in the world for the steel industry. It is a premium commodity that is 3 times as expensive as power-generating coal ($200 per tonne), even though the production costs are the same.
— What are the other projects that you take pride in?
— Rusagro’s project of the Russian Far East’s first pig-breeding complex: this year, the company commissioned a complex with a capacity of 77,000 tonnes. Previously, pork used to be brought in from European Russia.
Or yet another example. The Amur Region is the soy champion. In the past, we exported nothing but raw products — the soybean. And we used to import the isolate — valuable protein soy product, for instance, to make salami. Absolute nonsense! We financed Russia’s first plant for advanced soybean processing and isolate production. Certain projects that we implement under direct order of the President and the Government are necessary to ensure the integrative effect. For instance, construction of a major new shipyard Zvezda is underway in Bolshoy Kamen. This task requires thousands of people, and therefore, housing. Jointly with AHML, we provided financing for housing construction. The project meets the need for new apartments at minimum prices due to a low interest rate of 4.5% per annum and a long financing period of 23 years for the developer.
— Would Rusagro have initiated the project of the pig-breeding complex without your support?
— It’s hard to say. Possibly. And yet I do believe that the main outcome of the work we have done over the last five years is the attention to the region on the part of really strong market performers. Rusagro is a company with professional corporate governance that enjoys a solid reputation on the international market. Yet its core businesses were located in European Russia, in the Central Black Earth Region. I think that going to the Russian Far East and setting sights on the Asian market would have been more difficult without state support. The Russian Far East by itself is a small local market of 8 m people (combined with the Baikal region). Everyone knows that.
— But the Chinese prohibit imports of pork — how does this get along with Rusagro’s ambitions in the Asian markets?
— Constant dropping wears away a stone, and we can already see certain progress in our negotiations with China. They have gradually made concessions on grain and they are already starting to let meat in to a certain extent — namely beef at this point. Thus, for instance, pilot supplies to Japan have been launched already. Considering the quality requirements brought up by the Japanese and the produce they buy, it looks like they will pay any price so to say. They are ready to pay a lot. Their rice is 8 times as expensive as ours. However, it is their home-produced rice protected in the domestic market.
We can have different opinions of [Donald] Trump. But being a straightforward person, he refused to play nice and chose to call things by their proper names. China has relatively aggressive practices of domestic market protection. However, the relations between our countries are more positive than the relations between China and the U.S. In the past, they used to have a weary dialogue. They used to say abstractly: open the market; they used to say: where are you going to buy things, this is economically unviable. Now their negotiations are meaningful: they concern specific regions and specific products to be supplied.
Investors from Asia
— What are the areas of your work with the Chinese?
— We are discussing investments in the natural gas chemical industry, mining sector, manufacturing, and agriculture. We are taking part in the deal in the Zabaikalsky Territory involving investment in the development of Klyuchevskoye field by China’s government-owned gold producer. This is a relatively large deal — total investment exceeds RUB 30 bn, the deal involves major businesses from three countries: India (the project has been founded by Khemka family’s Sun Group from India), China (China Gold), and Russia (Far East Development Fund).
Based on our first cooperation experience with an individual project, we are discussing the possibility of creating joint funds with China. Joint funds with China is the talk of the town, so to say: multiple platforms have been announced that work far less frequently than they do not. However, the ones that work are impressive in scale. And they have to make decisions in big strokes. If we look at our peers, each of them has assets worth of more than $100 bn. This is why we assume the role of project developer and intellectual centre. As we will be unable to invest comparable financial resources in the project.
— They say that it is virtually impossible to negotiate with the Chinese.
— Well, if that was the case, China would probably be unable to develop as fast as it is developing. This implies that they have succeeded in fostering pragmatic commercial relations with the rest of the world. It is equally true, though, that they are not fast decision-makers. Probably, the most important peculiarity that everyone willing to work with Asia needs to understand is as follows: the Chinese never say “no”. This is why the negotiations can take you a long way when you end in a dark place without coordinates unable to tell the difference between day and night. This is due to the fact that they always agree with you.
— And yet do it their own way?
— It depends. You can always agree and ultimately refuse to do something. Multiple visits, negotiations, ceremonies, receptions, etc. I know people who have spent years doing this. But when they need something, they will close a deal rapidly. RDIF has structured a deal involving sale of the treasury package in Polyus for the China Investment Corporation back in 2012. A deal worth of $500 m took a mere three weeks. When they see company No. 1 in its market, they will do it straight away. They love it when something is No. 1.
China has created an unparalleled export infrastructure. This is why working with China is a must. Over the last 20 years, China used to be the factory of the world: it used to manufacture everything sellable for a competitive price for export. By now, China has outgrown the status of the factory of the world and has turned into the world’s largest source of financial assets: the banking system of China is twice as large as the banking system of the U.S.
— Are there any investors from Japan and Korea?
— We are engaged in an intensive dialogue with Japan. Unfortunately, progress is slow. Over the last couple of years, it was geopolitics and security that was in the focus rather than business. We have a joint platform with their development bank (JBIC, peer of Russia’s VEB) that helps middle-sized Japanese businesses implement project in the Russian Far East. We have nine projects in progress. For example, recycling of used cars, manufacture of wood pellets (fuel pellets), management of solid domestic waste. The Japanese ask a lot of questions about greenhouses. Korean business feels comfortable in the Russian Far East. For instance, this year, Korean Kexim Bank financed the purchase of Hyundai hotel complex in Vladivostok and agricultural assets in the Primorye Territory by Lotte Group.
RUB 10 bn Worth of Investments in Aquaculture
— When I went to Vladivostok, I was surprised to see very little fish and it was more expensive than in Moscow.
— I would disagree with your statement concerning problems with seafood in Vladivostok. Did you come during the Eastern Forum? Vladivostok itself is a rich port city. This is the place where the key companies engaged in the fishing business are headquartered. They do not necessarily strive to sell everything there. Supplying fresh products to the domestic market is a very sophisticated endeavour. There are no dedicated refrigerators to accommodate these products. This is due to the fact that once fish is out in the open air, you have just a few hours to register and package it. As a rule, businesses already have established ties with their customers.
— And these customers are usually from Japan?
— One of the major customers is in Busan (Korea). A port that has invested $1 bn in refrigerators, I believe. Vladivostok has projects providing for creation of fish facilities. There is a plan to create a fish hub. I hope they will ultimately be implemented. Meanwhile, competition is obviously high merely due to market reasons: Asia has a lot of people, a lot of consumers, and huge capitals. They pull the produce out of the markets. This is why the global value chains look amazingly weird at times. Here is a good examples: cod is produced in the North Sea in Scotland, is frozen, and is shipped to China in containers. It is cleaned in China where the cod fillet is packaged and it ultimately returns to the stores in Scotland. It is cheaper to do it this way.
— How do you support the fishing industry?
— In cooperation with the Federal Agency for Fishery, the Ministry for the Development of the Russian Far East, and the Federal Agency for Cartography and Geodesy, we have created an e-service intended to allocate areas for aquaculture. Artificially produced marine bioresources account for about one half of the global market. In the Russian Far East, their share is a mere 0.1%. In the meantime, we are not suffering from a shortage of scallop or trepang. Nonetheless, the investment raising system for this industry that we had was out of date. A bureaucrat in Moscow had to choose an area for aquaculture to be allocated in the Russian Far East. This gifted clairvoyant bureaucrat would draw the boundaries of the area at his discretion and announce a hammer auction. A businessman from the Primorye Territory, Sakhalin Region, or Khabarovsk Territory had to go to Moscow to take part in the auction. As the whole procedure would drag on for years, business people used to sabotage such auctions and essentially continued working without a legitimate basis.
We have developed an online map depicting all water areas. The investor can simply go to www.aquavostok.ru and draw four points with his finger — a water area will be formed automatically without involving any officers from the Federal Agency for Fishery within three days. An e-auction will be announced. The first auction took place last summer, the battle lasted for more than twenty-four hours, the opening price rose five-fold. Over the three months since the launch of the system, we have allocated around 7,000 ha translating into an inflow of some RUB 10 bn in the industry and meaning that professional companies have come to work. This ensured a 15% growth of the total number of allocated areas over three months in relation to the last 25 years.
People and Other Issues
— In your opinion, what are the key problems in the Russian Far East?
— The main problem is not a regulatory one. The key challenge is people. The Russian Far East is Asia the other way around. Asia has little resources but a lot of people. We have abundant resources and space, but are short of people.
And we feel it. For instance, we are investing in a project involving construction of passenger-and-freight ferries to modernise the Sakhalin — Mainland ferry service. It turned out that the construction of the ferries was significantly accelerated when the Crimean bridge was completed and 120 welders were redeployed to Komsomolsk-on-Amur. The project had been stalled until these 120 welders came. We couldn’t find welders in the entire country! And yet we need hundreds of them. This is just one example. Now imagine the competitiveness of the economy. As compared to 1.5 bn of the Chinese and another 1 bn people in Southeast Asia, Japan, and India. It is easier for them to create production facilities with a large manpower. By contrast, the Russian enterprises dealing with natural resources stand out for a huge value added combined with low staff strength. From the macroeconomic standpoint, it is probably better to have two pillars. The first comprises high-performance projects involving advanced processing of natural resources. And the other comprises SMEs.
— How are you planning to solve the problem concerning mass exodus of people?
— The solution is to create a comfortable urban environment. China creates new cities from scratch relying on the scientific approach in order to ensure a comfortable living for residents in terms of transport flows, public health, and safety. However, this solution does not fit the Russian Far East. Every city in the Russian Far East needs to find its own shtick. In Vladivostok — it’s the ocean, in Yuzhno-Sakhalinsk — mountain ski resorts and hot springs, in Petropavlovsk — volcanoes, in Khabarovsk — taiga and fishing, in Yakutsk — the charms of the North, etc.
— Overall, how would you characterise the development pace of the Far Eastern regions?
— It is faster as compared to the rest of the country. This is primarily due to the attention that the region receives: ASEZ, the Free Port — they have made a stir in a good sense. However, the public perception of the Russian Far East is largely distorted. The first two words that usually come in mind are as follows: The Russian Far East is wood and fish. And yet, if you consider the economic structure, the largest part of the gross product is accounted for by logistics. Any commodities entering Russia in the East cross the entire territory of the Russian Far East. And this logistics involves a lot of businesses. The second is hydrocarbons. Sakhalin’s economy is largely based on hydrocarbons. Yakutia has large deposits of hydrocarbons, alongside with Eastern Siberia, the Irkutsk Region. The Russian Far East is home to 50% of Russian gold. Agriculture covers 3 million ha of cropland. Not as impressive as in the Central Black Earth Region, but this is the land that neighbours the largest markets in terms of demand — the Asian markets. You can grow grain and beans, feed animals, and further process meat and milk. There is industry — it is largely cluster-based, but powerful enough: all things associated with aircraft engineering and shipbuilding. A natural gas chemical cluster is to be created in Svobodny. This is a pretty diversified economy.
— The gubernatorial election in the Primorye territory last September was a major scandal, the Russian President had to interfere. Why is the protest sentiment so high, despite such close attention to the region?
— We have a department of economics here, not politics. (Laughing.) Democratic processes are becoming more conflictual: people in Khabarovsk do not like Shport, people in Chicago do not like Trump. Attention to elections is a good thing. This is democracy in action: the distance between the well-being of the people and those responsible for this well-being is narrowing down. I am personally acquainted with Oleg Nikolayevich Kozhemyako who is amongst the candidates for the position of Governor of the Primorye Territory. He is a real man of action.
— And he has already been at the head of a half of the regions in the Russian Far East.
— That’s great. An experienced man full of energy. He knows the region and business. And competition produced a candidate that had not been there before.
— Competition? Really? Quite the opposite.
— Do you really think that there is a mastermind who knows 10,000 answers to 10,000 questions? Life revolves around the competition of ideas and competition of people at various levels of life. The fact that the electoral agenda has become so dynamic is a good thing. This means that the people do care about their future. Especially considering that we all used to suffer from apathy. Many people refused to treat elections as civil duty.
Magic of the Islands
— Russky Island has recently been assigned to the Primorye Territory. What are its future prospects?
— Islands have a magic of their own. Singapore is an island, Manhattan is an island, Hong Kong was originally an island. Russky Island is twice as big as Manhattan and virtually the same size as Hong Kong. We do imagine the concentration of intelligence, well-being, history, and human energy that either Manhattan or Hong Kong possess.
— Shall we have a Manhattan on Russky Island?
— We are not planning to create a Manhattan on Russky Island. But this is obviously a jewel of the Crown. It will be a crime to crumble it thoughtlessly for a pile of diamonds. You can obviously make 10 rings with them. By contrast, if you work one gem properly, it will be unique and will be a hundredfold more expensive. We need to work Russky Island properly and turn it into a unique place. This will be the brightest and easternmost part of Russia. It is 30 minutes away from the international airport along a straight line.
— What should we do there?
— We have our concept. We call it the International Cooperation Centre. The Eastern Economic Forum is held in the Far Eastern Federal University. We think that Russky Island may be turned into a congress and exhibition centre. And a recreation centre for guests from all around Asia, from the entire Asia-Pacific Region. Vladivostok to them is the easternmost European city, they are fond of it. It has a certain atmosphere. Clean air. A resident of an average Chinese city may even want to go there to get some fresh air. We should develop health, business, academic, child, and sports tourism and e-sports. If we create such magnets on Russky Island wisely, it will flourish.
— Who are the potential investors?
— There are a lot of them: from Japan and from China. As well as Russian companies.
— What do they want? Development?
— No trivial development. No way. Russky Island must be man-made. Or be preserved as a natural place. In this case, it will give no economic effect.
By Bela Lyauv