Alexei Chekunkov: 2020 Will Be the Year of Breaking Ice in the Arctic Region

Alexei Chekunkov, CEO of the Far East Development Fund, told RIA Novosti about the projects in the Arctic Region that may secure financing as early as next year and about the importance of Northern tourism, about the projects implemented by the Fund in the Zabaykalsky Territory and Republic of Buryatia that were incorporated into the Far Eastern Federal District last year, as well as about a project of major reform in Russia’s forest industry, performance of the Russia–Japan investment platform, and building relationship with Chinese investors.

— Alexei, how many projects does the Fund currently have in its portfolio and what is the total size of its investments?

— We are implementing 17 projects with a total investment of RUB 477 bln. The Fund has invested RUB 59.6 bln in these projects: RUB 45 bln has already been made available, while the other RUB 13.5 bln will be made available as the work proceeds. Therefore, our capital of RUB 60 bln has been fully allocated. Yet another RUB 1.5 bln will be made available by the end of the year. Besides, the next-year budget has a dedicated line providing for an increase of the Fund’s capital by RUB 19 bln. The Fund has already selected the projects to be financed with this money in 2020.

All of these 17 projects are located in the Far Eastern Federal District. At that, the experts of the Far-Eastern Division of the Russian Academy of Sciences have recently included five of them in the list of ten best-performing projects in the Russian Far East for their multiplier effect on area development. Infrastructure accounts for about 26 percent of investments, mining — for 18 percent, agriculture — for 13 percent, and industry — for 12 percent. Besides, we are implementing a small and medium business support program and have already supported more than 850 projects thereunder.

— Switching over to specific projects: the new terminal in the Khabarovsk Airport was opened in October and erection of an international terminal is supposed to follow suit. What are the timeframes and parameters?

— We are currently at the project expert review stage. We are planning to embark upon its implementation in the second half of next year.

— Some time ago, you said that the model of collaboration with VEB used for the Khabarovsk Airport project may be replicated in the other projects. Can you mention any specific cases to illustrate how this model could be used?

— Absolutely. We are currently administering ten joint projects with VEB RF; as a rule, we are trying to invest on a parity basis (1:1), meaning that a half of the money is provided by VEB, and the other half — by the FEDF (in the debt portion). At times, we support projects in the capacity of a trilateral consortium composed of VEB, FEDF, and a commercial bank. Specifically, this is the arrangement we are contemplating for the Novy Urengoy Airport and for the Elizovo Airport in Petropavlovsk-Kamchatsky.

— Have you already signed the agreement for the Novy Urengoy Airport?

— The agreement has been signed, but the financing of the project has not started yet.

— And what is the status of the Elizovo Airport project?

— The financial closing of these projects has been scheduled for the first quarter of 2020.

— Please say a few words about the Blagoveshchensk Airport. Do we have just an implementation agreement there or any interested investors already?

— The Blagoveshchensk project is based on the concessionary model, but there is no private initiator to date, since the airport is owned by the government. We have announced a tender and are waiting for the outcome.

— And what is the status of the international terminal in the Yakutsk Airport?

— We discussed this project at the early phases with Yakutsk-based banks among others. We are not taking part in this project yet, but I do not rule out the possibility that we will join in at some point in 2020.

— What are the other airports in the Far East that you are looking at?

— Our important task is to promote general aviation, i.e., to increase the number of airfields and supply the appropriate aviation equipment in order to connect small settlements and villages. During the Soviet era, the net was denser, as there were at least thrice as many regular flights. Today, a large number of areas ended up isolated. This is a systemic problem that must be addressed at the national government level: at the level of the Ministry of Transport in charge of the runways and at the level of the Ministry of Industry and Trade that decides which aircraft should be used.

There are national aircraft industry development interests, there are a few projects of small aircraft, but not all of them take our peculiarities into account. In case of our most remote areas, the old An-2 is still critically important, as it can take off and land anywhere. It is true that it has become morally and physically obsolete, but it needs to be either upgraded or replaced. In the meantime, the more popular and better-looking aircraft like DHC that our Fund has financed for Aurora airline represent full-fledged aviation that requires expensive hard-surface runways that are unavailable in many places.

The passenger airline services in the Far East will not break new ground until we find a solution for this so-called last mile, i.e., until we choose the airfields we support and the small aircraft we use there. Besides, when we speak of a government subsidy, we invariably speak of a social-oriented project rather than of business. It will pull both tourism and public healthcare, since people in smaller localities are oftentimes deprived of high-quality medical care, as they are unable to get out of there.
This is an important aspect, but it goes beyond the Fund’ mission due to its purely social nature. But since you have asked, I think that the situation with the airports, including the international terminals, has significantly improved in the Russian Far East in recent years. By contrast, the problem of airfields and domestic airports for smaller localities has not been resolved to date.

— Development of the Arctic Region is a major new challenge for you and for all Far Eastern entities. Do you already have any ideas about the Arctic projects that are top priority for the Fund and about the overall course of action in this area?

— This is a huge scope of exciting work. From the formal and legal standpoint, we have the right to work in the Arctic Region starting from January 1, but we had a year to prepare. Over this time, we saw a few clusters of projects there. One major area is shaped around the hydrocarbons, but we do not go there, as relevant companies invest trillions of Rubles there. Another promising line of medium-scale projects concerns transport and tourism, and this is exactly the area of our focus.

For instance, there is an excellent project of dock redevelopment in the Murmansk Port. The most exciting urban environment redevelopment projects worldwide are the dock redevelopment projects, including Canary Wharf in London and the docks in San Francisco, Barcelona, Lisbon, and Bordeaux. I think that Murmansk will create one of the most amazing places in Russia — people will be able to see the ships entering and leaving the bay and the Lenin nuclear-powered icebreaker right in the port.

The second area is transport. The Northern Sea Route is a major subject. However, the NSR is a project of such a scale that everyone is involved one way or another. Besides, there are some isolated intelligent projects in the area of transport and urban environment that the Fund is currently exploring. I think we will implement at least one of them next year.
Moreover, there are some interesting telecommunications projects, for instance, the Arctic cable — this is also the Northern Sea Route, but in terms of data transfer. This is a good, lively, and interesting project that is becoming increasingly relevant due to the introduction of 5G, which will result in a major increase of data traffic. The Arctic Region will turn into a large and significant area of our work, but this work is at a very early stage now, and therefore, 2020 will become the year of breaking ice and setting the course.

— You have mentioned tourism. All of us generally understand the potential interest for the Russian Far East. But who are the people that will want to travel to the Arctic Region as tourists?

— I can spend hours telling you about Northern tourism and how incredibly popular and trendy it is becoming right now. I have just come back from Iceland that is located on the Arctic Circle at the same latitude as Chukotka and is visited by 2.5 mln tourists every year. This is a country with a population of Yakutsk and an area between the Primorye Territory and the Khabarovsk Territory. Northern tourism is incredibly popular — the Asians believe that the aurora is a must-see. A large number of Chinese tourists travel to Iceland — they arrive by plane and spend a lot of money. This is something unusual and exotic for them.

It’s true that the Russian North is dark and cold, and yet Murmansk, for instance, can offer the world’s best flyfishing. This is a royal recreation indeed. It is quite simple to organize any winter entertainments — the only things you need is a little money, snow, and cold. We do have snow, and cold, and we have money too. Recreational tourism, including hot springs and spas, may be offered in Kamchatka. Eco-tourism — people want to eat the least polluted fish and drink the purest water in the world. These niches are open wide to us. The key issue is who will do all of this. As opposed to giant gas pipelines and railways, it is quite difficult to plan such business from above. It is impossible to order your country to turn into a tourist paradise. Ten, twenty, fifty, one hundred thousand businessmen must do something. For instance, this is currently taking place in Vladivostok where local business is gradually starting to accommodate tourists.

To sum it up, the present-day world has a very trendy concept known as marketing of areas as travel destinations, which usually refers to the marketing of countries or individual cities, e.g., Istanbul. For instance, Georgia is a travel paradise recognized worldwide that accommodates six million tourists. Thus, I believe that a moderate financial investment will be enough to advertise a Northern Sea Route travel as a thing that everyone must do at least once in life, since this will give an unforgettable and unmatched experience. And here you are — we will have a target audience of 100 million that we can take for rides 24/7. I think that northern passage operators should start doing this. The Northern Sea Route definitely qualifies as an asset that can provide for us over centuries to come.

— Is this just an idea so far?

— We are not in the position to overextend ourselves. At this point, we have a promising health tourism project in Sakhalin. Governor Valery Limarenko has forward-looking guys in his team who want the Japanese to come to their region for health recreation. Instead of us going to Japan, the Japanese will come to Russia. This is theoretically possible considering the aging of the population and heavy commercialization of the services abroad — healthcare is transforming from a social service into a very expensive luxury everywhere. The Asian population (in China, Japan, Republic of Korea) is aging at a speedy rate: 500 million persons aged 60+ will need various medical and health recreation services. I do believe that we can turn around the flow of the Far East residents going to the Republic of Korea and Japan for healthcare services and start offering these services to the citizens of the Asian countries instead. Sakhalin and the Primorye Territory are the two destinations that have a potential to succeed. Sakhalin has an elaborated program specifying the land plots and the number of beds. We will support this effort of theirs. I expect us to see the launch of high-potential projects within the next two years or so.

— Is the project of a health recreation center to be created on Russky Island in cooperation with Chinese continuously implemented?

— There is a project of a large travel recreation cluster to be created on Russky Island. We have named it an international cooperation center. We are continuously working on this project, but without involvement of any foreign partners.

A congress and exhibition center is yet another aspect. The construction phase is highly likely to be launched next year and will be implemented by Russian contractors. The project of a congress center is very important. On the one hand, it is hard for Vladivostok to compete against international congress supercenters, e.g., in Las Vegas, Frankfurt, or Shanghai. On the other hand, why shouldn’t some medium-sized Chinese companies contemplate holding an exhibition or event in Russia? This may serve as an interesting experience that is politically appealing. We may do it smart and attract them to our place — to the congress and exhibition center at the University without interrupting the educational process.

— Summing up the Arctic subject: you have mentioned that the Fund will need its capital to be increased by RUB 50 bln in order to implement the projects in the Arctic Region. Has this decision been made already?

— There is a decision that potentially provides for allocating RUB 15 bln to the projects in the Arctic Region from our current capital and from the capital that we expect to secure in 2020. I think that we will invest this amount within the next two years — in 2020–2021. I mentioned RUB 50 bln with a reference to the projects in the Arctic Region scheduled for about five years to come.

— Yet another big story is the incorporation of the Zabaykalsky Territory and the Republic of Buryatia into the Far Eastern Federal District. What is the progress in these regions and what are the projects that you have already joined or are planning to join?

— I find it incredible that these two constituent entities are at the very bottom in terms of social and economic development despite their geography and natural resources. Buryatia has Lake Baikal, Buddhism constituting a global-scale competitive edge, and pretty decent mineral reserves. The Zabaykalsky Territory has land, forests, mineral reserves, and a border with China. These two constituent entities obviously have all prerequisites for their economic growth to outpace the average rate.

We have gathered a portfolio of projects for the Republic of Buryatia and the Zabaykalsky Territory and are planning to launch at least two projects in each region. I expect them to be launched in the first quarter of 2020. Buryatia has a major lead and zinc deposit with a total investment of USD 1 bln (the Ozyornoye Field) that we hope to launch next year. The Zabaykalsky Territory has a uranium production project. We are planning to invest RUB 5 bln in this project in the first quarter of 2020.

In addition, we are implementing a pilot project to test the new assessment model for forest reserves in the Zabaykalsky Territory. This region has never claimed the title of the Russian timber capital; however, it has a very spacious area and massive forestland, but little road infrastructure. It is impossible to deliver wood by helicopter, which is the reason why Russia has a lot of wood, but it is economically unviable to produce it in the areas that have no forest roads. The Zabaykalsky Territory lags significantly behind in this respect, but it is open to innovation and has a strong potential for developing a processing-oriented model straight away. The depth of such processing does not have to be super-high, and yet we should make sure that the final product is not round wood; instead, this should be well-surfaced and well-packaged timber produced in a manner transparent to the government.

Russia’s present-day forest industry is mired in total non-transparency. We have no idea where 60 percent of our wood comes from whatsoever. And the current regulatory framework virtually blocks any development of processing. In particular, we compared our forest industry to Finland’s forest industry. We found that Russia’s income per ha of forestland is 240 as low as the income for Finland’s economy. The root cause is that the industry is running at a loss. We have identified the subproblems and proposed the potential solutions.

The first and very least thing to do is to allow forest cultivation on forested farmland. This may prove to be a very appealing business. Why not? It is allowed to grow potatoes, but it is not allowed to grow pine trees. Let everyone cultivate whatever they want to cultivate.

Second, we propose to use airborne drone laser scanning to assess the forest reserves. This is more expensive than satellite imaging, but less expensive than doing this work by hand. We estimate the costs at around RUB 50 per ha. This means that we will need a mere RUB 50 mln to survey a million ha of forestland.

Third, wood logistics is a very sensitive and important issue. The maximum capacity of a wood truck is 44 tons, both in summer and winter. In winter, however, the roads freeze and are able to accommodate even tanks. If we increase the load up to 47 tons in summer and up to 60 tons in winter, this will have no effect on the roads, and yet the wood logistics costs will be 17 percent lower. This translates into a 20% improvement in the cost-efficiency of the industry and a longer shipping distance for wood. This is crucial.

Finally and most importantly — processing. Our technical and environmental requirements are so tough that a project of a paper mill in Russia is 150%–200% more expensive than in Finland. We propose to allow the application of the technical standards used, for instance, in the OECD countries — at least within the framework of Advanced Special Economic Zones (and such a zone should be created for each individual paper mill, since it requires massive investments). Such standards are deemed fit for construction projects in Finland, Canada, or Sweden, but not in the Khabarovsk Territory. Why not? Let’s do like the Finns do, and then our paper mill will cost USD 1 bln instead of USD 2 bln. This will trigger the economics and attract investors.

Yet another important measure we propose is to switch from the plot development plan and forest use report to an electronic output report. Similar to the oil and gas sector. We are not telling the oil producers to drill the wells of a certain depth. We just tell them that they may produce a million tons of oil and pay the mineral tax on one million tons of oil. We should do the same in the forest industry by telling the producers that they may produce 100,000 m3 of wood and be responsible for this output. And we will know the exact number of trees thanks to the airborne laser scanning.

The last most important thing is to build high-quality forest roads, trunk roads in particular, at investors’ expense through public-private partnership arrangements under concessions providing that investors invest in the construction of such roads and the government pays back over a lengthy period. In particular, by offsetting such investments against certain concession payments for the wood produced.

— Is this just a package of ideas so far?

— No, these ideas have already been converted into a draft federal law that we expect to be sent to the State Duma during the spring session.

— Provided that everything goes according to plan, when shall we see the electronic forest plot allocation facility?

— We are planning to present it at the Eastern Economic Forum in 2020. Indeed, we initially treated it just as an electronic facility; later on, however, we realized that everything is related, started thinking hard about it, and finally designed an integrated project to improve the performance of the entire industry by launching an experiment in the Russian Far East. The good news is that there is nothing super-challenging or undoable in this project. It is true that it involves multiple entities, but we have enjoyed their support so far. We received no reasoned objections to any of the solutions that we proposed.

— How is the online facility for investors in aquaculture doing? Are there any plans to further expand the water area designated for business?

— This task takes times, as it involves multiple important aspects. The first is the environmental aspect. The second aspect concerns security considerations. Not all seas and water areas in the Russian Far East are fit for mariculture, as we should not disregard the defense aspects. There are areas that may not be used for mariculture, that’s it. Overall, this is a modest business to date, but we are happy that a large number of plots have already been allocated — thrice as many as in the previous 20 years.

— Switching over to the international agenda: are there any plans to establish a direct investment fund with China that was discussed during Russian President Vladimir Putin’s visit to the PRC in April?

— The fund with China is a long-standing challenging project. We are at an active stage now. We have not agreed to establish a direct investment fund with China yet, but we have been working on different content for quite a while already. In this sense, our Chinese colleagues are difficult partners. On the one hand, they are quite interested. On the other hand, their real strength is in the area of civil engineering capacities, and they would not embark upon projects without tied financing. Oftentimes, this leads to a situation when the Russian budget has to invest in the work of Chinese contractors. This is oftentimes in conflict with the best interests of the project and state. I am personally aware of dozens of projects in Russia that ended up in mutual disillusionment. And yet, Russian and Chinese business communities are looking closely at each other and I believe that quantity will gradually translate into quality.

— Could you please name the sectors and projects that the Chinese may choose to invest in?

— Mining and power engineering. We have collaborated on gas infrastructure development projects, mobile gas infrastructure development projects involving LNG technologies, and even natural gas conversion projects. Russia has an excellent resource base, excessive bank liquidity, and technologies, which is the reason why China should better be treated as a market and partner at a more advanced stage rather than as a development partner at the design stage. We have made quite an effort to accommodate them in the agricultural sector. They are definitely looking for a source of environmentally safe food, livestock products, or businesses, but the government is refusing to let the products in. China refuses to buy foreign-produced meat and engages in the talks at the level of heads of state for each individual quota.

These imbalances and differences persist, but they should by no means undermine the dialog. We take energetic efforts to communicate with China and share all investment opportunities and updates with its representatives. I think that one of the ways to cooperate with the Chinese is to establish multilateral organizations, for instance, by involving European partners, instead of creating Russia–China bilateral institutions. Multilateral organizations involving China, Russia, Switzerland, France, and Germany could represent a balanced interest of all parties better and serve as more accommodating partners.

— You have already mentioned the agricultural sector. We hear from time to time that for instance COFCO is interested in purchasing a grain terminal in the Krasnodar Territory, but nothing follows…

— The key word is interested. This is sporadic interest. Should there be anything serious, we will give it a second thought. The Chinese are strategic thinkers. This implies that the lack of strategy and of a large-scale collaboration plan is exactly the strategy for China–Russia relations in the agricultural sector. Specifically, on the part of China, since Russia is willing to engage. Tell Russian producers that the Chinese market is open to them, and they will launch production and saturate the Chinese market with high-quality meat, grain, and anything else within three years. But the Chinese agricultural lobby is taking its toll, which results in a situation when millions of Chinese are employed in the low-productive and inefficient agricultural sector. If they let affordable meat and grain from Russia in, what will all these people do? China is quite rigid in these terms.

— Is there any progress with the Koreans? Are there any specific projects that Korean investors are willing to join?

— Korean investors predominantly focus on small and medium business in the Russian Far East. We are discussing certain projects involving our Fund, but the number of such projects is limited.

— How is the Russia–Japan investment platform doing?

— It is administering around a dozen projects of a very wide spectrum. The first project we have implemented is the project of Sayuri greenhouses in Yakutsk that have already reaped their first harvest — this is a technological innovation based on Japanese technology. Previously, these northern latitudes had no year-round greenhouses. Besides, Japanese investors have expressed interest in the project of an LNG transshipment terminal to be erected in Kamchatka and have contacted the platform to that end. In addition, there are interesting urban environment projects, utilities projects, a waste incineration plant project, and a motor vehicles scrappage project.

In general, we think that the platform has made a good start and we would like to see a higher number of implemented, completed projects by now. The Japanese may be a little slow, but they never give up easily, which makes me believe that we will complete at least a half out of these ten projects.