2014 Knowledge Sharing Program II with Russia (Primorsky Territory) 2014 Knowledge Sharing Program II with Russia (Primorsky Territory)

Improvement of Primorsky Territory's Investment Environment 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) 2014 Knowledge Sharing Program II with Russia (Primorsky Territory)

Project Title Improvement of Primorsky Territory's Investment Environment

Prepared by Institute of Eurasian Studies (IES) at Kookmin University (KMU)

Supported by Ministry of Strategy and Finance (MOSF), Republic of Korea Korea Institute for Industrial Economics and Trade (KIET) Korea Trade-Investment Promotion Agency (KOTRA)

Prepared for The Government of Primorsky Territory

In Cooperation With Department of Economy of Primorsky Territory Government

Program Directors Kye Hwan Kim, Director, Industrial Cooperation and Globalization Division, KIET Hakki Kim, Head of Global Industry Team, KIET

Senior Advisor Dong-kyu Shin, Former President of NongHyup Financial Group Inc.

Project Manager Yoonhee Kang, the Institute of Eurasian Studies (IES) at Kookmin University (KMU)

Authors Chapter 1. Gongpil Choi, Korea Institute of Finance Jaeshin Park, Kookmin University Chapter 2. Hye jung Ryu, Law Firm Jipyong Young Kwan Jo, Korea Eximbank

Program Officer Yunhee Choi, KMU

English Editor Haina Lee, Korea Institute of Finance

Government Publications Registration Number 11-1051000-000645-01 ISBN 978-89-5992-807-1 978-89-5992-803-3 (set) Copyright ⓒ 2015 by Ministry of Strategy and Finance, Republic of Korea Government Publications Registration Number

11-1051000-000645-01

2014 Knowledge Sharing Program II with Russia (Primorsky Territory)

Improvement of Primorsky Territory's Investment Environment Preface

Korea’s Knowledge Sharing Program (KSP) was launched in 2004 by the Ministry of Strategy and Finance (MOSF) based on the recognition that knowledge is one of the key determinants of a country’s level of socio-economic development. The aim of KSP is to share Korea’s development experience and knowledge accumulated over the past decades with the partner countries in order to assist their socio-economic development. KSP includes policy research, consultation and capacity-building activities, all in all to provide comprehensive assistance to the partner countries. By doing so, it helps the partner countries to build a stable foundation for self-sustainable growth. In 2014, the MOSF additionally launched KSP-II to provide the policy consultation, specifically focusing on both industry and investment climate within the partner countries.

Policy experts and specialists who have extensive experience in their fields are involved in analytical work. In addition, former high-ranking government officials are effectively involved in policy con- sultations to share their intimate knowledge of development challenges. Both the government officials and practitioners closely collaborate with their counterparts in partner countries to work jointly on pressing policy challenges and share development knowledge in the process.

KSP with Russia was initiated in 2013 with Primorsky territory. Based on the written demand survey form as well as the discussion with the government of Primorsky territory, the program entitled ‘Policy consultation to increasing investment attractiveness of Primorsky territory’ was launched in 2014 as KSP-II. It focuses on the following two topics: Offers for improvement of mechanisms to support investment activity and improvement of knowledge and skills of strategic planning (experience of the Republic of Korea) and Analysis and support of investment strategy of Primorsky territory till 2019 and offers to establish special economic zones in Primorsky territory (Study on the Korean experience).

I would like to express my sincere thanks to Gongpil Choi, Jaeshin Park, Hye Jung Ryu, and Young Kwan Jo for their efforts to conduct in-depth research for this report. I extend my deepest appreciation to Dong-kyu Shin, Senior Advisor of 2014 KSP-II with Russia (Primorsky territory), for his support throughout this program. I also appreciate the Ministry of Strategy and Finance (MOSF), the Korea Institute for Industrial Economics and Trade (KIET), Korea Trade-Investment Promotion Agency (KOTRA) for providing great support for the program. I am grateful for the helpful comments and discussion provided by referees and consultants. Last but not least, special thanks go to Program Officer Yunhee Choi and all the other members of the Institute of Eurasian Studies for their hard work and useful comments.

Finally, policy recommendations, statements of fact, or analysis expressed in this report are the responsibilities of the authors alone and therefore do not reflect the official positions or views of the MOSF, KIET, KOTRA, IES or their respective institutions.

Yoonhee Kang Professor/Director Institute of Eurasian Studies Kookmin University Contents

2014 KSP-II with Russia (Primorsky Territory) ···························································································· 010 Overview ····························································································································································· 013 Executive Summary ··········································································································································· 021

Chapter 1 Suggestions for Improving Investment Support System and Capacity Building for Strategic Planning

1. Measures to Improve the Support System for Investment Activities in Primorsky Territory ·· 028 1.1. Current Status and Issue Analysis ··································································································· 028 1.2. Korea's Experience in Improving the Support System for Investment Activities ··············· 039 1.3. Proposed Policies ·································································································································· 041 2. Capacity Building for Strategic Planning – Experience of Korea ··················································· 047 2.1. Current Practice of Strategic Planning in Primorsky territory ················································· 047 2.2. Experience of Korea in Capacity Building for Strategic Planning ········································· 049 References ··························································································································································· 068 Chapter 2 Analysis of Investment Strategy of Primorsky Territory until 2018 and Suggestions for Establishing Special Economic Zones in Primorsky Territory

1. Review of Investment Strategy of Primorsky Territory until 2018 ················································· 072 1.1. Overview of Investment Strategy of Primorsky Territory until 2018 ···································· 072 1.2. Analysis of Issues in the Investment Strategy ············································································· 073 1.3. Korea's Experience Relating to Establishment and Implementation of the Investment Strategy ·················································································································································· 076 1.4. Policy Suggestions ································································································································ 078 2. Effectiveness of Policy on Special Economic Zones and Case Study in the Republic of Korea ·· 083 2.1. Classification and Characteristic of SEZs in Korea ······································································ 083 2.2. Case Study of Korea and Policy Proposal ···················································································· 085 3. Development Prospect in Semi-finished Goods and Korea's Experiences ····································· 090 3.1. Industrialization Structure of Primorsky Territory and Semi-finished Manufacturing Industry ·· 090 3.2. Case Study of Korea and Policy Proposal ···················································································· 092 4. Development Prospect in Tourism and Korea’s Experiences ···························································· 095 4.1. Characteristic of Tourism Sector in Primorsky Territory ···························································· 095 4.2. Tourism Development Policy in Primorsky Territory ·································································· 097 4.3. Case Study of Korea and Proposition on Tourism Development in Primorsky Territory ·· 098 5. Development Strategy and Alternatives for Agriculture ··································································· 101 5.1. Status and Policy Direction of Agriculture in Primorsky ·························································· 101 5.2. Korea's Experience in Agriculture Development ········································································· 102 5.3. Agriculture Investment in Primorsky by Korean Investors ······················································· 103 5.4. Major Obstacles in Agriculture Investment in Primorsky and Direction for Improvement ·· 104 5.5. Necessity of Establishing Detailed Investment Promotion Plan in Connection with Core Projects ········································································································································· 108 References ··························································································································································· 112 Contents | List of Tables

[Table 1] Structure of Primorsky Territory’s GRP ····················································································· 016 [Table 2] Investment into Primorsky Territory ·························································································· 017

Chapter 1 [Table 1-1] Russian FDI by Region ··············································································································· 030 [Table 1-2] Economic Indicators for the Baseline Scenario ··································································· 033 [Table 1-3] Asia Major Country GDP Growth ··························································································· 034 [Table 1-4] Program for Socio-Economic Development of the Far East and the Baikal Region: Before and After Revision ········································································································ 037 [Table 1-5] IFEZ Foreign Investment ············································································································ 040 [Table 1-6] Population Change by Region ································································································· 041 [Table 1-7] Researchers and Staffs of KDI ································································································· 055 [Table 1-8] KDI Settlement of Accounts (2011~2014) ············································································· 055 [Table 1-9] Goals and Key Indicators of Seoul Plan ··············································································· 063

Chapter 2 [Table 2-1] Primorsky Territory's Priority Investment Projects ······························································· 080 [Table 2-2] Investment in Masan FTZ ·········································································································· 087 [Table 2-3] Investment on Masan Free Export Zone ·············································································· 087 [Table 2-4] Structure of Industrial Production in the Far East Russia ··············································· 091 [Table 2-5] Manufacturing Production in the Far East Federal District in 2013 ····························· 091 [Table 2-6] Changes in Korea’s Industrialization Policy ·········································································· 093 [Table 2-7] Top Destination for Far East Russia’s Outgoing Tourists ················································· 096 [Table 2-8] Incoming Tourist in Primorsky Territory ··············································································· 097 Contents | List of Figures

Chapter 1 [Figure 1-1] FDI Inflow into Russia ·············································································································· 029 [Figure 1-2] FDI into Primorsky Territory ··································································································· 029 [Figure 1-3] Foreign Investment in Russia by Region ············································································· 030 [Figure 1-4] RUB/USD Exchange Rate ·········································································································· 031 [Figure 1-5] External Debt of Central Bank of Russia ············································································ 032 [Figure 1-6] Organization of KDI ················································································································· 054 [Figure 1-7] Structure of 2030 Seoul Plan ································································································· 059 [Figure 1-8] Promotion System of 2030 Seoul Plan ················································································ 061 [Figure 1-9] Formulation Process of ‘Citizens Participatory’ Seoul Plan 2030 ·································· 062

Chapter 2 [Figure 2-1] Overview of Korean FTZ ········································································································· 084 [Figure 2-2] Priority Development Area in Primorsky Territory ··························································· 088 2014 KSP-II with Russia (Primorsky Territory)

Yunhee Choi (KMU)

The Ministry of Strategy and Finance (MOSF) of the Republic of Korea has been implementing the Knowledge Sharing Program (KSP) with selected development partnership countries since 2004 with the overarching goal to assist in enhancing national competitiveness and the institutional restructuring efforts of partnership countries by sharing Korea’s development experience.

In 2014, the MOSF launched KSP-II in collaboration with the Korea Institute for Industrial Economics and Trade (KIET), specifically focusing on both industry and investment climate within the partner countries.

The KSP with Russia was initiated in 2013 in cooperation with the government of Primorsky territory. From July 2013 to March 2014, the Institute of Eurasian Studies at Kookmin University and the Department of Economy of Primorsky territory jointly implemented the Knowledge Sharing Program on the topic entitled ‘Policy consultation to strengthen Russian economy’s capacity’ under the supervision of KDI. Upon the successful implementation of the program, the government of Primorsky territory offi- cially requested a follow-up program on the topic “Increasing investment attractiveness of Primorsky territory.” Based on the request, the MOSF selected Primorsky territory, Russia as its partnership counterpart for 2014 KSP-II, which has been conducted by the Institute of Eurasian Studies (IES) at Kookmin University (KMU) under the supervision of KIET and KOTRA.

010 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) The KSP team and the government of Primorsky territory agreed upon two sub-topics after taking into account Primorsky territory authorities’ area of request, as identified in a written Demand Survey Form and close consultation between the two sides. The two topics and respective Korean experts are:

Consultation Topic Korean Experts Offers for improvement of mechanisms to support investment activity and improvement of knowledge Dr. Gongpil CHOI and skills of strategic planning (Experience of the Dr. Jaeshin PARK Republic of Korea) Analysis and support of investment strategy of Primorsky territory till 2018 and offers to establish Dr. Hye Jung RYU special economic zones in Primorsky territory (Study of Dr. Young Kwan JO the Korean experience) Role Name Project Manager Dr. Yoonhee KANG Program Officer Ms. Yunhee CHOI

As the first stage of the 2014 KSP-II, the Demand Survey and Pilot Survey Study were carried out from 28 to 30 July 2014 in Vladivostok, Russia. The Korean delegation headed by Dr. Sangwon Kim, professor of Kookmin University, met Primorsky territory government’s officials and specialists and discussed policy priorities. As the next stage, the Korean delegation, headed by Dr. Yoonhee Kang, program manager of the 2014 KSP-II with Russia (Primorsky territory) and the director of the Institute of Eurasian Studies at Kookmin University, carried out a briefing session and an additional Pilot study from 27 to 29 August 2014 in Vladivostok, Russia. At the briefing session, the Korean KSP-II team was able to identify and confirm the research topics through the discussion with high-level government officials and specialists.

In November 2014, ‘the Interim Reporting & Policy Practitioners Workshop’ was held in Seoul for the purpose of presenting research findings and sharing consultation in process. The Russian delegation, composed of nine members, including government officials and private sector CEOs, was headed by Mr. Kostenko Alexander Ivanovich, the first-vice governor of Primorsky territory. From 17 to 22 November, the Russian delegation participated in Russia Far East 4 Regions Investment Forum hosted by KOTRA, seminars at KOTRA, the Seoul Institute and Incheon Free Economic Zone (IFEZ). Also, the meetings were arranged with interested parties from public sectors such as Jeju Free International City Development Center (JDC), Jeju Special Self-governing Province, and Jeju Tourism Organization, concerning the consultation topics.

2014 KSP-II with Russia (Primorsky Territory) ∙ 011 As the final stage of KSP-II, the Korean delegation headed by Dr. Dong-kyu Shin visited Vladivostok for the Senior Policy Dialogue and Final Reporting Workshop to deliver final findings to the Russian senior policy-makers and other stakeholders related to the agenda. The Final Reporting Workshop was successful with active participation of the audience during the discussion session. Also, it allowed participants to learn and compare different aspects of development experiences and perspectives of the two countries. In the Senior Dialogue, Dr. Shin and other Korean experts had a meeting with Mr. Nikolay Dubinin, director of the Department of Economy of the government of Primorsky territory, and discussed its result in-depth. Mr. Dubinin expressed his sincere gratitude for the Korean KSP-II team’s efforts.

012 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) Overview

Yoonhee Kang (KMU)

1. Overview

Vladimir Putin, who was inaugurated as president of Russia in 2012, is actively promoting political stability and economic development to solidify his power during his third term. He successfully managed to consolidate his power by taking a series of political reforms and by actively involving in foreign policy. Immediately after the annexation of the Crimea in 2014, the popular approval rating for him soared to 80%.

At the same time, he took several measures to gain momentum for the economic growth of Russia. In fact, the popular support that he enjoyed during his first and second terms was strongly related with the rapid economic growth in the 1990s. Putin probably understands that he needs a continuous economic growth to solidify his power. Therefore, he put strong emphasis on attracting foreign direct investment and put pressure on regional governments to attract FDI into their own region.

At the same time, the third Putin administration expressed a strong willingness to develop the Russian Far East and Siberia. Putin has announced that the economic development of the Russian Far East and Siberia is Russia’s most important geopolitical challenge, and he is visibly exerting more efforts than the previous administration: Putin created the Ministry for the Development of the Russian Far East, hosted the Asia-Pacific Economic Cooperation (APEC) Leaders’ Summit in Vladivostok, and adopted the “State Program of the Russian Federation on Socio-Economic Development of the Russian Far East and the Baikal Region by 2025.”

Overview ∙ 013 These measures came from the desire to gain momentum for the economic growth of Russia and to achieve balanced development between regions by improving the Russian Far East and Siberia that were comparatively lagging behind. What is important here is that Russia is looking forward to reinforcing economic cooperation with Asia-Pacific countries for the development of the Russian Far East and Siberia. Asia-Pacific region has the most rapid economic growth in the world. Therefore, Russia, which borders Northeast Asia, is naturally interested in being associated with Asia-Pacific in order to gain momentum for its own growth.

However, two things that happened in 2014 put a blight upon Putin’s hope. The first is the dramatic fall of the oil prices. As we witnessed last year, the oil price plunged into a 50 dollars a barrel. The problem is that the rapid growth that Russia experienced in the 1990s is possible only when the oil price is over 100 dollars a barrel. However, the oil price is unlikely to climb back to over 100 dollars a barrel, at least in the near future, and Russian economy is doomed to struggle.

Secondly, the economic sanctions applied by the West-led by the US and EU-against Russia had begun to negatively influence Russian economy. As Putin decided to annex the Crimean region to Russia amid the political turmoil caused by the stepping down of Ukrainian President, the West warned economic sanction and approved it. Sanctions were applied against individuals and businesses from Russia and Ukraine starting from March 2014. Russia has responded with counter sanctions against a number of countries, including a total ban on food imports from the EU. Both the sanctions against Russia and Russia’s own import bans have triggered the collapse of the ruble and caused the financial crisis in Russia in 2014. A high rate of inflation, massive capital outflow have ensued, Russian stock market crashed, and budget revenue dramatically decreased. As the Ukrainian conflict has not been resolved, the tension between Russia and the West is likely to persist for the time being.

Facing economic sanctions and dramatic fall of oil price, Russian government is turning to the East for a breakthrough. East Asian countries such as China and Korea can provide much needed foreign investment, as these countries have not approved economic sanctions. Russian government intends to expand its trade with Asian countries up to 40% of total volume of its foreign trade. This means that Russia’s major foreign trade partner would be Asian countries instead of Europe. Russia’s recent moves to strengthen ties with China and North Korea can be understood in this context. Last year Russia concluded an agreement on gas pipeline projects with China. Russia and North Korea agreed to strengthen their cooperation on trade and investment. Moreover, Russian governments, both federal and regional, are exerting more and more efforts to attract investment from South Korea. In this context, Russian Far Eastern regional governments want to get useful policy recommendations from South Korean experts on how to improve their foreign investment environment.

014 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) 2. Overall Economy

Russia is full of potential: it boasts the largest territory in the world, abundant natural resources, world-class technology, and an educated workforce. Although Russian economy suffered greatly after the collapse of Soviet Union in 1990s, Russia maintained a 7% year-round economic growth rate in the 2000s. The economy, however, suffered again in 2008 when the global economic crisis struck a hard blow on its economy. Although the economic recovery has been slowly underway since the late 2009, the GDP growth rate did not recover to over 5%: it was 4.5% in 2010, 3.4% in 2012, and 1.3% in 2013. In 2014, the growth rate was a meager 0.6% due to economic sanctions and a sharp drop of oil price in the global market.

All the macroeconomic indicators worsened in 2014. The ruble depreciated by 72% against dollar and stock prices fell by 72%. In December 2014 Russia’s inflation rate was 11.4%, reaching the highest level since 2008. Foreign exchange reserves dramatically shrank from 509.6 billion dollars to 388.5 billion dollars. Russian government’s foreign debt was 64 billion dollars, whereas private sector’s debt was 614 billion dollars. Russia had a favorable trade balance of 220 billion dollars in 2014, as its exports exceeded imports due to the ban on food imports. A noteworthy change in 2014 was a massive capital outflow: a total of 125 billion dollars left the country.

As mentioned above, Russian government turned to the East to overcome the economic difficulties caused by the hostile international environment. Primorsky territory gains more importance as the outpost for trade and investment expansion with the Asian countries. In fact, Primorsky territory has been developed as the hub of the development of the Russian Far East and Siberia. Prior to and following the APEC Leaders’ Summit in 2012, a huge amount of money was invested in Vladivostok, the capital city of Primorsky territory.

Primorsky territory is Russia’s southeasternmost region, bordered by China and North Korea. The region’s population is 1,938,500 and its territory is 164,673 km². So far, it is most developed region in Russian Far East and it has the largest economy. Its Gross Regional Production (GRP) reached 603.1 billion rubles in 2013, accounting for 20.5% of the total GRP of Far East. Primorsky territory has a wide spectrum of industries: fishing, forestry, timber processing, machine building, metal processing, chemical, energy, food and light industries. According to the official statistics, transport and communication account for 20.1% of its GRP, retail 18.3%, construction 10.3%, and processing industry 8.8% respectively.

Overview ∙ 015 [Table 1] Structure of Primorsky Territory’s GRP

(%) 2010 2011 2012 2013 Fishing 5.4 4.5 - 4.7 Processing Industry 7.2 8.1 8.1 8.8 Construction 12.5 17.2 20.3 10.3 Retail 18.1 15.5 15.7 18.3 Transport and Communication 17.6 21.9 19.2 20.1 Real Estate 8.4 6.6 7.7 9.2 Government Administration, Security, Social Insurance 9.1 7.6 7.2 8.9 Health, Social Welfare - - - 4.6 Production and Distribution of Electricity, Gas and Water 4.9 4.4 - - Agriculture and Forestry - - 4.4 - Others 16.8 14.2 17.4 15.1

Source : Russian National Statistical Office, www.gks.ru (accessed March 15, 2015)

As shown here, transportation is one of the leading industries of Primorsky territory. Primorsky territory has the most dense railway networks in Russia, as well as 13 ports along its coastline. Vladivostok has the commencing station of Trans-Siberian railway and it is connected to China and North Korea by railway. Primorsky’s major ports include Vostochny, Nakhodka, Vladivostok, Slavianka, Posyet, and Zarubino. All these ports except Slavianka are connected with railway. Shipping companies in Vladivostok deal with as much as 80% of marine shipping services in Russian Far East.

Due to its geographical location, foreign trade has been developed. In 2013 the total volume of foreign trade was 11 million dollars, combining 3.3 million dollars of exports and 8.7 million dollars of imports. Import exceeds export by far in the region. The major trade partner is China which accounts for 51% of the total trade. Korea and Japan come next, accounting for 17% and 14% respectively. Major export goods are fish, timber and ferrous metals.

Retail sales are expanding gradually: total retail sales increased from 177 billion rubles to 249 billion rules between 2010 and 2013. In particular, restaurant business has been growing briskly as its total volume almost doubled in the last four years.

However, the most noteworthy change took place in construction. The sum total increased from 14 billion rubles to 62 billion rubles for the years between 2005 and 2013. It reached a new peak in 2012 with the total of 128 billion rubles, mainly due to the hosting of APEC Summit meeting.

016 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) Primorsky territory boasts of its manufacturing industry, which is relatively well developed in Russian Far East. Primorsky territory has been known for its machine building industry, mostly for fishing and shipbuilding. Construction materials produced in the region are distributed throughout Russian Far East. Recently, cars are manufactured in automobile assembly plant in Vladivostok. Automobile parts are shipped from Japan and Korea, manufactured in Vladivostok, then distributed to other parts of Russia by railway. Primorsky territory government intends to apply the successful experience of to other fields including home appliances and IT.

The region’s agriculture has a potential to grow. The main agricultural areas are located in the southern and the southwestern parts of the region. The total agricultural production has been 20 billion rubles on average in the 2010s. Grain cultivation accounts for 62.5%, whereas livestock industry accounts for 37.5%. Grains such as rice, oats, bean, wheat, potatoes and vegetables are produced, and bean is the most proper grain to be cultivated in the region. Primorsky territory takes the first place in meat production in Russian Far East.

Primorsky territory’s timber and fishing industry have a great potential to grow. Considerable portion of its territory is covered with forest, both coniferous and broadleaved. The timber industry, though in recession, is still second only to Khabarovsk Region’s with an annual yield of about 3 million cubic meters of timber. Primorsky territory also has abundant fishery resources, including salmon, cod, crab and shrimp. However, due to underdevelopment of fishery processing industry, it is importing proc- essed fish from neighboring countries such as China. Therefore, the regional government has a keen interest in developing fishery processing industry.

Primorsky territory has been enjoying a large inflow of foreign invest in the last four years (see [Table 2]). The total amount recorded 113 billion rubles in 2013, but the figures for 2010, 2011, 2012 exceeded 200 billion rubles. This means that massive capital investment was put into this region, prior to APEC Summit. Japan takes first place in investment, accounting for 70% of the total, with Germany 26%, China and Korea 4%.

[Table 2] Investment into Primorsky Territory

(RUB mil.) 2005 2010 2011 2012 2013

Total 28,499 208,209 307,618 203,189 113,094

Source : Russian National Statistical Office, www.gks.ru(accessed March 15, 2015).

Overview ∙ 017 Primorsky territory government has adopted and is now implementing the “Socio-Economic Development Program of Primorsky territory in 2013-2017.” As the feasibility of the program was analyzed in 2013 Russia KSP final report in detail, it will not be repeated here.

It is noteworthy to mention that 5 out of the 14 Priority Development Territories (PDT) selected by the Russian federal government last year are located in this region. There are Nadezhdinsky, Zarubino, Russky Island, Petrochemical and Mikhailovsky. Russian government is promising more favorable tax exemption for foreign investors. It is Primorsky regional government that has to find and attract foreign investors and to operate the above mentioned PDT.

Although the subjects that Primorsky territory government presented for 2014 KSP do not deal with PDT, they are indirectly related to the issue. The topics are the improvement of investment supporting system and strategic planning, the evaluation of investment strategy up to 2018, and the establishment and operation of Special Economic Zones. These topics are dealt with in detail in following chapters.

3. Summary of Policy Recommendations

Considering the growing importance of foreign economic relations in the Russian Far East, the Korean government initiated KSP with Russia in 2013 to strengthen the cooperative relationship. In the first year program with Primorsky territory, Russia covered three key areas; first, the reorganization of the administrative system to improve the investment promotion climate of Primorsky territory; second, capacity building for Primorye Investment Promotion Agency; third, review and detailed planning on the “Socio-Economic Development Program of Primorsky territory in 2013-2017.” With successful execution of the 2013 Russia KSP with Primorsky territory, the second year of KSP has been conducted as KSP-II under the following topics: first, offers for improvement of mechanisms to support investment activity and improvement of knowledge and skills of strategic planning (Experience of the Republic of Korea); and second, analysis and support of investment of Primorsky territory till 2018 and offers to establish special economic zones in Primorsky territory (Study of the Korean experience). Research findings and policy recommendations are as follows:

018 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) 3.1. Suggestions for Improving Investment Support System and Capacity Building for Strategic Planning

The key to supporting investment activities in Primorsky territory is establishing a set of conditions that enable market evaluation as objective as possible. As Russian economy is sharply weakening after its annexation of the Crimea last year, it is important to find a new legitimate entity with the right authority and expertise to turn around the sagging sentiment and push forward some of the mega projects in the region. Since federal level decision is largely based on a variety of factors that have little bearing on local interests and concerns, the decision often lacks pertinent market responses, and cannot be sustained. To bring in market factors in promoting investment, it is important to create an entity with the right authority and mandate to make decisions on their own. For this reason, the study suggests establishing a Multilateral Primorsky Investment and Development Authority, which would include the memberships of neighboring countries, e.g. Korea and Japan. With the introduction of a new ("international") agency for "regional" development, it is also important to create adequate amount of market information via the help of regional academic institutions and financial companies. Suggestions are made to invigorate various joint study programs among neighboring Asian universities.

Also, the study shows the relevant Korean experience to offer useful knowledge and skills for formulating economic and social development strategic plans in Primorsky territory. This study introduces three different Korean research institutes-Korea Development Institute, the Seoul Institute and the Research Institute for Gangwon-which provide national-level strategies as well as the development strategies at the local government level. Based on these experiences of Korea, two policy recommendations are made for the capacity building of Primorsky territory. First is to promote the establishment of a tentative ‘Primorsky Development Institute’. Second is to prepare and implement the official and systematic administrative procedures through which the capacity of the civil society is fostered and utilized in the formulation process of the Primorsky development strategic plans.

Overview ∙ 019 3.2. Analysis of Investment Strategy of Primorsky Territory until 2018 and Suggestions for Establishing Special Economic Zones in Primorsky Territory

This chapter reviews the ‘Investment Strategy of Primorsky up to 2018’ approved by the Administration of Primorsky territory on December 23, 2013 (the “Investment Strategy”). Furthermore, it provides analysis for the effectiveness of the Special Economic Zones (SEZ) policy as well as the priority investment projects which were requested by the government of Primorsky territory to be reviewed. The KSP team evaluated that the “Investment Strategy” might not be effective due to the lack of efforts to translate the strategic targets into detailed practice tasks. Another problem is the lack of analysis on the result of the previous investment promotion related policies, and the lack of practical measures for redressing the failure or removing the obstacles in the Investment Strategy. Considering the current economic crisis in Russia followed by the annexation of the Crimea last year, the chapter recommends a full-scale revision of the Investment Strategy.

After reviewing the Investment Strategy of Primorsky territory, the chapter focuses on three sectors: manufacturing industry, tourism, and agricultural industry in Primorsky territory. To develop the manufacturing industry, Primorsky territory should establish the Special Economic Zones and provide tax related benefits in order to increase investment attractiveness. Considering the current condition of Primorsky territory, it is desirable to start with establishing the production complex based on the knock down system. This approach would allow Primorsky territory gradually to prepare for the firm base of the special economic zone which is combined with logistics and services. With regard to development of the tourism, three recommendations are suggested. First, offering specialized tourist attractions; second, developing tour programs based on the strengths of the region; third, developing tour programs focusing on the Korean tourists considering the historical relations between Korea and Primorsky territory. Lastly, the chapter analyzes the agriculture in the region and provides recommendations. It is recommended to simplify the customs clearance procedure and to strengthen administrative support to enhance predictability, provide administrative support for export license/permit acquisition procedure, expand incentives for investing in the logistics system through special support on companies investing in the logistics system, provide recruiting service for skilled professionals through linkage between the industry and the academia, and provide information on various entitlements including agricultural subsidies. It also emphasizes the importance of the detailed investment proposal linked with the focus projects, in addition to the macroscopic investment promotion plan.

020 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) Executive Summary

Yunhee Choi (KMU)

Chapter 1. Suggestions for Improving Investment Support System and Capacity Building for Strategic Planning

With adverse conditions for market development, the importance of establishing a control tower to overcome the prevailing constraints for investment cannot be emphasized too much. Typical Primorsky investment projects specifically require the legitimate authority to initiate and implement various programs to mitigate existing barriers. Since the region has been little exposed to outside markets, federal authorities are singled out as de facto legitimate partners while the regional government remain de jure stakeholders for most investment projects. In fact, it has been repeatedly recognized that a sheer dearth of market-based information and evaluations about the Primorsky region remain the most serious hindrance to attracting overseas investment.

To regain the investment momentum that is sharply weakening after the Russian annexation of the Crimea last year, it is important to find a new legitimate entity with the right authority and expertise to turn around the sagging sentiment and push forward some of the mega projects in the region. The current setup of ignoring systemic mismatch where all the key decisions are made at the federal level, while regional government is virtually taking cues from the central government, could not work because the risks associated with Primorsky investment are of such magnitude that require multilateral cooperation beyond national borders. Since federal level decision is largely

Executive Summary ∙ 021 based on a variety of factors that have little bearing on local interests and concerns, the decision often lacks pertinent market responses, and cannot be sustained. To bring in market factors in promoting investment, it is important to create an entity with the right authority and mandate to make decisions on their own. The relevant Korean experiences reveal that special free economic zone strategy with a full authority (e.g.,IFEZ) is a good choice since it helps overcome unavoidable conflicts among local constituents during the transition toward a more sustainable environment.

Specifically, the study suggests establishing a Multilateral Primorsky Investment and Development Authority, which would include the memberships of neighboring countries, e.g. Korea and Japan. With the introduction of a new ("international") agency for "regional" development, it is also important to create adequate amount of market information via the help of regional academic institutions and financial companies. Suggestions are made to invigorate various joint study programs among neighboring Asian universities. While the necessary ingredients for market development are missing in Primorsky currently, the proposed investment and development cooperation would be instrumental to promoting market information on Primorsky, e.g., Primorsky investment climate index, etc. The Korean experiences clearly show that KOTRA has played a critical role in promoting investment and trade for several decades. By utilizing enough regional information, the region can be developed into a viable attractive investment destination for global investors.

Again, the legitimate body to attract investment in the region is a multilateral investment and development corporation, which would be a perfect partner with international financial cooperation such as ADB, AIIB, IFC, MIGA in bringing mega projects in the region. Since an international corporation can also issue bonds and other financial arrangements globally, it could provide a strongholds for currently depressed investment communities. Further, the joint project would significantly reduce risks associated with the region, help highlighting the potential and disseminate market information for the region. The partnership with international financial institutions would also result in favorable funding arrangement, which ensures less volatility and stable funding conditions.

In the second part of chapter 1, the experience of Korea is introduced for the capacity building of Primorsky territory in formulating economic and social development strategic plans. In Korea, as in many other countries, numerous government-affiliated or non-governmental think tanks are conducting research and proposing strategies for national or regional development. The activities and roles of central or local government-funded research institutes are outstanding compared to those of political party or enterprise-affiliated ones.

022 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) Among others, the Korea Development Institute (KDI) is a representative think tank of Korea, of which activities are even internationally well recognized. In this study, the major contributions, history, organizational structure and research areas, personnel and budget, and the governance of KDI are introduced with an emphasis on activities related to the formulation of development strategic plans. Also, in order to recommend ways for capacity building, which take into account the limitation and challenges that Primorsky territory Government faces as a local authority of Russia, two additional cases are introduced. One is the Seoul Institute, which is located in the capital of ROK. The other is the Research Institute for Gangwon in Gangwon Province, the location and status of which are similar to Primorsky territory.

Based on these experiences of Korea, two policy recommendations are proposed. First, it is necessary for Primorsky territory Government to promote the establishment of a tentative ‘Primorsky Development Institute’. It is intended to be a group of experts that carries out the role of a think tank, in a timely and professional manner, in response to the request of Primorsky territory Government. Second, it is necessary to prepare and implement the official and systematic administrative procedures through which the capacity of the civil society is fostered and utilized in the formulation process of Primorsky development strategic plans.

Chapter 2. Analysis of Investment Strategy of Primorsky Territory until 2018 and Suggestions for Establishing Special Economic Zones in Primorsky Territory

In the first part, we reviewed the ‘Investment Strategy of Primorsky up to 2018’ approved by the Administration of Primorsky territory on December 23, 2013 (the “Investment Strategy”). After a brief introduction of the Investment Strategy, we dealt with the issues relating to the concreteness of the realization plan, securing investment resources, and the SWOT analysis. The effectiveness of the Investment Strategy is dubious because there is no intimate relationship between the strategic targets and detailed practice tasks, and the realization plans remain mostly abstract. There is also no analysis of the result of past investment promotion policy, or suggestion of practical measures for redressing the failure or removing the obstacles in the Investment Strategy.

The Investment Strategy needs to be wholly revised due to the economic sanctions imposed by the EU and US triggered by the situation in Ukraine in 2014, plunge in oil price and ensuing fall in roble. For full-scale revision of the Investment Strategy,

Executive Summary ∙ 023 it should closely combine the strategic tasks and realization plan; specify the detailed system and organization, and business promotion plan, as well as the timeline and the evaluation method. The detailed policies need to include the promotion schedule. Also, foreign investor meetings may be regularly held to establish detailed policies and ensure their flexible operation. The priority investment projects should be ap- proached individually and specifically to include (i) method of selecting potential investors; (ii) determination of target investors; (iii) method of approach to target investors; (iv) contact target investors; (v) post-management; (vi) funding and budget; (vii) selection of responsible department, and plan for setting up cooperative system; and (viii) schedule.

In sections 2 to 4, we attempted to evaluate the role of Free Export Zones which would enable accelerating development of manufacturing industry in Primorsky territory. There are two factors to be considered: 1) relationship between Russian policy orientation and market demand of Russian Far East and 2) description of articles that match up with the interest of foreign investors. In the initial stage, automobile production in Sollers and resource processing industries may be expanded.

There are a few suggestions on developing tourism industry in the region. First, specialized tourist attractions should be developed. Second, tour programs should be developed that reflect the advantage of Primorsky territory by adopting programs combined with Russian traditions and winter programs. Third, there is a need to develop programs to attract Korean visitors. Due to no-visa entry, accessibility of Koreans to Russia has been convenient and vice versa.

Currently, Korean tourists visiting Primorsky territory show high interest in history and culture of the region, including places related to Korean independent movement and former Korean settlements. Given this, tour programs targeting Korean secondary and tertiary students, university students and social organizations are promising in the near future.

In section 5, we took a look at the agricultural industry in Primorsky territory. The agriculture in Primorsky grew dramatically during the last five years. While Primorsky is more focused on livestock industry than agriculture, the Korea investors investing in Primorsky is mostly focused on grain production. While the agriculture production in Korea grew steadily during the last 10 years, the self-sufficiency rate has in fact declined, and the gaps in the living conditions and income disparity between the urban and rural areas have been widening. Korea is now professing to focus on higher value-added smart agriculture. The basis of the policy does not seem to be much different since Primorsky also aims for innovation in agriculture.

The greatest attraction for foreign investors in Russia is the cheap farmland, and comparatively low institutional barrier in acquiring farmland ownership. However, one has to execute the 49-year lease contract through bidding in case of independent

024 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) investment. Given the difficulties in participating in the bid, and maintaining the terms of the lease contract, strengthed investor protection is much needed. It is also recommended that they simplify the customs clearance procedure and strengthen administrative support to enhance predictability, provide administrative support for export license/permit acquisition procedure, expand incentives for investing in the logistics system through special support on companies investing in the logistics system, provide recruiting service for skilled professionals through linkage between the industry and the academia, and provide information on various entitlements including agricultural subsidies. It is also necessary to draw up more detailed investment proposal linked with the focus projects, apart from the macroscopic investment promotion plan. Since the investors in northeast Asia including the Korean investors may show great interest in the grain terminals and agro-food multi-complex projects, the investment proposal should emphasize the investment incentives and include contents differentiable from other areas.

Executive Summary ∙ 025

2014 Knowledge Sharing Program II with Russia (Primorsky Territory) Improvement of Primorsky Territory's Investment Chapter 1 Environment

Suggestions for Improving Investment Support System and Capacity Building for Strategic Planning

1. Measures to Improve the Support System for Investment Activities in Primorsky Territory 2. Capacity Building for Strategic Planning – Experience of Korea ￭ Chapter 01

Suggestions for Improving Investment Support System and Capacity Building for Strategic Planning

Gongpil Choi (Korea Institute of Finance), Jaeshin Park (Kookmin University)

1. Measures to Improve the Support System for Investment Activities in Primorsky Territory

1.1. Current Status and Issue Analysis

Before analyzing investment activities in Primorsky Krai, we need to take a look at the FDI across Russia to show that the foreign investment is closely tied to global economic conditions ([Figure 1-1], [Figure 1-2]). Similarly, investment in Primorsky is tightly related to overall investment climate in Russia that state-level efforts alone have only limited impact on improving investment in the region. In fact, state governments have made diversified efforts to attract greater investment in recent years. There has been significant improvement as a result, however, remarkable outcomes are yet to be produced ([Table 1-1]). As can be seen in [Table 1-1] and [Figure 1-3], Primorsky Territory has not made the list of top FDI-attracting regions until 2013. In this chapter, we investigate reasons for slow improvement in investment activities, and introduce experiences of Korea.

028 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) [Figure 1-1] FDI Inflow into Russia

(%, GDP) 80,000 5.00 Millions of Dollars (% of GDP) 4.50 4.50 70,000 4.30

3.80 4.00 60,000 3.37 3.50 50,000 2.83 2.89 3.00 2.99 40,000 2.50 2.51 2.00 30,000 2.03 1.50 20,000 1.00 10,000 0.50

0 0.0 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source : Worldbank, World Development Indicators

[Figure 1-2] FDI into Primorsky Territory

(USD mil.) 700

625 600

500

401 400

316 300

200 144

100 65 66 61 30 26 42 8 12 1 54 0 1996 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source : Russian Federal State Statistics Service

Chapter 01 _ Suggestions for Improving Investment Support System and Capacity Building for Strategic Planning ∙ 029 [Table 1-1] Russian FDI by Region

(USD mil.) Rank Rank Region 2012 2011 Change % Change (2012) (2011) Russian Federation 18666 18414 251 1.4 1 1 Moscow city 4233 3998 235 5.9 2 5 Tyumen Oblast 1441 971 470 48.4 3 2 Moscow Oblast 1376 2594 -1218 -46.9 4 8 Leningrad Oblast 1079 567 512 90.4 5 4 St. Petersburg city 891 1074 -183 -17.0 6 3 Sakhalin Oblast 826 2228 -1403 -62.9 7 6 Kaluga Oblast 674 814 -140 -17.2 8 9 Arkhangelsk Oblast 632 566 66 11.6 9 24 Republic of Tatarstan 577 100 478 479.8 10 10 Amur Oblast 559 426 134 31.4 11 13 Krasnodar 455 255 200 78.8 12 42 Primorsky 401 54 347 644.9 13 18 Omsk Oblast 369 180 189 105.4

Source : Money Isn’t Rushing to Russia, World Economic Journal, 2013.9

[Figure 1-3] Foreign Investment in Russia by Region

160 Foregin Investment : Sakhalin Region Foregin Investment : Tumen Region 140 Foregin Investment : Sverollovsk Region Foregin Investment : City of St Petersburg Foregin Investment : City of Moscow 120

100

0 ep-06 ep-07 ep-08 ep-09 ep-10 ep-11 ep-12 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 S S S S S S S Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12

Source : CEIC

030 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) In fact, promoting investment in the region is becoming a real challenge in light of the on-going western sanctions on Russia and lingering economic and financial volatilities in the wake of recent oil price decline. Despite such adverse development, it is our belief that the Far East region in Russia, especially Primorsky territory holds great promises and potentials for the region, if not the world. The rationale for that optimism stems from the immense natural resources and currently underdeveloped, unexploited growth factors that can be tapped for years to come. If the necessary framework is installed to connect all the potential resources effectively, the huge potential could be translated into visible outcomes and benefits for the global community. In the sense of facing the greatest challenge of tackling the most difficult task given the adverse backgrounds, our efforts in this vein need careful and deliberate preparation and execution. In this report, we first investigated the reasons for the lack of vigorous investment activities, and then offered potential lessons from the experiences of Korea. By highlighting the causes for weak investment in the region, we can determine possible directions for efforts to stimulate future investments. Based on field visits and relevant analytical results, we draw the following reasons for the recent state of weak investment in Primorsky territory to shed some light on our future efforts.

The first factor is the depression in the investment climate resulting from the effects of the latest global financial crisis and sanctions by western economies following the Ukraine crisis. Macro or geopolitical factors can excessively magnify investment-related risks in Russia, which usually has limited market access, and thus often experiences sensitive movement of investment flows. The stance of the western countries is critical to the direction of FDI since the federal government plays a prominent role in Russia due to unconventional economic structure, heavy reliance on commodities, and the lack of key currency. And more recently, the drop in oil prices and the weakening of the ruble ([Figure 1-4]) have coincided to precipitously worsen investment conditions in the region.

[Figure 1-4] RUB/USD Exchange Rate

45.732 45

3월 6월 9월 12월 3월 6월 9월 12월 3월 6월 9월 12월 3월 6월 9월 12월 3월 6월 9월 12월 2010 2011 2012 2013 2014

Source : Bloomberg Finance LP

Chapter 01 _ Suggestions for Improving Investment Support System and Capacity Building for Strategic Planning ∙ 031 According to the EBRD (European Bank for Reconstruction and Development), the Russian economy is predicted to shrink by 0.2% in 2015, and if oil prices fall below 65 dollars per barrel, attracting foreign investment is expected to receive an even stronger blow due to the weakening of its financial base ([Figures 1-5]). Similarly, the World Bank’s scenarios and IMF outlook show that the future direction of the Russian economy may be a stumbling block to improving investment climate in Primorsky ([Figure 1-1]). Thus, it is worrisome that the economic outlook for Russia is dim for the next two years, given the reliance of Primorsky on the overall Russian economy. Russia’s economic condition, which has shown gap with the global economy, is likely to obstruct investment in Primorsky ([Table 1-2]). Investment climate in Russia used to be considered self-sufficing, but, it turned out vulnerable to fluctuations in commodities prices. A deteriorating economic condition in Russia has restricted activities of state governments and Far East development agencies. Furthermore, the recent sanctions imposed by western economies highlighted external vulnerability of the Russian economy, putting the investment climate to the test once again.

[Figure 1-5] External Debt of Central Bank of Russia

(USD)

0.7M 0.678M

0.6M

0.5M

0.4M

0.3M

0.2M

0.1M Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 RUFDCBTL Index (러시아중앙은행 대외채무) 분기 15DEC 1999-15DEC2014 Copyright@ 2014 Bloomberg Finance L.P. 15-Dec-2014 09:50:37

Source : Central Bank of Russia, Bloomberg Finance LP

Second, neither the basic initial conditions nor the situations in contiguous countries in the region act favorably to give any insulation effect from the prevailing negative sentiment regarding Russia. Apart from non-economic factors, infrastructure that is expected to yield long-term and sustainable investment outcome remains inadequate, and neighboring economies that are equally vulnerable to external shocks also add

032 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) to the factors for Primorsky territory’s inability to attract foreign investment. In other words, securing financial or insurance-related services is difficult, the professional pool is small, and the condition in non-tradable sector including medical, education, and health services remains poor. In Russia, the Far East has been the backbone for supplying natural resources, and has not been regarded as a well-balanced, self-sufficient economic bloc with a full authority. To transform the region to be more self-sufficient requires massive involvement of neighboring countries, which is hard to come by in this period of global economic stagnation.

In particular, before jumping to a discussion about demand for products and services from the Far East region, we should point out that the demand base of the global economy has been significantly weakened. In other words, the situation is deteriorating for Far East border countries that are highly dependent on foreign markets like China, Japan and Korea ([Table 1-3]). In particular, the lack of human capital that can make the geographical characteristics and abundant natural resources of Primorsky territory marketable is significantly limiting the Far East region’s capacity to develop itself, which can in turn offset the overall worsening of investment conditions towards Russia. Therefore, with sanctions from western economies put into place, it is difficult to expect that development plans for the Far East region, including Primorsky territory, will rebound any time soon especially due to Russia’s exacerbating conditions and the economic downturn of neighboring countries that previously might have enabled potential investment.

[Table 1-2] Economic Indicators for the Baseline Scenario

2012 2013 2014 2015 2016 Oil price (US$ per 105 104 97.6 53.2 56.9 barrel, WB average) (105~105) (104~104) (97.6~97.6) (45~65.5) (50~67.8) 3.4 1.3 0.6 -3.8 -0.3 GDP growth, percent (3.4~3.4) (1.3~1.3) (0.6~0.6) (-4.6~-2.9) (-1~0.1) Consumption growth, 6.4 3.9 1.5 -5.3 -1.9 percent (6.4~7) (3.9~3.5) (1.5~0.9) (-6.6~-3) (-2.7~-0.6) Gross capital formation 3 -6.6 -5.7 -15.3 1.1 growth, percent (3~1.5) (-6.6~-5.6) (-5.7~-8.2) (-17.1~-10.8) (-0.4~1.8) General government 0.4 -1.3 -1.2 -3.6 -3.1 balance, percent of GDP (0.4~0.4) (-1.3~-1.3) (-1.2~-1.2) (-4.5~-2.8) (-2.6~-2.1) Current account 71.3 34.1 56.7 73.7 62.9 (US$ billions) (71.3~71.3) (34.1~34.1) (56.7~56.7) (83.1~61.7) (79.7~54.) 3.6 1.6 3 4.4 Percent of GDP 6(7.1~4.5) (3.6~3.6) (1.6~1.6) (3~3) (5.8~3.5) Capital and financial -32.3 -56.2 -143.2 -122.1 -60 account (US$ billions) (-32.3~-32.3) (-62.2~-62.2) (-143.2~-143.2) (-130.2~-105.5) (-79.7~-49.6) -1.6 -3 -7.7 -10 -4.2 Percent of GDP (-1.6~-1.6) (-3~-3) (-7.6~-7.6) (-11.1~-7.7) (-5.8~-3.1) 5.1 6.8 7.7 16.5 8 CPI inflation (average) (5.1~51.) (6.8~6.8) (7.7~7.7) (18~14) (9~7)

Source : Rosstat, Ministry of Finance, CBR, and World Bank staff estimates.

Chapter 01 _ Suggestions for Improving Investment Support System and Capacity Building for Strategic Planning ∙ 033 [Table 1-3] Asia Major Country GDP Growth (percent)

2012 2013 2014 2015e 2016e Korea 2.3 3 3.3 3.3 3.5 China 7.8 7.8 7.4 6.8 6.3 Japan 1.8 1.6 -0.1 1 1.2

Source : World Economic and Financial Survey, Regional Economic Outlook, IMF, April 2015

Third, despite the federal government’s strong determination to develop the Far East region, it is difficult to identify a voluntary entity with a full authority that can play a leading role in providing strong incentives or liberalization that can overcome inadequate prevailing conditions. These types of entities are essential to yield investment outcomes under transitional economic system based on past socialism. Although Russia has been dealing successfully with these difficulties by relying on President Putin’s leadership, it has become extremely difficult to identify countries or private partners that can jointly implement development and investment projects because of the recent tension between President Putin and western economies. In fact, the current state and opaque investment climate enables only short-term investments in small-and-medium sized enterprises, rather than the long-term, infrastructure-related projects. In other words, because the system does not let local governments make their own decisions, the situation surrounding the federal government cannot help but have direct effects on other regions. This is a catch-22 situation, where the blessings and commitment of the central authority has been critically important to implement any development plans, which yet turned out to be a major blow to push forward development plans in the region under a different setting.

Fourth, the lack of transparency in a complex governance structure makes it difficult to consider investment performance itself as a meaningful outcome. Investment outcomes need to be interpreted with caution, especially with regard to its sustainability based on market demand. As Primorsky territory region’s handling of “the Suspension of Hyundai Heavy Industries Circuit Breaker Production Factory” demonstrates, it is difficult to expect an entity acting in a central role that can both mobilize market demand and provide long-term support. Although the Russian government recently proposed a regional development program as part of a Far East development policy, frequent modifications and announcements, and the government’s leading role in directing the economic development plan have actually resulted in passive and reserved participation from the private sector. Furthermore, it is difficult to identify a responsible entity that can aggressively tackle the problems that investors experience when dealing with the complex decision-making processes between the federal and regional governments. The proposed investment plans often reflect the needs of Russian government against the interests of potential investors. It has been one of the important factors that prevented

034 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) market conditions that would facilitate continuous investments from materializing in Primorsky territory.

In sum, it is inarguable that Primorsky territory has been pursuing strategies to attract investment with considerable tax exemptions based on the central government’s strategies, especially with Putin’s dedicated attention. Equally, it is also the case that investment, like any other economic activity, is mutually connected and is actualized only when there is a thoroughly acceptable economic rationales and incentives based on reciprocity. What has been overlooked, despite Putin’s strong will and drive to develop, is that a strong leadership entails risks of distorting market evaluation and neglecting partners’ opinions. Investment only takes place where there is a mutually beneficial opportunity based on positive market evaluation and entrepreneurship, not a product of one-sided sheer will and drive to make it happen.

That is, while investment attractiveness should be based on market-oriented assessment that treats every participant equally, Russia’s Primorsky region, if not the entire Russia, is almost devoid of a fully functioning market-based system and hence has limited ability to form a wide consensus and understanding on assessments, even when there is strong leadership. Nevertheless, acknowledging that sluggish investment is a result from insufficient efforts, granting a stronger authority to the central government and the expansion of related agencies should not take priority. This would further distort market assessment of risks involved in potential projects and the sustainability and feasibility of the proposed plan would suffer over the intermediate run. Although the government – be it the federal or central - is coming forward with ever stronger determination, actual investment outcomes will be difficult to improve. This difficulty arises because they have failed to alter the collaborative framework under which potential investors work. Particularly, given that most of private-sector capital is mobilized through foreign investment, the government efforts should be focused on creating an open investment climate and eco-system that encourages participation of various market players, rather than on mere investment volume.

The more important task for development of the Far East region lies in addressing the largely neglected and inadequate exposure to a proper market evaluation. Without the full evaluation by the markets, any investment projects are subject to significant risks. And too often, efforts are directed to increase investment outcome itself without strengthening the market functioning that would make investment more efficient over the longer run. For example, the investment promotion agency needs to start publishing the “Primorsky investment climate index” such that potential investors can have a better sense of a proposed investment plan. It will be important to gradually expose the region’s potential to the market, but at the same time check and prepare all the matters related to investment decisions so that the region receives a proper assessment. In particular, for Russia’s Far East development, an assessment needs to be considered and emphasized by looking back at Korea’s experience, where we yielded successful

Chapter 01 _ Suggestions for Improving Investment Support System and Capacity Building for Strategic Planning ∙ 035 outcomes after a rapid development process. Especially, a cautious, long-term approach is critical to attracting foreign investment to produce tangible outcomes without excessive side effects. In this regard, it is useful to examine some of the controversial investment projects in the past, where we attracted foreign investment and produced tangible outcomes despite the risk of giving preferential treatment to involved parties. For example, controversy remains in the preferential treatment given to Macquarie Bank and its role in the Incheon International Airport Expressway and Umyeonsan tunnel. Criticisms regarding Gale International and the Incheon Free Economic Zone (IFEZ) can also be argued in the same vein.

It is important to understand risk factors endemic to the region before analyzing the support system for attracting regional investment in Primorsky territory. The problems identified based on past analyses of investment in Primorsky territory are as follows: economic background based on natural resources, geopolitical alienation directly related to insufficient human capital, and the lack of an independent decision-making entity in the Far East region due to historical background. The next section offers a few notable issues related to supporting investment activities. The region definitely needs a large-scale strategic preparation to satisfy the basic requirements for sustainable investments in the future.

First, as geographical isolation, an insufficient infrastructure, and political factors are intricately related, it is virtually impossible to resolve all of these conflicting factors in a short period of time. Therefore, it would be too simplistic to only consider obstacles to investment and expect tangible results in the short term. Rather, the target for future efforts should be concentrated in improving the investment climate itself via more structural and underlying efforts. Since most of the job evaluations are based on actual and committed investment amount during a specific period, any provision of public goods also needs to be accounted and compensated for properly to encourage decisions for improving investment climate.

Second, the investment needed to establish a robust economic foundation in the Far East region is quite different in character from the investment treated by an investment office. In fact, the gap is widening between the central government’s big picture for the Far East development plan and locally-customized investment performance measures that are being realized. The feasibility can only be improved by narrowing the recognition gap between the central authority and the local government ([Table1-4]). It started as a national program in March 2013 (‘Socio-Economic Development of the Far East and the Baikal Region 2014-2025’), and revised in April 2014 to a federal target program amid various changes including the Ukraine crisis. The goals and key initiatives were revised, and the budget was sharply cut. Specifically, focus on core strategy became sharper, and the role of private sector funding was emphasized. More ministries were involved, and a special zone strategy was added (“socio-economic development leading zone”), strengthening feasibility of the program.

036 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) Nonetheless, the revised state-led investment promotion efforts hardly seem based on the market demand, and lack rationales on how investment can be organically linked with the other economic activities, and whether the development plan ensures consistency in the long term. Also, funding strategy is key to successful long-term investment promotion, and yet, the program lacks plans for strategic partnership with multilateral development banks or establishing designated development companies. Considering that three countries border one another near the Tumen River of Primorsky, the region can benefit from active participation of the newly launching AIIB. As it is, the investment program advocates the ultimate goal of shared growth and sustainable balanced growth, but lacks detailed explanations or vision on the relationship with the neighboring countries or its mid-to-long-term impact, making it hard to objectively assess the practicability of the program.

[Table 1-4] Program for Socio-Economic Development of the Far East and the Baikal Region: Before and After Revision

Ministry of Far East Development, Federal Air Transport Agency, Authority Ministry of Far East Development Federal Agency for Maritime and River Transport, road authority, railway authority Total Investment 10.7094 tril (100%) 3.5,666 tril (100%) (RUB) Federal Gov 3.8169 tril (35.6%) 536.6 bil (15%) State Gov 347.7 bil (3.2%) 90.3 bil (2.5%) Private 6.5447 tril (61.1%) 2.9401 tril (82.4%) 2 federal target programs, 16 advanced socio-economic development Program 12 sub-programs zones, 20+ investment projects Upgrading Siberia railway, BAM, local Renovating 37 airports (mostly in northern Main airports; construction of LNG and power area); renovating 17+ harbors; Project plants construction of main roads and - GRDP growth by 2.2 times between 2011 - Formation of advanced socio-economic and 2025 development zones and infrastructure building - 1 million increase in population to 12 - PPP principles and strategies to establish Target million the special development zones - Export growth by 3 times - Human resource training - Transport infrastructure for trade and personnel exchanges in Far East and Baikal Region

Source : Socio-Economic Development of the Far East and the Baikal Region (2013.3.29), Federal Government Decree 446; Kim, ’Russia Far East Development and Our Response,’ KIER Industry Economy Analysis 2013.6, and Han, 'The Russian Program for “Socio-Economic Development of the Far East and The Baikal Region” and Its Implications for Economic Cooperation between Korea and Russia,’ Russia Research, 24(2), 2014.

Chapter 01 _ Suggestions for Improving Investment Support System and Capacity Building for Strategic Planning ∙ 037 Third, the fundamental reason for the inability to attract investment is that each of the related authorities has focused on delivering tangible outcomes, and has not thoroughly reviewed environmental and non-economic barriers. Therefore, in order to draw out more robust outcomes and nurture development through investment, a common ground among stakeholders needs to be first established so that it is possible to pursue a progressive approach in a long-term plan. As this issue is directly related to Russia’s governance structure, we suggest operating a separate agency to establish consensus. The hierarchical delivery model is easy to operate, but is also a hindrance to establishing consensus among potential investors. Consensus is necessary so as to balance against the risks in an isolated region such as the Far East.

In order to deliver tangible outcomes that take into account the structural characteristics of risk factors, it is important to first focus on a rather intangible environmental factor called “improving the investment climate” and reflect this as a measure in performance evaluations. In other words, rather than measuring tangible results in terms of the amount of investment, it would be better to measure the improved “attractiveness for investment” as this will lead to sustained investment over the medium- and long-term. Of course, it would not be easy to separate out factors that contribute to systemic improvement in investment climate as it is measured by a combination of determinants. In practice, we can monitor the progress of the Primorsky investment climate index as constructed by a local government or research centers in the region.

To summarize, to evaluate investment outcomes in the Far East region, it is important to improve the investment climate through various efforts such that continuous investment can be achieved, rather than only short-term investments. Additionally, in addition to poor investment performance, we can observe that the investment outcomes in Primorsky territory are excessively inconsistent. As this inconsistency is interpreted as the government’s political will it excessively influencing the investment climate itself. As demonstrated in recent situation, it can quite readily have a negative effect on long-term and continuous investment outcome. In other words, it is highly likely that the Russian central government, in particular Putin’s Far East development initiative1), will be perceived as a strategic and self-centered investment plan because it is based on bold drives toward the establishment of state-owned enterprises or funds. This is why even if there are tangible results, it will be difficult to sustain them. Therefore, rather than strong and determined proclama- tion, it is absolutely necessary to develop and declare “Primorsky territory Investment Climate Indicators” that promote efforts that can be understood from an outside perspective and which will noticeably improve the investment climate.

1) At the end of 2012, Putin emphasized that the Far East region needs to break away from conventional perception of producers of raw materials and shift to a self-sufficing, balanced economy. For this, Putin announced several incentives, such as tax exemptions for the first 10 years for investments of more than 16 million dollars and investments of five-hundred million dollars in mineral extraction industries.

038 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) 1.2. Korea's Experience in Improving the Support System for Investment Activities

How much of Korea’s investment support experiences needs be shared to promote investment in Primorsky? What is important is to identify strategic approaches to key investment elements, instead of merely listing case studies. Given the unique governance and decision-making system in Russia, it would be unrealistic to expect that Primorsky government can fully accommodate the proposals and recommendations of this report by itself. To make the best use of this report, it will be appropriate to narrow down the scope of application and focus on small, workable projects. Such limitation might make the proposals presented here seem vague and abstract, as they focus on overall policy direction and framework. However, to understand a country with markedly different governance and investment climate, policy proposals need to focus more on overall approaches and backdrop, than on specific instructions.

Introducing Korea’s investment support experiences can be useful to understanding how a designated, independent investment agency can be organized and managed to complement market activities, even though Korean experiences might not be fully relevant to Primorsky with its different background and conditions. When an investment authority has strong political power, investment-related decisions are often made on a political base, often defying the market mechanism. This is where a special purpose company comes into the picture. In the case of Korea, IFEZ was set up to effectively promote foreign investment, without being burdened with political pressure. It can provide a useful reference to establish investment strategies in Primorsky, such as inviting foreign experts to work more independently.

We would like to introduce Korea’s experience in order to overcome regional risks, identify obstacles and offer relevant measures to invigorate investment activities in Primorsky territory. Although Korea is also driven by a type of state-directed capitalism2), in reality there is little interference by bureaucracies or political leadership regarding investment evaluations due to an openness in the investment climate. However, it is still difficult to expect core market participants to be original or take leadership, and most activities to attract investment have thus far been driven from the administration level. Compared to private firm-driven capital attraction by conglomerates like Hyundai and Samsung, capital attraction at the government level did not turn out superior in terms of sustainability or efficiency. Therefore, regarding Far East development, the Russian government needs to focus on its role of coordinating necessary parts to maximize private and market-driven investment. Although the current state of Russia makes it difficult to identify private actors, this can be resolved by seeking private foreign investors. When public-private partnership, including foreign capital, operates to improve investment conditions, demand for investment arises and leads to actual investment, subsequently building a sustainable growth engine.

2) “Emerging-Market Multinationals: The Rise of State Capitalism”, The Economist, 19 Jan 19 2012, http://www.economist.com/node/21543160?fsrc=email_to_a_friend.

Chapter 01 _ Suggestions for Improving Investment Support System and Capacity Building for Strategic Planning ∙ 039 It was our view that Korea’s experience in securing initial investment conditions would be helpful in regards to improving investment activities in Primorsky territory. However, reflecting on Korea’s experience, we confirm that investment driven by the government did not carry over into improving conditions for continuous investment. In the case of Korea, foundations for key industries were successfully established through foreign investments driven by large conglomerates. The chaebols have been the main engine to initiate large scale investment plans and the authority basically played the role of a cheer-leader. In the case of Russia, it is important to put effort into establishing an entity that can find and attract private actors, and if possible, prioritize private-driven investment, since attracting investment by the government has clear side effects. Importantly, as soon as some level of investment foundation is completed, efforts should be accelerated to make a transition toward a private-driven paradigm.

Furthermore, the strategic directions and operating capacity demonstrated by Korea’s investment promotion agency and free economic zone were also important factors. The largest advantage in the cases of Invest Korea and the Incheon Free Economic Zone (IFEZ) was that they both hired experts in attracting investment and provided systemic service so that the problems that foreigners encountered during the investment process were quickly resolved. This partnership actually proved to be effective to overcome the difficulties of investment initiatives driven by authorities.

The unification of an investment window through an investment consulting center provided a basis to deliver consistent messages to foreigners. Through the introduction of a one-stop service, foreign investors who hope to invest in Korea are able to take advantage of comprehensive support service from the initial investment stages to post-investment. This helped foreign firms to adapt to Korea’s investment climate, and seize investment opportunities. Corporate and income tax exemption based on industry and investment size, as well as the relaxation of various regulations also contributed to enhancing the investment climate. As of July 2013, IFEZ successfully entered into agree- ments with 60 foreign investors, attracting 5.1 billion dollars (FDI reported). ([Table 1-5])

[Table 1-5] IFEZ Foreign Investment

(Unit: USD mil., as of 2013.7.31) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Total declaration 1 76 86 128 118 562 502 554 2070 926 5060 arrival 1 74 11 123 103 475 365 211 522 334 2248

Source : IFEZ, www.ifez.go.kr

However, regardless of this operational advantage, it is also important to consider problems that arose from the establishment process of the free economic zone. Above all, agenda selection by producers without consideration for demands, competition, oversupply issues due to herd behavior, and the lack of transparency and benefits

040 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) during bidding are areas that Korea needs further improvement. At the same time, it is highly relevant to empower an investment promotion agency for Primorsky territory.

In sum, various efforts should be put into promoting investment in a limited setting, rather than focusing on the investment decision itself. Deciding whether to invest or not is based on a combination of many factors including long-term prospects for profit, guarantees of investment returns, conciliation of disputes between labor and management, supply and demand of manpower, education and culture, and medical facility. In particular, market evaluation should be made possible so that investors are convinced that the demand base is strong and expandable over the long term. Because this type of market evaluation itself is challenging in Russia’s Far East region, it is difficult to expect significant positive outcomes despite the government’s strong determination and empowerment of a support system to attract investment.

1.3. Proposed Policies

Recently, Russia has shown a strong enthusiasm for Far East development by even allowing the area to function as an autonomous region. The Russian government’s political will to develop the region is getting stronger, as reflected by an increase in the budget to 105 billion dollars, which is five times larger than three years ago. However, whether this grand scheme will be realized is still unclear. Notwithstanding the federal government’s enthusiasm for Far East development, the number of residents in the Far East region is in fact declining. In 2012, the rate of population decline was 21 percent (in Alaska, the population increased by 33 percent during the same period) and the prospects for economic growth are still uncertain.

[Table 1-6] Population Change by Region

(1,000 persons) % change (2012) 1990 2001 2012 from 1990 from 2001 Total 147,665 146,304 143,056 100.00% -3.10% -2.20% Central 38,018 38,175 38,538 26.90% 1.40% 1.00% Northwestern 15,310 14,199 13,660 9.50% -10.80% -3.80% Southern 13,324 14,060 13,884 9.70% 4.20% -1.30% North Caucasian 7,373 8,702 9,493 6.60% 28.80% 9.10% Volga 31,764 31,532 29,811 20.80% -6.10% -5.50% Ural 12,725 12,471 12,143 8.50% -4.60% -2.60% Siberian 21,106 20,333 19,261 13.50% -8.70% -5.30% Far Eastern 8,045 6,832 6,266 4.40% -22.10% -8.30% Siberian Baikal Region 5,163 4,799 4,495 3.10% -12.90% -6.30% Far Eastern and Baikal Region 13,208 11,631 10,761 7.50% -18.50% -7.50%

Source : KIEP World Economy Update, KIEP, June 17, 2013

Chapter 01 _ Suggestions for Improving Investment Support System and Capacity Building for Strategic Planning ∙ 041 Therefore, before preparing countermeasures, a status check and preparation needs to take precedence. First, a more objective analysis needs to be conducted regarding why past plans have failed and why there has been no progress made in order to prepare for the future. An external consulting service should be utilized to accommodate analytical results from an objective perspective. In particular, it would be very useful to refer to the development plan for Alaska, which has a similar background. Second, specific preparations for budgeting and private fund utilization are necessary to operate the development program. It would be difficult to consider investment through state-owned enterprises that reflect the government’s will as private investment based on market conditions and self-judgment. That is, there are limits to interpreting an increase in investment as the outcome of improvement in investment conditions. In practice, attracting “private” investment using state-owned enterprises is applied as a strategy to draw out funds from the federal budget. Third, we emphasize the need to focus on establishing an investment ecosystem so that physical and human capital is naturally connected through improvements that occur in a comprehensive investment climate. Most of all, the federal government needs to have a considerate attitude so that the Far East region can develop itself based on regional government decisions, rather than those of the federal government.

Allowing BOOT (Build-Own-Operate-Transfer) may also be considered for private entities participating in infrastructure investment. Moreover, it is important to provide special benefits only to the development entities in the Far East region rather than the special zone itself. As the conditions are poor, strong incentives that would offset various challenges are needed to achieve the desired results. Unconventional measures should be considered, such as allowing residents of the region to construct their own residences, or the liberalization of privately owned airports and harbor construction. Alaska, which has a similar environmental background, has an income level that is 11 times higher than Russia. In 1989, Anchorage and Magadan had similar population sizes, but today Anchorage boasts a three times larger population. The federal government needs to promote investment that is based on independent preparation by state government or cooperation with private entities, rather than through strong central government leadership. In particular, the Far East region needs to be able to establish ties with neighboring countries and cross-border economic cooperation as an independent economic base.

These findings suggest that the federal government’s failure to establish plans and implement them are more responsible for the relatively underdeveloped state of Russia’s Far East region, than geographical isolation, environmental factors, and population declines. Therefore, the autonomous rights of the region needs to be secured so that the regional government can play a role as a catalyst accepting external requests for development or participation in multilateral settings. It is more important to prioritize the task of laying this groundwork, than focusing only on investment outcomes, so

042 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) that the Far East region becomes an attractive world-class investment destination. Korea’s development experience can be summarized as a “bold opening strategy” in which development leadership was transferred to a third party, and this approach can be helpful to developing a geographically and economically-isolated region such as Primorsky territory. It is also essential to engage various consulting services and research support that can back up the attractiveness of the proposed of investment opportunities.

For Russia especially, the entity that seeks development and the driving force for development are clearly different, and as such there is the need to operate a public-private organization that can coordinate differences in opinion in a multilateral setting. Above all, local situations and surrounding conditions, and the positions of regional economic interests should be sufficiently reflected in order to be seen as valid. For Korea, considerable preparation and active participation helped the country leap from the ruins of post-war to the recent entrance to the club of developed countries. For Russia, the political will to develop Primorsky territory has recently been re-emphasized, and there is unprecedented support from the upper class, which is yielding surprising outcomes. However, in order for this development trend to take root and stay on a sustainable growth trajectory, it is necessary to have more elaborate planning and dynamic participation from a public-private investment entity.

The government of Primorsky territory has already prepared and has implemented an ambitious plan to attract investment. However, from an objective perspective, there are serious difficulties in evaluating validity. Even if an implementing agency or budget is prepared for a large-scale strategic plan, the final outcome ultimately depends on whether there is enough market demand. Thus far, development has been driven by investment plans that focused on natural resources or geographical advantages, while in recent years a more refined plan has been drawn out, increasing the possibility of success. However, it is still difficult to analyze the results of investment attraction or the development plan.

Today’s global economic situation has created an unprecedented level of uncertainty. The aftereffects of the 2008 global financial crisis still remain, and the restructuring process for structural factors that acted as the cause for the crisis has been delayed. In responses from around the world, each government’s policy has sought to support its own survival rather than cooperate, as demonstrated by competition among developed economies through quantitative easing. Because Japan and Europe, following the U.S., are still pushing forward with extensive quantitative easing, the global market situation is extremely unclear, apart from the uncertainty within the Far East region itself. Furthermore, the rapid drop in oil prices is making it difficult to push ahead various development plans that have been ambitiously carried out in the past few years.

External factors and situations like these suggest that using conventional approaches to develop the Far East region would make it difficult to yield tangible outcomes.

Chapter 01 _ Suggestions for Improving Investment Support System and Capacity Building for Strategic Planning ∙ 043 If we were to return to conventional measures to attract investment or develop, we need to first overcome the uncertain situation and clearly and strongly declare the development incentives in Primorsky territory to the global community. In other words, visible efforts are urgently needed to demonstrate the role of Primorsky territory in overcoming the current situation. In order to show efforts to improve the investment climate, the central government needs to clarify what it can do and will not do. Since economic sanctions against Russia are getting stronger, Russia needs to put an emphasis on recovery and improvement of the investment climate. If the situation worsens due to non-economic factors, then more effort needs to be put into resolve the political situation because one cannot ignore its effects on the economy. At the same time, we stress the need to draw out diverse efforts to improve the investment climate.

What we can first propose from the outcome of this research is the idea of joint development of Primorsky territory involving participation from APEC members. Rather than having the Russian government leading every plan on its own, we suggest consideration of a proposal to delegate considerable development or soliciting activities to Korea or towards a multilateral investment corporation. The delegation of authority and responsibility to the main agents of investment can materialize Far East development even if confidence towards the main agents of development are not recovered in the short term. Changes in the governance structure are the most decisive factor in recovery of investment conditions. Participation by a multilateral development bank or specialized development corporation can quickly resolve issues that are constantly raised. For example, despite a different historical background, issues with leased territory in Hong Kong are considered a successful strategy. Special zones or a clustering strategy look similar on the surface, but difference arises from the fact that Hong Kong delegated full authority to the United Kingdom and the actual development agent is still the Russian government. If a drastic level of autonomy is guaranteed, Primorsky territory can secure an opportunity to realize significant potential despite natural and geographic limitations.

Furthermore, Russia can achieve the expected results if the investment corporation has the responsibility and authority to decide on all matters related to investment and expediting of development, rather than strengthening its own investment capacity. The choice lies in conflicting positions between an independent authority and the size and nature of capital. Whereas a strategic choice that can even renounce the concept of a national border is needed for a fully freed economic zone, there are limits to today’s public-driven development strategy, as Korea’s experience demonstrates. Since a series of issues that are sensitive to the government are also guiding factors for foreigners who contemplate long-term investments, these considerations can stand out as serious obstacles. The transfer of investment returns or the level of shares is difficult to approach from an economic standpoint alone. As to specific countermeasures, the following tasks need to be implemented.

044 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) First, as part of institution-building efforts to develop border regions, it is necessary to promote an investment promotion agency at the level of the federal government so that it can be directly involved with decisions at the level of state government. Recently, the Russian government established the Ministry of Far East Development with the full authority over various development projects in the region, dissipating lots of concerns about the possible long-term commitment in the remote area. Yet, a dedicated separate body to engage in talks with private investors as a valid counterparty is still necessary and we recommend setting up a multilateral development institution to reflect area-specific interests that stretch over areas covering China, Korea and Japan. Also it will be worth considering whether to grant full authority to a state government-oriented agency and hold it responsible for its investment decisions. There is also the need to consider allowing a state government-oriented agency to be responsible for investment decisions that has complete authority to make decisions. Clear limitations will arise if investments in the vast area of Primorsky territory are handled only through the state government that is under the direction and management of the federal government.

Second, by encouraging participation by international financial institutions, various obstacles to investment need to be eliminated to prevent insufficiencies in conventional financial services. Participation by international financial institutions would be effective in lowering the most important risk factor in attracting foreign capital. This in turn acts as a catalyst that stimulates a public-private partnership. Another risk factor is that the state government will also need to acquire a status that corresponds to the country regarding Primorsky territory development.

Third, there is the need to establish a joint agency to induce participation from neighboring countries and to foster related markets. Since risk factors related to investment in Primorsky territory are significant, it is our determination that there needs to be the establishment and operation of a multilateral investment agency to dissipate anxiety and achieve investments of appropriate size. More specifically, it would be useful to share the case of IFEZ for benchmarking, and hire investment experts from other countries who can work more independently. An analysis needs to be conducted to decide which of the five main development areas in Primorsky Territory would lead this initiative.

Fourth, we expect that investing in Primorsky territory will pose considerable difficulties for the state government because the challenges are based on geographical characteristics or categorization. Therefore, it would be an appropriate approach to involve the federal government and neighboring countries like Korea to jointly develop the region. The strategy of ameliorating the initial burdens of development cost and raising investment incentives in a neglected area can be accomplished by sharing benefits. This strategy has already been successfully applied in many countries.

Chapter 01 _ Suggestions for Improving Investment Support System and Capacity Building for Strategic Planning ∙ 045 Fifth, it will be essential to establish a regional development institution that includes participation from international development organizations, international financial institutions and neighboring countries to prepare a roadmap that could lead to stock market floatation in the region. This will in turn secure services for investment- and development-based services.

Lastly, a multilateral investment institution should ensure participation of diverse human capital, and produce and provide investment information. Far Eastern Federal University needs to lead the effort in this regard to improve investment environment of the region. Because it is difficult to determine related risks despite the massive potential of Primorsky territory, the investment will only be invigorated when support functions emerge at a market level. It is essential to form an extensive research network among regional institutes and universities to generate and circulate investment data and information.

As any significant investment in Primorsky territory needs to overcome considerable risk factors, it is important to establish partnerships that can implement long-term plans and share risks. Inviting the proposed Asian Infrastructure Investment Bank is one possible option. A proposal that prioritizes inducing a tangible outcome over the short term is unlikely to receive a positive response from the actual market. Primorsky territory has poor overall conditions for producing investment profits and is an alienated region that has clear limitations for overcoming such issues.

Therefore, a thoroughly long-term perspective is required here more than anywhere else and it will be necessary to have a multilateral consultative group that can share the risks. To be more specific, it is important to involve a multilateral bank in order to eliminate fundamental risks and build an enabling environment for project implementation. This stands in contrast to just attracting multilateral investment for its own development project. That is, although it is important to yield an expected outcome through visible investment results that the current Primorsky government considers urgent, it is even more critical to focus on improving conditions such that Primorsky territory emerges as an attractive area for investment. Of course, at the core of these efforts lies the establishment of an investment bank or public-private partnership.

In conclusion, it is difficult to invigorate investment activities in the Far East region in Russia given the recent drop in oil prices, unstable fluctuation in the ruble, and sanctions from western economies. However, as described above, the Far East region has enough room for development because from a global economic perspective it has enormous potential in the fields of energy, environment and agriculture. It is difficult to determine particular merits from a pure economic perspective because there are many significant non-economic factors involved. Due to the nature of the project, a large budget needs to be allocated for the long-term, thus making a multilateral

046 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) platform a prerequisite, and there needs to be an emphasis on the need for integrated financial services that can provide guarantees or insurance. The key is to fully make use of a multilateral agency to secure investment resources that cannot be sourced locally.

Therefore, in the short term, Russia needs to focus on improving the investment climate in related areas and yielding deliverables. In particular, reviewing how other areas overcame difficulties in the governance structure, such as in Hong Kong and Alaska, may prove to be useful. The point is that one cannot change the whole structure to be more accommodative of foreign investment so it is important to create an environment strategically that is most suitable for attracting overseas investment. Above all, in preparation for the possibility that innate conditions act as an obstacle to investment, it may be necessary to make a strategic decision about turning to outside consulting firms and outsource key resources to resolve the issue. This type of outsourcing can be seen as evidence of national confidence and openness, which can carry signaling effect to attract multilateral investment. Although implementing a national project for national profit seems valid from an external perspective, this strategy can actually lower the validity including tricky issues of social equity among population, especially with the advent of today’s network-sharing economy elsewhere. Therefore, we propose prioritizing a more forward-looking and comprehensive strategy that can create an investment eco-system that encourages participation of various market players, rather than emphasizing the state-led approach so that the global community directs sufficient investment attention to the Far East region, including Primorsky territory. In short, the federal and local authorities need to remain in tune with the global trends and deliver the message that they also share common values and virtues with the rest of the world.

2. Capacity Building for Strategic Planning – Experience of Korea

2.1. Current Practice of Strategic Planning in Primorsky territory

It is indispensable to have a long- and short-term strategic plan for economic and social development, in order to make consistent and systematic efforts for future despite the rapidly changing international situation and socio-economic challenges. The plan should be a piece of work that integrates the entire intellectual and policy capability of the nation or the region. The Russian Federation and Primorsky territory Government have also formulated the vision and strategies for the development of the Primorsky

Chapter 01 _ Suggestions for Improving Investment Support System and Capacity Building for Strategic Planning ∙ 047 region and been implementing them with concrete plans. Examples are ‘the State Program of the Russian Federation on Socio-Economic Development of the Russian Far East and the Baikal Region by 2025’, ‘the Socio-Economic Development Program of Primorsky territory in 2013-2017’, and ‘the Strategy and Strategic Plan for the Development of Vladivostok by 2020’.

It is understood that an upper-level plan is first formulated at the federal level through communication and collaboration with Primorsky territory Government and local think tanks, and then the upper plan is specified into the Primorsky level strategic plans. In case of the ‘State Program of the Russian Federation on Socio-Economic Development of the Russian Far East and the Baikal Region by 2025’3), it was presented by the Russian Federal Government as the fundamental concept for the development of the relevant regions in 2009, and then Primorsky territory Government responded by developing ‘the Socio-Economic Development Program of Primorsky territory in 2013-2017’.4)

In formulating the above mentioned strategic plans, the International Center for Regional Development (ICDC) and the Russian Center for Asia-Pacific Integration and Development (RAPID) played an important role. The International Center for Regional Development was established in 1995 and was called as the International Fund for Regional Development until 2002. The mission of ICDC includes the development of regional investment policies, the development of federal-level and regional-level programs, and the investment promotion to regional economy.5) RAPID is a research institute established in the Far Easter Federal University, in order to support the formulation of economic and social development strategic plan in the far eastern region of Russia. It is conducting research and policy supports on the integration of APEC and the regional economy of Russia, social development, and multi-lateral collaboration.6)

3) The target of this plan is to increase, by means of investing RUB 10.7 billion, GDP by 2.2 times until 2025, industrial production by 53%, export by 3 times, and the population of the Far Eastern region by a million people. It is also aimed to manufacture cutting-edge technology centered high value-added products and to strengthen the status of the Far Eastern region in the Asia-Pacific economy, through the construction of plant and transportation network. Upon the launch of the 3rd Putin Administration, the establishment of the ‘Development Fund for Far East and Baikal Region’ (Nov. 2011) of the External Economy Bank and the establishment of Ministry of the Development of the Russian Far East (May 2012) mean that the interest of Russian government toward the development of the Far East has been reified. 4) This program consists of four sub-programs as follows: improving the investment environment of Primorsky territory, fostering the SMEs in Primorsky territory, strengthening the competitiveness of product and service market in the Primorsky region, and the advancement of budget structure including medium- and long-term budget planning. 5) http://mfrr.ru/. 6) http://www.dvfu.ru/web/fefu/russian-eastern-territories-economic-and-social-development-strategic-planning.

048 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) 2.2. Experience of Korea in Capacity Building for Strategic Planning

As in many other countries, numerous government-affiliated or non-governmental think tanks7) in Korea are conducting research and recommending policies on national or regional development strategies. In case of pure civil institutions such as research institutes of universities and corporations, the government cannot intervene in their research theme, direction, and conclusion, although they are making duplicated efforts on certain policy issues. However in case of government-funded research institutes established by the government based on related statutes8), the government not only has a room for, but also needs centralized tuning and organizing the division of roles on policy research.

As for research on economic and social development strategic planning, there are 26 government-funded research institutes, including Korea Development Institute (KDI), Korea Institute for Industrial Economy and Trade (KIET), Korea Institute for International Economic Policy (KIEP), Korea Institute of Public Finance (KIPF), Korea Rural Economic Institute (KREI), Korea Energy Economic Institute (KEEI), Korea Research Institute for Human Settlements (KRIHS), Korea Labor Institute (KLI), and Korean Institute for Health and Social Affairs (KIHASA). These institutes are governed by the National Research Council for Economic, Humanities, and Social Sciences (NRCS), which was separately established under the Prime Minister, in order to function as a national policy research hub, supporting, fostering, and systematically managing government-funded research institutes.

Out of these, Korea Development Institute (KDI) is a key research institute that will represent the experience of Korea with regard to the theme of this chapter. KDI was ranked as 55th in the world9) (14th without USA.) in the ‘Global Go-To Think Tank Index Report’ (GGTTTI Report)10) regularly published by the ‘Think Tanks and Civil Societies Program’ (TTCSP) of the University of Pennsylvania. KDI was ranked as 1st among think

7) The term ‘think tank’ is the name designated to the place (tank) where U.S. strategists gathered and discussed the war plan in the 2nd World War period. 8) There is the ‘Act on the Establishment, Operation and Fostering of Government-Funded Research Institutions’ about economics, humanities, and social science area research institutes, and the ‘Act on the Establishment, Operation and Fostering of Government-Funded Science and Technology Research Institutions’ about science and technology area research institutes. 9) Being ranked as 55th seems to be a mistake. KDI should be ranked within 27th, considering that the Carnegie Moscow Center was ranked as 28th in the world (18th without USA). It is reaffirmed in comparison with KIEP, which was ranked as 54th in the world and 49th without USA. 10) This index has been published yearly since 2006. In 2013, total 1,947 panel members of policy makers, journalists, and sectorial & regional experts participated in the evaluation. Despite the criticism on bias that policy institutions located in Europe and North America are comparatively more represented, it is recognized as an index that collects most comprehensive data on the activities of think tanks and compares their capacities.

Chapter 01 _ Suggestions for Improving Investment Support System and Capacity Building for Strategic Planning ∙ 049 tanks in China, India, Japan, and Korea, and was also ranked as 17th in the world in the area of domestic economic policy area, which is most relevant to the formulation of national development strategic plans.

Therefore, in this study, we will introduce the research and policy support activities that KDI has performed for 40 or so years since its foundation in 1971, focusing on the formulation of development strategic plans. The introduction of NRCS, which supports, fosters, and systematically manages 26 government-funded research institutes including KDI, will act as a useful benchmark for the capacity building of Primorsky territory in formulating strategic plans. Also, considering that Primorsky territory is a local authority of the Russian Federation, the ‘Seoul Institute’ and the ‘Research Institute for Gangwon’ will be briefly introduced, which are think tanks that support the formulation of development strategic plans and conduct research on local policy issues of Seoul and Gangwon Province, respectively.

2.2.1. KDI’s Activities on Development Strategic Planning11)

2.2.1.1. Activities on the Formulation of Strategic Planning in the First 10 Years (1971~1980)

KDI was established in March 1971 in order to conduct systematic research on economic policy issues and to assist the government in formulating the “Five-year Economic Development Plan” and related policies. Specifically, in formulating the 4th Five-year Economic Development Plan (1977~1981) and the 5th Plan (1982~1986), most of KDI senior researchers took part in the working-level planning team. During this process, KDI held numerous policy discussions and conferences with experts in various fields and reflected their opinions into the plans. KDI supported the government not only in the process of formulating the Five-year Economic Development Plans, but also in drawing up the three-year rolling plans and yearly economic management plans of then Economic Planning Board. In 1976, KDI made and submitted to the government a 15 year plan ｢Long-term Socio-Economic Development during 1977~91｣. The plan was drafted mainly by the senior researchers of KDI, but the government officials of relevant ministries including then Economic Planning Board and civil experts were also invited to participate and their opinions were reflected in the plan.

2.2.1.2. Activities on the Formulation of Strategic Planning in 1981~1991

During this period was also the support for the formulation of the government’s development plan important. KDI deployed most researchers in the working-level planning team of the 6th Five-year Economic Development Plan formulation. In 1985, KDI

11) This section was extracted and summarized from ‘Part I. Overview’ of ≷KDI, the Forge of Policy Research of the Republic of Korea≸ published (in Korean) by KDI in 2012.

050 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) conducted a collaborative research on “Long-term National Development Plan for 2000”. This research was to identify a vision for national development in 2000 based on the prospects of the domestic & foreign environmental change and the evaluation of national development potential. It also aimed to propose the fundamental perspective and direction to respond about various policy issues. The issues considered in this research include the development of the social system, the capacity building of social members, the expansion of economic infrastructure, national welfare promotion, and the expansion of international base. For this, 11 other government-funded research institutes conducted joint research and experts from various circles including academia, industry, and government ministries participated in discussions. Also, in 1988, KDI served as the secretariat of the ‘Economic Restructuring Consultative Council’, which was a presidential advisory body. This council formulated a reform plan of the mid- and long-term economic and social policies in order for open economy, industry restructuring, and the stabilization of citizens’ lives, and reported the results to the President of the Republic of Korea.

2.2.1.3. Activities on the Formulation of Strategic Planning in 1991~2001

Similar to past 20 years, most senior researchers of KDI were mobilized for formulating the 7th Five-year Economic Development Plan (1992~96). About a year later after the completion, the newly-elected government initiated a new plan formulation for its term period (1993~1997) called “the Five-Year Plan for the New Economy” in 1993 and KDI had to take part in the planning process. However, this new economy plan remained a tentative paper plan without a specific implementation plan. As a result, the series of the Five-year Plan for national economy development over a few decades came to an end. Following the foreign exchange crisis in 1997, KDI conducted numerous studies to seek for strengthening the growth sources of nation economy and long-term development path. For example, in 1999, KDI carried out a comprehensive and collaborative research on the knowledge based economy development strategy with then Ministry of Finance and Economy and 10 external research institutions. As a result, KDI provided a foundational sketch for the “Three Year Knowledge-Based Economic Development Plan”, which was actively promoted by the Kim Dae-Jung Administration. In 2001 when the foreign exchange crisis was entered into the overcoming stage, KDI conducted a collaborative study with 16 other research institutes and academia in order to set long-term coordinates for national economy after the crisis. This study, resulted in the publication of the report “Vision 2011: Open Society, Flexible Economy”, which was a scenario to develop Korean economy as the hub of Northeastern Asia, by means of settling down the open market economy, technology innovation, securing growth momentum in human resource and ICT, vitalizing market mechanism for infrastructure supply, and improving the quality of life.

Chapter 01 _ Suggestions for Improving Investment Support System and Capacity Building for Strategic Planning ∙ 051 2.2.1.4. Activities on the Formulation of Strategic Planning in 2002~2011

The process of drawing up the ｢Vision 2011｣ by then Ministry of Finance and Economy and KDI in 2001 progressed quite differently from former economic development planning. The former economic development planning was a top-down, primarily government-driven process, in which the government presented its economic vision to the public, even though civil experts participated in the writing process. But the drawing up of the ｢Vision 2011｣ began with a perception that the market economy was too expanded to be unilaterally driven by the government. Hence, the work was led by civil experts and the quantified target setting was excluded. The details of this visioning process, including the initiation, the working group organization, work schedule, promotion tasks, seminars and conferences, public relations (PR), writing up the report, public hearings, and final contents, can be found in ‘Part II. Vision Formulation of Korean Economy’ (pp. 412~443) of ⎠KDI, the Forge of Policy Research of the Republic of Korea–Collection of policy study cases in the 40th anniversary of KDI establishment⎡. During this decade, ｢Vision 2030 – Hopeful Korea Going Together｣ was also published in 2006 by a collaborative task force between the government and the private. The ｢Vision 2030｣ was a national development strategy formulated by 60 civil experts reflecting opinions collected through 60 or so forums, questionnaire surveys, discussions with representatives of non-governmental organizations.

2.2.2. Introduction of KDI

2.2.2.1. Purpose of Establishment and History

KDI was founded in 1971 in recognition of the need for a think tank that researches economic policy issues concerning Korea in both systematic and applicable ways, and assists the government in formulating the “5-year Economic Development Plans" and related policies.

The history of KDI with a focus on strategic planning is as follows.

• 1970 Promulgation of Act establishing KDI (Law No. 2247)

• 1974 Policy Council on Basic Direction of the 4th 5-year Economic Development Plan

• 1975 Study on Process of Modernization of Korean Economy and Society (1975~78)

• 1975 Study for the Development of Socio-economic Indicators (1975~79)

• 1977 "Long-term Socio-economic Development 1977~91" published

052 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) • 1985 Policy Councils on "Long-term National Development Plan for 2000" (11 areas)

• 1988 Secretariat of 'Presidential National Economic Advisory Council' installed and operated at KDI (1988~89)

• 1990 Policy Council on the establishment of the 7th 5-year Socio-economic Development Plan and its major policies (33 areas)

• 1993 Supports for Government to draw up the 5-year Plan for the New Economy

• 1994 Study on the Maturation Process of the Korean Economy and Society

• 1995 "A Half Century of the Korean Economy: Historical Evaluation and 21st Century Vision" published

• 1996 "Government Innovation: Strategy and Lessons of Advanced Economies“

• 1998 "Opening the Future with the National Public: Economy Blueprint by the Government of the People" published

• 1999 "Paradigm of the New Millennium: Development Strategy for Knowledge-based Economy" published

• 2001 "Vision 2011: Open World, Flexible Economy" published

• 2004 "Vision and Agendas of Participatory Government's Socio-economic Policies: Korea's Dynamism and Opportunities" published

• 2006 "Vision 2030, Forum on Future Growth and Welfare“

• 2012 ｢Global Korea 2012｣, “Shared Growth: Toward a New Model of Capitalism after the Crisis” published

Chapter 01 _ Suggestions for Improving Investment Support System and Capacity Building for Strategic Planning ∙ 053 2.2.2.2. Organizational Structure and Research Area

[Figure 1-6] Organization of KDI

Division of Audit and President Evaluation Senior Advisor

Senior Vice President

Chief Economists Group

Dept. of Dept. of Human Economic Public&Private Division of Division of Dept. of Dept. of General Macro- Resource Information Infrastructure Research economic Financial Competition Developoment & Education Investment Admini- Planning Policy Policy Management stration Policy Policy Center Center

Division of Division of Dept. of Dept. of Dept. of Dept. of Center for KDI School of External Information Industry and Public Foresight North Korean International Public Policy Affairs Management Service Finance and and Strategy Economy Development & Manage- Economy Social Policy ment

Source : KDI, http://www.kdi.re.kr/about/organization.jsp

KDI is conducting research on macro-economic policy, financial policy, competition policy, human resource development policy, industry and service economy, public finance and social policy, foresight and strategy, and North Korean economy. It has opened, as affiliated institutions, the Economic Information & Education Center, the Public & Private Infrastructure Investment Management Center, the Center for International Development, and the KDI School of Public Policy & Management.

Especially, the Public and Private Infrastructure Investment Management Center (PIMAC) is playing an important role in enhancing fiscal productivity through efficient and transparent management of infrastructure investment procured either from public or private financing. Its mission includes conducting project evaluations such as Preliminary Feasibility Studies and Re-assessment Studies of Feasibility on public investments, and Value for Money Tests for Public-Private Partnership projects.

2.2.2.3. Personnel and Budget

Total 243 researchers and staff members are working in KDI. Out of them, 105 researchers hold a Ph.D. degree and 90 hold master’s degree or post-graduate level researchers.

054 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) [Table 1-7] Researchers and Staffs of KDI

Number of Persons Rank Role Male Female Note Total 152 91 Dean Director 1 0 Senior Researcher Research 15 0 Researcher Research 12 2 Associate Researcher Research 22 6 Assistant Researcher Research 35 7 Senior Research Assistant Research 43 51 Research Assistant Research 1 0 Senior Specialist Librarian 0 1 Specialist Librarian 1 2 Senior Administrator Administration 4 0 Administrator Administration 13 2 Junior Administrator Administration 5 20

Source : KDI, http://www.kdi.re.kr/about/organization.jsp

The budget of KDI was about USD 172.7 million in 2013. About USD 104.4 million was covered by the government’s direct or indirect supports, which is the most of the budget except debt and others.

[Table 1-8] KDI Settlement of Accounts (2011~2014)

(Unit: Million USD) Settlement Settlement Settlement Budget Account (2011) (2012) (2013) (2014) Contribution 50,289 47,051 78,719 79,820 Subsidy 0 0 0 0 Direct Allotment 0 0 0 0 Support Transfer 0000 Income Collateral 0000 Income Government Business Support 13,847 20,583 25,567 0 Income Trust In 0000 -come Indirect Income Support Exclusive 0000 Income Collateral 1,180 1,099 1,686 0 Income Sub-Total 65,316 68,733 105,972 79,820 Other Business Income 0 0 0 0 Collateral Income 0 0 0 34,298 Debt 0 71,455 53,195 16,136 Others 19,011 14,075 13,549 5,300 Total 84,327 154,263 172,716 135,55

Source : KDI, http://www.kdi.re.kr/about/organization.jsp

Chapter 01 _ Suggestions for Improving Investment Support System and Capacity Building for Strategic Planning ∙ 055 2.2.2.4. Governance Structure – National Research Council for Economics, Humanities, and Social Sciences

KDI is one of the 23 government-funded research institutes affiliated to the National Research Council for Economics, Humanities, and Social Sciences (NRCS) under the Prime Minster. The President and the Auditor of KDI is appointed by the Chairperson of NRCS.

The primary goals of NRCS are to provide solutions for the implementation of national agenda through the coordination of joint and inter-disciplinary research between research institutes, and to plan mid- and long-term development direction of research institutes toward think tanks that perform a leading role in national policy-making processes.

The major activities of NRCS are, first, to identify and promote research agenda in order to excavate national agenda and development plans, second, to plan the development direction of research institutes that reflect the national agenda and policy issues, third, to review the research management system to make the research reports practically contribute toward the policy formation, fourth, to network and vitalize joint research between domestic & foreign renowned research institutes, and fifth, to identify and conduct spot studies necessary for policy decisions. In addition to these primary activities on the direction of research and development of research institutes, NRCS is carrying out activities to lead those government-support think tanks to contribute to the national development, by means of adjusting and improving the functions of research institutes, evaluating their performance, supporting joint research, reviewing business plans and budgets.

2.2.2.5. KDI’s Support for the Formulation of Korea Development Strategic Plans

KDI’s contributions as a think tank can be summarized in two areas; for the Korean economic policy formation and for the national development strategy formation. First, for over three decades, KDI has continuously provided policy analyses and recommendations based on in-depth analyses of domestic economic and foreign situations and projections while conducting anticipative and empirical studies. Second, KDI has played a pivotal role as a comprehensive research institute that suggests comprehensive mid- and long-term strategy and policy measures on Korea’s pending challenges and issues. It carried out embracing analysis on diverse fields encompassing overall economic and social phenomena. KDI has provided long-term blue prints for national development, focusing its research on enhancing the productivity of the government, corporations, and private sectors as a way to reinforce the national capacity. KDI has also improved the practicality of research results by building and operating an all-embracing policy research network of the ministries, academics, industry, and research institutes.

056 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) The activities of KDI to support the government’s formulation of development strategic plans have been carried out in close collaboration with the Korean Ministry of Strategy and Finance. Especially, when the government-wide vision or development strategic plan is formulated, KDI has played a central role as the general secretariat, which integrates the capabilities of and coordinates the participating government-funded research institutes.

2.2.3. Seoul Institute

Each local self-governing body in Korea established its own development institute to formulate local agenda and strategic plans. These include Seoul Institute, Busan Development Institute, Incheon Development Institute, Daegu Gyeongbuk Development Institute, Gwangju Development Institute, Ulsan Development Institute, Gyeonggi Research Institute, Chungnam Development Institute, Chungbuk Research Institute, Research Institute for Gangwon, Jeonnam Research Institute, Jeonbuk Development Institute, Gyeongnam Development Institute, and Jeju Development Institute. Among them, the Seoul Institute is introduced here including the establishment purpose, research areas, personnel and budget, and activities on the formulation of development strategic plans.

2.2.3.1. Establishment Purpose and Research Areas

The Seoul Institute was established by the Seoul Metropolitan Government in 1992 with the goal of establishing a medium- to long-term vision for Seoul, conducting intensive research on a variety of policy issues, and supporting the policy-making processes of the municipal administration. Its research areas include:

• Future and Social Policy: Research on future society, unban management, social welfare and education, and culture, art and leisure. Recent research includes ‘2013 Seoul SurveyTM’ and ‘Conceptual 2030: Seoul Cultural Plan 2030’.

• Civil Economy: Research on industrial policies, employment policies, economic policies, and tourism policies. Recent research includes ‘The Study on Characteristics of Seoul’s Price Structure and Future Policy Perspectives’ and ‘Strategies for the Development of Creative Industries in Seoul’.

• Transportation Systems: Research on transportation systems sustainability, public transportation, travel demand management and survey, roadway planning and maintenance, transportation operation, and taxi and urban logistics. Recent research includes ‘Master Plan for Safety and Convenience of Pedestrian in Seoul’ and ‘Strategies for the Establishment of Sustainable Transportation Systems in Seoul’.

• Safety and Environment: Research on safety, climate and energy, and environment. Recent research includes ‘A Study on Long-term Plans for Waste Disposal in Seoul’

Chapter 01 _ Suggestions for Improving Investment Support System and Capacity Building for Strategic Planning ∙ 057 and ‘Making a Seoul Master Plan for Urban Safety’.

• Urban Planning and Design: Research on urban and regional planning, housing policies, urban renewal, and urban design. Recent research includes ‘Seoul Historic Downtown Plan’ and ‘2030 Seoul Plan’.

In order to conduct the above research, currently 130 members are working in the Seoul Institute. Among those, 65 senior researchers, researchers, and associate researchers hold a Ph. D. degree, and 31 research assistants hold master’s degree or graduate level researchers.

2.2.3.2. Seoul Institute’s Support for the Formulation of Seoul Development Strategic Plans

The Seoul Institute recently formulated ‘2030 Seoul Plan’ (April 2014) with the public participation, which is the long-term development strategic plan of the Seoul Metropolitan City. The Seoul Institute had participated in the formation of four former master plans of Seoul. In the first statutory plan formulated in 1990 were addressed the issues of balanced development between the north and south of Han River and revamping toward a multi-core city with a focus on convenience, health, culture and leisure. In 1997, the second comprehensive plan was formulated, which addressed the local self-government and the five development base initiative with an emphasis on the citizen-oriented and human centered city. Next, in the third comprehensive plan of Seoul formulated in 2006 were addressed the issues of the change of conditions since the IMF relief loan, the restoration of the Cheonggye Stream, and the relocation of administrative functions, with the theme of healing and recovery. Finally, in 2009, the Seoul Institute assisted the formulation of the fourth comprehensive plan of Seoul, which addressed the issue of shifting from the growth of citizenship and development to the era of recycling.

The ‘2030 Seoul Plan’ formulated in 2014 is the highest-level development strategy of Seoul. The Plan has a unique characteristic that it was made by the cooperation among diverse stakeholders, including citizens, experts, and administrations, whereas former plans were formulated mainly by experts. During this process, the Seoul Institute participated in the planning stage on how to formulate the plan, and took the lead in recapitulating and systematizing the discussions of 5 divisions on key issues. Like this, the Seoul Institute has been playing a key role in formulating the medium- and long-term development plan of Seoul in order to build a citizen-friendly city, utilizing the results of research on demographic and social changes.

058 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) 2.2.3.3. Characteristics and Promotion System of Seoul Development Strategy ｢2030 Seoul Plan｣

(1) Characteristics of Seoul Plan

• Participation of citizens from the early stages of planning In order to make the Seoul Plan based on consensus of citizens, citizens were invited to participate in from the beginning stage of the plan formulation. They identified the future vision of Seoul and promotion tasks on key issues, together with other stakeholders including administrative officials and experts.

• Goal-oriented strategic planning centered on key issues The previous comprehensive plans were a compilation of 12 separate, sectorial plans, so there was a lack of consistency and its contents were vast and difficult to understand. To address this, the ｢2030 Seoul Plan｣ only included key issues that would lead the future changes of Seoul and its contents were made compact with clear explanations.

[Figure 1-7] Structure of 2030 Seoul Plan

Current Structure 2030 Seoul Plan

City characteristics, City characteristics, current situation current situation change diagnosis

Future vision of Seoul Futrue vision of Seoul

Spatial structure 5 key issues: welfare, Plans on key issues education, womankind, industry, and job 12 sector-wise plans incl. Realization of plans transportation & logistics Spatial structure on key issues through spatial plan Implementation of plans (administration, budget) Implementation plans

Source : 2030 Seoul city Mater Plan, Seoul City Office, 2014, P.11

• Collaborative plan of entire departments of the Seoul Metropolitan City The previous plans were formulated mainly by the Department of City Planning, centered on spatial and physical aspects. The ｢2030 Seoul Plan｣ added non-physical elements such as welfare, education, history, culture and environment. Its status as the highest strategic plan of Seoul was strengthened by all departments and divisions’ close cooperation and collaboration during the entire formulation process.

Chapter 01 _ Suggestions for Improving Investment Support System and Capacity Building for Strategic Planning ∙ 059 • Reinforcement of roles and functions of life zones The previous plans were centered on the quantitative and external development and mainly emphasized the strengthening of city competitiveness, revealing some distance from the quality of life. The ｢2030 Seoul Plan｣ reinforced the roles and functions of life zone plan and reshuffled the spatial structure, in order to promote regionally balanced development and to lay a base necessary for elaborateness and consistency from the general plan to detailed plans that encompass the life of citizens.

• Operation of continuous monitoring and evaluation system to enhance the effectiveness of the plan

The ｢2030 Seoul Plan｣ explicitly stated to check the progress during the implementation through continuous monitoring and evaluation. Indicators and targets are set for every key issue and goal, the progress is monitored every year, and the results are made public so that feedback from citizens can be reflected in the follow-up plans.

(2) Promotion System of Seoul Plan

• Establishment of a cooperative promotion system among citizens, experts, and the administration

The ｢Steering Committee for 2030 Seoul Plan｣ was formed and operated in order to formulate the plan cooperatively among citizens, experts and the Seoul city administration. The steering committee consisted of the Seoul Plan Citizen Participation Group for setting the future vision and Steering Committee Divisions for formulating plans on key issues. The Seoul Plan Citizen Participation Group consisted of 100citizens and they performed the role of identifying the future vision of Seoul and key issues. The Steering Committee Divisions consisted of 108 people in five divisions, according to the key issues that the citizen participation group identified. Each division consisted of 20 or so members from expert groups, the Seoul Metropolitan City officials, the Seoul Metropolitan Council members, civic groups, sectorial citizen groups, and the Seoul Institute researchers and they identified goals and strategies for each key issue.

060 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) [Figure 1-8] Promotion System of 2030 Seoul Plan

Steering Committee for 2030 Seoul Plan (Co-Chair 1st Vice Major, 2nd Vice Mayor, Executive Master Planer(MP))

Expert Advisors Executive Master Planer (Draft Master Plan, in charge of Executive Coordination Division

Seoul Plan Citizen Participants Key Issue 1 Key Issue 2 Key Issue 3 Key Issue 4 Key Issue 5 Division Division Division Division Division (MP:○○○) (MP:○○○) (MP:○○○) (MP:○○○) (MP:○○○) 6 Experts 6 Experts 6 Experts 6 Experts 6 Experts General Citizen Group 6 Citizens 6 Citizens 6 Citizens 6 Citizens 6 Citizens (100 people) 3~5 Seoul 3~5 Seoul 3~5 Seoul 3~5 Seoul 3~5 Seoul City City City City City ▪ Role 2~4 Seoul 2~4 Seoul 2~4 Seoul 2~4 Seoul 2~4 Seoul - Vision and key issues Institute Institute Institute Institute Institute

(20 ±people) (20 ±people) (20 ±people) (20 ±people) (20 ±people) Sectorial Citizen Group (30 people) ▪ Division MP Role - Coordinates division meetings / draft plans

▪ Role - Sectorial goals & strategy [Citizen Participants Re-deliberate sectionrial issues & function as jurors]

Source : 2030 Seoul City Mater Plan, Seoul City Office, 2014, P.16

(3) Formulation Process of Seoul Plan

• Process through advance preparation, identification of future vision and promotion tasks, drawing up of detailed plans, and opinion gathering and administrative officialization The advance preparation stage began with forming the Expert Advisory Committee. The expert advisors identified the direction of the formation and promotion system and determined the way of citizens’ participation. Accordingly, the Citizen Participation Group of 100 citizens was formed and they identified the future vision of 2030 Seoul Plan and promotion tasks.

In order to implement the future vision and promotion tasks identified by the Citizen Participation Group, the Steering Committee for 2030 Seoul Plan, which consisted of sectorial citizen groups, the Seoul Metropolitan Council members, experts, and the Seoul Metropolitan City officials, formulated the draft of 2030 Seoul Plan that included a concrete plan for each key issue, spatial structure and the land usage plan, initiatives for each zone, and their realization plans.

The Seoul Plan formulated by diverse stakeholders including citizens, experts, and the administration was then put forward to public hearings and regional briefing sessions

Chapter 01 _ Suggestions for Improving Investment Support System and Capacity Building for Strategic Planning ∙ 061 for opinion gathering. Finally, the plan was confirmed and officialized by the required administrative procedure.

[Figure 1-9] Formulation Process of ‘Citizens Participatory’ Seoul Plan 2030

Future Vision Formulation Public Hearing Administrative Preparation & Key Tasks of Plan Briefing Session Implementation

Expert Advisors Citizen Participants Steering Committee (33 people) (100 people) for Seoul Plan Borough Office, City Council, All Citizens (108 people)

5 discussion forums Identification of Plans on key issues, Consensus building & modification future vision & tasks spatial plan, land plan, sectorial plan, etc.

Source : 2030 Seoul City Mater Plan, Seoul City Office, 2014, P.14

2.2.4. Main Contents of Seoul Plan

2.2.4.1. 2030 Blueprint of Seoul

• The future vision of Seoul in 2030 proposed by citizens: “Livable City for Citizens with Communication and Consideration” The biggest difference of the Seoul Plan from the previous plans is that the citizens themselves proposed the future vision and directions to realize it. In order to set the future vision, the members of the Citizen Participation Group held a series of workshops and discussed the advantages and disadvantages of Seoul and other key controversial issues. Through these efforts, the citizens group concluded that the future vision of Seoul in 2030 should be the “Livable City for Citizens with Communication and Consideration”.

2.2.4.2. Plan on Core Issues

• Specific theme-centered strategic plan that sets the priority of city government The plan for each key issue has the nature of strategic plan that sets the priority of city administration, securing consistency among the plans of other areas. Each plan consists of the direction of plan, goals, strategies, and key indicators. To formulate the plans on five key issues, the members of each division on welfare/education/womankind, industry/job, history/culture, environment/energy/safety, and city space/transportation/maintenance held 10 or so workshops over 10 months and identified 17 goals, 60 strategies, and 17 key indicators.

062 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) [Table 1-9] Goals and Key Indicators of Seoul Plan

Key Issue Goal Key Indicator

Welfare system in response to an aging Number of leisure facilities for the society elderly

Number of regional public health Healthy city 1. facilities Together Without Well-integrated social system without Guarantee rate of minimum income Discrimination, discrimination standards People-centered City Opportunities for education available to Rate of lifelong education everyone experience

Rate of dependency on national and Gender equality and social care public nurseries

Global economic city based on creativity Proportion of creative class 2. and innovation Dynamic Global Synergetic growth among economics City with a Strong Proportion of social economic jobs units co-developing among regions Job Market People and ho-centered vital economy Employment rate

Historic city where culture and life are Cultural environment satisfaction integrated 3. Vibrant Cultural & City landscape that moves the minds of Number of cultural infrastructures Historic City citizens

Diverse city cultures for everyone to enjoy Number of foreign tourists

Proportion of regions excluded from Part-oriented ecological city park service 4. Lively & Safe City Energy-efficient resource recycling city Usage rate of new renewable energy

Creating a safe city for everyone Rate of decrease in disaster victims

Urban regeneration for harmony Job-housing balance indicator 5. between life and work spaces (minimum value for area) Stable Housing & Easy Green transportation environment for a Proportion of green transportation Transportation, convenient life without cars Community- Provision of various choices for stable Oriented City Proportion of public rental housing housing

Chapter 01 _ Suggestions for Improving Investment Support System and Capacity Building for Strategic Planning ∙ 063 2.2.4. Research Institute for Gangwon

The Gangwon Province has many overlapping, similar features with Primorsky territory. 1.94 million people, or 1.3% of the Russian population, reside in Primorsky territory, while 1.5 million people, or 3% of the Korean population, reside in the Gangwon Province. The land size of Primorsky territory is 165,900km2, occupying 0.9% of the whole Russia, while the land size of the Gangwon Province is 20,569km2,occupying 16.5% of whole South Korea. The GDP of Primorsky territory in 2013 was USD 19.9 billion, or 1% of the Russian GDP, while the GDP of the Gangwon Province was USD 32.0 billion, or 2.5% of the Korean GDP. Both regions are located in the far east of its country, port cities facing the Pacific Ocean, and promote tourism as an important industry. Given this, it could be useful to introduce the Research Institute for Gangwon, which is a regional think tank that conducts policy studies for the development of the Gangwon Province.

2.2.4.1. Structure and Personnel

The Research Institute for Gangwon was established in 1994. Currently, 81 members are working, 29 of them hold a Ph.D. degree, 39 researchers hold master’s degree or graduate level researchers and the rest 13 members are administrative staffs. The organizational structure consists of four divisions, six centers and a secretariat. The four divisions are: the Planning and Management Division, the Economy and Industry Research Division, the Regional Society Research Division, and Tourism and Environment Research Division. The six centers are: the Center for DMZ & Northern Region Research, the Center for Coal-Mining Region Development, the Center for Gangwon Economy Education, and the Center for the Industrialization Support of Gangwon Agriculture. The budget of the Institute in 2014 was about USD 9.3 million, including USD 4 million of provincial contribution and USD 3.6 million of trust money.

2.2.4.2. Research Areas

The Research Institute for Gangwon is conducting studies on six main areas to assist the policies of the Gangwon Province. The areas are (i) developing strategies for Gangwon Province in preparation of the northern and unification era, (ii) fostering creative and convergent industry and job creation, (iii) converging the culture and tourism for securing global competitiveness, (iv) strengthening regional social infrastructure for safety and health, (v) enhancing the value of clean ecology and environmental resources, and (vi) support for successful hosting of Pyeongchang Winter Olympics in 2018. Its previous projects include the strategy for the innovation and management of local administration in the IMF era (1998), the promotion of tourism in eastern Asia toward the New Millennium (1999), balanced national development and the Gangwon Province (2007), and development direction of the eastern coast regional zone (2008).

064 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) 2.3. Policy Recommendations

2.3.1. Establishment of the Primorsky Development Institute

With the policy that directly and indirectly supports the civil sector such as industry, academia, and research institutions in order to enhance their capability for research and alternative development on the economic and social policies of Primorsky territory, it is necessary for Primorsky territory Government to promote the establishment of a tentative ‘Primorsky Development Institute’. It is intended to be a group of experts that carries out the role of a think tank, in a timely and professional manner, in response to the request of Primorsky territory Government. The Korean cases of a government-funded research institute ‘KDI’ and local government-funded research institutes the ‘Seoul Institute’ and the ‘Research Institute for Gangwon’ will provide a good reference for designing the governance, organizational structure, research areas, personnel, budget, and relationship with Primorsky territory Government of the Primorsky Development Institute.

For example, the KDI case implies how the Primorsky Development Institute should make progress in order not to merely function as a supporting role for the Primorsky Territory Government, but to be able to voice its own opinions and suggest practical policy alternatives. Also, the Seoul Institute case highlights a point that the Primorsky Development Institute needs to make active efforts for eliciting civil participation and consent, in order for a development strategy of the region to maintain consistent driving force despite the changes in the Primorsky Territory Government leadership. Finally, the case of the Research Institute for Gangwon, which is a Korean province that is most similar to the Primorsky Territory in terms of its geographical, social and economic characteristics, shows how a local government can utilize a think tank for eliciting supports from the central government within the framework of the national comprehensive economic development plan and, at the same time, for driving a specialized development for the province’s society and economy.

The Primorsky Development Institute may be established as a non-governmental public institution, to which board of directors - a few key officials of Primorsky territory Government (e.g., Director of Economic Development) - need to be appointed as ex officio directors. The primary responsibility of the institute would be to conduct investigation, analysis, and academic and practical research on the economic and social policy issues of the local government. At the beginning, the institute could be launched with 20 or so members, of which composition would be 3:2:1 of Ph.D. researchers, Master or graduate-level research assistants, and administrative staffs, respectively. The local government needs to contribute the basic budget for the operation of the institute, including the personnel, research, and administrative expenses, but the institute needs to make efforts to gradually increase the ratio of its own income by means of trust

Chapter 01 _ Suggestions for Improving Investment Support System and Capacity Building for Strategic Planning ∙ 065 and secondary businesses.

The Primorsky Development Institute would start with obligatory research and consultation on the policy related issues of Primorsky territory Government, but it is desirable to gradually increase the share of independent research in order to establish proper identity as a think tank that produces policy recommendations for the public benefit. It is necessary for the institute to build expertise on policy issues based on hands-on experience gained through the interchange of personnel with the local government, thus producing research outputs that contain concrete and practically effective policy recommendations. The institute would also perform policy marketing functions on research outputs by means of publishing reports, theses and monographs, holding seminars and conferences, and contributing columns to newspapers and magazines. It is worth considering co-operating with KDI or the Seoul Institute by means of personnel exchange and others, in order to facilitate early stabilization of the Primorsky Development Institute’s operation.

2.3.2. Fosterage and Utilization of Civil Capacity in Development Strategic Planning

In addition to strengthen the capabilities of Primorsky territory Government and public organizations for policy formation and recommendations through the establishment of the Primorsky Development Institute, it is necessary to build a system that taps into the capacity of the civil society in the formulation process of Primorsky development strategic plans. This is not only appropriate in view of enhancing the citizen participatory democracy, but also, more importantly, the best way to secure the implementation of the development strategic plan. In addition, the utilization of the civil society has validity in the economic and social dimensions as well, considering the fact that the capability of the civil society is rapidly growing through the improvement in public education and the dissemination of information and communication technology (ICT). The market economy has grown too diverse and diffused to be covered by government-driven, top-down development strategic plans.

There should be various systematic step-by step approaches for fostering the capacity of the civil society, but more urgent task is to build a system to gather and concentrate the currently existing capabilities of public, private, academia, and research institutions of Primorsky territory. As mentioned during the introduction of ‘2030 Seoul Plan’ of the Seoul Institute, the civil society is ready to willingly share their experiences and provide their opinions and suggestions, if the government and the public sector provide a place for participation. In response to the demand of the civil society, or even before they demand it, Primorsky territory Government needs to actively request and facilitate the participation of the civil society, and to prepare and implement the official and systematic administrative procedures necessary for this.

Until mid-1980s, the non-governmental civil sector in Korea could not play an active

066 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) role in generating independent policy alternatives and proposing them toward public policy formation processes, and it is considered worthy of mentioning the reasons even briefly, in order for Primorsky territory Government to refer in initiating the activation of think tanks (Kang et al., 2006).

First, the formation and functions of think tanks were weak in the state-led development period, when the state decides everything unilaterally. In such a regime, the state blocks outside criticisms and influence, and monopolizes the formulation and execution of various plans. Therefore, there is little room for independent and critical think tanks, or voicing opinions. In case of think tanks established and funded by the government, they perform ancillary roles that provide detailed plans and logic of the policies the government promotes.

Second, the role of think tanks was not magnified in the time when the elections were pervaded with the regionalism in Korea. It was because politicians needed to win elections through the instigation of regionalism and the mobilization of kinship and school relations, rather than the competition about differences in ideology and policies. Moreover, the fact that the differences of position in ideology and policies were fundamentally modest affected negatively to the vitalization of think tanks. The role of experts in policy making becomes important only when there are widely different views or arguments about policies in order to justify and logically defend a party’s positions.

Third, another reason for the limited role of think tanks in the past is different priority of activities during the time of authoritarianism. The concern of the civic groups that functioned as think tanks at that time even in a tenuous way was to clean up and correct the distorted policies and practices made in the state-led authoritarianism. Because pointing out the wrongdoing of the past and then present and demanding to correct them was the highest priority, the issue of identifying future-oriented policy alternatives and carrying through them had nothing but to be pushed back on the priority list.

In sum, the political and social condition of a society greatly affects the role and activities of think tanks. Think tanks work with the aim of proposing ideas and persuasive logic on public policies and making them accepted and reflected in the policy making process. Therefore, democratic competition amongst politically diverse ideas and policies is essential to creating a vibrant environment for think tanks.

Chapter 01 _ Suggestions for Improving Investment Support System and Capacity Building for Strategic Planning ∙ 067 References

Abramov, A. L., “Major Contributors of Strategic Documents” (in Russian), 2015.

Fedorov, A. A. “Entrepreneurship and Economic Globalisation in Primorsky Region: Problems and Decision Ways.” Management Review: An International Journal, 6(2), 2011.

FEFU, http://www.dvfu.ru/web/fefu/russian-eastern-territories-economic-and-social- development-strategic-planning.

International Center for Regional Development (in Russian), http://mfrr.ru/.

Invest Korea, http://www.investkorea.org.

Kang, W., Park I., and Jang, H., Possibility of Korean Think Tanks, SERI, 2006. (in Korean)

KIEP, Investment Guide of the Russian Far East, KIEP, 2013. (in Korean)

Kim, I., “Experience and Challenges of Making ‘Citizen Participatory’ 2030 Seoul Plan“, Seoul Institute, 2014.

Kim, I. “Seoul City General Plan: 2030 Seoul Plan”, The Seoul Institute, 2015. (in Korean)

Korea Development Institute (KDI), 60 Year History of Korean Economy I (Colligation), 2011. (in Korean)

Korea Development Institute (KDI), KDI, the Forge of Policy Research of the Republic of Korea– Collection of Policy Research Cases in the 40th Anniversary of KDI Establishment, 2012. (in Korean)

KOTRA, Vladivostok Business Center, 2012.

http://www.globalwindow.org/gw/overmarket/GWOMAL020M.html?BBS_ID=10&ME NU_CD=M10103&UPPER_MENU_CD=M10102&MENU_STEP=3&ARTICLE_ID=2159 256&ARTICLE_SE=20302).

Lee, W., “The Reason to Talk about Think Tanks Again”, The Hankyoreh Newspaper, 12 August, 2014. (in Korean)

Ministry for Economic Development of Russian Federation, http://www.ved.gov.ru/ eng/investing/investment_rus_reg.

068 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) Newell, J. The Russian Far East: A Reference Guide for Conservation and Development. CA: Daniel & Danil, 2004, http://urbansustainability.snre.umich. edu/wp-content/uploads/2011/04/RFE.02_Part1.pdf.

Park, M., Strolling around German Think Tanks, The Hope Institute, 2012. (in Korean)

Primorsky Krai investment Portal, http://invest.primorsky.ru/images/textdoc/Invest_ Guide.pdf.

Thorsteinson, A. Russian Federation as Central Planner: Case Study of Investments into the Russian Far East in Anticipation of the 2012 Asia-Pacific Economic Cooperation Conference, University of Washington, 2012.

The Think Tanks and Civil Societies Program, “2013 Global Go To Think Tank Index Report”, University of Pennsylvania, 2014.

Chapter 01 _ Suggestions for Improving Investment Support System and Capacity Building for Strategic Planning ∙ 069

2014 Knowledge Sharing Program II with Russia (Primorsky Territory) Improvement of Primorsky Territory's Investment Chapter 2 Environment

Analysis of Investment Strategy of Primorsky Territory until 2018 and Suggestions for Establishing Special Economic Zones in Primorsky Territory

1. Review of Investment Strategy of Primorsky Territory until 2018 2. Effectiveness of Policy on Special Economic Zones and Case Study in the Republic of Korea 3. Development Prospect in Semi-finished Goods and Korea's Experiences 4. Development Prospect in Tourism and Korea’s Experiences 5. Development Strategy and Alternatives for Agriculture ￭ Chapter 02

Analysis of Investment Strategy of Primorsky Territory until 2018 and Suggestions for Establishing Special Economic Zones in Primorsky Territory

Hye Jung Ryu (Jipyong), Young Kwan Jo (Korea Eximbank)

1. Review of Investment Strategy of Primorsky Territory until 2018

1.1. Overview of Investment Strategy of Primorsky Territory until 2018

On December 23, 2013, the Administration of Primorsky territory (hereinafter, the “Primorsky government”) approved the ‘Investment Strategy of Primorsky territory until 2018 (hereinafter, the “Investment Strategy”)’ through its Resolution No. 495-pa. The Investment Strategy is composed of 26 pages of main text, Annex 1 (10 Targets for Realization of the Investment Strategy), and Annex 2 (List of 31 Detailed Policies for Realization of the Investment Strategy).

The main text is comprised of the SWOT analysis including the strengths of investment in Primorsky and its institutional environment, long-term development outlook on the world and Russian economy, industrial/regional priorities in the Investment Strategy, purpose of investment policy in Primorsky, realization plan and mechanism for the investment strategy, principle of mutual cooperation for improving the investment environment, and revisions to and monitoring of the investment strategy. The main text, centering on the policy goals, describes the industrial priorities of the Investment Strategy as (i) development of fossil fuel transportation and processing cluster, including coal, oil, and gas.; (ii) development of high-tech industry, including automobiles, aircrafts, and ships.; (iii) integration of transportation network; (iv) development of innovative

072 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) agriculture and fisheries processing industry; (v) development of construction supplies industry; and (vi) development of tourism industry. However, there is no mention of detailed project, or the detailed policy for the development of relevant industry. The regional priorities are also mentioned briefly, e.g., efficiency of resources allocation and development of environmental technology industry for the northeastern region; development of agriculture, mining, livestock, and construction supplies industry for the central and western region; and development of finance, transportation and logistics services, and high-tech industry for the southern region, however, without any mention of the detailed realization plan.

Annex 1, the 10 Targets for Realization of the Investment Strategy, is divided into establishing investment promotion system, enhancing the quality of government support for increasing private sector investment, increasing the share of innovative corporations, strengthening the competitiveness of core industries, development and strengthening the competitiveness of small- and medium-sized companies, expansion of social infrastructure, curtailing investment costs through quantitative growth of technical infrastructure, increasing efficiency in training and retraining to meet the investors’ demands, removal of administrative obstacles interfering with investment promotion, and establishment of investor-friendly image, and sets forth the step-by-step target figures up to 2018. Provided, however, it fails to mention specifically how these figures can be achieved.

Annex 2, classifies the 31 detailed policies according to the 10 targets, and then indicates in detail the policy effectiveness indices, relevant authorities, and the financial support policy. However, these are hardly detailed plans to achieve the target policies in the Investment Strategy because they are legally, systematically based on separate state programs.

1.2. Analysis of Issues in the Investment Strategy

1.2.1. Issues in the Content and Structure

The Investment Strategy was prepared and approved based on the Russian government’s several state programs, “Social and Economic Development of the Russian Far East and the Baikal Region until 2025” and Primorsky government’s “Social and Economic Development Program of Primorsky territory for 2013-2017”, and 18 detailed social and economic development state programs for each field. In fact, Annex 2 of the Investment Strategy lists various state programs prepared prior to the Investment Strategy, as detailed policies to implement the Investment Strategy.

Unlike the state programs, the Investment Strategy does not include the detailed list of the investment projects, nor does it contain any detailed policy direction for

Chapter 02 _ Analysis of Investment Strategy of Primorsky Territory until 2018 and Suggestions for Establishing Special Economic Zones in Primorsky Territory ∙ 073 the realization of the strategic targets, or the realization plan through detailed project.

An investment strategy should be a basis for preparing an investment proposal or business plan by each project, and the potential investors should be able to confirm from the investment strategy basically what benefits they can expect.

Nor does the Investment Strategy contain any detailed criticism or assessment regarding the past achievements of Primorsky government’s investment promotion policy, which weakens the credibility of the Investment Strategy. For instance, the oil refinery (Rosneft) and LNG plant (Gazprom) construction projects related with the development of fossil fuel transportation and processing cluster such as coal, oil, and gas, are frequently mentioned, but these were proposed back in the 1980s before the collapse of the Soviet Union. It seems necessary to explain why their implementation has been delayed for so long.

1.2.2. Issues Relating to the Concreteness of the Realization Plan

The Primorsky government seeks to strengthen the public sector by expanding private investment, to increase the proportion of innovative corporations in the high-tech field, to strengthen the competitiveness of small- and medium-sized corporations, to provide easy access to technology infrastructure, to nurture expert groups, to remove administrative obstacles, and to engage in full-scale reform of the investment environment in Primorsky (paragraph 4 of the Investment Strategy).

The realization plans include (i) strengthening control over policy instruments specified in the state programs of the federal and state governments; (ii) seeking efficiency in the administration of the Primorsky government; (iii) conducting regular assessment on the level of improvement in the investment environment; (iv) guaranteeing investors’ rights to enable direct communication with the Primorsky government; (v) granting tax benefits on the investment activities; (vi) implementing private investment projects; (vii) renovating the land to be fully equipped with roads and social infrastructure to save time and expense for investors during the stage of acquiring land and relevant permits and licenses; (viii) forming a manufacturing special economic zone in Vladivostok; (ix) creating the brand Primorsky with investor-friendly environment; (x) implementing programs to support small- and medium-sized businesses; and (xi) implementing investment projects that will create jobs and guarantee development of small- and medium-sized businesses (paragraph 5 of the Investment Strategy).

However, it is hard to find the connection between the suggested plans and the strategic targets, and the plans remain too abstract and vague. There is no mention in the Investment Strategy of what system renovation or procedure they will take to realize such plans.

074 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) 1.2.3. Issues with Securing Investment Resources

The Investment Strategy stresses on numerous occasions that the economic development in Primorsky has to take place through ‘influx of external funds other than the federal or state government budget.’ The Investment Strategy seems more inclined to focus on revitalizing private investment through efficiency in government’s indirect support, than on direct investment of the state and local budget on the social and economic development of Primorsky.

However, no private investment project has yet been carried out in Primorsky (paragraph 5 of the Investment Strategy, p. 22), and the institutional framework, which can become the basis of private investment, has yet to be prepared. Although the corporate tax and property tax exemption/reduction took place in 2013 for investors who made a certain amount of investment (paragraph 5 of the Investment Strategy, pp. 20-21), it was applicable to all four (4) states in the Far East, as well as Primorsky, and it should be noted that while special taxation can be a major consideration in an investment decision, it is not a critical factor.

1.2.4. Issues in the SWOT Analysis Suggested in the Investment Strategy

We need to take a special look at the SWOT analysis in the Investment Strategy. The strengths include the geopolitical location, development of social infrastructure through state support, modern electric power grid, transportation infrastructure, development of social infrastructure network, high level potential in science and technology, financial infrastructure, state programs, guaranteed legal rights for investors, and investment by multinational corporations. On the other hand, the weaknesses include the continued decrease in population, lack of investment projects to attract Russian and foreign investors, administrative obstacles relating to various licenses and permits, e.g., acquisition of land ownership, and the lack of marketing strategy focusing on investment promotion in Primorsky. However, the advantages of the region, other than the geopolitical location, do not seem to be superior to those of other regions in North East Asia. Moreover, as for the plans to address the weaknesses, the Investment Strategy merely emphasizes or publicizes the strengths of Primorsky, e.g., administrative or tax support. Effective measures need to be proposed to overcome the weaknesses of the region.

The opportunities include the status as a new center in the Asia-Pacific region, center of the international cooperation between Russia and Asia-Pacific countries, increase in demand for natural resources, energy and food in North East Asia, increase in the purchasing power of North East Asia residents, integration of transportation and logistics system, prioritization of social and economic development in Primorsky, and the construction of the world’s best infrastructure in preparation for the APEC

Chapter 02 _ Analysis of Investment Strategy of Primorsky Territory until 2018 and Suggestions for Establishing Special Economic Zones in Primorsky Territory ∙ 075 summit. The threats include relatively less developed capital market, technology and manpower, possible ascendency by another potential competitor in case of delayed internal reformation, development of international logistics routes bypassing Russia and Primorsky, expansion of non-resident area, and damage to the environment. While the opportunities are romanticized and interpreted broadly, no detailed measure to overcome the threats has been suggested.

1.2.5. Drastic Changes in the Circumstantial Premise of the Investment Strategy and the Need for Complete Revision

The Investment Strategy requires that the economic affairs bureau of the Primorsky government prepare and submit to the primorsky government an annual report on the implementation of the investment strategy by March 20th of each year, and to make it public through Primorsky investment portal. No annual report has been made public to date not yet, but it is understandable since the Investment Strategy was only approved in December 2013.

After the approval of the Investment Strategy, the situation in Ukraine broke out, following which the US and EU, joined by Japan, imposed economic sanctions against the Russian Federation. Moreover, the value of ruble plunged due to the 50% or more drop in the oil price since the latter half of 2014. Major credit rating agencies rushed to demote Russian Federation’s rating as unqualified in January and February of 2015. Such changes in the external economic circumstances call for complete revision of the Investment Strategy. The crash of ruble not only drastically drained the foreign exchange reserves, but also limits the issuance of governmental, municipal or corporate bonds, which will incur considerable setbacks in the execution of the federal budget presently in 2015. In fact, the Russian federal government prepared and submitted a new budget bill reflecting such economic crisis to the parliament at the end of February 2015.

It seems inevitable for Primorsky, which relies heavily on importation for most raw materials, as well as manufactured goods and agricultural products, to prepare a new budget, and to completely revise or adjust numerous state programs, which it plans to fund including Investment Strategy.

1.3. Korea's Experience Relating to Establishment and Implementation of the Investment Strategy

Korea has maintained a gradual growth of foreign investment since 2010 despite daunting overseas environment. According to the UNCTAD data, while Korea’s potential index is the fourth in the world, its actual performance ranked the 31st place in 2012. In this regard, the Korean government is aware of the need to further promote investment

076 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) by fully reorganizing the existing foreign investment policy, given the recent acceleration in investment promotion competition between nations. Korea amended the Foreign Investment Promotion Act in 2013 to introduce foreign investment corresponding to individual-type foreign investment regions, alleviating share acquisition from domestic affiliates by a sub-subsidiary, and the Korean government is planning further amendment of the Foreign Investment Promotion Act for deregulation.

The Korean government frequently holds foreign investor meetings and seminars attended by the chairmen of foreign businesses in Korea, CEOs of major foreign investors, and the ministers and vice ministers of relevant ministries.

For instances, on January 9, 2014, the Minister of Trade, Industry and Energy unveiled plans to concentrate on high value-added investment promotion and improvement of core regulations through announcement of ‘Foreign Investment Promotion Plan’ jointly with the other relevant ministries, and explained the direction of foreign investment policy for 2015 by holding meetings for domestic corporations in January 2015, and for foreign investors in February.

In connection with the establishment of investment strategy, the Korean government publishes the ‘plan to stimulate foreign investment,’ which the Minister of Trade, Industry and Energy formulates every year by integrating and coordinating plans to stimulate foreign investment submitted by the heads of relevant central administrative agencies, the special metropolitan city mayor, metropolitan city mayors, special self-governing city mayor, provincial governors, or the governor of special self-governing province pursuant to Article 4-2 of the Foreign Investment Promotion Act, and determines after deliberation by the Foreign Investment Committee. The stimulus plan includes the basic direction of stimulating foreign investment; analysis of circumstances of foreign investment, such as trend of overseas business expansion, industrial structure of the country; plan for attracting foreign investment; and plan for assisting agencies in charge of attracting foreign investment. The Minister of Trade, Industry and Energy, the heads of related central administrative agencies and the mayors/provincial governors report annual outcomes of foreign investment attraction to the Foreign Investment Committee by the end of February the following year for evaluation.

The direction of Korea’s foreign investment promotion policy for 2015 is to attract large investment through Korea-China FTA; to secure future growth engine and create quality jobs through promotion of high value-added industry from global corporations; and to resolve difficulties aggressively and to improve the incentive system. To this end, they prepared detailed plans such as finding investors from global 500 corporations, improving the incentive system to reflect the degree of economic contribution, and aggressive funding through Korea Development Bank’s investment promotion program. The Minister of Trade, Industry and Energy reviewed the status of more than 10 cases of large foreign direct investment projects reported in 2014, and also promised to provide full support to remove any setbacks.

Chapter 02 _ Analysis of Investment Strategy of Primorsky Territory until 2018 and Suggestions for Establishing Special Economic Zones in Primorsky Territory ∙ 077 Korea has achieved certain results in changing the direction of foreign investment policy toward enhancing the quality of investment through promotion of high value-added industry, from the existing amount-centered approach, amid the overall low growth trend in world economy, e.g., hosting 8 global corporate headquarters and R&D centers in 2013 alone. With such a backdrop, the Korean government has made a list of 500 potential global corporation investors, 50 of which were selected as priority targets, and is currently undergoing negotiations to attract investment.

1.4. Policy Suggestions

1.4.1. Change the Structure and Content

In terms of the structure and contents, foreign investment promotion measures announced every year by the Korean government in collaboration with the relevant authorities and municipalities do not differ much from the Investment Strategy. However, while the former presents as practice tasks the ‘strategic investment promotion activities’ targeting regions and specific projects; considers the specific circumstances of each industry and country in connection with the improvement of regulations and systems relating to foreign investment; and claims to advocate improvement of domicile conditions for expatriates as the core practice tasks, the Investment Strategy does not seem to consider much the additional investment possibilities by existing foreign investors in Primorsky, or the specific circumstances of each industry or investing country.

While Korea’s plan to stimulate foreign investment presents the detailed stimulation tasks pursuant to the focus areas, and specifies the timeline for each task, the strategic tasks and realization plans in the Investment Strategy are listed in parallel, thus obscuring the effectiveness of the realization plans.

Above all, Korea’s plan to stimulate foreign investment specifies in detail the relevant system, issues and improvement plans in connection with the detailed stimulation tasks, and even clearly indicates the timeline, which mostly lacks in the Investment Strategy. This gap would bring about fundamental differences in how to achieve the investment goals. For instance, the Korean government draws up a list of potential candidates in order to invite the headquarters or R&D centers of global corporations, and contacts them individually, even when one cannot expect to achieve tangible results presently, as well as forms a task force team for investment cooperation with corporations which already have headquarters or R&D centers, and makes concrete efforts to resolve various issues, including the residential conditions of the officers and employees of the relevant corporations. In case of Primorsky, it is not easy to measure the implementation outcomes because the investment strategy itself is focused on the overall economic development and improvement of the quality of life, and its realization plans are very broad and abstract.

078 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) In order to procure effectiveness of the Investment Strategy, it would be necessary to select the priority tasks, and specify in detail the realization plan for each priority task, including the timeline and evaluation methods.

1.4.2. Specify the Schedule for Detailed Policies

Korea’s plan to stimulate foreign investment specifies the detailed schedule for practice tasks by the priority task, and the responsible department. Although Annex 2 of the Investment Strategy adopts a similar structure by naming the relevant state programs and the responsible institutions under the title, detailed policies, the 31 detailed policies presented in the Investment Strategy are not only too broad and abstract, but also considerably different in terms of substance because they mostly refer to relevant state programs.

The Investment Strategy should be changed so that the detailed policies would describe substantial and concrete matters for realization of the tasks, and clarify when and how they should be implemented, as well as the schedule and preparations, or the responsible institution.

1.4.3. Hold Foreign Investor Meetings Regularly to Set Up Detailed Policies

The top officials take part in the foreign investor meetings, large scale national IRs for each major investing country, and events such as foreign investment week, which are held by the Korean government to show government’s sincerity in investment promotion, to directly listen to the demands and difficulties of foreign investors, and to accordingly revise the policy or improve the regulations, which are believed to contribute greatly to enhancing national credibility of Korea.

The Primorsky government also needs to regularly hold IRs tailored to each country or industry, and hold regular meetings with foreign investors in Primorsky to resolve issues or difficulties faced by each investor or corporation.

1.4.4. Individual/Concrete Approach to Priority Investment Projects

The Investment Strategy forecasts that it would be possible to establish a new social and economic development model comprised of competitive investment environment, revitalization of economy, development of small- and medium-sized companies, and development of export-oriented local base, through the following priority investment projects.

• Industrial complex in Mikhailovsky • Industrial complex in Nadezhdinsky • Construction supplies industry cluster in Spassk-Dalny

Chapter 02 _ Analysis of Investment Strategy of Primorsky Territory until 2018 and Suggestions for Establishing Special Economic Zones in Primorsky Territory ∙ 079 • Special economic port zones in Vostochny and Troitsa Bay • Marine product processing cluster • Oil and coal mining and processing cluster: oil refinery (Rosneft), LNG plant (Gazprom) • High-tech industrial complex • Special industrial and economic zone in Vladivostok • Integrated entertainment zone based on casino “Primorye” • Special tourism-recreation economic zone in Russky Island

The status and degree of progress of each of the above priority investment projects are as follows:

[Table 2-1] Primorsky Territory's Priority Investment Projects

Project Progress Industrial Complex in Agro-industrial complex promotion project on 121 ha and 117 ha Mikhailovsky land owned by Primorsky and Mikhailovsky local governments, respectively. Although LLC “Agro-Biotekh” is also considering the relevant land for bean processing and producing complex, Primorsky government is planning to create an agro-industrial complex including the same. There is information only on the status of social infrastructure, and none on the method of development or sale. Since the land is farmland, and no road, electricity or water has been connected as of yet, the investment possibility shall be considered after the complex development construction works have been performed first.

Industrial Complex in Two pieces of land amounting to 1,500 ha. Nadezhdinsky The land is owned jointly by Nadezhdinsky local government and OJSC “Jadezlinskoe.” No social infrastructure as of now. Although an industrial complex project such as logistics complex is being considered, there is no specific development plan including the usage as of yet. It is difficult to assess the feasibility of the project since the land is partly owned by a private company, and there is no tangible development plan yet.

Construction Supplies Planning an integration of construction supplies Industry Cluster in manufacturing/processing, and metal processing industries on the Spassk-Dalny basis of the construction supplies manufacturing plant for blocks and manholes of OJSC “SKATSI,” which is engaged mainly in cement wholesale. However, no investor other than OJSC “SKATSI” has been identified yet, and the size of investment or the will to carry out the project on the part of OJSC “SKATSI” cannot be confirmed.

080 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) [Table 2-1] Continued

Project Progress Special Economic Port Has an exclusive coal terminal with the only conveyer system facility Zone in Vostochny in the Far East. Planning to increase the processing capacity through modernization and repair of outdated facilities, construction of additional warehouse, and railroad extension, etc. Although not yet designated as port economic zone, it will be the top priority consideration if a port economic zone is to be designated in the Far East because the traffic volume and profitability have been on the rise during the last few years. Special Economic Port Not designated as port economic zone yet. On May 20, 2014, Summa Zone in Troitsa Bay Group, the owner of Vladivostok trading port, signed an MOU on the development of Zarubino port in Troitsa Bay with Jilin province in China. On Nov. 10, 2014, Summa Group and China Merchants Group signed an MOU at the APEC summit meeting, thus making visible the port modernization port which had been promoted since the 1990s. Planning to incidentally develop special grain terminal, container and alumina terminal, and general marine terminal. Summa Group announced they will begin to work on the design from Feb. 2015 for the project which had been promoted since the 1990s.12) Marine Product Although the area and boundary of the land subject to development Processing Cluster have not been determined yet, it is understood that it includes some private property. Policy target is to develop a marine product processing cluster connected to a port. However, it is 18 km away from the nearest port, Bolshoy Kamen, and no road, electricity, heating, water, sewage or gas system has been connected at all. Rosneft Oil Refinery The project was made public in 2011, and Rosneft is known to have completed the preliminary inspection and site feasibility test until the end of 2013. They are planning to engage in joint venture with Mitsui, and will not be recruiting additional foreign investors through an open tender or business presentation. This project was first planned in 1974, yet it is not certain how willing Rosneft Oil Company is to promote this project. Gazprom LNG Plant No progress made in 2013. Still in the feasibility investigation preparation stage; Gasprom is planning to directly hold an investment presentation. It is uncertain whether they will disclose business implementation and operation share investment, or whether they will proceed through contracts. High-Tech Industrial Although numerous high-tech industrial complex plans have been Complex announced, Russky Island technopark project, and technology center project are the most promising. The technopark business is being initiated jointly by Primorye Investment Promotion Agency and Primorsky mass media bureau, but the structure and developer of the project have not been determined yet. The technology center construction is being carried out by a subsidiary in charge of the Far East region of United Shipbuilding Corporation, which is also engaged in Zvezda shipyard construction and ancillary business; foundation design being reviewed since 2011.

12) “Chinese investors to be invited for the Far East Zarubino port construction,” Russia Focus, Dec. 12, 2014.

Chapter 02 _ Analysis of Investment Strategy of Primorsky Territory until 2018 and Suggestions for Establishing Special Economic Zones in Primorsky Territory ∙ 081 [Table 2-1] Continued

Project Progress Special Industrial Vladivostock designated as special industrial economic zone on Aug. Economic Zone in 18, 2014. This industrial economic zone is based on Sollers Vladivostok automobile factory, and the key investors will be LLC “Mazda Sollers Manufacturing Rus,” a joint venture between Russia and Japan, and LLC “Pacific Logistic,” a logistics company. RUB 5.6 billion (including federal budget RUB 5.3 billion) will be invested entirely in social infrastructure, with target private investment of RUB 12 billion.13) Integrated Entertainment Nash Dom Primorye OJSC announced as the developer. Prospect of Zone Based on Casino profitability very bright as it is one of the four special zones where “Primorye” casino is allowed exceptionally in Russian Federation, not to mention the news that some foreign investors will be participating. However, the first stage including the development of social infrastructure is being delayed much beyond anticipation. Special Joint developers include the Ministry of Economic Development of Tourism-Recreation the Russian Federation, Primorsky government, Vladivostok city Economic Zone in Russky government, and special economic zone OJSC. Designated as a special Island economic zone in 2010, but the details including the privileges, etc., have not been determined.

We have yet to identify any tangible results from the above priority projects, some of which have been promoted from as early as the 1980s. It would hardly have positive influence in attracting investors, not to mention regional development, to have the same projects listed in the priority project list for scores of years, without any progress check. The difficulties with the above priority projects, which are mostly special zones, clusters or industrial complex are that they require (1) enormous investment, (2) public resources to procure land and social infrastructure, and (3) a large number of investors within a short period (1-5 years).

First of all, Primorsky government shall regularly announce and disclose in detail the federal and state government’s policy support plan for the investment projects, and result of regular monitoring on the progress of relevant projects, and shall provide information on detailed plans and IRs, to enable foreign investors to participate in the relevant projects.

Primorsky government They should also set up concrete and selective plan for attracting investment for each project. For instance, such a plan shall include (i) method of selecting potential investors; (ii) determination of target investors; (iii) method of approach to target investors; (iv) contact target investors; (v) post-management; (vi) funding and budget; (vii) selection of responsible department and plan for setting up cooperative system; and (viii) its schedule.

13) В Приморье создали особую экономическую зону на базе завода «Соллерс», LENTA.RU, 18 сентября 2014

082 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) 1.4.5. Selection of Priority Tasks and Re-classification of Priority Investment Projects

As mentioned, Primorsky government would face many difficulties in independently promoting the 10 priority investment projects listed in the Investment Strategy due to their size or nature. Synergy effect is hard to expect because the listed projects regard different industries, ranging from manufacturing (construction supplies, high-tech), to fisheries processing, tourism, entertainment, port, and petrochemicals. Above all, the timing of implementation for such priority investment projects cannot be estimated because the potential investors have yet to be identified in most cases.

Therefore, it would be necessary to select priority tasks, and accordingly re-classify the priority investment projects after considering the geopolitical, industrial and market characteristics of Primorsky, with due consideration for the size of feasible budget and public resources. It would be most important to make a success case by selecting one or two top priority projects and focusing on them with intensive and full-scale support from the Primorsky government.

1.4.6. Reflect Analysis of Success and Failure Cases

It is necessary to collect and analyze cases of notable success or failure in the last few years, and draw the key lessons from them. It has been already 25 years, counting from the transition to market economy, since the Russian Federation government and Primorsky government established and implemented investment promotion policy for economic development, and it would be difficult to gain trust with an investment strategy, which failed to resolve obstacles identified through the causes of failure, or to elucidate the measures for reducing the negative effect. Promoting successful cases of investment projects would greatly help to attract more investment in Primorsky, and enhance credibility of the Investment Strategy.

2. Effectiveness of Policy on Special Economic Zones and Case Study in the Republic of Korea

2.1. Classification and Characteristic of SEZs in Korea

Generally speaking, free economic zones can be classified as follows: a free trade zone designed to promote trade and traffic; a special economic district or export-processing district; a free trade harbor to stimulate the combined development of trade and manufacturing: and lastly an information-process district for specific purpose or financial

Chapter 02 _ Analysis of Investment Strategy of Primorsky Territory until 2018 and Suggestions for Establishing Special Economic Zones in Primorsky Territory ∙ 083 service district. In case of Korea, export-processing district has been first found for the economic needs at the early stage of its economic development, followed by free trade zones and specific-purpose districts.

The purpose of Korea’s Special Economic Zone (SEZ) policy is to attract foreign investment in order to foster manufacturing business and trade promotion. The SEZ is classified into Free Trade Area (hereinafter FTA), Foreign Investment Zone (hereinafter FIZ) and Free Economic Zone (hereinafter FEZ) in chronological order.

In the 1970s, FTA was implemented as the initial Special Zone System and operated as a Custom Free Zone (hereinafter CFZ). Accordingly, the Zone had immensely activated trade because it was no longer necessary to go through customs clearance for import of raw materials and product export. At the outset, it managed as the center of free export zone for manufacturing industry. From 2004, however, it was unified as a FTA after adopting additional custom free zones for logistics. Now, FTA incorporates industrial complexes, an airport and ports. Industrial complexes are located in eight regions (Masan, Gunsan, Daebul, Iksan, Donghae, Yeulchon, Ulsan and Gimjae), one airport in Incheon and ports in five regions (Incheon, Busan, Gwangyang, Pohang and Dangjin).

[Figure 2-1] Overview of Korean FTZ

Source : Administration Agency of Yulchon Free Trade Zone http://www.ftz.go.kr/yulchon/YulchonFreeTradeArea/freeTradeArea.jsp

The FIZ is divided into two distinctive types; 1) group foreign investment zones and 2) individual foreign investment zones. After 1989, foreign investment has declined

084 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) due to deteriorating condition of domestic investment. Hence, in 1994 the group foreign investment zones were adopted to accelerate domestic investment for foreign corporations that holds advanced technologies. After the foreign exchange crisis in 1997, individual foreign investment zones were established to elevate domestic investment by authorizing foreign investors to select the desired region. Currently, group foreign investment zones are designated in nineteen regions (i.e. Cheonahn, Ohchang, Gumi, Daebul, Jisa, Jangahn, Dangdong, Sachun, Ohsong, Dalsung) and sixty regions for individual foreign investment zones.

FTA and FIZ share a common feature in terms of tax exemption for moving-in corporations and lease for plants sites, yet the difference is that FTA is managed as a non-tariff zone for trade promotion.

The FEZ offered friendly business and living environment for foreigners, in a bid to become a business hub of Northeast Asia. The Zone targets above large-scale of lower level local governments and it typically covers an area of 20 million pyeong and 60 million pyeong. Moreover, administrative authority of lower level local governments is delegated to supervisory agency for an autonomous administrative authority. Currently, eight regions are designated as FEZ (Incheon, Busan (Jinhae), Gwangyang, JunBuk (Saemangeum, Gunsan), Daegu Gyeongbuk (Gumi, Kyungsan, and Youngchun), Hwanghae (Pyeongtak, Dangjin), Donghae, Chungbuk).

These SEZs have not always performed well. Criticism and conflicts arose over violation of property rights, compensation conflicts, and incomplete government support. Furthermore, there were critics of weak investment since SEZs were set up to achieve balanced regional growth rather than industrial gains. According to 2014 KDI report, 44 percentage of the whole development scopes have trouble embarking on development projects due to various reasons including lack of schemes, absence of project feasibility. Correspondingly, the government withdrew 22% of FEZ and more FEZs are likely to be removed.14)

2.2. Case Study of Korea and Policy Proposal

2.2.1. Case of Korean Free Economic Zones, Focused on Free-Trade Zone

It is considered to be adequate to implement SEZs such as FTA in Russia considering the need of manufacturing industry development. The Korean FTA that initiated in the 1970s had contributed immeasurably on industrial development and economic

14) Song, Young Kwan. "Evaluation of the SEZ policy and policy proposal for activation of FEZ," KDI Focus, September 28, 2014.

Chapter 02 _ Analysis of Investment Strategy of Primorsky Territory until 2018 and Suggestions for Establishing Special Economic Zones in Primorsky Territory ∙ 085 growth through development of manufacturing industry. Korean FTA was established on the bases of “Act on the Establishment of Free Export Zones” in January 1970 as industrial complexes exclusively for foreigners, to result in export promotion, employment growth, technology advancement through foreign investment. This Zone provides convenience by implementing One-Stop Service System, entire administrative tasks including investment notification, planning permission, exports and imports approval, for moving-in companies. In addition, the Zone provides diverse benefits including exclusion on related legislation, tax exemption and economical rental & supporting facilities for foreign investors. As a non-tariff zone, there is an additional benefit for exports and imports.

The tenant qualification of FTZ is manufacturing companies backed with foreign investments, export-oriented manufacturing companies and wholesalers based on import and export transactions. To qualify as a foreign-invested corporation, foreign investment should be over 100 million won in amount and represent more than 10/100 of total investment. Moreover, corporations (i.e. finance, insurance, customs, tariff, data-processing) supporting moving-in corporation and public institutions (i.e. Korean Trade Insurance Corporation) & government agencies are qualified to move in. Among the institutions, most preferred industrial types are high technology, sophisticated technology-based industries and industrial support service industries, industries targeted for intensive foreign investments in connection with regional strategic businesses and manufacturing industries that have greater effects in terms of technical transfer and job creation.

Masan Free Trade Zone (hereinafter FTZ) has been established as the first-ever foreign exclusive industrial complex and it covers an area of 953,576㎡. Masan FTZ operated as a ‘Free Export Zone’ based on manufacturing from 1970 to 2000, and, in July 2000, it was reorganized and expanded to FTZ that guaranteed trade, logistics, transport & cargo, data processing and service industries.

Currently, more than 100 companies are in operation in Masan FTZ, including 100% foreign-investment companies, joint companies and companies invested by domestic only, and 98% of total productions in exports. In addition, nearly fifteen thousands are employed and the average exports amount to 2~3% of total Korean exports. In 1970s, when Masan FTZ thrived the most, it seized 4% of total Korean exports with thirty thousand employees.

In the initial stage, Masan FTZ handled simple processing industry (i.e. food processing, cosmetics, leather wares); however, it progressed to high technology industry (i.e. electronics, semiconductor, computers, office machines, cameras, communication devices). Currently, over one hundreds of companies from Japan, EU, United States are operating in Masan FTZ including Korean Sony Electronics, TT Korea from Sanyo.

The advanced technology and management system of Multilateral Corporations

086 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) operating in Masan FTZ has great spread effect on companies within the region and other domestic companies. The Multilateral Corporations have expanded technology through technique guidance, quality assurance, high technology equipment and transfer of the machines to processing companies outside the area. Simultaneously, Korean labor technology improved due to the transfer of labors from tenant companies to domestic companies and transfer of technology. Hitherto, World Economic Processing Zones Associations (hereinafter WEPZA) has chosen Masan FTZ as the success model of promoting the foreign investment policy for the development countries.

The primary reason for the success of Masan FTZ is enhancement of production system according to the circumstances and active attraction of foreign investment. Nowadays, it puts efforts into attracting domestic companies operating in foreign countries, which are returning back to Korea.

[Table 2-2] Investment in Masan FTZ

Tenant and Investment Foreign Invested Domestic Investment Country Companies Total Companies (USD 1,000 ) Single Joint Korea 44 44 76,666 Japan 10 24 34 85,066 EU 3 2 5 76,235 United States 11 11 1,517 Others 8 8 2,714 Total 13 45 44 102 242,198

Source : Administration Agency of Masan Free Trade Zone http://www.ftz.go.kr/kor/Morgue/Total/totalInvest.jsp

[Table 2-3] Investment on Masan Free Export Zone

Amount of Proportion Total Investment of Foreign Amount of Exports Year Employment Company (USD 1000) Fund Investment (USD 1000) Domestic Foreign (%) (USD 1000) 1970 200 1,236 86 1,436 - - 4 1971 383 4,869 90 5,252 857 128 22 1980 19,748 93,136 83 112,884 628,100 28,532 88 1990 34,464 181,353 84 215,817 1,405,374 19,616 72 2000 57,683 193,676 77 251,359 4,442,141 14,415 78 2013 76,017 165,363 69 241,380 1,527,815 6,009 102 2014.09 76,667 165,533 68 242,200 898,994 6,385 102

Source : Administration Agency of Masan Free Trade Zone http://www.ftz.go.kr/kor/Morgue/Total/totalYear.jsp

Chapter 02 _ Analysis of Investment Strategy of Primorsky Territory until 2018 and Suggestions for Establishing Special Economic Zones in Primorsky Territory ∙ 087 2.2.2. Primorsky Territory Free Economic Zone

In the case of Primorsky territory in the Far East Russia, it is necessary to establish Free Export Zones which provides trade transaction activities in non-tariff zone, benefits of tax and rentals to attract foreign investment and develop manufacturing industry.

From 2014, the Russian government has actively employed the policy of free economic zones under the Department of the Development of Far East in order to attract foreign investments. As part of the efforts, the government has set up the Special Economic Zone called Priority Development Areas (hereinafter PDA, TOP: территории опережающего развития) and introduced the free trade harbor system.

Currently, Russia is promoting fourteen PDA for economic growth and foreign investment. The PDA covers harbor logistics, petro chemistry, agriculture, tourism and mining industries.

The PDA launched in March 2015 with taxation benefits and plans to strengthen various infrastructures. Primorsky territory has the most PDAs across the Far East Russia with five PDAs. As illustrated below, they are: Mikhailovsky (agriculture), Zarubino (transportation and logistics), Russky Island (R&D, education, tourism), Nadezhdinsky (logistics, food industry, production of construction materials), and Eastern Petrochemical Company (petrochemical industry). Among five PDAs, Nadezhdinsky is concerned with manufacturing industry. This area considers logistics as well as production of food industry and construction materials.

[Figure 2-2] Priority Development Area in Primorsky Territory

Source : Investmnet Portal of Primorsky Territory, http://www.invest.primorsky.ru

088 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) The following lists some of the characteristics of Korean cases that may be applicable to Primorsky territory: 1) Approval of types of investments (i.e. single investment, joint venture, local production), 2) Construction of prompt business management system (e.g. Korean FTZs provides tenant approvals after registration within seven days, which is one of the critical success factor) and 3) Implementation of Outward Processing policy for medium and long term project to establish FTZs in Russia. According to the policy, tenants in FTZ are authorized to manufacture parts of products in another customs zone.

Russia, from the end of 2014, has set up a plan to promote seven harbors in the region including the City of Vladivostok into a free trade harbor. Accordingly, these seven harbors will see the formation of free economic zones whose service is similar to that of harbor zones, such as no visa entry and customs-free economic zones in the field of traffic, manufacture, science and technology, tourism and so on.

2.2.3. Suggestions for Primorsky Territory Free Economic Zone

Korean experiences may be closely examined and reflected into the Russian plan for the PDA or free trade harbor, designed and implemented by the Department of Far East Development and the Government of Vladivostok, while taking into account specific conditions of the region. Especially, the free trade harbor which President Putin made the first mention at the Federal Assembly at the end of 2014, and then which the Department of Far East Development has actively developed, has overlapping features with the Korean free trade harbors. Especially the Masan Free Trade Harbor can be a useful reference.

For Vladivostok Free Trade Zone, separate considerations may be given to the policy dimension and the service dimension.

First, in terms of the institutional set-up, separate committees are needed to be organized such as ‘the international nongovernment investment-attraction committee’. The committee members should include not only government officials but also en- trepreneurs, scholars, representative of foreign trade and investment organizations and diplomats.

Second, at the level of the Department of the Far East Development and the Vladivostok Government, it should be able to give more detailed consideration to the promotion of the PDA or free trade harbors. As it is, free trade harbors are unlikely to be developed into that of manufacture, science and technology and tourism on short-term period.

At the same time, followings should be taken into account. First, an organization for administrative service should be in place on a standing basis. From the Korean

Chapter 02 _ Analysis of Investment Strategy of Primorsky Territory until 2018 and Suggestions for Establishing Special Economic Zones in Primorsky Territory ∙ 089 experience of developing free economic zone, it is considered necessary that such organization should provide services for foreign businesses in the beginning stage.

Back in December, the Vladivostok government mentioned the introduction of the single channel in the Administration Command. However, it is concerned less about administrative services than the introduction of project and the connection with investors. Going forward, more attention should be paid for the services of resident companies.

Third, infrastructure service is another important element of the free economic zone. In case of Korea, all the necessary services are well provided, including electricity, water, traffic, unloading, and the same should be done for the Vladivostok Free Zone.

3. Development Prospect in Semi-finished Goods and Korea's Experiences

3.1. Industrialization Structure of Primorsky Territory and Semi-finished Manufacturing Industry

Generally, the importance of manufacturing industry in the Fast Eat Russia is lower compared to industries such as mineral, energy and agriculture. However, Primorsky territory has relatively more developed manufacturing industry and less developed mineral industry. Moreover, due to the location, trans-Siberian railway and harbors of Primorsky territory in the Far East Russia, it is predicted that there will be high possibility of attracting foreign investment on manufacturing industry.

Among the manufacturing industry, Sollers is the leading automotive company in Primorsky territory. This company was established in December 2009 and started to produce Ssangyaong Moto. Currently, Sollers produces Japanese ISUZU trucks, as well as ZMZ petrol and diesel engines. All the logistics are preceded in the plants such as Automobile Port loading/unloading & location and rail freight transportation of finished goods. Total annual output is 100,000 cars with 853 workers. In November 2009, Education Centre for staffs in manufacturing industry was built to provide training programs.

Production of manufacturing industry in Primorsky territory is growing annually (52.8% in 2005, 67% in 2012 and 72.2% in 2013) ([Table 2-3]). This totals up to three times higher than the average of the Far East Russia which is 24%.

090 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) [Table 2-4] Structure of Industrial Production in the Far East Russia

Electric power, Industrial gas and water Mineral mining Territory processing production and distribution 2005 2012 2013 2005 2012 2013 2005 2012 2013 Far Eastern Federal District 45.5 64.1 62.1 30.2 22.3 24.0 24.3 13.6 13.8 1 Sakha Republic 77.6 80.8 81.2 9.7 6.9 6.6 12.7 12.3 12.0 2 Kamchatka 12.3 12.7 8.8 41.4 63.0 66.2 46.4 24.3 24.9 3 Primorsky 9.4 6.4 5.4 52.8 67.0 72.2 37.7 26.6 22.2 4 Khabarovsk 17.4 20.6 20.7 56.4 57.5 55.1 26.3 21.9 24.1 5 Amur 25.0 52.3 50.1 27.2 20.9 22.1 47.9 26.8 27.7 6 Magadan 68.9 79.2 77.1 12.7 5.6 5.5 18.4 15.2 17.3 7 Sakhalin 65.8 93.2 92.3 21.7 4.1 4.6 12.6 2.8 3.0 8 Jewish Autonomous Oblast 6.5 5.2 5.5 69.2 41.5 51.2 24.3 53.3 43.2 9 Chukotka Autonomous Okrug 41.2 81.2 75.5 13.1 1.7 1.4 45.6 17.0 23.0

Source : Регионы России: Социально-экономические показатели, 2012. Стат.сб. /Росстат. - М., 2012; Регионы России: Социально-экономическиепоказатели, 2014. Стат.сб. /Росстат. - М., 2014.

As the automotive production at Sollers increases, production of vehicles and machines sector takes 52.6% of manufacturing industry in Primorsky territory. This is 1.7 times higher than the average of the Far East Russia (32.6%).

[Table 2-5] Manufacturing Production in the Far East Federal District in 2013

Petro Electric chemistry, Non-mineral Mineral Machine, power Etc. plastic goods goods automobile facilities goods Far Eastern 10.6 6.3 5.4 32.6 2.7 4.8 Federal District Sakha Republic 8,7 14,5 2,2 8,9 3,6 32,9 Kamchatka 0,6 1,5 1,4 5,9 0,5 0,6 Primorsky 4,1 5,8 2,1 52,6 4,3 2,7 Khabarovsk 25,6 4,6 12,3 27,2 1,2 3,6 Amur 4,0 10,3 7,1 19,2 1,6 4,5 Magadan 4,2 19,4 14,0 17,4 2,0 11,4 Sakhalin 15,0 6,0 5,3 7,8 1,7 1,6 Jewish Autonomous 3,5 42,2 1,9 0,4 5,6 8,7 Oblast Chukotka Autonomous 1,7 - - 0,3 - - Okrug

Source : Регионы России: Социально-экономические показатели, 2014. Стат.сб. /Росстат. - М., 2014.

Chapter 02 _ Analysis of Investment Strategy of Primorsky Territory until 2018 and Suggestions for Establishing Special Economic Zones in Primorsky Territory ∙ 091 Primorsky territory plans to develop energy, harbor, agriculture, tourism industries and unlike other parts in the Far East Russia it will respond to the demand of the region in manufacturing industry. Hence, regardless of the fact that Primorsky territory remains only in automotive industry, it is predicted to develop with various sectors in the near future.

3.2. Case Study of Korea and Policy Proposal

3.2.1. Korea's Experience of Industrialization Policy and Manufacturing Development

Since 1960s, Korea rapidly promoted industrialization policy. Accordingly, the five year economic development plan was implemented to promote import substitution industrialization and export growth. The first plan was implemented between 1962 and 1966. During the time, government of Korea sought to reach a milestone through development and exports of light weighted industries (i.e. textile, footwear). The second five year plan was implemented from 1967 to 1971, which focused on exports of heavy weighted industries (i.e. fertilizer, cement, oil refining). The third five year plan was implemented from 1972 to 1976, which focused on heavy chemical industries (i.e. steel, shipbuilding).

Industrialization policy in Korea advanced from light weighted industries to heavy chemical industries, and exports have been the essential engine of the economic growth. For this reason, large scale industrialization complex was established in several regions to encourage manufacturing industry.

Industrialization complex policy in Korea had transformed in accordance with particular needs of the time and government policies. In the 1960s, Export Industrial complex was constructed and in the 1970s Free Export Zone was established with the policy that enforces development of manufacturing industry and expansion of exports. Guro Export Industrial Complex and Masan FTA (initially Masan Free Export Zone) are the epitome of the development.0.00000000

092 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) [Table 2-6] Changes in Korea’s Industrialization Policy

1960s 1970s 1980s 1990s 2000s

Formative Expansion Adjustment Develop Take off Foster/Expansio period of period of period of -ment period of n period of industrialization heavy chemical industrial Stage industrialization industrialization development industry structure

Information S/W Industry, Petro chemistry, Communication Semi-conductor, semi-conductor, Textile, harbor, steel, industry, Industrial electronic fine chemistry, electronics, shipbuilding, game industry, Structure industry, development of shoes automobile, genetic industry, automobile automation machine convergence program industry

- (The former part) - Promote - Rationalization Liberalization - Government- knowledge-bas of heavy and private- driven exports- ed industry, chemical led economic centered policy - Government- future industry Basis of industry movement on light driven heavy - Transformation Industrial - Technology- - (The latter weighted chemical of economic Policy intensive part) IMF industry industry policy innovations exports management - Expansion of and balanced industrializa- system and SOC growth on tion adjustment on various sectors industrial structure

- Reinforcement - Knowledge- - Development of Industrializa - Diversification based policy on - Large scale of -tion Complex of location economic and planning of heavy chemical Location - Balanced type clusterization location industry Policy Regional Plan - Appeasement - Competitive- - Light weighted - Zero growth - Agricultural policy on ness provision industry-orient on capital area and industrial location on existing ed locations complex complex

Urban high-tech Large scale of Individual industrial industrial conditions, complex, complex in Explanatory Guro Export Free Export Techno-park, culture industry Southwest area, Note Complex Zone expansion of complex, agricultural and Apartment-style multi-functional industrial factory high-tech complex complex

Source : Korea Industrial Complex Corporation, Brochure on industrial location, 2014. p. 19.

Chapter 02 _ Analysis of Investment Strategy of Primorsky Territory until 2018 and Suggestions for Establishing Special Economic Zones in Primorsky Territory ∙ 093 Korea has successfully developed various fields of manufacturing for different stages of industrialization. It started from the processing industry such as textile and shoes and has diversified into the high-value added industry of IT and electronics. Similarly, Vladivostok should be able to start from the sort of manufacturing industry which will put the benefits of Russian Far East into maximum use and then move onto high-value added sectors.

3.2.2. Suggestions for Semi-finished Assembly Industry

One of the areas with high expectation is the semi-finished assembly industry. The Russian government appears to put much expectation on this industry when it announced the priority policy of PDA and the policies for free trade. Russia plans to implement the PDA for the five areas of Vladivostok. But in this plan, with the exception of Nazezinsk, top priority is not placed upon the processing industry. It is also very likely that the free trade harbor project will place importance more traffic than anything else.

In the case of manufacturing industry in Primorsky territory, there are two factors to be considered: 1) relationship between Russian policy orientation and market demand of Far East Russia and 2) description of articles that match up with the interest of foreign investors. Russian government exerts every effort on production of automobile, IT and home appliances industries. Manufacturing industry can be a possible destination of foreign investment due to the high demands on latest model automobile, IT gadgets and electronics in the Far East Russia. In the initial stage, automobile production in Sollers plants may be expanded, followed by IT and electronics. In the beginning stage, what should be actively promoted is the development of the automotive assembly industry, and to this end, establishing automotive parts factories can be considered.

Second, the existing local industry should be considered. The main businesses in Primorsky territory are fishing industry, lumber business and agriculture. With the existing local industries, it is expected to develop into resource processing industries (i.e. fishery processing, timber processing, agricultural processing and mineral processing). There is a need to attract foreign investment by providing benefits such as non-tariff, tax exemption and rental reduction. By collaborating on production, logistics and sales with the foreign investment corporation and local business will result in various effects. Due to the high volume of tourist and labors in the Far East Russia, the demand for residence and hotels will rise and boost the production of construction materials.

In medium and long term plans, the region is considered to develop as in the case of Korea which FTA gradually transformed into Free Export Zone which is a combination of trade transaction, logistics, transport and service. Currently, the region’s semi-finished manufacturing complex focuses on production and is considered to develop into combined Free Export Zone.

094 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) 4. Development Prospect in Tourism and Korea’s Experiences

4.1. Characteristic of Tourism Sector in Primorsky Territory

Tourism is announced as one of the crucial sectors in the investment strategy promoted by Vladivostok in December 2013, along with cars, agriculture, fisheries, energy and transportation. From this strategy it can be said that Vladivostok has high potential for tourism development in the region. Followings show the beneficial conditions for the development of tourism industry.

Primorsky territory has high potential in the tourism sector. First, it has natural environment that can attract tourists. The region is near the seashore and provides various sceneries including inland and sea boarders. Moreover, the region has thirty-five thousand hectare Natural Park with six national reservation areas, thirteen game park and three national parks (i.e. Udegeyskaya Legenda National Park, Call of the Tiger, Zov Tigra National Park).

Second, the region has rich historical heritage to attract tourists. Primorsky territory is home to the most cultural heritage sites among the regions in the Far East Russia, which includes 184 museum owned by the country & social organizations and approximately 2,000 history and art sculptures. Moreover, there are habitats for minority race in five regions in Primorsky territory which can also develop as cultural anthro- pological touristic place.

Third, the region has a location advantage for tourism industry. Vladivostok in Primorsky territory is known as the first and the last station of Trans-Siberian Railroad in Russia. This famous railroad also can contribute to Primorsky territory’s tourism development. Moreover, the region is close to national border of China and North Korea. Also, the distance between the region and Korea & Japan is very close, which is another favorable condition for attracting tourists.

Fourth, the region has development potential for international conferences or academic events. For instance, 2012 APEC Summit was a boon to the region’s tourism industry. The Summit provided the momentum to shift the focus of tourism development from scenic landscape to business-related services. Also, Russky Island, where 2012 APEC Summit took place, has distinctive advantage.

Chapter 02 _ Analysis of Investment Strategy of Primorsky Territory until 2018 and Suggestions for Establishing Special Economic Zones in Primorsky Territory ∙ 095 Regardless of countless potential in tourism industry, the region has much room for improvement. One challenge that Primorsky territory faces is lack of renowned touristic place due to poor marketing activities. The government website for tourism (www.tour.primorsky.ru) provides tourist information, but marketing efforts are not evident.

The Ministry of Tourism is in charge of tourism policy of Primorsky territory. In private sector, ‘Regional Association for Tourism Promotion’ and tourist association of international integration are providing licensed tourism services. In addition, "Primorsky territory Development Corporation" OJSC that was established in 2013, is responsible for the development of tourism in the region.

China is the most visited country followed by Korea from Primorsky territory. However, their trends are markedly different. For instance, between 2006 and 2013, visitors to China fell by 47%, while visitors to Korea increased 5.4 times. The number of visitors traveling to Taiwan and Vietnam is increasing as well ([Table 2-6]).

[Table 2-7] Top Destination for Far East Russia’s Outgoing Tourists

2006 2007 2008 2009 2010 2011 2012 2013 China 768733 934192 1138867 351637 444301 581658 482123 408342 Japan 10271 9619 10939 4988 3210 2093 5533 7343 Korea 11050 10165 13739 22618 32614 37117 45604 60379 Vietnam 1622 1931 3163 2964 2402 3740 6450 8752 Indonesia 157 457 450 444 444 592 169 0 Taiwan 884 7205 11452 2978 7207 22840 31726 34149 Other 509 432 575 427 611 3331 19474 41433 countries Total 793226 964001 1179185 386056 490789 651371 591078 560398

Source : Данные Департамента международного сотрудничества и туризма Приморского края

The number of tourists to Primorsky territory is the largest from China, followed by Korea. Between 2007 and 2013, Chinese tourists increased by 56%, and Korean tourists doubled. ([Table 2-7])

096 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) [Table 2-8] Incoming Tourist in Primorsky Territory

% Change 2007 2008 2009 2010 2011 2012 2013 (2007-2013) China 50349 49647 38102 43671 60985 72070 78498 +155.9 Japan 5529 4814 3496 4167 3188 4490 5715 +103.4 Korea(ROK) 6991 7808 4935 8123 7578 7120 14331 +205.0 Korea(North) 24 2 6 11 18 0 0 -75.0 USA 2484 1775 2456 4272 3730 2230 1504 -39.5 Canada 492 505 528 1686 1812 1320 0 - Australia 321 385 298 698 1246 3035 863 +268.8 UK 461 737 366 791 805 50 0 - Taiwan 586 112 108 184 339 210 118 -79.9 Other countries 1145 1394 2657 4168 2713 3695 2894 +252.8 Total 68382 67179 52952 67771 82414 94220 103929 +152.0

Source : Данные Департамента международного сотрудничества и туризма Приморского края

4.2. Tourism Development Policy in Primorsky Territory

Currently, the main issue regarding the tourism policy in Primorsky territory is con- structing a casino and developing Russky Island. The government of Primorsky territory is building a gambling zone “Primorye” at the territory of Artyomovsky urban district in Muravyinaya bay. This district is one of the four authorized places to build casinos which include hotels, exhibition halls, cultural facilities. By 2015, motorway connecting to Knevichi International Airport will be constructed, scheduled to be open in 2016. The region is targeting tourists from Korea, China and Japan.

The government of Primorsky territory plans to develop Russky Island into tourist resort. The government designated the Island as place of tourism and innovative science technology after holding the APEC Summit and plans to develop the region into international tourism and science technology complex.

The development plan of Russky Island launched back in 2011. The government appointed the Island as the SEZ for tourism and resort industry. The plan, however, is hindered since the proprietor of the land is under the Ministry of National Defense.

According to a recent research, it is at the final step of property right transfer to the government of Primorsky territory for tourism development. The government had segmented the area into theme park, aquarium, naval museum, military museum, marine tourism & leisure sports center including diving board and yacht, senior care center.

Chapter 02 _ Analysis of Investment Strategy of Primorsky Territory until 2018 and Suggestions for Establishing Special Economic Zones in Primorsky Territory ∙ 097 The Island includes road connected to Vladivostok and Far Eastern Federal University which was the venue of 2012 APEC Summit. After the Summit, the region became widely known for decent corridors, accommodation and infrastructure. In addition, the environment is pleasant with well-preserved nature.

4.3. Case Study of Korea and Proposition on Tourism Development in Primorsky Territory

4.3.1. Suggestions for Tourism Development in Primorsky Territory

There are a few suggestions to propose. First, specialized tourist attractions should be developed. Generally speaking, tour site can be divided into two parts: 1) tourist site with resorts, leisure and cultural system and 2) resort complex connected with casinos. Therefore, tourist site in Primorsky territory needs awareness on developing and fostering the adequate kind according to the district.

Second, tour programs should be developed that reflect the advantage of Primorsky territory by adopting programs combined with Russian traditions and winter programs, for example, traditional sauna or winter sports such as ski camp. Tour programs may be linked with Trans-Siberian Railroad network that departs from Vladivostok station.

Third, there is a need to connect tour programs with local festivals. In Korea, there are diverse local festivals such as Boryeong Mud Festival and Hwachun Trout Festivals. Similarly, for Primorsky territory, programs that reflect regional characteristics such as Sledging Festival and Ice Festival can be planned.

Experiences of Korean tourism industry provide useful reference to Primorsky territory. First, the region lacks convenience facilities for foreign visitors such as hotels, restaurants and stores. Second, lack of publicity was another issue. In the case Korea, there are supporting programs for foreign familiarization tour, which is absent in Primorsky territory. Third, lack of programs and services for foreigners should be addressed, including information on tour route, availability of guide and interpreter.

Therefore, there is a need to develop publicity, promotional materials, and foreign familiarization tour in order to support tourism industry in Primorsky territory, and establish more restaurant and store for the visitors.

098 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) 4.3.2. Korea's Experience and Suggestions for Tourism Industry in Russky Island

For the tourism development in Primorsky territory, the paper explores the case of Jeju Island in Korea. Jeju Island has developed from domestic tourist attraction to international tourist site. The numbers of tourist visiting Jeju Island are 10,850,000, which surpasses Hawaii (i.e. 7,990,000) and Bali (8,960,000). Foreign tourists have also increased from 46,000,000 in 2006 to 78,000,000, which is almost 70% increase for four years. The growth has been driven by expansion of international direct flights, international cruise routes, no-visa entry and active international publicity.

Furthermore, the success of tourism industry in Jeju Island is in large part due to specialized tourist site with resorts, leisure sports, culture, world natural heritage, casinos and shopping center. Olle Routes, which is popular among Koreans, were installed all over the Island including rural villages, lava cave, and have developed into the touristic point. Also, there are specialized leisure facilities such as international tracks, marine leisure sports and casinos.

Jeju’s MICE (Meeting, Incentive tour, Convention, Exhibition) Industrial Policy might provide a useful reference to the development of tourism industry in Russky Island. In 2006, Korea enacted “International Conference Industry Promotion Act” and the government supported promoting MICE policy to hold international conferences, train manpower, and build conference facilities. Through this effort, Korean ranking for hosting international conference has risen from 24th (109 conferences) in 2000, to 16th (206 conferences) in 2005 and 5th (563 conferences) in 2012. Moreover, policy of producing high economic value products by holding international conferences which concerns designating convention city including Jeju Island with facilities, accommodation and shopping centers are in progress. At this moment, the benefits of appointed convention cities includes government financial support, tax exemption, reduction of allotment, eased regulation on business activities, prohibiting/limiting thoroughfare for vehicles. There are eight existing convention city such as Jeju Island and Incheon, and PyeongChang (venue for 2018 Olympic Winter Games) and Gyeongju (city that has large-scale convention facilities and traditional heritage) will be appointed additionally.

In order to develop tour industry in Russky Island, it needs to refer to the case of Jeju Island and develop into Multi-Resort Areas with the character of MICE industry. Russky Island hosted the APEC Summit meeting, and is equipped with convention facilities. Therefore, there is a possibility to develop Russky Island into a specialized resort area including MICE (Meeting, Incentives, Convention, and Exhibition) functions.

The Far East Federal District and Primorsky Government may consider the idea of developing Russky Island as the convention city, and implement projects to host international events, foster experts and construct infrastructure.

Chapter 02 _ Analysis of Investment Strategy of Primorsky Territory until 2018 and Suggestions for Establishing Special Economic Zones in Primorsky Territory ∙ 099 For medium and long term, connecting with international cruise that operates to Korea, China and Japan is necessary. Russky Island has the potential to develop into tourist site and center of actively hosting conventions for Northeast Asia. Moreover, it can develop into a complex resort area with higher value-added services by including science technology complex and MICE functions.

4.3.3. Suggestions for the Korean Tourist Industry for Cooperation with Russia

Primorsky territory has a high expectation and aspiration to attract tourists from Korea. This means that the Russian authorities have a good reason to take into account suggestions from the Korean side.

There is a need to develop programs to attract Korean visitors. Due to no-visa entry, accessibility of Korean to Russia has been convenient and vice versa. Furthermore, number of Korean visitors to the Far East Russia is predicted to increase in the near future.

Currently, Korean tourist visiting Primorsky territory show high interest in history of the region, which is related to Korea, including Korean Residence in the 19th, the early of 20th century and the activities of Korean independence activist. Given this, tour programs targeting Korean secondary and tertiary students, university students and social organizations are promising in the near future.

Since there are cultural heritage related to Korean history and culture in Vladivostok, Khasan and Ussuriysk located within Primorsky territory, tour programs may be developed accordingly. In Vladivostok, there is a monument in Sinhanchon district which was the residential district for Koreans (Goryeo), before they were deported by Soviet Union. In Ussuriysk, there are historic sites such as residential district for Korean (Goryeo) related to 1937 Deportation during Stalin Era, Korean (Goryeo) Cultural Centre, residence of Choi Jae Hyoung who was related with the independence movement and memorial of Lee Sang Sul. In Khasan, Tizinkhe village is the first settlement site of thirteen families from Hamgyong province in Russia after migrating in the year of 1863. Other historic sites include residence of Choi Jae Hyoung which was the venue for meetings with Lee Yui Jong and Ahn Jeung Keun as well as places of Anti-Japanese Movement.

100 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) 5. Development Strategy and Alternatives for Agriculture

5.1. Status and Policy Direction of Agriculture in Primorsky

The agriculture in Primorsky has grown rapidly in the past five years. Not only did the agricultural production in Primorsky rise by 13% in 2014, but also the proportion of farming enterprises among agricultural production is increasing steadily. Surplus rate is high especially among medium- and large-sized farming enterprises. Accordingly, private investment in agriculture is expanding, For instance, ‘Rusagro’ decided to invest RUB 60 billion in swine breeding facilities in Primorsky in July 2014, and Merci Trade decided to invest RUB 100 million in swine breeding facilities in June 2014.

With respect to the above, the Investment Strategy claims to advocate innovative agriculture and marine product processing as the priority investment industries in Primorsky. The marine product processing cluster pilot project, eco-friendly health food production are suggested for such projects. Geographically, the western/central regions of Primorsky will be specialized with agriculture and resources development (paragraph 3 of the Investment Strategy, p. 16).

As for agricultural development under the Investment Strategy, there is a state program for development of agriculture and regulation of the markets of agricultural products, approved by Resolution No. 392-pa of the Administration of Primorsky territory dated December 7, 2012 (“Agriculture Development Program"; Annex 2 of the Investment Strategy), which includes Primorsky budget and plan for the implementation of the relevant policy for 2013-2020 (RUB 5,280.3 billion is put aside for investment in the modernization of agriculture in Primorsky territory.)

However, due to the drastic changes in the economic circumstances of Russia and the surrounding areas since 2014, it seems unavoidable that the Agricultural Development Program would have to undergo full-scale modification. Especially, in case of agricultural products, since the Russian government announced and immediately implemented a one-year ban on importation of agricultural products from the US, Canada, EU, Australia and Norway, which imposed economic sanctions against Russia, Primorsky was left with no choice but to make a prospective transition in the agricultural policy, including import substitution, because it relies heavily on importation for most agricultural products. In this regard, the Russian government has professed to be seeking various measures, including free land provision, to attract Asian investors to the Far East, but such policy changes have not been made visible.

Chapter 02 _ Analysis and Support of Investment Strategy of Primorsky territory until 2018 and Offers to Establish Special Economic Zones in Primorsky territory ∙ 101 5.2. Korea's Experience in Agriculture Development

Although the Korean agro-food industry grew steadily in terms of volume in the past 10 years, its sustainability is assessed to be weakening due to its decreasing proportion among the national economy and a falling food self-sufficiency rate. Korea showed certain progress in terms of specialization and scale-up of farm managers by investing KRW 57.1 trillion for strengthening competiveness in agriculture, and KRW 14.1 trillion for rural welfare and rural area development from 2004 until 2012; however, the income disparity with the urban area widened due to stagnation in agricultural income, and the gaps between urban and rural areas in the residential and welfare infrastructure including residence, medical care, education and culture seemed to have widened also.

In this regard, the Korean government made it a future priority task to expand agriculture beyond the traditional method of production to the sixth industry, i.e., to creating a higher value-added industry by combining traditional agriculture with converging technology such as IT, BT, ET and NT and has been promoting informatization of agriculture and rural area pursuant to the informatization master plan established on three occasions since 2002. The detailed policies include creation and expansion of export agriculture complex for higher value-added agriculture, improvement of farmland banking business, introduction of new technology certification system, and agro-food fund.

They are promoting a transition in the method of intervention in agriculture product supply/demand and price management for the sake of agro-food safety and improvement of distribution system from the consumers’ standpoint. They also have a plan to secure public support on agricultural budget through efficient investment on agriculture and rural area through internal reorganization of the agricultural administration. The detailed policies include legislation for revitalization of direct transaction of agricultural products, development of online direct transaction business platform, nurturing marketing firms in partnership with related cooperatives and associations, opening wholesale agriculture logistics centers for each zone, setting up supply/demand control system through agreement between the private and public, accelerating agricultural/livestock product safety management system, and improving agro-food certification/labeling system (expanding food information labeling to all agricultural products).

Although neither the Investment Strategy nor the Agriculture Development Program includes as much detail as the Korean government’s development plan for agriculture, rural area and food industry, the basis of the agricultural development policy does not seem to be much different, given the numerous emphasis on agriculture innovation, or development of innovative fisheries processing business. The Korean government has been promoting Korean Agricultural Policy Experiences for Food Security (KAPEX) in Laos, Cambodia and Ethiopia since 2013 to share its policy development experiences in agriculture and rural area.

102 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) 5.3. Agriculture Investment in Primorsky by Korean Investors

The Korean Ministry of Agriculture, Food and Rural Affairs set up a farming support center in Primorsky in 2014 to resolve difficulties of local companies in focus regions through administrative support, technical consulting, and group purchase of agro-materials, and to establish a tripartite cooperation system between manufacturers, distributors and domestic purchasers.

As of the end of 2014, there are 213 cases of foreign direct investment on the agriculture, forestry and fishery in Russia, with 58 new corporations in the amount of USD 167.29 million.

The Korean investors reported 13 cases of investment on agriculture in Russia, 11 of which are concentrated in Primorsky. The investors include Pohang Livestock Cooperatives, Future Invest Leaders, Happy Bean Co., Ltd., Korea Trading Co., Ltd., Seoul Feed Co., Ltd., Bari Dream Co.,Ltd., Univera Inc., Arro Co.,Ltd., Agro Sangsaeng LLC, and Hyundai Heavy Industries Co.,Ltd. The Korean companies invested on beans, corn, wheat, barley, oats, soybean, and rice in Primorsky, mostly on beans and corn among them. In 2013, the total cultivation area by Korean investors in Primorsky amount- ed to approximately 30,000 ha, where beans were grown in 17,000 ha, grain in 4,400 ha, rice in 4,100 ha, and corn in 2,200 ha. In 2014, the area of rice cultivation increased to 4,500 ha, and corn to 5,800 ha. Recently, the investment in dairy and cattle farming is increasing. According to the Primorsky government, the accumulative investment by Korean investors in agriculture in Primorsky amounts to RUB 3 billion, and the Korean companies had a positive effect on rice and livestock production, which require massive manpower and funding.

However, the unit productivity of farming enterprises in Primorsky is merely a third of China, and the Korean investors all face the issue of profitability. The obstacles commonly voiced by the Korean investors on agriculture in Primorsky are the laws restricting land ownership by foreigners and foreign corporations, ineffective and ex- pensive logistics system, licenses and permits requiring complex and prolonged procedure including customs clearance (for importation of farming equipment) and export license (e.g. for special crops), difficulty in obtaining work visa and risk of cancellation thereof, corruption, and inconsistent administrative procedure.

Chapter 02 _ Analysis and Support of Investment Strategy of Primorsky territory until 2018 and Offers to Establish Special Economic Zones in Primorsky territory ∙ 103 5.4. Major Obstacles in Agriculture Investment in Primorsky and Direction for Improvement

5.4.1. Stable Procurement of Farmland

The greatest concern in the agriculture investment in Primorsky is procuring secure farmland. The price of farmland in Russia is 15% of the international average, and 2% of the EU average. The low land price is a major attraction. Whereas foreigners and foreign corporations, as well as local corporations with its shares held by foreigners or foreign corporations, are not allowed or limited to acquire ownership of land in South East Asian countries with similar agricultural environment as Korea, e.g., Vietnam, Cambodia, or Indonesia, the ownership of farmland in Russia is limited only when the foreigners or foreign corporations own more than 50% of shares, and thus the institutional environment relating to farmland ownership is comparatively favorable.

However, there is still some difficulty in securing farmland ownership since Russian corporations with more than 50% of its shares owned by foreigners or foreign corporations are not allowed to acquire farmland, and the acquisition of land ownership by foreigners and foreign corporations are banned entirely in the southwestern part of Primorsky due to its geopolitical importance as a border area.

Private sale and purchase of farmland are permitted, and there is no need to obtain a prior license/permit from government authorities in order to acquire or maintain such ownership.

It seems best for a foreigner or a foreign corporation engaging in independent agriculture investment in Russia to execute the 49-year lease contract on farmland owned by the local government in order to stably secure farmland. However, the lease contract can be achieved only through a bid conforming to farmland privatization procedure.

It is difficult in many ways for foreign investors including Korean investors to participate in a bid to acquire farmland in Primorsky. While the various bidding information including those on farmland are posted on the Internet by the local governments in Primorsky, such information are provided only in Russian, and the application for the bid and attachments thereof have to be prepared in Russian according to the forms prescribed under the Russian laws and regulations. Therefore, it takes considerable effort and expense for foreign investors to participate in such a bid.

Therefore, in order to induce foreigners to invest in agriculture in Primorsky, one should first set up the system for encouraging or supporting participation in the bid for stable securing of farmland. In this regard, one may consider introducing a plan

104 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) to disclose data on farmland subject to lease by the state and local governments before initiating the bidding procedure, so that the foreign investors may execute lease contracts on farmland of interest through bidding. Moreover, the bidding procedure needs to be made simple and efficient through notification of the bidding information in advance, simplification of the application forms, negotiable terms and conditions of the lease contract, and shortening the period required for the bidding procedure.

Next, regarding the terms and conditions of the lease contract on farmland, the local government may consider measures to guarantee the following matters within its authority.

Guarantee sale of land leasehold: 49-year lease contract has a provision requiring the lessor’s prior consent before assigning the leasehold. The lessor’s consent is entirely up to discretion of the local government, the lessor, because there is no separate restriction on or reference thereto. This functions as authorization substantially restricting assignment of the leasehold. Therefore, it may be desirable to include in the lease contract such provisions as those forbidding the lessor to withhold consent without reasonable cause, requiring the consent to be given within a specified period, or presum- ing a prior notice to the lessor to be the consent.

Protect and compensate for ownership of a building or structure built on the land during the lease period: The acquisition of ownership by a foreigner or a foreign corporation, or any Russian corporation with more than 50% of its shares held by a foreigner or a foreign corporation is prohibited only in case of ‘farmland.’ In other words, any building or structure built on the farmland for agricultural management becomes the property of the builder. When the lease is terminated due to expiration or rescission, the lessee has to restore the farmland (i.e., demolish the building or structure) before returning the same to the lessor, unless otherwise set forth in the lease contract. It may be unreasonably disadvantageous to the lessee, given the residual value of the building or structure, or the expense, incurred in building the same. It would be desirable for protection of the investor to guarantee acquisition of ownership by changing the purpose of the relevant farmland to a building site if the building or structure had been built on the farmland for agricultural management, or to expressly state in the lease contract a measure to otherwise protect or compensate the ownership to the relevant building or structure.

Flexible interpretation of the scope of use (restriction) of farmland according to the purpose of lease: It may be applicable also in case of a building or structure built on farmland. It may provoke arguments or disputes because the purpose of lease is indicated very abstractly as, for instance, agricultural management, in the generally used 49-year farmland lease contract. The farmland may not be wholly arable even if it is the subject of a farmland lease contract, and if it were used as supporting facility (such as warehouse, administrative building, or road), or for agricultural manage-

Chapter 02 _ Analysis and Support of Investment Strategy of Primorsky territory until 2018 and Offers to Establish Special Economic Zones in Primorsky territory ∙ 105 ment in the broad sense, it would be desirable to expressly indicate in the lease contract that they not be cited as the cause for termination of the contract on account of being the use of farmland contrary to the purpose of lease.

Guarantee acquisition of land ownership with respect to investors who become no longer subject to the legal restrictions during the lease term: The execution of the 49-year lease contract takes place through a bid conforming to farmland privatization procedure. Given the above, it would be desirable to expressly state the procedure or measure for enabling acquisition of land ownership if the status has been changed to qualify for ownership acquisition even during the lease term, or if an unqualified person succeeds to the status of lessee.

Expressly state the ceiling for the rent: In many cases, lessor is to determine, and notify or announce the rent for the 49-year lease each year. So far there has been no unreasonable increase in rent,; however, given the 49-year lease term, it would be desirable for protection of the lessee to expressly indicate in the lease contract the cause, procedure and/or the upper limit for increase in the rent.

State the causes and procedure for termination in detail: An early termination of the lease contract would make the lessee fully assume the loss from the relevant investment made after signing the 49-year lease contract. It would be desirable to list in detail the causes of, and procedure for termination so that the lessor may terminate the contract only when the intention of, or gross negligence by the lessee is obvious.

Effect of early termination: even if the contract is terminated by intention or gross negligence of the lessee, it shall be arranged so that a certain amount of compensation can be made for any increase in the value of the relevant farmland attributable to the lessee’s investment.

Such terms and conditions of lease shall be subject to change or adjustment upon comprehensive consideration of the status or value of the farmland, and lessee’s purpose of lease, during the negotiation stage after the notice of tender or selection of the preferred bidder. These suggestions are made to strengthen investor protection.

5.4.2. Complex and Unpredictable Customs Clearance Procedure

Meanwhile, since the size of a single farmland in Primorsky is considerably larger than in Korea, it is indispensable to make considerable investment on farm machinery and other equipment, after securing the farmland. However, in many instances, korean investors face difficulties in customs clearance because farm machinery and fertilizers are classified as dangerous materials.

106 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) Especially in case of Russia, there are so many uncontrollable variables in customs clearance, e.g., unpredictable delay in the procedure, arbitrary demand for additional document from the customs office without any clear legal basis, or imposition of import duties against the international practice.

While it is encouraging that the restrictions or discriminations on customs clearance will be abolished gradually with the entry into the WTO, Primorsky government still needs to make an effort to improve administrative support so as to shorten or simplify customs clearance when a quality certificate of international standards can be presented, and when the purpose of use, and the principal agent of importation are clearly disclosed.

5.4.3. Difficulties in Obtaining Export License for Crops

Some investors complain of difficulties in obtaining special license for exportation of medicinal crops. It would also be necessary to provide administrative support, e.g., provide information or guide the procedure, and to allow for simple acquisition of special permit if the requirements are met to suit the international standards.

5.4.4. High Logistics Cost

According to the Investment Strategy, Primorsky is superior to other regions in Russia in terms of social infrastructure; however, from the international perspective, the ineffective logistics system and the backward transport and storage facilities still increase the cost of transportation and storage. The Korean investors in Primorsky point out that it is difficult to export the crops to Korea due to high logistics cost.

In this regard, Primorsky government should consider ways to reduce distribution costs by using the Russian distribution network, or to provide special support to agricultural enterprises investing in logistics system.

5.4.5. Shortage of Skilled Professionals

The average wage for farm workers in Russia is very low compared to other industries, and there is overall labor shortage. The professional manpower capable of handling farm machinery is especially limited. It is necessary to set up information network on professional manpower who are able to communicate in foreign languages, and to handle imported farm machinery, in collaboration with universities or colleges located in Primorsky, such as Far Eastern Federal University. It is also necessary to consider ways to subsidze investors’ expenditure on the education and training of agricultural manpower.

Chapter 02 _ Analysis and Support of Investment Strategy of Primorsky territory until 2018 and Offers to Establish Special Economic Zones in Primorsky territory ∙ 107 5.4.6. Lack of Information on Various Entitlements on Agriculture in Russia

It is encouraging for potential investors considering agricultural investment in Primorsky that the Federal Tax Law would be enforced to reduce or exempt corporate tax for foreigners investing in the Far East region, and that the Primorsky law for reducing/exempting property tax was enforced in 2013. However, while Russia is enforcing numerous support policy for agriculture including subsidies (farm subsidies will be re- duced/abolished gradually due to the entry into the WTO), there are few benefits applicable to Korean companies investing in Primorsky.

It is recommended that they should provide accurate information on requirements for various support policies including the subsidy, and that they positively consider ways to bear responsibility or costs in the event of any interim change in policy if the investment or expenditure has been made by Korean companies according to such information.

5.5. Necessity of Establishing Detailed Investment Promotion Plan in Connection with Core Projects

5.5.1. Grain Terminal Construction Project

Primorsky government confirmed in March 2014 that they are promoting three grain terminal construction projects. They will be built in Slavyanka and Zarubino ports in Hasan region, and the commercial port in Vladivostok. The commercial port in Vladivostok already processes 700 KMT of grain each year, and is planning an expansion.

In September 2013, Primorsky government announced the terminal construction project for exclusive grain import/export in the Asia-Pacific region. The grain terminal, with the capacity to process 50 million tons of grain in a year, will be built in Bolshoy Kaman where Zvezda shipyard is being built, and is scheduled to begin operation in 2017. The amount of initial investment is USD 330 million, and it will be carried out by “Transportnaya promishlennaya companiya.”

In March 2014, Marubeni, a Japanese corporation, affirmed the intent to invest in the grain terminal to be built in Troitsa Bay (Zarubino). United Grain Corporation, FESCO Transportation Group, and Marubeni entered into a tripartite MOU. However, the realization of the above investment is uncertain at the moment since Japan thereafter decided to participate in sanctions against Russia, and the legal binding force of the tripartite MOU is yet to be confirmed. Jilin province of China, and China Merchants Group also affirmed their intention to invest in Zarubino port construction and expansion project. Summa Group (FESCO), which is one of the largest private transportation and

108 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) logistics companies in Russia, and owns Vladivostok commercial port and a private railway, signed MOUs for development of Zarubino port with Jilin province of China on May 20, 2014, and with China Merchants Group on Nov. 10, 2014. Zarubino port development project also includes a special grain terminal construction project. Summa Group announced that they will begin to work on the design in February 2015.

Although the grain terminal construction projects have been made public on numerous occasions, and a part of them (the project in Troitsa Bay) is included in projects financed by the federal government, no visible result has come out yet. Even if Zarubino port development project, which is being initiated by Summa Group, progresses as scheduled, the construction of the grain terminal will be completed in 2020 at the earliest.

Since the grain terminal construction project will have considerable effect on the distribution of grain in the North East Asia, including Japan and China, as well as Korean investors, they may expect certain outcome in investment promotion if the detailed business outline and investment proposal are determined and made public. Many Korean investors could become interested in the grain terminal construction project, given that the traffic volume and profitability of Vostochny, the largest port in the Far East, are recently improving.

In connection with the grain terminal project initiated or financed by Primorsky government, the following items shall be included in the investment proposal or the information memorandum:

• Outline and characteristics of the project • Purpose of the project • Technical characteristics: outline, design characteristics, protection of cultural prop- erties and environment, key technical details, status and expansion plan of relevant social infrastructure • Terms of long-term investment contract: general terms and conditions (contract terms, legal basis, project structure including attribution of assets, project progress stages), contractual obligations borne by contracting parties, developer (obligations of the state government or state government-financed public corporation) • Financial structure: financing and disbursement plan at the investment stage and the operation stage, investment payment procedure and disinvestment plan • Risk allocation: risk-bearing parties, and allocation of various risks arising from design, delay in construction, cost increment, environment, maintenance, demand fluctuation, bankruptcy of bank providing security to the counterparty, and change of project structure • Conditions for participating in the bid or investment: legal basis, list of documents to be submitted to show qualification for participating in the investment or bid • Estimated project schedule

Chapter 02 _ Analysis and Support of Investment Strategy of Primorsky territory until 2018 and Offers to Establish Special Economic Zones in Primorsky territory ∙ 109 5.5.2. Other Major Agricultural Projects

The major projects in the relevant field introduced by Primorye Investment Promotion Agency are as follows. They will be funded mostly by private investment; however, the details of investment or realization thereof have yet to be confirmed.

• Swine breeding facility project for 500,000+ pigs by “Merci Traid” • Third-class breeding facility for 16,000+ livestock by “Grin Agro” • Expansion of dairy processing facility by “Gormolokozavod Artemovskiy” • Modernization of sugar refinery by “Primorskiy Zavod” • Modernization of poultry facility in Ussuriysk • Construction of innovative agricultural complex facility by “Zeleniye Listya” • Poultry processing facility development by “Mikhaylovskiy broyler”

The modernization of sugar refinery by “Primorskiy Zavod,” and the construction of innovative agricultural complex facility by “Zeleniye Listya” have been in the priority project list even before 2010, but the progress of the projects has not been made public or confirmed although their deadline has already elapsed or is almost imminent.

The above list is based on the data disclosed by the Primorye Investment Promotion Agency, which is dated August 21, 2013. The progress of the projects since then have been confirmed neither by Primorsky government nor by Primorye Investment Promotion Agency. Even in the project catalogues provided in Russian and Chinese, there is no mention at all from where detailed information on the relevant project can be obtained, or how one can participate in the relevant project. This makes it difficult for potential investors to pay attention to the relevant projects.

5.5.3. Agro-Industrial Multi-Complex Construction Projects

There is movement to propose development of a special agriculture zone mostly in the area inhabited by Korean Russians in Primorsky. The Hokkaido Bank of Japan has proposed to the Ministry of Economic Development of the Russian Federation at the end of 2013 to develop a special economic zone for raising grain and other crops in Khabarovsk and Primorsky. The Hokkaido Bank had then announced that they were preparing the proposal for development of the special economic zone. However, Japan’s move is likely to have slowed down following its participation in the economic sanctions against Russia. On Sept. 23, 2009, China and Russia signed the “cooperative program between the Far East and northeastern region of Russia, and the northeastern region of China”; and China is strengthening agricultural cooperation at border areas in the Far East by deciding to hold the relevant vice ministers’ meetings regularly for agricultural cooperation following the sanctions against Russia, and by holding the first China-Russia food fair.

110 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) In order for Russia to develop special agricultural zones, given its policy for special economic zones, there has to be an underlying agricultural corporation or a group, which warrants attention on agro-industrial complex construction project.

‘Industrial complex in Mikhailovsky’ among the priority investment projects listed in the Investment Strategy was originally planned as an agro-industrial multi-complex. However, neither social infrastructure nor site renovation has been completed, and the sales plan has not been made public yet.

The Korean investors who have already invested in Primorsky may be interested in agro-industrial complex integrating agriculture and food industry. If the Primorsky government were to disclose the agro-industrial development projects, and to sell the relevant complex sites to foreign investors, including Korean investors, the following matters shall be included in the investment promotion plan:

• Investment environment in Primorsky and Mikhailovsky: geopolitical location, economic scale, industrial infrastructure, status of connecting facilities or competing complexes, residential environment for expatriates • Status of agriculture, food and livestock industries in Primorsky and Mikhailovsky • Production facilities, or projected route for carrying in raw materials, production, processing, storage, distribution and sales, and the competitiveness of the relevant complex • Type, size and placement plan for the target industries, e.g., seed development, grain production, feed production, pig/cattle breeding, compost production, food/beverage product • Investment incentive: terms of lease for the factory site, tax exemption/reduction, tariff exemption/reduction, or simplification of customs clearance procedure, government subsidy and other administrative support • Site renovation plan: placement of background or supporting facilities for circuit connection and systematic management of material procurement, processing, storage, distribution, packaging, marketing, quality management, quarantine, and integrated management • Complex management and support service: occupancy by public service institutions for certification and food safety management, and quarantine

Chapter 02 _ Analysis and Support of Investment Strategy of Primorsky territory until 2018 and Offers to Establish Special Economic Zones in Primorsky territory ∙ 111 References

Administration Agency of Masan Free Trade Zone Yulchon www.ftz.go.kr/yulchon/YulchonFreeTradeArea/freeTradeArea.jsp.

Administration Agency of Masan Free Trade Zone www.ftz.go.kr/kor/MsFreeTrade Area/Investment/residenceQualify.jsp.

Agency for Strategic Initiatives, Doing Business in Russia: Map of Opportunities, 2014.

Bae, Sang Doo, “Agriculture Entry Strategy into Primorsky, Russia,” World Agriculture, Vol. 154, June 2013.

“Chinese investors to be invited for the Far East Zarubino port construction,” Russia Focus, Dec. 12, 2014.

Food and Agriculture Organization of the United Nations, Russia’s Restrictions on Imports of Agricultural and Food Products, 2014.

Food and Agricultural Organization of the United Nations, Agricultural Investment Funds for Developing Countries, 2010.

Gorchakov C., On the Structural Changes in Economy of the Primorsky Krai, NICE 2011.

G20, Comprehensive Growth Strategy: Russia, November 05, 2014.

Gwak, Byeong Deok, Study on Foreign Investment Promotion Policy and Post Management by Local Governments, doctoral thesis for Yeungnam University, 2013.

Interview with Kushnareva I. Iy. (Кушнарева И.Ю, professor of Far Eastern Federal University).

“Investing in Russian Agriculture: Where There’s a Will There’s a Way,” Russian Survey, September 2013.

Investment Portal of Primorsky Territory, “Implementation of Investment Standard in Primorskye Territory,” 21 August 2013.

Ji, Yeong Han, Study on Time Lag and Direction for Foreign Direct Investment Policy, KISTI, 2014.

Jin, Geun Seong, “Status of Agriculture in Primorsky, Russia, and Korea’s Entry Strategy,” World Agriculture, Vol. 162, 2014.

112 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) Junior Leader Course at Local Government Officials Development Institute, Foreign Investment Support System and Incentives, July 17, 2014.

KIET Industry and Economy, Recent Changes in Development Policy for the Russian Far East and Countermeasures, Jan. 2014.

Kim, Yoon Jin, “Trend and Industrial Structure of Global Food Manufacturing Industry,” World Agriculture, Vol. 169, Sept. 2014.

Kim, Yong Taek, “Revitalization Tasks and Strategies for Overseas Agriculture Development,” World Agriculture, Vol. 160, Dec. 2013.

Korea Institute for International Economic Policy, Russia’s Entry into the WTO: Its Economic Effect and Our Countermeasures, Dec. 16, 2011.

Korea Institute for International Economic Policy, Korean Consulate General in Vladivostok, Hanyang University, Investment Guide on the Russian Far East, 2013.

Korea Industrial Complex Corporation, Brochure on Industrial Location, 2014.

Korea Rural Community Corporation, Report on Agriculture Investment Environment in the Russian Far East, 2012.

Korea Rural Economic Institute, Status and Development Direction of Smart Agriculture, Sept. 2013. (in Korean)

Korea Rural Economic Institute, Agricultural Forum, 2013, Vol. 403. (in Korean)

Korea Rural Economic Institute, Overseas Business Trip Report, June 4, 2014. (in Korean)

Korea Rural Economic Institute, Overseas Business Trip Report, March 23, 2014. (in Korean)

KOTRA, Working Guide on Investment in Russia, 2009. (in Korean)

KOTRA, Comprehensive Guide on Foreign Investment Entry, 2013. (in Korean)

KOTRA, Guide on Project Entry into Russia, 2013. (in Korean)

KOTRA, Status of Russia Green Industry and Entry Plan, 2013. (in Korean)

Lee, Byeong Gi, Foreign Direct Investment Environment and System Improvement Tasks, Korea Economic Research Institute, 2008.

Ministry of Agriculture, Food and Rural Affairs and KOTRA, Consultation Casebook of Foreign Investment Entry into 10 Major Countries in 2013.

Chapter 02 _ Analysis and Support of Investment Strategy of Primorsky territory until 2018 and Offers to Establish Special Economic Zones in Primorsky territory ∙ 113 Ministry of Agriculture, Food and Rural Affairs, 2013-2017 Development Plan for Agriculture, Rural Area and Food Industry.

Ministry of Knowledge Economy and KOTRA, Consultation Casebook of Foreign Investment Entry into 8 Major Countries in 2011.

Newell, J. The Russian Far East: A Reference Guide for Conservation and Development, CA: Daniel & Daniel, 2004.

Nagacorp, Nagacorp’s Primorsky Entertainment Resort City in Vladivostok, Russia.

Overseas Economic Research Institute at Export-Import Bank of Korea, Report on Risks in Russia Investment Environment, May 31, 2013.

Samil PricewaterhouseCoopers, Overseas Agricultural Development Expansion Strategy in the Russian Far East, Nov. 25, 2013.

Shepotylo, Oleksandr and David G. Tarr, Impact of WTO Accession and the Customs Union on the Bound and Applied Tariff Rates of the Russian Federation, World Bank, August 2012.

Song, Young Kwan. "Evaluation of the SEZ policy and policy proposal for activation of FEZ," KDI Focus, September 28, 2014.

Syrbe, Torsten, “A Legal Overview of Foreign Investment in Russia’s Strategic Sector,” 23 May 2014.

Thorsteinson, Anne, Russian Federation as Central Planner: Case Study of Investments into the Russian Far East in Anticipation of the 2012 Asia-Pacific Economic Cooperation Conference, University of Washington, 2012.

YeonhapNew, 28 Oct 2014.

www.tour.primorsky.ru.

www.invest.primorsky.ru.

www.ftz.go.kr/kor/MsFreeTradeArea/Investment/residenceQualify.jsp.

«Инвестиционная стратегия Приморского Края на период до 2018 года», утверждена постановлением Администрации Приморского края от 23 декабря 2013 года № 495-па.

Государственная Программа Приморского Края «Развитие сельского хозяйства и регулирования рынков сельскохозяйственной продукции, сырья и продовольствия. Повышение уровня жизни сельского населения Приморского Края» на 2013-2020 годы», утверждена постановлением Администрации Приморского края от 7 декабря 2012 года № 392-па.

114 ∙ 2014 Knowledge Sharing Program II with Russia (Primorsky Territory) Кушнарева И.Ю."Туристская политика приморского края," 2015.

Регионы России: Социально-экономические показатели, 2012. Стат.сб. /Росстат. - М., 2012.

Регионы России: Социально-экономические показатели, 2014. Стат.сб. /Росстат. - М., 2014.

Chapter 02 _ Analysis and Support of Investment Strategy of Primorsky territory until 2018 and Offers to Establish Special Economic Zones in Primorsky territory ∙ 115

2014 Knowledge Sharing Program II with Russia (Primorsky Territory) www.ksp.go.kr 2014 Knowledge Sharing Program II with Russia (Primorsky Territory)

Improvement of Primorsky Territory's Investment Environment

Ministry of Strategy and Finance Government Complex-Sejong, 477, Galmae-ro, Sejong-si, Korea 30109 Tel. 82-44-215-7732 www.mosf.go.kr

Korea Institute for Industrial Economics & Trade 370, Sicheong-daero, Sejong-si, Korea 30147 Tel. 82-44-287-3114 www.kiet.re.kr

Korea Trade-Investment Promotion Agency 13, Heolleung-ro, Seocho-gu, Seoul, Korea 06792 Tel. 82-1600-7119 www.kotra.or.kr

Institute of Eurasian Studies Kookmin University 77, Jeongneung-ro, Seongbuk-gu, Seoul, Korea 02707 Tel. 82-2-910-5272 www.evrazia.or.kr

ISBN 978-89-5992-807-1 ISBN 978-89-5992-803-3 (set)