Economy and Transport Development in the Russian Far East

2016 Northeast Asia International Conference for Economic Development (NICE) in Niigata B-KHOLOSHA

TRANSPORT INFRASTRUCTURE DEVELOPMENT IN THE FAR EAST OF RUSSIA AND NEW IDEAS AND PROJECTS FOR PRIMORYE Far-Eastern JOINT STOCK COMPANY “FAR-EASTERN Federal MARINE RESEARCH, DESIGN AND TECHNOLOGY District INSTITUTE”, JSC «FEMRI», VLADIVOSTOK, RUSSIA (FEFD)

Dr. Mikhail Kholosha Member of the GTI Transport Expert Group and GTI Transport Corridors Study Project Team

JSC «FEMRI», bld. 40, Fontannaya St., Vladivostok, 690091 Russia http://www.dniimf.ru/ Tel.: +7 423 240 26 53 E-mail: [email protected]

Vladivostok Free Port Territories 2016 1

ECONOMY AND TRANSPORT DEVELOPMENT IN THE RUSSIAN FAR EAST

(PART 1)

©ERINA 2016 Northeast Asia International Conference for Economic Development (NICE) in Niigata B-KHOLOSHA

GDP, millions rubles 3,000,000

2,500,000 FEFD 2,000,000

1,500,000

1,000,000 Primorsky Territory

500,000

GDP per capita, rubles 500,000 FEFD 450,000 400,000 Russia 350,000

300,000 Primorsky Territory 250,000

200,000

150,000

100,000

50,000 http://www.gks.ru/ 2015 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 3

Investments in Capital Assets, millions rubles Foreign Trade, millions USD

1200000 45000 FEFD FEFD 1000000 40000 35000 800000 30000 25000 600000 Primorsky Territory 20000 Primorsky Territory 400000 15000 10000 200000 5000 0 0 2005 2010 2011 2012 2013 2010 2012 2013

Foreign Investments, thousands USD

14,000,000 FEFD 12,000,000

10,000,000

8,000,000

6,000,000 Primorsky Territory

4,000,000

2,000,000

0 2005 2010 2011 2012 2013 http://www.gks.ru/ 2015 4

©ERINA 2016 Northeast Asia International Conference for Economic Development (NICE) in Niigata B-KHOLOSHA

Growth Million tons/year 2014/2006 (%) 700 +47% 600

500 Shares in 2014: Baltic – 36%, Much 400 Arctic – 6%, faster! Caspian & Azov-Black Sea Basins – 32%, 300 Russia Far East Basin – 26% Far East 200 Primorye +132% 100 +123%

0 2006 2007 2008 2009 2010 2011 2012 2013 2014

CONTAINERS: FEFD TURNOVER STRUCTURE (TEU, %) 2013 Kamchatka Magadan 4.9% 4.1% Sakhalin 7.3% FREIGHT GROWTH (TONS) 2014/13 Khabarovsk NOMENCLATURE 2013/12 (%) 0.2% (%) Russian Far East +7.5% +12.2% Containers +18.0% +5.2% Primorye 83.6% Coal, coke +11.8% + 23.3% Vladivostok Vostochny Liquid Bulk and LNG +10.3% +6.8% + Nakhodka 52.6% 31.0% General (without TEUs)-11.0% +28.5% Timber -17,7% +3.8% GROWTH (TONS) REGION Primorye: 2013/12 (%) 2014/13 (%) Average annual growth rates = 11.6 %, 18.5% in 2013 Russian Far East +7.5% +12.2% Primorsky territory +10.2% +15.6% Khabarovsk territory +10.9% +11.4% Sakhalin ~0.0% +3.7% 6

©ERINA 2016 Northeast Asia International Conference for Economic Development (NICE) in Niigata B-KHOLOSHA

Territorial Subject Share (%) of local public roads complying with standard requirements 2007 2008 2009 2010 2011 2012 2013 2014 Russia 64.560.156.555.055.458.3 56.0 56.6 Far-Eastern Federal District (FEFD) 36.244.929.831.441.0 51.9 56.6 53.8 Primorsky territory 50.8 52.0 51.7 54.2 60.1 69.7 62.0 60.6 http://www.gks.ru/ Updated 21.12.2015 Share (%) of containerized cargoes (TEU/FEU) in total cargo amount (Russia) 2000 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Railway transport 0.7 1.1 1.2 1.3 1.4 1.4 1.5 1.9 1.9 2.1 2.2 Sea transport ………5.54.43.43.5 3.1 7.5 9.2 8.3 Inland water transport ………0.2 0.3 0.4 0.5 0.4 0.2 0.2 0.2 http://www.gks.ru/ Updated 09.07.2015 Other (1.1%) Liquid & LNG (40.2%) Coal, coke (36.2%)

CARGO TURNOVER STRUCTURE (%) (FAR EASTERN PORTS, 2014) Timber (1.7%) Containers (7.7%) General (without containers) 6.9%

Share (%) of electrified tracks in public railroads (Russia) 2000 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 47.6 50.3 50.4 50.4 50.4 50.4 50.4 50.5 50.6 50.6 50.7 http://www.gks.ru/ Updated 07.07.2015 FURTHER DEVELOPMENT AND GROWTH ARE NECESSARY 7

PORTFOLIO OF EXISTING IDEAS AND PROJECTS IN THE RUSSIAN FAR EAST INCLUDING PRIMORYE

(PART 2)

©ERINA 2016 Northeast Asia International Conference for Economic Development (NICE) in Niigata B-KHOLOSHA

“SINGLE WINDOW” FREE PORT PROCEDURE when being cleared on the border, VLADIVOSTOK 24-hour operation of border crossing points 15 municipalities

Population 1.4 million SIMPLIFIED VISA PROCEDURES Square area 28,400 km2 Issue of 8-day visa when crossing the border REDUCED INSURANCE TARIFFS 7.6% total sum of insurance premium for 10 years pa yable by residents during 3 years after adoption of th e law FREE CUSTOMS ZONE FOR 5 years exemption from profit, property RESIDENTS and land taxes Duty-free and tax-free: - Importation, storage, consumption (use) of foreign goods VAT BENEFITS - Exportation of goods (equipment) 10 days accelerated refund procedure - Importation of foreign goods (equipment)

ACCELERATION IN CONSTRUCTION INDUSTRY Shorter period for obtaining capital construction permits

MEASURES TO STREAMLINE AND REDUCE REGULATORY INSPECTI ONS OF BUSINESS Shorter duration of regulatory inspections, approval of inspections by the Min istry for Development of the Russian Far East and joint inspections

MANAGING COMPANY HAS THE RIGHT TO FILE LAWSUITS IN FAV OR OF FREE PORT RESIDENTS

SUPERVISORY BOARD – a single governing body of the free port

PROCEDURE FOR OBTAINING A RESIDENT STATUS Registration of Application to the Examination of Decision whether applicant Signing of an organization or Ministry for application within may perform its activities agreement and individual Development of the 15 business days entering applicant entrepreneur Russian Far East into the list of residents

9 9

SPECIAL ADVANCED ECONOMIC DEVELOPMENT ZONES (RAPID DEVELOPMENT AREAS)

Строительство свиноводческих комплексов ООО «РусАгро-Приморье» ООО «Мерси трейд» / ООО «Приморский бекон»

3885 ha

ООО «Инком ДВ» - Транспортно-логистический комплекс ООО «Приморский кондитер» - Кондитерский и хлебобулочный завод ООО «Невада-Восток» - 806,7 ha Логистический комплекс и производство 10 10

©ERINA 2016 Northeast Asia International Conference for Economic Development (NICE) in Niigata B-KHOLOSHA

PRIMORYE: MAIN IDEAS & PROJECTS MAP Ideas Project + ongoing Mixed status Pogranichny RDA «Mikhaylovsky» completed

Poltavka Logistic complex Primorsky (Russian Railway)

RDA «Nadezhdinsky» Ussuriysk Logistic complex «Dry Port» (Aqua Resources Group) Transport & logistic complex (Inkom-DV) Logistic (warehouse) complex (Pantos Logistics) Logistic complex (Group of companies Union) Vladivostok - the Business, Scientific, Finance, Transport, Logistic and Tourist Center Port and Industrial Airport Complex «Sukhodol» RDA Idea Artyom «Russian Island» Specialized petrochemical complex, VNKhK (JSC NC Rosneft) Gambling Zone New BCP Coal Port «Vera» Rostech State Corp. Solid bulk terminal (coal) Development of port terminals in Vladivostok: (Summa Group) VMTP, VMRP, Pervomaysky terminal, Dalzavod etc. Mineral fertilizer plant with port Development of existing port terminals : (JSC National Chemical Group) Evraz NMTP, Nakhodka Fishery port etc. Nakhodka Vostochny Slavyanka Kozmino Intermodal production & logistic complex, Slavyanka (“Transit DV Group” LLC) Kraskino Industrial & logistic cluster in Slavyanka (“BERKUT” Managing Company LLC) “Greater Port Zarubino” (Summa Group) Zarubino Posiet “Trinity Bay Sea Port” modernization (“SP International Sea Port Zarubino” LLC) Khasan Project Khasan-Rajin (RZhD) Posiet Port Modernization (Mechel Group) 11

PRIMORYE: LAND BCPS Ideas Project + ongoing Mixed status PROJECTS AND IDEAS completed Ideas of new BCPs Reconstruction of Railway BCP “Pogranichny” (Lesozavodsk-Hulin) (Grodekovo): border crossing, railway station Grodekovo, container terminal, railway border crossing

Road BCP “Pogranichny”: upgrading of throughput capacity to 1300 vehicles and 4000 passengers per day: 500 trucks/day, 200 buses/ day, 600 cars/day

Ideas of new BCPs (along ITC Primorye-3 via Fenshuiling)

Railway BCP “Makhalino”: Far Eastern Railroad Branch implements a set of measures to reinstate the infrastructure of Makhalino railway border crossing point.

Road BCP “Kraskino”: construction of a multilateral border crossing point capable of handling 250 vehicles per day.

Railway BCP Khasan (Project Khasan-Rajin, RZhD) 12

©ERINA 2016 Northeast Asia International Conference for Economic Development (NICE) in Niigata B-KHOLOSHA

MAIN IDEAS IN NEW AND EXISTING PROJECTS

(PART 3)

PRIMORYE: EXISTING ROADS AND RAILWAYS PROJECTS AND IDEAS

Railway Network: Ideas Project + ongoing Mixed status state border (Sukhanovka) – Zarubino (ITC Primorye-2), Pogranichny (Grodekovo) – Sukhodol, Nakhodka, Vostochny (ITC Primorye-1) and state border (Sukhanovka) – Pogranichny (Grodekovo) (ITC Network with Ring). Stage-by-stage development of Motor Road Network: infrastructure of the East railroads Road BCP Kraskino – Zarubino (ITC Primorye-2), road to Nakhodka/ network for 2013-2017 (RZhD) Vostochny: 18-148 km (ITC Primorye-1), Road BCP Kraskino – Road BCP Vladivostok- Pogranichny (ITC Ring), new option of Primorye-3 route with a bridge Pogranichny Moscow across the Amur Bay + Vladivostok Outer Ring Road. Highway Pogranichny (Grodekovo) Idea (rail) SLB within Primorsky Territory Poltavka

Ussuriysk «Dry Rail Port» Project

Ideas of the speed and high-speed railroads: «Dry port» Projects - from the Provinces Jilin and Heilongjiang Airport - from the Republic of Korea - local lines (Vladivostok-Ussuriysk, several options) Gambling Zone

Project of a toll road Peschany "Kraskino (BCP) – Sukhodol Port Zarubino" Vladivostok Slavyanka Kraskino Makhalino Nakhodka Zarubino Vostochny Posiet Project of a toll highway segment Khasan "Vladivostok - Nakhodka - Vostochny” Idea (road) 14

©ERINA 2016 Northeast Asia International Conference for Economic Development (NICE) in Niigata B-KHOLOSHA

MANY EURASIAN IDEAS. HOW TO COMBINE?

NEW MODEL OF CORRIDORS IN PRIMORYE IS BEST SOLUTION FOR MULTILATERAL COOPERATION IN NEA AND THIS MODEL IS CAPABLE OF HARMONIZING IDEAS AND PROJECTS PROPOSED BY RUSSIA, CHINA, ROK, JAPAN AND OTHER COUNTRIES

Image from Roman Wilhelm/ MERICS

OLD MODEL OF CORRIDORS ROUTING IN PRIMORYE

Current routing ITC Primorye-1 + Primorye-2: road/rail ~425/457+44 км

- border crossing points (BCP) on land - border crossing points (BCP) in seaports

Pogranichny Vladivostok-Moscow Highway

Segment from Pogranichny (Grodekovo) Khasan to the SLB within connection with the Primorsky SLB (road/rail) Poltavka Territory

Russian segment of Suifenhe Russian segment of Transport Corridor Tumen Transport Corridor (ITC “Primorye-1”) (ITC “Primorye-2”) Road/rail ~354/382 km + 44km км Road/rail ~71/75 км

This model looks obsolete Vladivostok today: - it includes too long and Slavyanka expensive routes for the Kraskino transit corridors; Makhalino Nakhodka - it includes several small Zarubino Vostochny ports of Gateway type with Posiet a minimum of logistic services. Khasan - It includes sea lines Sea lines: China-China, China-ROK, without calls of VLCS Korean East China-Japan, and other countries of NEA, containerships. Corridor excepting VLCS lines 16

NEW MODEL OF CORRIDORS ROUTING IN PRIMORYE

Key channel ITC Primorye-1 + Primorye-2: ~320/368 km (shorter on 119/89 km)

- border crossing points (BCP) on land - border crossing points (BCP) in seaports - new ideas Pogranichny Vladivostok-Moscow Highway

Segment from Pogranichny (Grodekovo) Khasan to the SLB within The junction of many connection with the Primorsky routes will form a key land corridor channel Territory SLB (rail/road) Poltavka which may have additional “tributaries”. Ussuriysk Thus, we will create a multimodal port HUB «Dry Rail Port» Project which may be included in VLCS lines rotation in «Dry port» Project routes between Europe ITC “Primorye-1” + “Primorye-2” and Asia and in Road/rail ~320/368 км Airport trans-Pacific routes. Gambling Zone + “Primorye-3” idea Peschany Sukhodol Port The new model is Vladivostok oriented at concurrent Slavyanka development of the Eurasian Economic Union Kraskino Passenger HAB and China’s “Silk Road Makhalino Nakhodka Economic Belt Project” as Zarubino Container port-HAB Vostochny well as “Northeast Asian Posiet Peace and Cooperation Initiative” and “Eurasia Khasan Initiative” handled by the g Sea lines: China-China, China-ROK, overnment of the Korean East China-Japan, and other countries of NEA Republic of Korea. Corridor and APR, including VLCS lines 17

CHALLENGES FOR PROJECTS IMPLEMENTATION AND EXPERIENCE

(PART 4)

SPECIFICS OF RUSSIAN INVESTMENT PROJECTS (EXPERIENCE IN PRIMORSKY TERRITORY)

KEY ASPECTS

OF INVESTMENT PROJECT IMPLEMENTATION

IN TRANSPORT INDUSTRY

AND FOREIGN INVESTOR ENGAGEMENT OPTIONS:

1. THROUGH OWNERSHIP OF LAND PLOT AND/OR WATER AREA

2. THROUGH OWNERSHIP OF CARGO SOURCES AND/OR LOGISTIC CHAINS

3. THROUGH PARTNER RELATIONSHIPS WITH INVESTMENT PROJECT OPERATOR (PART ICIPATION IN AUTHORIZED CAPITAL, INVESTING MONEY, ETC.)

4. PROVISION OF SERVICES (ENGINEERING, CONSULTING, ETC.)

Note: in all options it is necessary to borrow resources from international development institutes on a refundable basis

SPECIFICS OF RUSSIAN INVESTMENT PROJECTS (EXPERIENCE IN PRIMORSKY TERRITORY) Project categories included in ITC from the viewpoint of investment specifics

Category of ITC Specific features Scale of facility groups investment s Border crossing Significant portion of federal-owned facilities, Billions of points “no” microeconomics, domestic investments rubles Ports, logistic Significant portion of private-owned facilities, Tens or sites capital recovery “envisaged” in microeconomics, hundreds of broad opportunities for raising foreign investments billions of rubles Railroads Dominating role of budgetary investments, capital Hundreds of recovery is combined (in micro- and billions of macroeconomics), strong imperative of RZhD’ rubles decisions, foreign investment raising at level of international governmental agreements Motor roads Significant portion of budget grants, capital Hundreds of recovery is combined (mostly through billions of macroeconomics), rubles 20 t iti f f i i t t i i t l l ©ERINA 2016 Northeast Asia International Conference for Economic Development (NICE) in Niigata B-KHOLOSHA

SYSTEM OF ECONOMIC RETURNS OF TRANSIT TRANSPORT INFRASTRUCTURE

М1 (for infrastructure) is interesting for investor only when CAPEX are borne by government; М2 nears to zero if special tax policies are applied; М3 – primary objective of governmental policies

Macroeconomic efficiency = growth of turnover of economic agents (М3)

Budget efficiency = growth of tax revenues compared with inertial scenario (М2)

Microeconomic efficiency = OPEX + profitability rate (М1) 21

WAYS TO ELIMINATE DISPARITY OF М3

International trade Transit transport schemes leads to parity can’t create parity without M3 level at all levels

Goods and services of Country A Balancing mechanisms: - taxes of Country B; - or participation of Country A in creation of infrastructure in Country B; - another mechanism for ri sk Sharing Solutions… Economic Goods and services of Country B activities of Country A

Party “1” Party “2” ? which which invest in support construction for construction the future activities in transport flows abroad bear from abroad bear s CAPEX risk s OPERATING ris s ks Economic activities of Country B 22

DR. MIKHAIL KHOLOSHA GTI TRANSPORT CORRIDORS STUDY PROJECT TEAM http://www.dniimf.ru/ Tel.: +7 423 240 26 53 E-mail: [email protected] 23