VLADIVOSTOK, Russia — Russia's failure to keep up with its neighbors in building the roads, railways and other infrastructure needed to support growth is costing it dearly, and hindering the regional economy's full potential, business leaders gathered for an Asia-Pacific summit say.
President
Vladimir Putin has promised to make the modernization of Russia’s
infrastructure a priority for the coming years, but the challenges are
great.
While China, Japan and South Korea have raced to build
high-speed railways, ultra-modern ports and showcase airports — not all
of it needed — Russia’s investment in its resource-rich far eastern
regions has lagged behind.
Five years ago, it took four to five
days to send rail wagons from a Siberian mill to the Chinese border and
back. Now it takes seven to 10 days, Paul Herbert, CEO of Ilim Group,
Russia’s largest paper and pulp company and the largest soft-wood
supplier to China, said Friday in an interview.
Ilim, which has
been 50 percent owned by International Paper since 2007, ships more than
1 million tons of pulp and board for packaging to China each year, 90
percent of it by rail, 10 percent by rail to Vladivostok and then by
ship.
An Ilim rail car crosses into China every 20 minutes on
average, through three spurs of the Trans-Siberian Railway. Overall
traffic has increased but the switching equipment and rolling stock have
not.
The railroad’s capacity has been “constipated by under
investment in switching facilities,” said Herbert, who has worked in the
industry for over 40 years.
Putin said Russia has been increasing
the capacity of its railroads, noting that the Trans-Siberian now ships
more cargo than at Soviet-era heights, but he acknowledged that much
more needs to be done.
“Our railroads are struggling to cope with
the rising amount of cargo,” Putin said in an address to business
executives on Friday at the annual Asia Pacific Economic Cooperation
summit, held this year in Vladivostok.
He also promised new roads, airports and pipelines in Russia’s east.
“One
of the goals in the region is to expand the local energy sector and
link it up with energy supplies from the European part of the country,
be it hydropower stations or gas pipelines, Putin said.
Some of
the missing and lacking connections are a legacy of the Cold War: North
Korea, in particular, remains relatively isolated from the rest of Asia,
its own infrastructure in shambles.
But both Russian and foreign
executives attending a conference on APEC’s sidelines say the costs of
those missing pieces are an unnecessary burden both for the economy and
for consumers forced to put up with higher prices, less choice and the
trials of traveling and living in a region lacking the conveniences
taken for granted in most neighboring countries.
An estimate by the U.S.-Russia Business Council put Russia’s infrastructure needs during this decade at up to $1 trillion.
What
Russia needs is “Infrastructure, infrastructure, infrastructure,” said
Oleg Deripaska, chairman of UC Rusal, the world’s largest aluminum
producer. The cost of inadequate or poorly coordinated roads, ports,
railways and infrastructure: “Less profit and more time,” he said.
As
their traditional markets in Europe languish, Russian businesses are
increasingly looking to the Asia-Pacific region for growth.
“We
see this in their investment strategy, where they are focused on China
and the U.S,” said David Gray, a managing partner for PwC Russia, which
released an annual survey of CEOs in 40 economies.
He noted recent
investments in Vladivostok’s roads, bridges and airport in preparation
for APEC. “We see what Russia is capable of in a very short period of
time when it puts its mind to it,” Gray said.
Close to 40 percent
of those PwC surveyed in Russia cited bottlenecks in transport networks
as having a negative effect on their operations, he said.
Siberia
needs three times the railway capacity it has, said Deripaska. It also
needs better public facilities, such as schools, a “proper customs
regime” and incentives to attract an adequate workforce.
The gap
between Vladivostok’s housing and public facilities and those in most
other major port cities in the Pacific region is apparent on arrival at
the newly built but very basic international airport terminal, where
arriving passengers must tramp up the stairs to get to immigration.
“Not
just pipelines and roads but also airports and hotels and education,”
Deripaska said. “In Russia we are just beginning. We rested a long time
on our cushion of oil and gas. We need to be competitive and we have to
improve efficiency.”
To pay for such improvements is costly, and
Russia has made attracting more investment from its wealthy neighbors a
key aim in hosting the APEC summit.
The government has been
working to make the investment environment more attractive, said
Vladimir Dmitriev, CEO of VEB, a Russian state-owned bank. But much
remains to be done in terms of amending laws and ensuring they are
enforced fairly, he said.
Meanwhile, to ensure efficiency, prevent duplication and other waste and to coordinate logistics requires national planning.
APEC can play a role, those attending the conference said, in forging regional networks, especially in energy and transport.
South
Korea is keen to buy Russian natural gas, importing a bigger share of
the 35 million tons of energy it buys each year through pipelines,
rather than shipping by sea from the Middle East and Australia, said
Yang Bong Jin, CEO of Hyundai Energy & Resources.
“Pipeline gas is safer, cheaper and easier to use. All would be beneficiaries,” Yang said.
Korea
would also welcome a regional “smart grid” for electricity
distribution, to help it use excess supplies from Russia at times of
peak demand. Connecting railways from Russia through North Korea to the
South Korean port of Pusan would provide greater shipping capacity.
South Korea could also help Russia streamline border crossing procedures, which can be like a “snail line,” Yang said.
“In
South Korea, immigration takes only a few seconds,” he said. Sharing
technology to help speed things along could be a “magic wand.”
“Through sharing of infrastructure we may save time and minimize duplication,” he said.
Looking
at the decades it took Japan and later China to develop, this will all
take time, said Deripaska, the Rusal CEO. “We shouldn’t expect
everything should happen overnight,” he said.
John Faraci,
chairman and CEO of International Paper, said Russia appears determined
to develop the infrastructure needed to attract foreign investors.
“We
wouldn’t be investing $1 billion if we weren’t seeing a commitment from
the Russian government to diversify the economy,” he said.
