Ceepackaging

Economic stagnation in poorer regions has caused high unemployment and low incomes, and infrastructure has deteriorated. Investment is largely concentrated in richer urban areas and those reliant on natural resources.

Importance

Acute disparities exist between Russia’s 88 regions in terms of industrial output, population and incomes:

In 2005 (latest year available), Moscow alone contributed Rb4 billion – over 20% of total GDP;

In the first half of 2005, 37 regions experienced industrial growth of less than 3% year-on-year;

The 2002 census displayed large disparities between gross incomes per habitant in various Russian regions. The gap between the poorest regions (Ust-Orda Buryat Autonomous District) and the capital was at a proportion of 1 to 12;

Although the unemployment rate at the national level was 7.3% in 2006, in some regions the rate of rural unemployment could be between 22.0–52.7%;

As people in Siberia and eastern provinces are faced with economic stagnation and low incomes, they tend to move south and west. As a result of internal migration, Magadan and Chukotka lost 53% and 67% of their populations respectively between 1989 and 2002;

European Russia – west of the Urals – already hosts over 75% of the total population, although it accounts for 25% of the country’s territory.

Expanding sales beyond Moscow could be difficult because of underdeveloped transport and communication infrastructure but also as incomes and tastes outside of the urban hubs might be very different.

Implications

Extreme regional disparities in Russia mean that investment might be profitable in certain areas only:

Annual disposable incomes and consumer expenditure have grown significantly in Russia between 2001 and 2006. Private final consumption accounted for 48.7% of GDP in 2006 and Russia is estimated to be the world’s twelfth largest retail market. However, economic growth is concentrated in a few regions only: Moscow (together with the surrounding region), Khanty-Mansii, St Petersburg, and Krasnoyarsk;

Well developed areas such as Moscow offer firms large consumer markets and a good source of human capital. Populations of the poorer areas often lack skilled labour and the purchasing power necessary to attract investment;

With better prospects in other parts of Russia, more people are moving towards the western and southern areas of the country. The depressed provinces are becoming more depopulated accentuated by ageing and high mortality. The growing death rate, at 16.2 per 1,000 inhabitants in 2006, is especially worrying, as they affect working age men thus weakening human capital;

With increased internal migration, housing problems, crime and poverty are becoming a concern in the destination areas. Higher traffic puts transport infrastructure under strain, which might increase delivery times and incur additional costs for businesses;

On the other hand, growing urbanisation is responsible for increasing consumer expenditure. With higher incomes and eager to follow urban trends, newcomers are actively contributing to increased retail sales.

Russia will continue to grow, with FDI inflows expected to reach US$30 billion in 2007, rising to US$44 billion by 2010. However, as investment usually targets the biggest consumer markets, convergence among Russia’s regions is unlikly to occur in the near term:

Judging by the Ministry of Regional Development’s work on the Strategy for the Socio-Economic Development of Regions of the Russian Federation, promoting clusters of growth rather than investing in depressed regions is becoming the priority. The government has been working on plans to develop the areas of Magadan, Kamchatka and Irkutsk;

With regard to the Irkutsk region, there are plans to merge the regional capital, Irkutsk, with the towns of Angarsk and Shelekhov, creating a major Siberian hub. Additionally, funding is expected for the improvements of the Baikal-Amur Railway (BAM), a new airport in Irkutsk, and developing the defense industry. If these plans are implemented successfully, the new area of Irkutsk could be a great opportunity for investment;

Investment opportunities will also be ample in Magadan, Chukotka and Kamchatka. Moscow wants to devote Rb30 billion by 2013 to develop the Magadan region’s infrastructure. Infrastructure is also the priority in Kamchatka, where starting in 2008, Rb35 billion will be spent on building a gas pipeline.

The urban centres of Moscow and St. Petersburg will continue to be the main destinations of investment. With their populations increased by migrants from Russia’s poorer regions, growth and consumer spending will remain strong.