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Financial Times: FT REPORT – SIBERIA: Industrial giants tap into frozen wealth

Published: May 18, 2007

Siberia, Russians sometimes say, is the “real” Russia. Only by crossing the Ural mountains and venturing into this vast, cold expanse can an outsider obtain a true sense of Russia’s spatial immensity and cultural complexity.

Until the 19th century, Siberia was largely the domain of trappers, traders and scattered native tribes – as well as prisoners and outcasts. In the tortured Soviet 20th century, Siberia became the centre of the Gulag, the system of forced labour camps that reached its height under Stalin. In later decades, Siberia became the focus for Soviet planners’ boldest – and sometimes least viable – attempts to achieve economic development by diktat.

Today, it is the home of many of Russia’s biggest opportunities, as well as many of its biggest economic and social challenges. So big is the potential that one Moscow-based western diplomat poses the question: “Could this be the Siberian century?”

Here are concentrated the bulk of Russia’s reserves – 85 per cent of its natural gas, 80 per cent of its oil and coal, plus gold, platinum, nickel, diamonds, silver and other metals, and timber. As Alexander Khloponin, governor of Siberia’s Krasnoyarsk region – four times the size of France – jokes: “We’ve got rich reserves of just about the whole periodic table.”

But here, too, is one of the world’s least hospitable inhabited climates; nine of the world’s ten coldest cities of more than half a million people are in Siberia. While its cities are reviving economically, many towns and villages remain among Russia’s poorest.

Many of Siberia’s resources, moreover, are located in its coldest, remotest reaches. To extract them often requires cutting-edge technology. And while it shares a long border with booming but resource-starved China, Siberian goods must often travel thousands of kilometres to get there.

Take the massive Vankor oilfield in eastern Siberia. Annual output could eventually be equivalent to one-tenth of China’s oil consumption last year. But it is located in permafrost inside the Arctic Circle, with winter temperatures reaching 50°C below freezing, 650km from an export pipeline to Asia that is only just being built and could cost $11bn.

The challenge to exploit resources is being led by new Russian corporate giants, controlled by the state or businessmen loyal to the Kremlin, which emerged from the post-Soviet fight for assets. Those struggles continue. The Yukos case, the Kremlin’s assault on the independent-minded Mikhail Khodorkovsky’s oil company, concluded last week with state-controlled Rosneft having seized most Yukos assets.

Siberia, above all, is the domain of Rosneft and Gazprom, the state gas monopoly; of Alrosa, the state-owned diamond monopoly; and privately-owned groups such as Oleg Deripaska’s UC Rusal aluminium giant, Roman Abramovich’s Evraz Steel, and Vladimir Potanin’s Norilsk Nickel.

Siberia’s resources are also attracting foreign investors such as TNK-BP, the Anglo-Russian oil joint venture, Royal Dutch-Shell, independents Imperial Energy and Sibir Energy, and Britain’s Peter Hambro Mining. But all of these have seen challenges to their control of assets. Vladimir Putin’s Kremlin has made clear that Siberia’s riches are for Russian, or Russian-led, groups to harvest.

Russia’s economic recovery since 2000 has put grand investment projects back on the drawing board, in what some call a “new industrialisation”. Mr Khloponin told a conference in Krasnoyarsk in February that more than 300 investment projects totalling $400bn were planned for Russia by 2015-2020 – with two-thirds destined east of the Urals.

Mr Khloponin warned those projects could not succeed without massive state infrastructure investment – in road and rail links, airports, housing, services – estimated at $150bn. These were vital, he said, to attract new settlers and reverse a declining Siberian population. So severe is Krasnoyarsk’s labour shortage that the regional authority last year agreed to allow prison labour to be used in a big construction project, in a move that human rights groups said stirred memories of the Gulag. Krasnoyarsk says any work by prisoners would be on a voluntary basis and well-paid.

Sergei Ivanov, Russia’s first deputy prime minister responsible for diversifying industry – and a possible successor to president Vladimir Putin – also talks of bringing people to Siberia.

“You need capital investment, for example in transport infrastructure,” he told the FT. “If there isn’t mobility of the population and the labour market there will be no [industrial] diversification.”

Yet some experts challenge the idea of pouring money and people into Siberia, claiming it replicates the distortions of the Soviet period. As Clifford Gaddy and Fiona Hill of the Brookings Institution in the US argued in a 2003 book, The Siberian Curse, workers and factories ended up where Soviet planners, rather than market forces, put them.

Cities such as Omsk, Novosibirsk, Krasnoyarsk, and Irkutsk along the Trans-Siberian Railway – where average January temperatures are minues 18°C – have probably grown much bigger than if people had had a free choice of where to live.

Maintaining people in such frigid and isolated locations imposes huge costs. Extra heating, special construction and equipment to withstand the cold will always put manufacturing industry at a competitive disadvantage. Better, they say, for Siberia’s cities to shrink, for carefully-targeted resource extraction in Siberia using low-labour methods and technology, and for Russia to concentrate on developing its more temperate European zone.

Yet official strategy remains to develop Siberia as a place where people would want to live, not just a resource base. Soviet-era centres of science in cities such as Novosibirsk and Tomsk are being revitalised with some forging links with western technology companies.

“We are – yesterday, today, and tomorrow – connected with science and education,” says Viktor Kress, governor of Tomsk. “In no other region is the integration of scientific institutes and industry so high.”

One emerging factor, ironically, could make Siberia a little more habitable: global warming. But scientists say that Siberia should, by contrast, be at the centre of efforts to reverse that process. Its boundless forests and peat bogs act as “sinks”, drawing carbon dioxide from the atmosphere, and must be preserved.

“Siberia prevents the planet from overheating,” says Sergei Kirpotin, a biologist at Tomsk State University. “It’s a kind of refrigerator for the world.”

Mr Kirpotin’s work has found Siberia is already heating up and – because of its sharply continental climate – more markedly than almost anywhere on the globe. The Siberian permafrost is showing ominous signs of melting.

For Russia, that is double-edged. It complicates life in the far north, turning what used to be frozen-earth roads for much of the year into morasses. And a more fertile southern Siberia may attract increasing Chinese immigration, especially if warming makes life intolerable further south. With estimates that up to 1m Chinese may already be living illegally inside Siberia, old Russian fears have been rekindled of a massive Chinese influx – another, largely unstated, reason for the push to encourage Russian settlement. Exactly how Siberia develops may yet depend on climatic factors outside Russia’s direct control. But one theory has it that Siberia’s name – Sibir in Russian – came from a Turkic word meaning “sleeping land”. Coming decades seem set to see this sleeping land awaken.

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