The Russian Federation: An Exploratory
Assessment of Transport Connectivity




June 12, 2017
                              THE RUSSIAN FEDERATION

                An exploratory assessment of transport connectivity



                              Abbreviations and Acronyms

        Definition                                         Definition
APR     Asia-Pacific Region                 KnAAZ          Komsomolsk-on-Amur
                                                           Aviation Plant
ASEAN   Association of Southeast Asian      KK             Khabarovsk Krai
        Nations
BAM     Baikal-Amur Mainline                MFC            Multifunctional Center
BRICS   Brazil, Russia, India, China, and   PPP            Public-Private Partnership
        South Africa
CGE     Computable General                  PSEZ           Project Special Economic Zone
        Equilibrium
CIS     Commonwealth of Independent         RGDP           Regional Gross Domestic
        States                                             Product
EEU     Eurasian Economic Union             ROSTAT         Russian Federal State
                                                           Statistics Service
EU      European Union                      SME            Small- and Medium-sized
                                                           Enterprises
FDI     Foreign Direct Investment           SUEK           Siberian Coal Energy Company
FEFD    Far-Eastern Federal District        TASED          Territories of Advanced Social
                                                           and Economic Development
GDP     Gross Domestic Product              UK             United Kingdom
GRP     Gross Regional Product              US             United States
HQ      Headquarters                        USD            United States Dollar
ICT     Information and                     WB             World Bank
        Communications Technology
JSC     Joint-Stock Company                 ZK             Zabaikalsky Krai



                         Global Practice Transport and ICT
                              Europe and Central Asia
                                 World Bank Group
                Regional Vice President:      Cyril E. Muller
                       Country Director:      Andras Horvai
         Senior Global Practice Director:     Jose Luis Irigoyen
                      Practice Manager:       Juan Gaviria
                    Task Team Leaders:        Daniel Benitez and Jung Eun Oh



                                                                                            2
Contents

Executive Summary ............................................................................................................... 6
Part 1 – Transport Connectivity in the Russian Federation .................................................... 13
   1.1      Introduction ...................................................................................................................... 13
   1.2      Transport and economic development ............................................................................... 13
   1.3      The Russian challenge ....................................................................................................... 16
      1.3.1        Country context .................................................................................................................. 16
      1.3.2        Spatial and socioeconomic disparities ................................................................................ 18
   1.4      Connectivity analysis ......................................................................................................... 21
      1.4.1        In-depth look at regional connectivity ................................................................................ 29
   1.5      Sector performance ........................................................................................................... 33
      1.5.1        Transport as one of the obstacles for doing business ........................................................ 39
   1.6      Improving transport efficiency: A preliminary analysis through a regional CGE model ......... 43
   1.7      Regional convergence: An equity/efficiency trade-off ........................................................ 47
   1.8      Some policy conclusions and areas for future research ....................................................... 49
Part 2 – A regional assessment of transport connectivity ..................................................... 52
   2.1      Case study of Zabaikalsky Krai ........................................................................................... 53
      2.1.1        Development of key sectors of the economy ..................................................................... 54
      2.1.2        Transport infrastructure and services................................................................................. 57
   2.2      Case study of Khabarovsk Krai ........................................................................................... 60
      2.2.1        Development of key sectors of the economy ..................................................................... 61
      2.2.2        Transport infrastructure and services................................................................................. 64
   2.3      Findings and policy implications for Zabaikalsky Krai and Khabarovsk Krai .......................... 68
      2.3.1        Connectivity and economic development .......................................................................... 68
      2.3.2        Connectivity and social sustainability ................................................................................. 70
References .......................................................................................................................... 71




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Index of Figures
Figure 1: Differences in socio-economic indicators .....................................................................................................18
Figure 2: Leading and lagging regions of the Russian Federation ...............................................................................19
Figure 3: Poverty incidence by region (including estimation of pockets of poverty) ..................................................20
Figure 4: Main transport connections of the Russian Federation and neighboring countries ....................................22
Figure 5: Main road and rail network in Russia ...........................................................................................................23
Figure 6: Volume-capacity ratio of national highways ................................................................................................24
Figure 7: Travel time isochrones by railway network ..................................................................................................24
Figure 8: Travel time isochrones by road network ......................................................................................................25
Figure 9: Travel time isochrones by air transport ........................................................................................................26
Figure 10: Freight connectivity (weighted average time to five most traded regional partners), 2014 .....................27
Figure 11: Network Map of Russian Domestic Trade, 2014 ........................................................................................29
Figure 12: Railway share of freight transport in 2010, percentage in total inland freight ton-km .............................33
Figure 13: Evolution of the perceived quality of railroad in selected countries ..........................................................34
Figure 14: Evolution of the perceived quality of roads in selected countries .............................................................35
Figure 15: Evolution of the perceived quality of ports in selected countries ..............................................................37
Figure 16: Evolution of the perceived quality of air transport infrastructure .............................................................37
Figure 17: Logistic Performance Index 2016 for the Russian Federation ....................................................................38
Figure 18: Percentage of firms identifying transportation as major constraint (2012) ...............................................41
Figure 19: Percentage of firms by size, market, and sector that identify transportation as a major constraint (2012)
      ............................................................................................................................................................................42
Figure 20: Russian regions used in the computable general equilibrium model.........................................................43
Figure 21: Impact of 10 percent increase in transport sector efficiency on federal districts ......................................44
Figure 22: Share of transport sector in regional product ............................................................................................45
Figure 23: The effects of a positive productivity shock on sectoral and regional growth (%) .....................................46
Figure 24: Market access estimation by decile ............................................................................................................48
Figure 25: Market accessibility and productivity of new and existing firms ...............................................................48
Figure 26: Zabaikalsky on the map ..............................................................................................................................53
Figure 27: Khabarovsk Krai on the map .......................................................................................................................60


Index of Tables
Table 1: Russia in numbers from World Development Indicators (2015 or latest information available) ..................17
Table 2: Railways productivity, 2015 ...........................................................................................................................34
Table 3: Main obstacles for manufacturing and service firms (in percentage) ...........................................................40
Table 4: Firms identifying transportation as a major constraint (%) ...........................................................................40
Table 5: Regional correlation analysis (2012) ..............................................................................................................41
Table 6: Impact of 10 percent increase in transport sector efficiency on welfare and poverty..................................46




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ACKNOWLEDGEMENT

This Advisory Services and Analytics piece was carried out by a World Bank team led by Daniel Benitez and
Jung Eun “Jen�? Oh and consisting of Maria Claudia Pachon, Aleksandra Durova, Evgenia Epaneshnikova,
and Megersa Abera Abate. The following consultants also contributed to this work: Adrian Scutaru,
Kenneth Gwilliam, Ludmilla Istomina, Luis Jacob Suter, and William Shaw. This work benefited greatly
from support from the Russia Country team, including Dorota Nowak, Mikhail Bunchuk, Sylvie K.
Bossoutrot and Apurva Sanghi.

The team is grateful for the management’s support and guidance, especially from Andras Horvai (Country
Director for the Russian Federation, ECCU1) and Juan Gaviria (Practice Manager, GTI03), as well as for the
useful advice and suggestions from the peer reviewers: Birgit Hansl (Program Leader, EACPF), Baher El-
Hifnawi (Lead Transport Economist, GTI03), Carolina Monsalve (Senior Economist, OPSPQ), Alberto Perez-
Portugal (Senior Economist, GTCTC), Gözde Isik (Senior Transport Economist, GTI03), and Cecilia Briceño-
Garmendia (Lead Economist, GTI04).

The team greatly appreciates the support and cooperation provided by the counterpart in Zabaikalsky Krai
and Khabarovsk Krai.




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Executive Summary

Access to transport infrastructure and services is critical to developing business and job opportunities.
Moreover, focalized investments and policies to improve connectivity can also reduce spatial
disparities. Transport connectivity remains a core element of development strategy in the Russian
Federation. Russia’s unique features, such as large land size, a dispersed population as a result of a long
history of policies designed to boost population in remote areas, and extreme weather shaped the
provision of transport infrastructure and services. In this context, investments and policy actions are
challenging and require difficult decisions balancing efficiency and equity. Despite efforts to promote
regional growth convergence, large spatial inequalities remain in Russia. While transport is crucial to close
the gap, other policies are also required.

This study describes the performance of the sector vis-à-vis socioeconomic features of regions and
discusses whether the development of market opportunities is limited by the availability of transport.
Specifically, this study has two main objectives. First, it provides an exploratory assessment of transport
connectivity in Russia. Second, it assesses the impact of improved transport productivity on the Russian
economy and whether such an improvement has different economic impacts in various regions of the
country. The study is complemented by a market/industry analysis and the performance of transport
infrastructure in two selected regions: Zabaikalsky Krai and Khabarovsk Krai. Transport connectivity, as
defined in this study, mainly focuses on freight transport and not so much on how passengers in different
parts of the country are able to access transport services. Furthermore, while this study assesses general
relationships between transport connectivity and economic outcomes—such as growth, poverty, and
productivity—it does not intend to formally or empirically establish a causal relationship between these
variables.

Russia’s large spatial inequities in part reflect differences in transport connectivity measured by the
time it takes to travel to markets. The core transport network has a single-corridor structure, stretching
along the southern border and connecting important industrial and trade centers as well as the largest
transportation hubs. Consistent with the territorial disparities, there are notorious differences in the stock
of transport infrastructure across regions. The western side of the country has a complex and
sophisticated transport network, while in the Far East the trunk networks of transport (main roads and
rail lines) are virtually non-existent. More than 40 percent of the Russian Federation lacks reliable access
to the transport network, and one-third of the settlements lack all-season roads.

Expectedly, the average economic distance to market is much less in the well-connected western and
central regions than in the more isolated eastern and northern regions. Similarly, trade volumes
(measured in rubles) across regions in Russia are positively correlated with market size (measured by
population). The correlation is higher for a subsample of western regions. On the other hand, half of the
domestic regional trade happens between neighboring regions (those that share a border) although
further analysis is necessary to conclude if this pattern is a reflection of lower travel cost or higher market
opportunities. A domestic freight connectivity analysis indicates that it takes longer to ship freight in the
northern and central eastern regions than in the western side of the country.

An increase in transport efficiency, resulting from reduction of travel time or technological progress,
can have a different impact on regional productivity and welfare. This study presents some preliminary

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results of a simulation of a positive shock in transport efficiency using a regional general equilibrium
analysis for Russia. At the national level, a 10 percent increase in transport efficiency (labor, capital, and
energy consumption) would raise GDP by 0.8 percent. Poor or underdeveloped regions enjoy the largest
increase in gross regional product, and the two richest regions the smallest, suggesting that an
improvement across regions could potentially contribute to regional convergence. These results are
mainly driven by the share of transport in the total cost of different industries. In that sense, some
industries are less or more affected depending on the share of transport cost and their location vis-à-vis
their markets. Overall, households are better off in terms of welfare and poverty reduction, but the main
beneficiaries are in the western part of Russia. Finally, productivity shift could be the outcome of some
policy reforms, infrastructure investment, technological advancement (widespread adoption of GPS,
autonomous vehicles), etc. The link between changes in these variables and impact on better connectivity
requires further analysis, which is beyond the scope of a CGE approach.

Russia’s transport networks face considerable challenges, which may result in increasing the travel time
and cost to markets. The extensive rail transport network is the east-west backbone for transport of
freight. It operates on an acceptable level of efficiency despite some bottlenecks and long shipping times,
but it has proved difficult to maintain. Railroads are also an important source of long-distance passenger
travel. On roads, despite some recent efforts to improve and modernize the network, more than 15 million
Russians lack access to the federal highway system. Moreover, fewer than half of federal roads meet
federal quality standards and the majority of roads cannot easily accommodate large, modern trucks.
Road investment in Russia is below other middle-income countries and maintenance has been
dangerously delayed. Port capacity is high, but efficiency can be improved. A massive investment in
seaports has increased total capacity above current and medium-term needs. However, rail and road
access to the ports is poor, and many ports lack modern logistic facilities. These issues are reflected in
poor indicators of the quality of logistics. Russia is ranked 99th out of 163 countries on the 2016 Logistics
Performance Index, the same ranking as in 2007.

International surveys of manufacturing and services firms provide mixed evidence of the importance of
transport for firm productivity in Russia. The Enterprise Survey in 2012 indicates that high taxes, followed
by access to finance, were the main constraints on business development. In contrast, only around 19
percent of the firms in Russia reported that lack of adequate transport was an important constraint on
their operations. The share of firms reporting transport as an important problem fell from its 2009 level,
perhaps reflecting the government’s investments to enhance and modernize transport infrastructure. The
extent to which access to transportation is viewed as an important constraint differs by region and by firm
size and activity. Finally, the share of firms that view transport as a major constraint is higher for firms
selling to international markets than for firms serving the domestic market.

For a country as a large as Russia, it does not suffice to provide an explanation of connectivity in the
whole territory. It needs to be complemented by more focused studies at the regional level as mentioned
above. The case studies focusing on two eastern regions—Zabaikalsky Krai and Khabarovsk Krai—in the
second part of this report tell a more nuanced story. Transport costs are greater and the benefits of
agglomeration smaller in remote, sparsely populated regions than in the denser, better-connected
regions. Moreover, the remote regions face several constraints on development such as access to
transport for agriculture in rural areas and for the exploitation of natural resources. Railroad-related
issues, in addition to non-transport-related issues, such as the high cost of energy and trade policies of
key partners (such as China), affect the manufacturing and fishing industry, and port operation. The case

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studies also highlight the social exclusion of communities that are poorly connected to their regional
capitals, and the failure to reap the benefits of mineral deposits and farmlands due to the high transport
cost.

However, isolated regions, at least those located in areas far from markets in the European side of
Russia, may not necessarily be “transport disconnected�? from their markets. For instance, the region of
Zabaikalsky Krai is relatively well connected for freight transport with its main existing regional trade
partners despite being far from the Moscow-St. Petersburg markets. Moreover, the domestic connectivity
index for Zabaikalsky Krai is similar to that of the Moscow Oblast, but the trade volume (RUB) of the latter
is 75 times larger than the former. That is, freight in both regions travel the same time but the ratio
RUB/minutes of freight is much higher in the Moscow Oblast. On the other hand, the main trading partner
for Zabaikalsky Krai is not the domestic market but China with which the region shares a border. In effect,
Zabaikalsky Krai’s trade with China in rubles is almost 11 times larger than its trade with regions within
Russia. A similar story can be described for Khabarovsk Krai, a region in the Far East, which has a maritime
border.

Finally, it is important to note that in a large country like Russia achieving a good level of connectivity
depends both on the density of the national transport network and the level of population dispersion.
There are many regions in Russia where the transport network is thin while the population is highly
dispersed. Connectivity in these regions can be increased either by investing in transport or by
encouraging people to relocate to larger towns. In cases where building more transport infrastructure
comes at a very high cost and small demonstrable benefits, the strategy should be to reduce population
dispersion. In the western and central regions where there is better connectivity, road congestion
continues to hamper urban-led regional growth. While transport investment plays a role in easing
congestion in these regions, it should be directed towards secondary cities to make them attractive
destinations for firms and people.

This report is divided into two parts. Part 1 considers the provision of transport services at the national
level. We first summarize selected studies of the impact of transport services on economic growth and
development, then discuss some relevant characteristics of Russia’s provision of transport services and
transport sector performance. Part 2 of the report develops two case studies. Section 2.1 provides a
deeper assessment of markets and sectors vis-à-vis the role of the transport services in Zabaikalsky Krai
and Section 2.2 in Khabarovsk Krai. Section 2.3 concludes with some region-specific findings and policy
recommendations.




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Резюме
До�?тупно�?ть тран�?портной инфра�?труктуры и тран�?портных у�?луг имеет решающее значение дл�?
развити�? бизне�?а и ра�?ширени�? возможно�?тей трудоу�?трой�?тва. Кроме того, целевые
инве�?тиции и �?кономиче�?кие меры, направленные на повышение тран�?портной �?в�?зно�?ти, могут
�?по�?об�?твовать �?окращению территориальных ди�?пропорций. Формирование единой �?в�?зной
�?и�?темы тран�?портных коммуникаций о�?тает�?�? одним из центральных �?лементов �?тратегии
развити�? Ро�?�?ий�?кой Федерации. Тран�?портна�? инфра�?труктура и тран�?портные у�?луги
Ро�?�?иий�?кой Федерации формировали�?ь под вли�?нием уникальных о�?обенно�?тей �?траны:
значительна�? �?ухопутна�? территори�?, территориальна�? ра�?�?редоточенно�?ть на�?елени�? как
результат и�?ториче�?кой политики, целью которой �?вл�?ло�?ь увеличение чи�?ленно�?ти на�?елени�? в
отдаленных регионах, а также �?к�?тремальные погодные у�?лови�?. Это определ�?ет �?ложно�?ть задач,
�?в�?занных �? инве�?тици�?ми и мерами �?кономиче�?кой политики, и требует прин�?ти�? непро�?тых
решений, обе�?печивающих балан�? между �?ффективно�?тью и �?праведливо�?тью. �?е�?мотр�? на
предпринимаемые у�?или�?, направленные на преодоление межрегиональных различий в темпах
�?кономиче�?кого ро�?та, в Ро�?�?ии по-прежнему �?уще�?твует значительное территориальное
неравен�?тво. И хот�? тран�?порт играет важнейшую роль в преодолении �?того разрыва, прин�?тие мер
в других направлени�?х �?кономиче�?кой политики также необходимо.

В на�?то�?щем и�?�?ледовании мы ра�?�?матриваем �?ффективно�?ть работы тран�?портного �?ектора �?
учетом �?оциально-�?кономиче�?ких характери�?тик регионов и проводим анализ того, �?вл�?ет�?�? ли
тран�?портна�? обе�?печенно�?ть одним из факторов, ограничивающих возможно�?ти рынка. В
ча�?тно�?ти, наше и�?�?ледование пре�?ледует две главные цели. Во-первых, мы проводим
предварительную оценку тран�?портной �?в�?зно�?ти территории Ро�?�?ии. Во-вторых, мы проводим
анализ того, как повышение производительно�?ти тран�?портного �?ектора вли�?ет на ро�?�?ий�?кую
�?кономику и различают�?�? ли �?кономиче�?кие �?ффекты такого повышени�? в разных регионах �?траны.
�?ар�?ду �? �?тим, мы проводим анализ рынка (тран�?портной отра�?ли) и показателей �?ффективно�?ти
тран�?портной инфра�?труктуры в двух выбранных регионах. В рамках нашего и�?�?ледовани�?
проблема тран�?портной �?в�?зно�?ти ра�?�?матривает�?�?, главным образом, �? учетом тран�?портного
об�?луживани�? в грузовом �?ообщении и в меньшей �?тепени �? учетом до�?тупно�?ти тран�?портных
у�?луг дл�? па�?�?ажиров в разных ча�?т�?х �?траны. К тому же, провод�? оценку общей зави�?имо�?ти между
тран�?портной �?в�?зно�?тью и показател�?ми �?кономиче�?кого развити�?, такими, как �?кономиче�?кий
ро�?т, уровень бедно�?ти и производительно�?ть, мы не планируем у�?танавливать (официально или
�?мпириче�?ки) причинно-�?лед�?твенную �?в�?зь между �?тими параметрами.

Значительное территориальное неравен�?тво, которое �?уще�?твует в Ро�?�?ии, отча�?ти отражает
различи�? в уровне тран�?портной �?в�?зно�?ти, который оценивает�?�? по времени, необходимому
дл�? до�?тавки грузов на рынки. По �?воей �?труктуре опорна�? тран�?портна�? �?еть ориентирована в
одном направлении: она прот�?нула�?ь вдоль южной границы и �?оедин�?ет важные торгово -
промышленные центры, а также крупнейшие тран�?портные узлы. Между регионами �?уще�?твуют
небезызве�?тные различи�? в уровне развити�? тран�?портной инфра�?труктуры, отражающие
�?уще�?твующее территориальное неравен�?тво. В западной ча�?ти �?траны ра�?положена комплек�?на�?
и хорошо развита�? тран�?портна�? �?еть, в то врем�? как на Дальнем Во�?токе маги�?тральных �?етей
тран�?портных коммуникаций (маги�?тральные автомобильные и железные дороги) практиче�?ки



                                                                                            9
нет. Более чем на 40% территории Ро�?�?ий�?кой Федерации нет надежного до�?тупа к тран�?портной
�?ети, а треть на�?еленных пунктов не имеют круглогодичного автомобильного �?ообщени�?.

Как и �?ледовало ожидать, в западных и центральных регионах �? хорошим тран�?портным
�?ообщением �?реднее �?кономиче�?кое ра�?�?то�?ние до рынка гораздо меньше, чем в более
изолированных во�?точных и �?еверных регионах. �?налогично, объем торговли в ро�?�?ий�?ких
регионах (оценивает�?�? в рубл�?х) имеет положительную коррел�?цию �? размером рынка
(оценивает�?�? по чи�?ленно�?ти на�?елени�?). В западных регионах �?та коррел�?ци�? про�?вл�?ет�?�?
�?ильнее. С другой �?тороны, половина объема внутренней региональной торговли приходит�?�? на
торговлю между �?о�?едними регионами (т.е. регионами, имеющими общую границу), хот�? дл�?
у�?тановлени�? причин такого характера торговли (низкие тран�?портные издержки или более
широкие рыночные возможно�?ти) необходимо проведение дополнительного анализа. Как
показывает анализ внутреннего грузового �?ообщени�?, перевозка грузов на �?евере и в центре
во�?точной ча�?ти �?траны занимает больше времени, чем в западных регионах.

Повышение �?ффективно�?ти тран�?портной �?и�?темы в результате �?окращени�? времени перевозок
или техниче�?кого прогре�?�?а может оказать вли�?ние на производительно�?ть и благо�?о�?то�?ние
регионов. В на�?то�?щем и�?�?ледовании пред�?тавлены некоторые предварительные результаты
моделировани�? положительного воздей�?тви�? повышени�? �?ффективно�?ти ро�?�?ий�?кой
тран�?портной �?и�?темы �? и�?пользованием региональной модели общего равнове�?и�?. �?а
общеро�?�?ий�?ком уровне 10%-ное повышение �?ффективно�?ти тран�?портной �?и�?темы (труд, капитал
и потребление �?нергии) приведет к ро�?ту ВВП на 0,8%. �?аибольший приро�?т валового
регионального продукта будет отмечать�?�? в бедных и �?лабо развитых регионах, а наименьший – в
двух �?амых богатых регионах, и �?то позвол�?ет предположить, что такое повышение �?ффективно�?ти
на в�?ей территории �?траны может �?по�?об�?твовать �?окращению межрегиональных различий. Эти
результаты, в о�?новном, �?в�?заны �? долей тран�?порта в общем объеме ра�?ходов различных
отра�?лей. В �?том плане, �?ффекты в р�?де отра�?лей будут меньше или больше в зави�?имо�?ти от доли
тран�?портных ра�?ходов, а также ме�?тонахождени�? �?амих отра�?лей по отношению к рынкам. Что
ка�?ает�?�? домохоз�?й�?тв, то, в целом, они выиграют в результате ро�?та благо�?о�?то�?ни�? и �?окращени�?
бедно�?ти, однако о�?новные бенефициары будут находить�?�? в западных регионах Ро�?�?ии. �?аконец,
повышению уровн�? производительно�?ти могут �?по�?об�?твовать �?кономиче�?кие реформы,
инве�?тиции в инфра�?труктуру, техниче�?кий прогре�?�? (широкое ра�?про�?транение технологии GPS,
автономные тран�?портные �?ред�?тва) и т.п. Св�?зь между изменением �?тих параметров и
повышением тран�?портной �?в�?зно�?ти требует дальнейшего изучени�?, которое выходит за рамки
вычи�?лимой модели общего равнове�?и�?.

Суще�?твует р�?д значительных трудно�?тей, �?в�?занных �? тран�?портными �?ет�?ми Ро�?�?ий�?кой
Федерации, которые могут приве�?ти к к увеличению времени и �?тоимо�?ти до�?тавки грузов к
рынкам. Разветвленна�? �?еть железных дорог – �?то о�?новной канал грузовых перевозок в во�?точно-
западном направлении. �?е�?мотр�? на некоторые �?уще�?твующие “узкие ме�?та�? и большую
продолжительно�?ть до�?тавки грузов �?еть работает до�?таточно �?ффективно, но при �?том ее трудно
�?одержать. Железные дороги также играют важную роль в па�?�?ажир�?ких перевозках дальнего
�?ледовани�?. Что ка�?ает�?�? автомобильных дорог, то не�?мотр�? на р�?д мер, которые принимали�?ь в
по�?леднее врем�? в цел�?х повышени�? каче�?тва и модернизации дорожной �?ети, более 15
миллионов ро�?�?и�?н в�?е еще не имеют до�?тупа к �?ети федеральных автомобильных дорог. Более
того, федеральным �?тандартам каче�?тва отвечают менее половины автомобильных дорог

                                                                                            10
федерального значени�?, а большин�?тво автомобильных дорог мало при�?по�?облены дл�? проезда
�?овременных большегрузных автомобилей. Объем дорожных инве�?тиций в Ро�?�?ии меньше, чем в
других �?транах �?о �?редним уровнем доходов, а работы по �?одержанию дорог выполн�?ют�?�? �?
опа�?ными задержками. Порты имеют хорошую пропу�?кную �?по�?обно�?ть, однако �?ффективно�?ть их
работы может быть повышена. В результате крупнома�?штабных инве�?тиций в мор�?кие порты
�?овокупна�? пропу�?кна�? �?по�?обно�?ть портов превышает текущие и �?редне�?рочные потребно�?ти. �?о
при �?том подъездные железнодорожные и автомобильные пути к портам �?лабо развиты, а во
многих портах нет �?овременной логи�?тиче�?кой инфра�?труктуры. Эти проблемы наход�?т отражение
в низких показател�?х каче�?тва логи�?тики. По результатам и�?�?ледовани�? «Индек�? �?ффективно�?ти
логи�?тики» за 2016 год Ро�?�?и�? зан�?ла 99-е ме�?то в �?пи�?ке 163 �?тран, получив тот же рейтинг, что и
в 2007 году.

Международные об�?ледовани�? предпри�?тий перерабатывающей промышленно�?ти и �?ектора
у�?луг дают неоднозначные результаты в том, что ка�?ает�?�? значени�? тран�?порта дл�?
производительно�?ти ро�?�?ий�?ких предпри�?тий. Как показало Об�?ледование предпри�?тий 2012
года, главными факторами, �?держивающими развитие бизне�?а, �?вл�?ют�?�? вы�?окие налоги, а также
ограниченный до�?туп к и�?точникам финан�?ировани�?. При �?том только около 19% ро�?�?ий�?ких
предпри�?тий отметили, что от�?ут�?твие хорошего тран�?портного �?ообщени�? �?уще�?твенно
ограничивает их де�?тельно�?ть. Дол�? предпри�?тий, �?ообщивших о том, что тран�?портное �?ообщение
�?вл�?ет�?�? �?ерьезной проблемой, �?ократила�?ь по �?равнению �? 2009 годом: возможно, �?то отражает
тот факт, что го�?удар�?тво о�?уще�?твл�?ет инве�?тиции в ра�?ширение и модернизацию тран�?портной
инфра�?труктуры. Оценка тран�?портной до�?тупно�?ти как �?ерьезного ограничени�? мен�?ет�?�? от
региона к региону и зави�?ит от размера и рода де�?тельно�?ти предпри�?тий. Среди компаний,
по�?тавл�?ющих �?вою продукцию на мировые рынки, дол�? предпри�?тий, �?читающих тран�?портное
�?ообщение �?ерьезным ограничением, выше, чем �?реди компаний, об�?луживающих внутренний
рынок.

Едина�? оценка тран�?портной �?в�?зно�?ти на уровне в�?ей территории недо�?таточна дл�? такой
большой �?траны, как Ро�?�?и�?. Ее необходимо дополнить более углубленными и�?�?ледовани�?ми на
региональном уровн�?, о чем говорило�?ь выше. И�?�?ледовани�? �?итуаций в двух во�?точных регионах
– Забайкаль�?ком и Хабаров�?ком кра�?х – изложенные во второй ча�?ти на�?то�?щего доклада,
позвол�?ют получить более детализированную картину. В отдаленных регионах �? низкой
плотно�?тью на�?елени�? тран�?портные издержки выше, а выгоды агломерации меньше, чем в
гу�?тона�?еленных регионах �? хорошими тран�?портными коммуникаци�?ми. Более того, отдаленные
регионы �?талкивают�?�? �? целым р�?дом факторов, ограничивающих проце�?�? развити�?, включа�?
до�?тупно�?ть тран�?портных у�?луг дл�? хоз�?й�?тв в �?ель�?ких районах, а также дл�? предпри�?тий,
занимающих�?�? разработкой природных ре�?ур�?ов. Трудно�?ти, �?в�?занные �? железнодорожными
перевозками – нар�?ду �? проблемами, не �?в�?занными �? тран�?портным �?ектором, такими, как
вы�?ока�? �?тоимо�?ть �?нергоре�?ур�?ов и торгова�? политика ключевых партнеров (например, Кита�?) –
отрицательно �?казывают�?�? на перерабатывающей промышленно�?ти, рыбном промы�?ле и работе
портов. Кроме того, результаты проведенных региональных и�?�?ледований �?видетель�?твуют о
�?оциальной изол�?ции городов и по�?елков, не имеющих хорошего тран�?портного �?ообщени�? �?
админи�?тративными центрами регионов, и о том, что вы�?окие тран�?портные издержки не
позвол�?ют и�?пользовать преимуще�?тва, �?в�?занные �? наличием ме�?торождений полезных
и�?копаемых и �?ель�?кохоз�?й�?твенных земель.

                                                                                              11
Выше�?казанное не значит, что изолированные регионы – по крайней мере, те, которые
ра�?положены далеко от рынков европей�?кой ча�?ти Ро�?�?ии – не имеют тран�?портного �?ообщени�?
�?о �?воими рынками. Забайкаль�?кий край, например, не�?мотр�? на удаленно�?ть от рынков Мо�?квы
и С.-Петербурга, имеет отно�?ительно хорошее грузовое тран�?портное �?ообщение �? о�?новными
региональными торговыми партнерами. Более того, у Забайкаль�?кого кра�? такой же национальный
рейтинг тран�?портной �?в�?зно�?ти, как и у Мо�?ков�?кой обла�?ти, однако по объему торговли (в рубл�?х)
Мо�?ков�?ка�? обла�?ть прево�?ходит Забайкаль�?кий край в 75 раз. Это значит, что продолжительно�?ть
перевозки грузов в обоих регионах находит�?�? на одном уровне, но отношение объема �?тоимо�?ти
грузов к продолжительно�?ти перевозок (руб./мин) в Мо�?ков�?кой обла�?ти намного больше. С другой
�?тороны, о�?новным торговым партнером Забайкаль�?кого кра�? �?вл�?ет�?�? не внутренний рынок, а
Китай, который граничит �? �?тим регионом. По �?уще�?тву, объем торговли между Забайкаль�?ким
краем и Китаем (в рубл�?х) почти в 11 раз больше объема торговли между Забайкаль�?ким краем и
другими ро�?�?ий�?кими регионами. То же можно �?казать и о Хабаров�?ком крае, дальнево�?точном
регионе, где проходит мор�?ка�? го�?удар�?твенна�? граница Ро�?�?ии.

И наконец �?ледует отметить, что в такой большой �?тране, как Ро�?�?и�?, возможно�?ть до�?тижени�?
вы�?окого уровн�? тран�?портной �?в�?зно�?ти зави�?ит не только от плотно�?ти национальной
тран�?портной �?ети, но и от плотно�?ти на�?елени�?. В Ро�?�?ии много регионов �? небольшой
плотно�?тью тран�?портной �?ети и крайне ра�?�?редоточенным на�?елением. В таких регионах дл�?
повышени�? уровн�? тран�?портной �?в�?зно�?ти нужны либо инве�?тиции в развитие тран�?портного
�?ектора, либо прин�?тие мер, �?тимулирующих переезд жителей в более крупные города. В тех
�?луча�?х, когда �?троитель�?тво дополнительных объектов тран�?портной инфра�?труктуры �?в�?зано �?
отно�?ительно вы�?окими затратами и прино�?ит мало очевидных выгод, �?тратеги�? должна быть
направлена на повышение концентрации на�?елени�?. В западных и центральных регионах, где
каче�?тво тран�?портного �?ообщени�? выше, помехой дл�? �?кономиче�?кого ро�?та регионов, �?тимулом
которого �?вл�?ют�?�? города, по-прежнему �?вл�?ет�?�? перегруженно�?ть дорожной �?ети. При том, что
тран�?портные инве�?тиции играют определенную роль в �?окращении заторов на дорогах �?тих
регионов, такие инве�?тиции �?ледует направл�?ть во второ�?тепенные города, чтобы повы�?ить их
привлекательно�?ть дл�? предпри�?тий и на�?елени�?.

�?а�?то�?щий доклад �?о�?тоит из двух ча�?тей. В первой ча�?ти ра�?�?матривают�?�? вопро�?ы
тран�?портного об�?луживани�? на национальном уровне. Сначала мы обобщаем результаты
отдельных и�?�?ледований, по�?в�?щенных вли�?нию тран�?портных у�?луг на �?кономиче�?кий ро�?т и
развитие, а затем ра�?�?матриваем р�?д актуальных характери�?тик тран�?портного об�?луживани�? и
показателей �?ффективно�?ти тран�?портного �?ектора в Ро�?�?ии. Во второй ча�?ти доклада
ра�?�?матривают�?�? результаты и�?�?ледований двух регионов. В разделе 2.1 пред�?тавлена углубленна�?
оценка рынков и отра�?лей �? учетом роли тран�?портных у�?луг дл�? Забайкаль�?кого кра�?, а в разделе
2.2 – дл�? Хабаров�?кого кра�?. В разделе 2.3 пред�?тавлен р�?д выводов и рекомендаций дл�?
и�?�?ледованных регионов.




                                                                                             12
Part 1 – Transport Connectivity in the Russian Federation

1.1       Introduction

Transport infrastructure and services contribute to economic growth and development in different
ways. Improved access to reliable, affordable, and competitive transportation can increase firm
productivity, improve access to markets and jobs, enhance the quality of life, increase the supply of labor
and entrepreneurship, and lead to changes in land use and spatial patterns that may improve growth and
welfare. At the national level, good connectivity to strategic nodes of global economic activity is critical
for integration into regional and global value chains. Improved transport infrastructure and services
provides important benefits across all sectors and users. These benefits are typically realized in the form
of reduced transport costs (both monetary and time costs). They also accrue in the form of improved
connectivity to existing national or international transport networks.1

Part one of this study provides an exploratory assessment of transport connectivity in the Russian
Federation followed by an analysis of the effect of an improvement in transport sector productivity on
the country’s economic growth. Furthermore, it describes the performance of the sector vis-à-vis
socioeconomic features of regions and discusses whether the development of market opportunities are
limited by the availability of transport. Finally, to assess the role of transport on regional competitiveness,
the study is complemented through a market/industry analysis and the performance of transport
infrastructure in two selected regions in Part 2.

This section is organized as follows: Section 1.2 reviews the general literature on the relationship
between transport and economic development followed by a broad assessment of Russian development
challenges in Section 1.3. Particular emphasis is given to the disparities that exist between the leading
western regions and lagging far eastern and northern regions. Section 1.4 and Section 1.5 focus on the
transport sector and assess its role in regional disparity in Russia. Transport connectivity indicators are
constructed in Section 1.4 to describe the level of transport access in different regions. In Section 1.5,
salient sectoral issues are discussed for the different transport modes in Russia. Using the Enterprise
Survey, Logistic Performance Index from the World Bank and other sources, we analyze the role of
transport as a factor in doing business. Section 1.6 discusses results from a CGE model, which assesses the
impact of transport sector productivity on the Russian economy. Finally, Section 1.7 and Section 1.8
conclude the first part of the study by discussing issues of regional convergence and making some policy
recommendations and areas of future research, respectively.



1.2       Transport and economic development

While it is almost impossible to understand how an economy can develop without transport services,
it is difficult to measure to what extent improved transportation results in an increase in economic
development. This is because estimates of the relationship between a reduction in travel time and
economic growth, for example, likely suffer from endogeneity problems. Rich economies are better able

1
    See Section 1.4 for the definition of transport connectivity in this study.

                                                                                                            13
to develop their transport network than poor ones, so greater availability of transportation may be the
result, rather than a cause, of economic development. Moreover, the benefits of better transport tend to
diminish over time (Helling, 1997), while the costs and negative externalities tend to increase. The benefits
also depend on the kinds of investments made. For example, undertaking large investments in transport
infrastructure that cannot easily adapt to a rapidly changing economic environment runs the risk of being
trapped with the wrong technology (WDR, 2010). Realizing the potential contribution of transportation to
economic development requires efficient and flexible services, and a decision-making framework that
takes citizens’ concerns for equity, self-determination, and stability into account. Moreover, transport
interact in complex ways with trade, migration, information, energy, and financial flows as discussed in
the next sections of this report.

Increasing the availability and quality of transport services, along with a regulatory regime that
encourages competition while limiting the administrative burden on operators, can boost growth in
developing countries. Transport prices tend to be much higher in developing than in high-income
countries, and highest in the poorest countries. Reducing these prices increases the profits of firms selling
goods, as well as those of firms purchasing intermediate goods. Improving transport can also have
important dynamic effects. Improved access to markets and inputs enables firms to capture economies
of scale and can increase efficiency by facilitating just-in-time inventory control.2 Transport improvements
can radically transform production processes. For example, lower transport costs have been an important
driver of the development of complex global value chains, whereby developing countries can participate
in the production of sophisticated goods. Improving access to output and input markets, and workers’
ability to travel to absorb new information, can also encourage innovation.

Improved transport, be it in the form of lower travel cost and time or better services, generates benefits
beyond the immediate users. Transport investment raises growth and welfare through agglomeration
effects or through the benefits generated by concentrations of economic activity.3 Historically, dense
urban environments have grown around transport centers, most notably rivers and navigable harbors,
but also railroad terminals and (more recently) airline hubs. The greater supply of skills in urban centers
facilitates more specialized production and innovation,4 while the availability of more diverse goods and
services improves consumer welfare. Other economic benefits may include less-distorted markets as
transport services are priced more efficiently (Helling, 1997), or benefits to firms or workers interacting
with firms profiting from transport improvements.

A number of approaches have been used to demonstrate the importance of transport for growth in
developing countries. The high transport costs facing producers in many developing countries have been
extensively documented. For example, for Latin America, Guasch and Kogan (2006) find that logistics costs
(as a share of GDP) in the 1990s were two to four times those in the OECD countries, and inventory levels
in the region are three times that of OECD countries (Gonzalez, Guasch, and Serebrisky, 2007). Moreira
and others (2013) document the impact of high transport costs on exports for several Latin American


2
  For example, Datta (2012) finds that firms located near highway improvements achieve efficiency improvements
by keeping inventories for less time than other firms.
3
  See Duranton and Puga (2004) and World Bank (2009) for a discussion of agglomeration effects from urban
concentration.
4
  Ebert and Stone (1992) find that infrastructure improvements are associated with lower wages, because
improvements in the quality of life from infrastructure investment attract more workers.

                                                                                                            14
countries. Considerable anecdotal evidence of the high costs facing developing country producers also
exists.5 Firm surveys often show that improvements in transport have led to increased production,
although such surveys cannot take into account either the impact on other firms of greater production by
the firms surveyed, or the costs of the improvements.

Macroeconomic modeling exercises find that improved transport can have a significant impact on
growth.6 Other macroeconomic studies have found that improved transport encourages trade.7 These
studies tend to be based on regression analysis, where some indicator of transport is the independent
variable and growth or trade is the dependent variable. Growth also affects the location, demand for, and
ability to finance transport, so that a correlation between growth and transport (even controlling for other
variables) can produce biased results. Various econometric strategies have been used to overcome this
difficulty, which is referred to as endogeneity.8 These studies are also limited by lack of data, particularly
of measures of the economic cost and importance of linkages to markets.

The impact of improved transport on production varies by product and sector. For example, the smaller,
lighter, and more valuable the product, the lower the sensitivity to trade costs (Arnold, 2009). The
importance of rapid and reliable transport can be great for most agricultural commodities (both due to
perishability and vulnerability to damage) and for intermediate goods that have to meet time-sensitive
production schedules. Tourism services are also particularly sensitive to reliable and inexpensive
transport.9

Improving transport connectivity, however, can be a double-edged sword for remote, poor areas. While
poor producers expand their trading opportunities, they also face greater competition from goods
produced in cities. For example, Faber (2014) finds that lower transport costs reduce industrial growth in
peripheral areas that are connected to the central network, compared to areas that are not connected.
Similarly, the concentration of production encouraged by transport investments may increase economy-
wide inequality by increasing the incomes of rich cities and regions at the expense of poor ones.10
However, the overall impact on poverty would have to take into account the opportunity for migration
(and the ensuing remittances) from peripheral areas to help reduce poverty. One view is that transport


5
  See, for example, World Bank (2012) for Costa Rica, Atkin, and Donaldson (2015) for Ethiopia and Nigeria, and
Milner, Morrissey, and Rudaheranwa (2000) for Uganda.
6
  See Calderón, Moral-Benito, and Servén (2015) for Latin America; Boopen (2006) and Calderón and Servén (2010)
for sub-Saharan Africa. Dorosh, Wang, You, and Schmidt (2012) find that reducing travel time to the closest market
boosts agricultural production in sub-Saharan Africa. However, Straub (2008), in a review of empirical findings,
concludes that estimates of the productivity and growth effects of infrastructure are uncertain, varying significantly
according to the details of the particular sample and estimation methods used.
7
  See Buys, Deichmann, and Wheeler (2010) for the impact of improved roads on trade within sub-Saharan Africa.
8
  These strategies include the use of instruments (that is, variables that are correlated with transport
improvements but are unaffected by growth, for example, physical features of the land) as independent variables;
using military investments or ancient investments in transport infrastructure, which are unlikely to be driven by
current growth; or transport improvements in a previous period.
9
  World Bank (2014) finds that investments in high-speed rail significantly increased tourism in China.
10
   This effect in China is a subject of controversy. Demurger (2001) finds that transport infrastructure is one of the
main reasons for inequality in growth across Chinese provinces, while Banerjee, Deflo, and Qian (2012) find that
transport investments had no impact on differences in per capita income growth among Chinese regions.
Vickerman, Spiekermann, and Wegener (1999) and Puga (2002) argue that infrastructure investments in lagging
regions have not reduced regional income disparities across Europe.

                                                                                                                   15
improvements initially worsen regional disparities by encouraging concentration of activities, but as the
costs of congestion rise over time, this is followed by dispersion of activities and greater convergence
(Roberts et al., 2009).

Improving transport connectivity can also reduce welfare through damage to the environment and
other unintended effects. Good connectivity results in more movement of goods and people over longer
distances. These movements generate negative environmental impacts, such as more energy
consumption and greenhouse gas emissions (Spiekermann et al., 2015)11. Investments in transport
infrastructure can be associated with deforestation, biodiversity loss, the degradation of ecosystems, the
blocking of seasonal migration patterns, and, from a global perspective, climate change (Berg et al., 2016).
While these environmental effects often can be mitigated, for example, by taxing fuel or car ownership,
or regulatory restrictions on car use, developing countries often lack the administrative machinery
required to do so efficiently. Transport links also can facilitate the spread of diseases.12

Finally, the impact of transport infrastructure depends greatly on context. While the average historical
impact of transport improvements tends to be large, the marginal impact falls over time while the costs
of improvements tend to rise.13 Hulten (2004) argues that the impact of reduced transportation cost in
built-up networks like the United States is to relocate economic activity to lower-cost regions, while
adding transport capacity to underdeveloped networks will improve efficiency. The regulatory regime, for
example, the competitive framework for transport services, the administrative/documentation
requirements facing users of transport services (particularly concerning international trade and the ports),
the existence of price controls or other constraints on market activities, also will affect the productivity of
transport investments.



1.3     The Russian challenge

1.3.1    Country context
The provision of transport infrastructure and services is greatly affected by Russia’s enormous size and
dispersed population. Russia has the largest land mass in the world, but extensive areas are sparsely
populated. Russia accounts for 42 percent of the land mass of the BRICS countries, but its population is
only about 70 percent of the population of Brazil and less than 5 percent of the total population of the
BRICS, which is largely dominated in terms of population by China and India. While Australia and Canada
also have large land mass and even lower population density than Russia, a large share of their populations
live near the border or the sea. In Russia, the population is more dispersed inland.14 Also, the population
in Australia and Canada is concentrated in major cities: more than two-thirds of the population in these


11
   Spiekermann, K., Wegener, M., Kveton, V., Marada, M., Schürmann, C., Biosca, O., Uliedsegui, A., Antikainen, H.,
Kotavaara, O., Rusanen, J. and Bielanska, D., 2015. Transport accessibility at regional/local scale and patterns in
Europe. TRACC executive summary and final report. Luxembourg: ESPON.
12
   AIDS transmission in Africa was increased through truck drivers who had multiple sexual partners across long-
distance routes (see, for example, Mark, 1999). And the spread of Ebola in West Africa was more limited in areas
of Guinea, Liberia, and Sierra Leone that lacked all-weather roads (UNDP, 2014).
13
   See Briceño-Garmendia, Moroz, and Rozenberg 2015. Li (2011) estimates that the rate of return on transport
infrastructure investments was quite high for cities affected by significant congestion in rail networks.
14
   As a consequence of policies during the Soviet time that sought to increase population in remote areas.

                                                                                                                16
two countries live in the three largest urban centers. In Russia, on the other hand, Moscow, St. Petersburg,
and Nizhny Novgorod are home to only about one-eighth of Russia’s population (World Bank, 2011).



Table 1: Russia in numbers from World Development Indicators (2015 or latest information available)
                                                                               United                  Russian
Indicator                                         Australia      Canada                   Brazil                  China     India     South Africa
                                                                               States                Federation
GDP (current US$ billion)                             1,340         1,551        17,947      1,775        1,326    10,866     2,074          313
GDP per capita, PPP (current international US$)      45,514        44,310        55,837    15,359        24,451    14,239     6,089       13,165
Land area (1000 sq. km)                               7,682         9,094         9,147      8,358       16,377     9,388     2,973         1,213
Population (mill)                                           24            36       321         208         144      1,371     1,311           55
Pop. density (people per sq. km of land area)          3.10          3.94         35.14      24.87         8.80    146.06    440.96         45.30
Rural population (% of total population)              10.58         18.17         18.38      14.31        25.99     44.39     67.25         35.20
Gini index (World Bank estimate)                      34.94         33.68         41.06      51.48        41.59     42.16     35.15         63.38
Poverty gap at $1.90 a day (2011 PPP) (%)               -             -             -         1.72         0.01      0.35      4.27          4.90
Poverty gap at $3.10 a day (2011 PPP) (%)               -             -             -         3.14         0.09      2.52     18.46         13.09




While Russia has transitioned from a planned to a market economy, some legacies of former Soviet
location policies remain. The Soviet government promoted population dispersion and these efforts
continue through the promotion of regional convergence by subsidizing regions in the coldest and more
remote areas of Russia. These policies may not sufficiently take into account transport costs and the cost
of creating living standards and business conditions in cold climates. As discussed in the next section, the
manufacturing firms placed in the
coldest and most remote areas were not
competitive and were not successful in
attracting significant foreign investment
(Gaddy, 2008).

Finally, Russia’s extreme winter
weather       also    greatly      impairs
transportation services. The photos on
the right show some images from the
city of Yakutsk,15 which holds the record
for being the coldest city in the world.




15
  See the link below for some pictures and discussion on the coldest city in the world.
https://www.dogonews.com/2014/2/14/think-your-winter-is-bad-dont-tell-that-to-the-residents-of-the-worlds-
coldest-city/page/2.

                                                                                                                                              17
1.3.2   Spatial and socioeconomic disparities
Despite efforts to promote regional convergence, disparities in growth and development among regions
remain high. Based on Regional Gross Domestic Product (RGDP) per capita, the highest-income regions
of Russia would be considered high upper-middle-income or high-income if they were separate countries,
comparable to many OECD countries. The lowest-income regions are comparable to lower-income
countries such as those in sub-Saharan Africa. The level of per capita GDP among regions is correlated
with economic dependency on natural resources. The RGDP per capita at purchasing power parity in
resource-rich regions, such as Tyumen and Sakhalin Oblasts (and in Moscow) is about ten times the level
in the regions of low population density, remoteness, unfavorable development conditions, and
significant population decrease due to migration outflow (e.g. the Republic of Ingushetia, Ivanovo Oblast,
and Altai Republic). Figure 1 shows the differences in socio-economic indicators between the top 10
percent and bottom 10 percent of Russian regions.



                            Figure 1: Differences in socio-economic indicators
                 between top 10 percent and bottom 10 percent of the Russian regions




                                             Source: Oxfam, 2014

Russia’s regions can be divided into a set of leading, middle-range, and lagging regions based on real
GDP per capita, mineral and non-mineral exports, and FDI inflows.16 Other than Moscow and St.
Petersburg, Russia’s leading regions are located in a broad swath across the north, while the lagging
regions are concentrated in pockets in the south and southwest (See Figure 2). This pattern is explained
by the uneven distribution of oil and other mineral resources. The areas with the highest shares of lagging
regions are North Caucasus, where all are lagging, and Southern and Volga Federal Districts, both of which
have a larger share of lagging federal regions than Russia as a whole. The best-performing regions are
located in the Far East, which has the second-highest share of leading regions and no lagging ones; Ural,
with the largest share of leading regions at 50 percent; and the North West, with the third-highest share.




16
  Dairabayeva, Ferrantino, Portugal-Perez, and Schmidt (2016), “Export Competitiveness and FDI Performance
Across the Regions of the Russian Federation�? World Bank (2016).

                                                                                                             18
                       Figure 2: Leading and lagging regions of the Russian Federation




                                          Source: Dairabayeva et al. (2016)
Notes: Numbered regions: (1) Yaroslavl, (2) Kaluga, (3) Vladimir, (4) Ivanovo, (5) Perm, (6) Moscow City, (7) Tula, (8)
Nizhniy Novgorod, (9) Ryazan, (10) Mari El, (11) Udmurtia, (12) Mordovia, (13) Chuvashia (14, 16) Tatarstan, (15)
Penza, (17) Ulyanovsk (18) Saratov, (19, 20) Samara, (21) Volgograd, (22) Kalmykia, (23) Adygea, (24) Stavropol, (25)
Karachevo-Chercheskia, (26) Kabardino-Balkaria, (27) North Ossetia, (28) Chechnya, and (29) Ingushetia .

Similarly, levels of poverty and income distribution differ greatly among regions, as shown in Figure 3.
Poverty is higher in the Far East and Siberian Federal Districts, which border China and Central Asia. These
regions do not have the lowest GDP per capita, suggesting that poverty coexists with opportunity. Income
inequality, as measured by the Gini coefficient, tends to be higher in the more economically successful
regions, and is not correlated with dependence on natural resources (Glazyrkina and Klevakina, 2014).

Spatial disparities also can be analyzed in terms of different groups of Russian cities depending on their
levels of growth and development during the post-Soviet era.17 First, many cities have developed rapidly
because they could produce goods at quality sufficient to compete in world markets and had access to
transportation infrastructure at a reasonable cost. These cities competed by providing cutting-edge
solutions based on high technology to serve global markets, rather than simply meeting local demand.
Many cities near Moscow are within this group. A second group of successful cities managed to diversify
production and rapidly adapt to changing market conditions but focused on domestic markets. A third
group of cities is characterized by their location, including proximity to markets, good climate, or
possession of natural resources, as well as access to transport infrastructure. Examples include small cities

17
  This grouping of cities is based on Becker et al. (2012): Becker, Mendelsohn, and Benderskaya (2012), Russian
urbanization in the Soviet and post-Soviet eras, Urbanization and Emerging Population Issues Working Paper 9,
International Institute for Environment and Development, United Nations Population Fund.

                                                                                                                    19
in large agglomerations—i.e. cities near Moscow and St. Petersburg—which serve as transport, supply,
and logistics hubs to the center while also providing goods and services, and small cities in rural areas of
southern Russia with favorable climatic conditions for agriculture and hence for food-processing
industries. Many cities have also benefited from stable institutions, a favorable investment climate to
attract foreign direct investment, and other factors.



           Figure 3: Poverty incidence by region (including estimation of pockets of poverty)




                                Source: Own mapping based on Rosstat 2012



Another group of cities has had only limited growth. Most of these cities rely heavily on government
subsidies or public procurement, or production is concentrated in a single product, produced on a non-
competitive basis. Some are poorly-connected cities in the north and east that depend on forest products,
but poor infrastructure makes their products uncompetitive. A combination of long distances, limited road
and rail connectivity in the northern and eastern regions, and often poorly chosen routes together make
it very difficult for remote cities to grow without the support of the government.

Spatial disparities declined in the Soviet era, but this came at a cost. Policies that shifted production
from the old industrial areas in the western part of the country had increased the share of the eastern
part of the country in production from 4 percent in 1925 to 28 percent by 1989 (World Bank, 2009). While
increasing spatial equity, these policies undermined efficiency. Many manufacturing enterprises were
placed in remote (and cold) regions, which seriously impaired productivity (Gaddy, 2008). In addition to
facing high transport costs to reach large markets, firms in remote areas often have to produce a large

                                                                                                         20
number of intermediate goods (at inefficient scale) to ensure that production can continue in the face of
breakdowns in logistics.

The transition to capitalism opened opportunities for the manufacturing and service industries to shift
to the higher-productivity urban markets of western Russia. There is evidence that production and
population are shifting toward locations with larger markets and more efficient business environments
despite persistent policy efforts to distribute the population across the country (Becker et al., 2012). This
trend has accelerated with the decline of subsidies and non-competitive incentives. One sign of this shift
was the high rate of internal migration during the first half of the 1990s, right after the breakup of the
Soviet Union. For instance, the Komi Republic lost one-fifth of its population, and Chukotka (at the far
northeastern tip of Russia) lost two-thirds. Immigration to the large regional capitals of Yekaterinburg,
Krasnoyarsk, Samara, and Novosibirsk slightly increased from 2003 and 2007. The shift in population is
consistent with market-driven forces and suggests that Russia’s secondary cities could grow as markets
become more effective if institutional obstacles to mobility can be lifted. But the rate of internal migration
has slowed in recent years. In sum, the overall shift in population is likely to be explained by the existence
of business and job opportunities, some of them fueled by the improvement in the enabling framework.
Nevertheless, firms’ inability to compete given the long distance to large markets, lack of access to
transport, and low quality of transport services are also factors that determine the entry, exit, and location
of firms in the market (Brown et al., 2008).



1.4    Connectivity analysis

The concept of transport connectivity is multidimensional and varies depending on the mode in
question. At a basic level, it can be defined based on the availability and capacity of transport
infrastructure between two locations. In this sense, connectivity is characterized based on the physical
properties of a transport network. The mere existence of transport infrastructure, however, does not
indicate the level of transport connectivity. As such connectivity should also be defined based on the
availability and capacity of transport services (Calatayud et al., 2016).18 In what follows, the effectiveness
of transport in improving market connectivity of people and goods in Russia is discussed from three
dimensions: 1) physical infrastructure, 2) quality of infrastructure and service availability, and 3)
(economic) distance to markets.

1) Physical Infrastructure

Russia’s large spatial inequities, in part, reflect differences in transport connectivity. The core east-west
transport network has a single-corridor structure, stretching along the southern border and connecting
important industrial and trade centers as well as largest transportation hubs (Figure 4 and Figure 5). Rail,
the primary mode of transport infrastructure that connects east and north with the western part of the
country, is mainly used for long-haul cargo traffic. Waterways connect the north-south axis of the country,
while the road network is more developed in the west. Large strategic infrastructure projects serving



18
  Calatayud, A., Palacin, R., Mangan, J., Jackson, E. and Ruiz-Rua, A., 2016. Understanding connectivity to
international markets: a systematic review. Transport Reviews, 36(6), pp.713-736.

                                                                                                              21
high-density corridors such as highways and national roads, and freight and passenger railway links
constitute the backbone of the country’s transport network.

         Figure 4: Main transport connections of the Russian Federation and neighboring countries




                                 Source: Logistics Map of Russia, Cap Gemini S.A.19



There are notorious disparities in the stock of transport infrastructure among regions in Russia. The
western side of the country, including Moscow and St. Petersburg, which account for a large share of GDP,
has a complex and sophisticated transport network, while in the Far East, the trunk networks of transport
(main roads and rail lines) are virtually non-existent and overall road density per 1,000 km2 in the smaller
and poorer regions is low. Regions are connected either by air (for passenger travel), secondary and even
tertiary roads, most of which are deemed inaccessible during the winter, and Arctic sea routes, accessible
only part of the year. More than 40 percent of the land mass lacks reliable access to the transport network
and one-third of the settlements lack all-season roads.




19
     http://www.nl.capgemini.com/resource-file-access/resource/pdf/Logistics_Map_of_Russia_0.pdf.

                                                                                                         22
                             Figure 5: Main road and rail network in Russia




                                           Source: Own mapping
2) Quality and service availability

To have a more nuanced measure of connectivity, the level of transport service given capacity has to be
considered. In the western and central regions with apparently good connectivity, measured by a good
transport network, road congestion hampers urban-led regional growth. In Figure 6, the road sections
marked in red carry traffic volumes that exceed the designed capacity and thus experience serious traffic
congestion. Moreover, the available connections and service frequency is highly uneven.


3) Economic distance to markets

Two sets of connectivity indicators are produced to characterize the level of connectivity of major urban
centers to their surrounding regions and major trading partners. First, figures 7, 8 and 9 show the travel-
time isochrones around 11 selected urban centers across Russia for the rail network, road network, and
air transport, respectively. A travel-time isochrone is defined as the boundary of a region surrounding an
urban center that can be accessed within a given amount of time spent traveling; in this case five, 10, and
15 hours.




                                                                                                        23
Figure 6: Volume-capacity ratio of national highways




                Source: Own mapping
Figure 7: Travel time isochrones by railway network




                Source: Own mapping.



                                                       24
Note: The figure shows the travel-time isochrones for the rail network around 11 selected urban centers across Russia. A travel-
time isochrone is the boundary of the region surrounding an urban center that can be accessed within a given amount of time
spent traveling.



As seen in Figure 7 and Figure 8, the distance to market is much less in the well-connected western and
central regions than in the more isolated eastern and northern regions . In the western regions, it is
possible for those living in rural areas to reach one if not several major urban areas with no more than 5-
10-hour travel time. By contrast, the eastern regions have a much smaller “web�? of major rail and road
lines around them, so they are far less accessible for the surrounding rural populations. As for air
connectivity, Figure 9 shows travel times between major eastern cities are greater than between western
cities. The western regions are once again more interconnected, with a high density of short, regional
flights. The eastern cities are much less interconnected, having few short-to-medium-range flights to
other eastern cities. Most flights connecting the east are long-haul trips to the Moscow Oblast. Travel
times to the main trade partners can take over eight times longer for some of the least-connected regions
than in the best-connected regions. In addition to transport issues, long travel times may reflect low
economic density and diversification: some eastern regions do not have much to trade among themselves
and hence are forced to trade at longer distances with western regions.
                              Figure 8: Travel time isochrones by road network




                                                   Source: Own mapping.
Note: The figure shows the travel-time isochrones for the road network around 11 selected urban centers across Russia. A travel-
time isochrone is the boundary of the region surrounding an urban center that can be accessed within a given amount of time
spent traveling.


                                                                                                                            25
                                 Figure 9: Travel time isochrones by air transport




                                                   Source: Own mapping.
Note: The figure shows the travel-time isochrones for the air network around selected urban centers across Russia.


Second, freight connectivity index is produced to characterize how quickly goods can move to/from
regions. The index shows that the average time required to ship goods in the northern and central eastern
regions is significantly higher than in the western side of the country. (For more on the freight connectivity
index calculation see Box 1). Figure 10 shows a clustering of regions as a function of the weighted travel
time. For instance, for Sakha Republic/Yakutia, the sum of the travel time to the top five regional trade
partners exceeds 11 days, while for Moscow the comparable figure is 4.6 days. Disparities also exist in the
western side of the country. All in all, disparities in ground travel time across regions underline the
transport difficulties facing the more remote regions. Trade volume and travel time are positively
correlated, meaning that more time is required to ship goods on routes with larger trade volumes.
However, there is no correlation between trade volume and origin and destination measured by distance.
Interestingly, half of the regions have as top-five trade partners a neighbor region while the others are
trading with regions where they do not share a border. Unfortunately, due to a lack of information, it is
not possible to track exports and imports from these regions.




                                                                                                                     26
Figure 10: Freight connectivity (weighted average time to five most traded regional partners), 2014




                                         Source: Own mapping

                         Methodology for calculating domestic connectivity

The official statistics used to calculate “freight connectivity�? comes from Rostat, and uses the travel
times estimated through network analysis (GIS tool). Origin/Destination (O/D) Cost Matrix was used
to create routes along the network, and in this case calculates the cost value, which was set to travel
time in minutes. The OD Cost Matrix functions by calculating the routes between every given origin
and any given destination. The resulting cost matrix connected each regional capital to every other
regional capital in Russia and provided the cost as travel time in minutes. Estimates were prepared for
all modes of transport.

“Freight Connectivity�? is defined as the weighted travel time between regions using volume of trade,
and the modal share of each transport method as key descriptive variables. For each region, the top
five trading partners were considered. The formula used was:

      Freight Connectivity = Percent of Trade by Mode: Road * Travel Time to Destination by Road +
      Percent of Trade by Mode: Rail/River * Travel Time to Region A by Rail/River

This calculation was repeated for top five trade partners of each region and the values added together.
The final number is the weighted travel time to each region’s top five internal trade partners.




                                                                                                      27
Isolated regions, at least those defined
in areas far from markets in the
European side of Russia, may not be
necessarily “transport disconnected�?
from their markets. For instance, the
region of Zabaikalsky Krai has relatively
high freight connectivity with its main
existing regional trade partners despite
being far from the Moscow-St.
Petersburg markets. Moreover, the
domestic connectivity index for
Zabaikalsky Krai is similar to the Moscow Oblast but the trade volume (RUB) of the former is 75 times
lower than the latter. That is, freight in both regions travel the same time but the ratio RUB/minutes of
freight is much higher in Moscow. On the other hand, the main trading partner for Zabaikalsky Krai is not
the domestic market but China with which the region shares a border. In effect, the trade with China in
rubles is almost 11 times larger than its domestic trade with regions. A similar story can be described for
the Khabarovsk Krai, a region in the Far East, which has a maritime border. These issues are discussed in
more detail in Part 2 of this report and, in particular, other transport and non-transport related issues that
explain the barriers for further development in both regions.

The centrality of Russian regions based on the volume of trade and travel time to their top five domestic
trade partners is visualized in Figure 11 using network analysis.20 The left panel depicts the centrality of
regions based on potential accessibility.21 The size of each node is weighted by the total trade volume
divided by average travel time. The regions around Moscow and St. Petersburg constitute the core of
Russian regional trade flow. On the other hand, Sakhalin and Chechnya and others in the republics of the
Northern Caucasus play peripheral roles. Interestingly, in terms of cost accessibility (i.e. the average time
to reach top five domestic trade partners) St. Petersburg and Leningrad Oblast perform better than the
capital region. Again, the republics of the Northern Caucasus appear to have the highest access cost to
their trading partners.




20
    The network analysis is conducted using a measure of network centrality called PageRank. The algorithm is the
basis for Google’s search engines and works by cou nting the number and quality of links to a page to determine a
rough estimate of the importance of a website. The underlying assumption is that more important websites are likely
to receive more links from other websites. There are three distinct factors that determine the PageRank of a node
(regions in this context): (i) the number of links (trade partners) it receives, (ii) the link propensity of the linkers, and
(iii) the centrality of the linkers.
21
    Potential accessibility of locations is typically measured as the sum of activity (opportunity) in locations weighted
by a measure of generalized transport cost (GTC). In this context, trade volumes and travel time are used as
proxies for opportunity at destination and GTC, respectively.

                                                                                                                          28
                       Figure 11: Network Map of Russian Domestic Trade, 2014




                                          Source: Own mapping

1.4.1   In-depth look at regional connectivity
The analysis of the transport network in countries with large territorial extension can be divided in
country-wide connectivity, as discussed above in this section, and region-wide connectivity. The
country-wide connectivity in Russia is provided by large strategic infrastructure projects serving high-
density corridors such as highways and national roads. Freight and passenger railway links constitute the
backbone of a country’s transport network. On the other hand, connectivity within and across neighboring
regions in Russia is not uniform. Western regions enjoy a dense network of rural roads and better access
to rails as opposed to the Far Eastern and Northeastern Federal Districts.

Region-wide connectivity requires focusing on the specific characteristics of each region to identify the
markets and opportunities that cannot materialize because of poor access and quality of transport
services. However, given the large number of regions in Russia, a sample of representative regions can be
selected as case studies to identify common patterns related to transport issues and define policy
recommendations. This report follows this approach in two regions—Zabaikalsky Krai and Khabarovsk
Krai—as the local authorities were interested in being part of the study. The analysis shows some
interesting findings on transport and non-transport issues that affect two regions that are far from the
main markets in the western side of Russia. There are a few region-specific findings described below, but
more information can be found in Part 2 of this report.




                                                                                                      29
     a. Zabaikalsky Krai22

The assessment of freight connectivity of Zabaikalsky Krai with the existing main region’s markets
shows that although the region is more isolated from the markets of European Russia, it is relatively
well connected with its main regional trade partners. Zabaikalsky Krai’s main domestic trade partners
are primarily the regions of the Siberian Federal District. Connectivity with those regions is provided by
the federal highway system and the railway.

Connectivity between China and Chita, the capital city of Zabaikalsky Krai, is reasonably good and
therefore not a binding constraint in a region in which connectivity with China is critical to its
development. As far as the main trunk routes are concerned, connectivity between Chita and the Chinese
border crossing, both by road and by rail, is good. Neither is there any notable deficiency in the capacity
of the customs post, though the complexity of administration for non-bulk cargoes can be time consuming
and hence increase transport costs. One must, therefore, look elsewhere for the main reasons why the
region is not thriving off its relationship with its raw-material and food-hungry neighbor.

Overall, the past 15 years have seen an impressive development of the road network in Zabaikalsky Krai
that has led to some positive social impact. The Amur federal highway has been completed and intensive
reconstruction work is going ahead on regional and municipal roads. The opening of the Federal Highway
Amur has had a positive social impact on the living standards in the areas adjacent to the highway. Public
transport services have improved and communities have become more accessible to transport. Small
businesses, such as road services, have begun cropping up along the highway. But these appear to be
essentially only services catering to the increased level of road traffic, rather than activities which might
be the core of a new sustainable development. There are arguments, moreover, that the Amur project
was poorly designed with no exits to communities planned.

However, the remoteness and low population density threaten social sustainability in Zabaikalsky Krai.
These factors, which impede economic development, also make it difficult to sustain the quality of life in
large parts of the region. The capital city, Chita, is 1,000 km from Chara, which has an airport but is not
accessible by road. While the Trans-Siberian Railway provides some passenger services along its main axis,
as well as some long suburban services from Chita, it is primarily a freight carrier and does not generally
serve the more remote areas. The problem of low population density is also associated with remoteness.23
The average population density of the region is only 2.5 persons per square kilometer. The problem of
connectivity for this remote, sparse, and declining rural population is addressed in three main ways—by
inter-municipal bus services, by air services, and by communications technology.

Agricultural exports are partly inhibited by deficiencies in connectivity, as well as Chinese policies and
trade restrictions. Low density of population and of the secondary road system raises the costs of
agriculture and hence reduces its competitiveness on the international market. Low density, high
collection, and fuel costs also discourage the development of food processing in the region. The expansion
of agricultural production to some extent depends on road conditions. The development of meat and
dairy farming is also hampered by transportation problems. Some investments have been made to


22
  See Section 2.1 for background information on the region.
23
  Regional tourism could be a source of growth as there is some Chinese interest in tourism in Zabaikalsky Krai.
However, most of the natural and cultural landmarks are far from the regional center, federal motor roads, and
railway stations.

                                                                                                                   30
facilitate agriculture trade. For example, a major export facility is under construction. Construction work
has begun on the first grain railway terminal, Zabaikalsk-Manchuria, which will be a multi-modal grain
storage and shipping center.

However, trade restrictions related to veterinary and phytosanitary standards and regulations are an
important impediment to the export of agricultural produce.

The expansion to new mining fields for the exploitation of natural resources requires large investments
in transport infrastructure. Today, the exploitation of natural resources with limited value add accounts
for the largest share of total industrial output. Many of the mineral resources are located in the north,
less accessible to the Chinese market.24 Minerals are expensive to transport in the unprocessed form and
it is increasingly common in equivalent mining areas, for instance in northern Canada, for as much
processing as possible to be done at the mining site in order to reduce transport costs. However, this
requires both water and electric power. The high power costs in Zabaikalsky Krai often preempt this
solution.

Timber is one of the most important exports to China. For this product, some of the reserves are in the
south of the region and a substantial trade already exists. The administration of Zabaikalsky Krai noted
10-20 percent annual growth in demand in the domestic market for the realization of wood products.
Since the introduction of regulations on the export of unprocessed timber, more emphasis has been
placed on various forms of processing to increase the value add in the product even if it does not, in this
case, significantly reduce the cost to transport the product.

While an important border crossing was improved (Zabaikalsk-Manchuria), other border points remain
poor. The time taken for gauge changeover is a major physical constraint on the rail traffic. As for
infrastructure constraints on motor traffic, the main problem is that cargo and passenger traffic flows
were not separated.

     b. Khabarovsk Krai

Khabarovsk Krai (KK) will have an important role to play as a transit region for exports to the Asia-Pacific
Region (APR). The region is a transit center of the Far East in particular and Russia as a whole. Its role has
been increasing due to the growing interregional cargo turnover resulting from the development of trade
relations between Russian territories and the APR countries. The transport system holds prominent place
in the structure of GDP of KK, with its share varying in the recent years between 11 percent and 14 percent.

It is, therefore, important to assess connectivity constraints in relation to the railway and port
capacities, and competitiveness of the logistics sector. Development policy for KK is part of a broader
strategy for the Russian Far East. The federal government’s priority is to strengthen Russia’s economic ties
with the APR. The southern part of KK is likely to be the primary focus for economic development. It has
significant reserves of natural resources, the most advanced and diversified industrial potential, including
defense machinery building, human capital, and a reasonably well developed fuel and energy complex.
Moreover, it has reasonable road, rail, air, and sea transport links. In this area, it is feasible to think of the




24
  Alternative trade route for these materials are by the Baikal Amur Mainline railway and through the Khabarovsk
Krai seaports.

                                                                                                               31
development of mutually sustaining economic clusters. While there are substantial natural resources in
the north, their exploitation is viewed more as a case for limited and very specific support.

Regional trade, largely oriented toward foreign markets, has declined in recent years. On the other
hand, foreign direct investment has increased. This is largely due to the territory’s public policy aimed at
creating a favorable investment climate. The most attractive types of economic activities for foreign
investments are: extraction of minerals, logging, metallurgy, wood processing, oil products, and geological
exploration of subsurface resources.

The development of the Bolshoy Ussuriysky Island link and border crossing would potentially give
agricultural and other products access to a large Chinese market. The Chinese part of the island now has
a border post and a bridge to the Chinese mainland where the island borders Fu Yuan area, which is part
of the city district of Jiamusi. Jiamusi is a large industrial center and transport hub, where important water,
road, and railway routes cross. On the Russian side, a road bridge crossing the Amur channel has been
commissioned, but further development has not been undertaken due to a lack of protecting hydraulic
structures.

KK is the leading producer of forestry products. However, the development of forestry resources is
restrained by a lack of road infrastructure. For effective development of forestry resources, it is necessary
to build up to 600 km of new roads additionally a year and to modernize a significant part of the existing
roads. Commissioning of logging roads in 2013-2014 was only 40 percent of real demand.25

KK is one of the leading regions in fishery in Russia and the output of fish products has only been
growing. Products of primary fish processing are exported mainly by rail, which does not provide
adequate consolidated refrigerated cargo logistics for companies engaged in deep processing. The
logistics system of Russian Railways targets large wholesale lots. As SMEs in KK do not have large
shipments of ready products, they have to narrow the radius of their supplies to 1,000 km—the maximum
distance that can be covered with road transport for such load. Small lots of ready deep fish processing
products are also shipped by air. Such shipments are only made to cities which have direct connections
with Khabarovsk (due to product storage requirements).

Fishery development will require investment in the port’s infrastructure. The fisheries industry in KK
appears to have some development potential. However, transforming this industry into a more highly
technological sector of the economy may prove difficult. It would require a substantial investment in port
infrastructure to solve the problem of infrastructure bottlenecks in collection, storage, and transportation
of fish products. Moreover, poor road infrastructure hinders the development of port-based fish
processing, and lack of adequate logistics services limits the radius for distribution of products. Primary
fish processing products from KK are exported mainly by rail, while products of deep processing are
transported by road transport on a limited radius.

The mainline rail capacity is generally adequate for the level of the current industrial activity and
exports, but is likely to require expansion and improvements on the Baikal-Amur Mainline (BAM)
railway in case of increased exports of coal and other mineral ores. Projected development of the ports
of Primorsky Krai also requires increasing the capacity of the Trans-Siberian Railway. The development of
ports’ capacities and manufacturing facilities requires adequate improvements of the existing railway

25
     According to the draft Strategy of Socio-economic Development of KT (2015).

                                                                                                            32
infrastructure, as well as logistics facilities and services. Beside capacity, the existing rail transport is
surprisingly unattractive to the manufacturing sector. The transport problems of this sector are
exemplified by a machinery company with production facilities in Khabarovsk and Komsomolsk-on-Amur.
Up to 50 percent of its materials for production is imported from western regions of Russia. Products are
shipped to all regions of Russia, Kazakhstan, Uzbekistan, and Belarus, other European and Asian countries.



1.5     Sector performance

Russia’s railroad network is large and extensive. Railroads accounted for 85 percent of Russia’s freight
transport in 2012 (in terms of volume), compared to 61 percent for Canada in 2010, 47 percent for the
United States in 2011, 41 percent for China in 2011, and 4.2 percent for Japan in 2011 (Murray, 2014).
Railroads are heavily devoted to the shipment of raw materials, which often have no alternative means
of transport.

Railroad productivity is high—the system is the third-largest in the world after the United States and
China—but maintenance has not been adequate. As a result, the rise in demand has resulted in significant
system degradation and capacity problems are severe (World Bank, 2011). The extensive transport
networks built during the Soviet period proved difficult to maintain with the shift to market prices, causing
a rapid deterioration in the stock of transport capital (Gill et al., 2014). Railroads are also an important
mode of long-distance travel, serving about 40 percent of passengers. Various high-speed rail links
between major cities have been planned.



      Figure 12: Railway share of freight transport in 2010, percentage in total inland freight ton-km




       Note: The figure excludes oil and gas pipelines. 2009 data is used for Canada, China, Greece, Luxembourg,
       Switzerland, and 2008 data for Australia, South Korea, New Zealand, and the United Kingdom.
                                      Source: Reprinted from OECD (2015)




                                                                                                             33
                                        Table 2: Railways productivity, 2015

                        Staff productivity      Track productivity                 Freight track                Locomotive
                         (ton-kilometers       (ton-kilometers and               productivity (ton-          productivity (ton-
                          and passenger             passenger                  kilometers per km of           kilometers and
                          kilometers per        kilometers per km                     track)               passenger kilometers
                            employee)                of track)                                                per locomotive)
 Canada26                       12,585,533                9,397,023                         9,365,759                172,830,833
 China                           1,349,981               40,217,029                        29,459,932                 136,202,106
 European
                                738,188              3,138,483                               1,235,785                35,901,883
 Union
 Russian
                              3,119,693            28,443,750                              27,031,479               138,494,147
 Federation
 United States
                                    n/a            11,108,480                              11,062,164               104,866,805
 (2011)
 India                        1,379,250            27,697,804                              10,324,035               170,446,039
** The data source is UIC unless specified otherwise.



Competition in railways is limited. While 80 percent of freight is carried by privately-owned wagons, the
state-owned company, Russian Railways (RZD), retains a monopoly over the operation of locomotives.
This arrangement has greatly impaired the efficiency of railway operations, leading to thousands of empty
wagons and thus additional bottlenecks and long shipping times, according to the OECD (2015). Similarly,
the passenger rail network is almost entirely controlled by RZD, which faces rail competition only on the
Moscow-St. Petersburg route. Efforts to complete the introduction of private sector participation in the
railway network are thus important. Still, the perceived quality of the rail sector has increased since 2009,
according to the World Economic Forum (see Figure 13).

                Figure 13: Evolution of the perceived quality of railroad in selected countries

                                             China   India       Russian Federation   South Africa
                  5.0

                  4.8

                  4.6

                  4.4

                  4.2

                  4.0

                  3.8

                  3.6

                  3.4

                  3.2

                  3.0
                         2009-2010    2010-2011      2011-2012          2012-2013      2013-2014      2014-2015

                          Source: WEF. The perception index ranges from 1 (worst) to 7 (best)




26
     http://www.railcan.ca/assets/images/publications/Rail_Trends_2016/Rail_Trends_2016.pdf.

                                                                                                                              34
The road network faces major challenges. In contrast to the railroads, the road network was relatively
underdeveloped in the Soviet period, although investment in roads has since risen (OECD, 2015). The
highway system is inadequate to provide rapid connections between cities. For example, it takes about
six hours to travel the 250 km between Chelyabinsk and Magnitogorsk by road. Moreover, more than 15
million Russians lack access to the federal highway system and fewer than half of federal roads meet
federal quality standards (World Bank, 2011), and the majority of roads cannot easily accommodate
modern, large trucks (OECD, 2015). Road investment in Russia is much below levels in other middle-
income countries, and maintenance has been dangerously delayed.

Poor roads are constraining growth. The poorly-maintained highway system has compelled firms to
locate in the major cities in order to maintain access to suppliers and government. As a result, congestion
in these cities has been exacerbated and opportunities for firms to benefit from lower wages and cheaper
land in secondary cities reduced (World Bank, 2011). As Russian firms switch from the production of low-
value commodities (the transport of which depends largely on rail) to just-in-time delivery of high-value
goods (which is largely shipped by trucks), the poor road system will increasingly limit production.

The perceived quality of the roads in Russia remains low compared with that in other BRICS countries,
according to the World Economic Forum (see Figure 14). However, some small progress can be observed
since 2012-2013, probably as a consequence of major and focused investments through the Federal
Highway Program.27



                Figure 14: Evolution of the perceived quality of roads in selected countries

                                        Brazil    China      India       Russian Federation        South Africa
                5.0


                4.5


                4.0


                3.5


                3.0


                2.5


                2.0
                      2006 -   2007 -    2008 -     2009 -      2010 -       2011 -       2012 -        2013 -    2014 -
                       2007     2008      2009       2010        2011         2012         2013          2014      2015



                        Source: WEF. The perception index ranges from 1 (worst) to 7 (best)



The road network has a poor safety and environmental record. The bad state of the roads, a sharp
decline in road police personnel, and alcohol abuse (HSE, 2013) have made it perilous to drive on Russian
roads. Road mortalities are five times the level in several European Union (EU) countries and twice that

27
  The total budget spending on road infrastructure (including federal and regional roads) in Russia was 1.5% of
GDP in the 2011-15 period (Ganelin et al 2015: Russian Infrastructure- To build or not to build, that is the question.
Gazprombank http://www.gazprombank.ru/upload/iblock/0ba/GPB_Infrastructure_update_030715.pdf ).

                                                                                                                           35
of the United States (OECD, 2015). Road transport accounts for about 40 percent of carbon emissions
(MNRE, 2012). More efficient vehicles are making up a growing share of the fleet, while fuel emissions
standards are being tightened. Nevertheless, monitoring and enforcement of the quality of motor fuel
remains ineffective (Dieselnet, 2013). In addition, the weakening of vehicle inspections requirements in
2012 (enforcement was delegated to insurance companies, which often issue policies despite the lack of
the required inspection) has impaired enforcement of safety and environmental standards (OECD, 2015).

The resources for an expanded investment and maintenance program could, in part, be gained by more
efficient pricing policies. World Bank (2011) reports that gasoline prices in Russia were only slightly higher
than in the United States and well below levels in Western Europe; the maximum price of gasoline in
Russia from July to October of 2016 was about half the average global price for that period.28 Greater
revenues also could be gained through tolls on the most densely-used highways (e.g. the route from
Moscow to St. Petersburg) and vehicle licensing fees.

Urban transport networks also face serious challenges. Traffic congestion is high in many Russian cities.
The average speed is 20 km/h in downtown Moscow, compared to 40 km/h in large European cities
(Ganelin and Vasin, 2014). In a survey of Russian cities, road traffic was viewed as accounting for over 50
percent of total carbon emissions (Oh and Gwilliam, 2013). Pollution is a severe problem in almost all of
the larger cities, particularly in Moscow and St. Petersburg (Donchenko, 2013).

Public transit is heavily used in Russia. Eighty-five percent of motorized trips in Russia are through public
transit, compared to 20 percent in Western Europe and 3 percent in the United States. Nevertheless, the
quality of transit systems has deteriorated as greater emphasis has been placed on building roads to
accommodate the growing supply of private cars (World Bank, 2011).29 Most municipal bus, tram, and
trolleybus companies in major Russian cities have significant financial deficits, usually accompanied by
aging and deteriorating fleets (Oh and Gwilliam, 2013). Private road transit companies also play an
important role in Russian cities—mini buses serve up to 15 percent of all the urban passengers (OECD,
2015). However, these companies are poorly regulated. One useful improvement would be to provide
private bus company franchises of sufficient duration to encourage investment.

Improvements in management could reduce congestion. Designating reserved lanes and priority at
traffic signals for buses, trolleys, and trams could speed public transit and thus increase its attractiveness
(World Bank, 2011). The division of responsibility for urban traffic issues between regional and municipal
authorities impedes the development of a coordinated program for large metropolitan areas, while within
municipalities transport sector responsibilities are often split between different agencies, further
impeding coordination (Oh and Gwilliam, 2013). Finally, the availability of parking in many urban areas
could be increased by greater reliance on meters. Street parking fees in Moscow “appear to be too low
to encourage a more efficient use of land and transportation systems�? (World Bank, 2011).

Port capacity is high, but efficiency is poor. Massive investment in seaports has increased total capacity
above current and medium-term needs. However, rail and road access to the ports is poor, and many lack
modern logistic facilities (Rosmorport, 2012). Further, most Russian ports lack the ability to handle
containers and wheeled cargo (OECD, 2015), which is important to establish an efficient link between land
transport and shipping. These deficiencies will limit the effective use of ports, particularly for high-value

28
     See Globalpetrolprices.com.
29
     Car ownership has doubled since 2000 (OECD, 2015).

                                                                                                           36
goods. This will impede the transition from reliance on natural resources to manufacturing, which is
becoming more feasible with the recent price declines for Russia’s oil and mineral exports (World Bank,
2016). Customs and other procedures at the border continue to impose lengthy delays, and despite
numerous projects, traders still lack access to a single window to handle administrative requirements
(OECD, 2015). Also, many Russian ports are located near congested city centers and have limited operating
space, and in some cases, inadequate depth to handle modern ships. These constraints may ultimately
require relocating ports to facilitate access (World Bank, 2011).

              Figure 15: Evolution of the perceived quality of ports in selected countries

                                      Brazil    China      India       Russian Federation        South Africa
              5.0


              4.5


              4.0


              3.5


              3.0


              2.5


              2.0
                    2006 -   2007 -    2008 -     2009 -      2010 -       2011 -       2012 -        2013 -    2014 -
                     2007     2008      2009       2010        2011         2012         2013          2014      2015


                      Source: WEF. The perception index ranges from 1 (worst) to 7 (best)


The efficiency of airport services is low. The number of take offs and landings per runway at Moscow
airports is less than half that in London and two-thirds that in some airports in China (Katchan, 2011).
Lack of competition in the provision of services at airports has led to high prices for air fuel and other
airport services. The degree of inefficiency that results is reflected in the common practice of importers
flying shipments to airports in neighboring countries and then transporting the goods to Russia via trucks
(OECD, 2015). Finalizing the separation between airports and airlines, as well as strong regulation of
remaining monopolies, is important to reduce prices and improve services.

              Figure 16: Evolution of the perceived quality of air transport infrastructure
                                          in selected countries

                                      Brazil    China      India       Russian Federation        South Africa
              5.0
              4.8
              4.6
              4.4
              4.2
              4.0
              3.8
              3.6
              3.4
              3.2
              3.0
                    2006 -   2007 -    2008 -     2009 -      2010 -       2011 -       2012 -        2013 -    2014 -
                     2007     2008      2009       2010        2011         2012         2013          2014      2015




                                                                                                                         37
                      Source: WEF. The perception index ranges from 1 (worst) to 7 (best)


There are important efficiency opportunities as a result of better transport services in Western markets.
Russian transport and trade facilities are heavily devoted to natural resource exports and trade with non-
European countries. A reorientation toward the West will require greater integration with the EU,
including development of ports, road links, and transshipment options through the Black Sea and the Far
East (World Bank, 2011).

Overall, there is considerable potential to improve physical connectivity in Russia. An estimate of the
benefits of transport improvements finds that the greatest return would come from upgrading all
connecting regional roads to a minimum standard of 74 percent paved surface (50 percent increase in
trade), compared to reducing customs documentation requirements for the region (20 percent increase
in trade) and lowering all tariffs to 8 percent or less (6 percent increase in trade) (World Bank, 2011).
Planned transport improvements will benefit from the law on public procurement, which increased the
transparency of the process. However, the law needs to be complemented by improvements to project
evaluation, management and control, better use of the public-private partnerships, and efforts to reduce
corruption (OECD, 2015).

                 Figure 17: Logistic Performance Index 2016 for the Russian Federation




                                         Sources: World Bank (2016)


Russia fares poorly on indicators of the quality of logistics. Russia is ranked 99th out of 163 countries on
the 2016 Logistics Performance Index (LPI) in Figure 17, the same ranking as in 2007. This represents a
deterioration from two years ago (90th out of 160) after a steady improvement since 2010. This ranking
puts Russia below many middle-income countries, as well as a couple of low-income countries. However,
Russia’s average score on the LPI is the result of significant differences in rankings among the types of
logistic services. Russian ranks 141st in the world for customs operations, putting the country below, for
example, lower-income countries. By contrast, Russia’s rankings on the other indicators of logistics
performance tend to be much closer to, although for the most part still worse than, the average.
According to the World Economic Forum’s Global Competitive Index, Russia is ranked 44 th out of 144




                                                                                                         38
countries for transport infrastructure, which reflects a high ranking for railroads (26th), a very low ranking
for roads (124th), and somewhat below average rankings for ports (81) and air transport (79).30


1.5.1    Transport as one of the obstacles for doing business

Investments in transport infrastructure have been widely used to improve economic integration and
reduce spatial income disparities. However, improved transportation may be a necessary, but not
sufficient, condition to increase growth in lagging regions. Transportation investments such as new roads
may or may not improve regional development; such investments may also have negative effects on
equity and income distribution.31 In effect, there are other factors that interact with transport
infrastructure and are likely to contribute to economic growth by creating business opportunities and
jobs. There is a bundle of resources (labor, land, minerals, entrepreneurship capacity, location, etc.) and
policies necessary to achieve more rapid development. An analysis of obstacles to business development
in the manufacturing and service industry can provide some important information.

Data from international surveys of manufacturing and service industry firms, particularly in the BRICS
countries, provides mixed evidence on the importance of transport on firm productivity. Unexpectedly,
most firms do not identify transport as among the most important constraints on their activities (Table 3).
In the case of Russia, the World Bank Enterprise Survey in 2012 shows that high taxes, followed by
restrictions on access to finance, are the main constraints on business development. Only a small share
of firms report transportation as a major constraint, similar to the results in the other BRICS countries
(only in China does the share of firms reporting transportation as a major constraint exceed 7 percent).
Note, however, that other important sectors, such as agriculture and natural resource extraction, are not
covered in this survey.

One reason transport may not be reported as a major constraint is that poor connectivity leads firms to
locate near their markets or near a transport facility if focusing on exports. Thus, inadequate transport
services may affect firm size and productivity by constraining firms’ choice of location. This is less of an
issue for firms exporting natural resources, which often benefit from dedicated transport infrastructure.
In the case of Russia, Brown et al. (2008) find that market size, along with proximity to Moscow and
regional infrastructure, are important determinants of productivity for new and private sector firms.
Evidence of the importance of agglomeration effects in Russia is that improved transport has the highest
gains in productivity in areas around Moscow and the lowest in peripheral regions, particularly in the Far
East.




30
   One issue with the World Economic Forum rankings is that Russia is ranked 11 th for the availability of airline
seats, which is given equal weight in the computation of the overall transport infrastructure index with the other
components. Excluding this category, Russia’s ranking would be significantly worse.
31
   See, for instance, the discussion on the effects of increasing rural road and rail access in France in Quinet (1992).

                                                                                                                     39
               Table 3: Main obstacles for manufacturing and service firms (in percentage)

                                                                                         Russian
                                                       Brazil    China       India                    South Africa
                Country                                                                Federation
                                                       (2009)    (2012)     (2014)                       (2007)
                                                                                         (2012)
                Access to finance                         7.5%     22.4%      11.7%          14.8%           7.5%
                Access to land                            0.5%      5.6%       4.6%           3.6%           2.7%
                Business licensing and permits            0.6%      0.2%       2.1%           4.5%           2.9%
                Corruption                                3.3%      1.2%      19.9%           8.2%           7.1%
                Courts                                    1.8%      2.0%       1.6%           0.6%           1.2%
                Crime, theft and disorder                 6.6%      0.3%       1.1%           0.9%          40.4%
                Customs and trade regulations             2.6%      1.8%       1.2%           2.1%           1.1%
                Electricity                               0.3%      4.8%      15.3%           1.8%          14.7%
                Inadequately educated workforce          12.6%     13.0%       3.4%           6.4%           6.7%
                Labor regulations                         7.4%      1.9%       4.9%           0.5%           5.6%
                Political instability                     3.0%      0.8%       3.5%           7.8%           1.1%
                Practices of the informal sector         12.4%     19.6%      12.1%           7.0%           4.9%
                Tax administration                        6.7%      4.2%       3.7%           1.9%           0.1%
                Tax rates                                33.5%     15.1%      13.0%          36.1%           1.7%
                Transportation                            1.3%      7.2%       2.1%           3.7%           2.3%
                Total                                   100.0%     100.0%    100.0%          100.0%        100.0%
                                         Source: Enterprise survey, the World Bank

In 2012, around 19 percent of the firms in Russia recognized that transport had some impact on doing
business (Table 4).32 The regional average for Europe and Central Asia is 9 percent and for all the countries
in the sample the average is 18 percent. Note, however, that in 2009 one-third of the firms reported that
transport represented a major constraint. The improvement in the period 2009-2012 could reflect
government investments to enhance and modernize transport infrastructure (see discussion in Section
1.7).

                        Table 4: Firms identifying transportation as a major constraint (%)

                                        Brazil(2009)                                 27.9%
                                        Russian Federation(2009)                     32.2%
                                        Russian Federation(2012)                     19.0%
                                        India(2014)                                  9.6%
                                        China(2012)                                  2.1%
                                        South Africa(2007)                           3.9%
                                        Source: enterprise survey, the World Bank



The number of firms that identify transport as a main business obstacle varies greatly across regions
(Figure 18). For instance, more than 42 percent of the firms in the Rostov Oblast, but only 2.5 percent in


32
  Also in terms of the share of products lost to breakage or spoilage during shipping to domestic markets, Russia is
placed slightly below the regional average (0.7 percent), and well below the global average (1.2 percent).

                                                                                                                     40
the Belgorod Oblast, identified transport as a major constraint. This survey does not include all regions.
However, a simple correlation with the freight connectivity index (Figure 10) shows that firms in regions
where the travel time required for trade was high tended to identify transport as a key constraint.
Moreover, a simple correlation of this perception and the RGDP is close to zero, while the correlation is
positive with the volume of intraregional trade and negative with road density (Table 5). A possible
interpretation is that firms in regions with higher levels of trade are more likely to view transport as an
important constraint, while firms in regions with a plentiful supply of roads are less likely to do so.
However, this analysis cannot provide evidence of causality between these variables.


          Figure 18: Percentage of firms identifying transportation as major constraint (2012)




                                           Percent of                           Percent of                                Percent of
                   Region or city                            Region or city                           Region or city
                                             firms                                firms                                     firms
            Rostov Region                     42.6      Lipetsk Region             23.4       Krasnoyarsk Territory          15.5
            Republic of Sakha (Yakutia)       39.5      Ulyanovsk Region           22.8       Kemerovo Region                15.2
            Leningrad Region                  39.0      Yaroslavl Region           20.7       Irkutsk Region                 15.0
            Voronezh Region                   29.0      Kaluga Region              20.2       Republic of Mordovia           13.6
            Sverdlovsk Region                 28.0      Moscow City                19.6       Primorsky Territory            13.4
            Khabarovsk Territory              27.7      Kursk Region               17.7       Nizhni Novgorod Region         13.3
            Moscow Region                     25.7      Republic of Tatarstan      17.3       Tomsk Region                   12.3
            Perm Territory                    25.6      Tver Region                16.9       Saint Petersburg                9.9
            Chelyabinsk Region                25.1      Kaliningrad Region         16.8       Novosibirsk Region              8.2
            Samara Region                     24.6      Murmansk Region            16.4       Republic of Bashkortostan       5.3
            Krasnodar Territory               24.5      Kirov Region               15.6       Stavropol Territory             3.9
            Omsk Region                       24.4      Volgograd Region           15.6       Belgorod Region                 2.5


                                          Table 5: Regional correlation analysis (2012)
                                                                        Percent of firms identifying
                                                                    transportation as a major constraint
                                    RGDP (current, RUB)                                       0.04
                                    Domestic Trade                                            0.11
                                    Road Density                                             (0.14)
                                    Number of Cars                                           (0.02)

                                                         Source: own estimation

                                                                                                                                       41
The extent to which access to transportation is viewed as an important constraint differs by firm size
and activity. Around 20 percent of small- and medium-sized enterprises identify transportation as a major
constraint, compared to 12 percent for large firms (Figure 19). The survey does not identify whether the
problem reflects poor access to or quality of infrastructure, rather than transport services. In general,
large firms are abler to select their location depending on various concerns, including access to domestic
and international markets. Large firms also may be able to secure better transport services and minimize
the disruption in services by diversifying the transport modes used. Still, large firms are more likely to
suffer from poor transport services and infrastructure quality, often a particular constraint on the
development of new markets, rather than from a lack of access. By contrast, small- and medium-size firms
are not likely to benefit from economies of scale in production and are less able to compete in large (or
distant) markets because of the cost of transport.

   Figure 19: Percentage of firms by size, market, and sector that identify transportation as a major
                                            constraint (2012)

                                                                                                                                                                             By Size and Market

       Large (100+)

   Medium (20-99)

           Small (5-19)




     Non-exporter

   Direct exports*

                          0.0                                                          5.0                                                                  10.0                                                    15.0                                          20.0                                            25.0                                                                      30.0
              *Direct exports are 10% or more of sales



                                                                                                                                                                             By Sector
                                 38.8




                                                                                                                                                                                                                                                                                                                        28.9
                                                                                                                                                                   26.1




                                                                                                                                                                                                                                                                         22.7
                                                                                                                                                                                                                                                    21.9
                                                                                                       20.3
                 19.9
    19.2




                                                                                                                                                                                                                    19.0
                                                                                                                                    18.3




                                                                                                                                                                                                                           18.3
                                                                                                                                                                                    16.3
                                                                                   15.5
                                                             15.0




                                                                                                                                                                                                                                                                                                                                                                     12.0
                                                                                                                                                                                                                                                                                    3.6




                                                                                                                                                                                                                                                                                                                                               2.1
                                                                                                                             C o m m u n i c a t i o n s…




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                                                                                                                                                              W ood P r oduct s &
                                                                                Machine r y &


                                                                                                C he m icals, P last ics &


                                                                                                                                 Ele ct r onics &
                                                                                Equipm e nt




                                                                                                                                                                                                                                                                                                                    C o m m u n icat io n s
                                                                                                                                                                 Fur nit ur e
                                                            P r oduct s
                                 P r oduct s




                                                                                                         Rubbe r




                                                             Manufact ur ing                                                                                                                                                                                             Se r vice s




                                                                                                 Source: Enterprise survey, the World Bank



                                                                                                                                                                                                                                                                                                                                                                                             42
Exporting firms perceive that transport is a major constraint for their business. A significant share (26.7
percent) of exporting firms perceive that transport is a major constraint for their business, eight
percentage points more than for non-exporter firms (Figure 19). Firms in the non-metallic mineral sector
appear to be the most constrained by poor access or quality of transportation, followed by firms in the
wood products and furniture sector. Finally, the transport, storage, and communication sub-sector has
the largest share in the services sector of firms showing transport as a constraint.



1.6    Improving transport efficiency: A preliminary analysis through a regional CGE model
This section presents some preliminary results of a simulation of a positive shock in transport efficiency
on regional productivity and welfare. The analysis is based on estimations from a computable general
equilibrium model at the regional level of the Russian Federation (SUST-RUS, 2017).33 The model is divided
into seven regions each with representative households divided by quintile of income. The production
sector includes 32 goods and services, and there is a federal government and external sector. 34



              Figure 20: Russian regions used in the computable general equilibrium model




                                            Source: SUST-RUS project

                                North-                                                    Siberian      Far East
                Central FD                    South FD      Volga FD       Urals FD
                                West FD                                                      FD           FD
 GRP, bln
                 17 988,82       4 950,79      3 650,62       8 142,10      8 833,38       4 979,55      1 991,60
 RUB
 GRP per
                 18 356,88      13 876,65      6 087,22      10 190,23     27 429,25       9 653,95    11 620,81
 capita USD


33
   The study includes some simulations using a computable general equilibrium model based on the SUST-RUS
project deliverable D3 “Description of the economic model, mathematical formulation a nd derivations,�? available
at http://sust-rus.org/wp-content/uploads/2010/08/wp3_sust-rus-model.pdf. Natalia Turdyava, one of the
authors of the model, reproduced new simulations for this report.
34
   The description of the model can be provided upon request to the authors of this report.

                                                                                                               43
 Population
                37 218,00     13 550,00    22 777,00     30 346,00    12 231,00     19 590,00     6 509,00
 thousand
 Area, 1000
                   652,80      1 686,97       589,20      1 038,00      1 788,90     5 114,80     6 215,90
 sq km


The regional division in the SUST-RUS model coincides with federal districts of Russia in the year 2006.
In 2010, the Southern Federal District was divided into Southern and North Caucasian Federal Districts.
These Russian regions are quite different. The biggest gross regional product is produced in the Central
Federal District. This is the most densely populated region of Russia with 52 persons per Km2, which is six
times higher than the national average density of 8.4 persons per Km2. The Far East is the least developed
region of Russia. It has the smallest GRP and the biggest territory. The Southern Federal District is the
poorest of the Russian federal districts with GRP per capita 2.3 times less than the national average. The
Ural Federal District is not only a manufacturing heart of the Russian economy; it is also rich in natural
resources. Khanty-Mansi and Yamalo-Nenets Autonomous Okrugs of the Ural Federal District have the
country’s largest oil and gas fields, which belong to the West Siberian oil and gas province. This province
contains 66.7 percent of Russian oil reserves (or 6 percent of the known world oil reserves) and 77.8
percent gas reserves (or 26 percent of the known world reserves). The Ural Federal District has the largest
GDP per capita.

A 10 percent increase in the productivity of transport inputs (labor, capital, and energy consumption)
would raise GDP by 0.8 percent. Poor or underdeveloped regions would enjoy the largest increase in GRP,
and the two richest regions (Central and Ural Federal Districts) the smallest, suggesting that a uniform
improvement across regions contributes to regional convergence (Figure 21).



       Figure 21: Impact of 10 percent increase in transport sector efficiency on federal districts




                                                                                                        44
                                             Source: SUST-RUS



Although the effects of a positive shock in productivity is a result of complex interactions in a general
equilibrium framework, the overall results are likely to be driven by the transport demand as shown in
the Figure 22. For instance, the transport cost in the Far Eastern Federal District represents 12 percent of
the total regional product—almost twice that of the Central Federal District. At the same time, an increase
of the transport productivity creates a regional GDP growth of 1.3 percent in the Far Eastern Federal
District and 0.7 percent in the Central Federal District.

It is worth mentioning that an increase in productivity requires, by definition, the production of the
same output while utilizing fewer resources or increasing output with the same inputs. This productivity
shift could be the outcome of some policy reforms, infrastructure investment, technological advancement
(adoption of GPS) etc. The link between changes in these variables and impact on better connectivity
requires further analysis, which are beyond the scope of a CGE approach.



                         Figure 22: Share of transport sector in regional product




                                             Source: SUST-RUS

Figure 23 shows the effect of productivity growth on the regional and sectoral growth. The lowest
impact is in the extraction industry and the result is driven by the large share of others inputs, mainly
energy, in the production cost.




                                                                                                         45
       Figure 23: The effects of a positive productivity shock on sectoral and regional growth (%)




                                             Source: SUST-RUS

Households are also better off in terms of welfare as measured by the Equivalent Variation. There are
some minor improvements in income distribution measured by the Gini coefficient and poverty reduction
(poverty intensity). In terms of regional impact, the main beneficiaries are the Central Federal District as
compared to the households in the Volga Federal District even though the latter are better off. In the end,
the largest benefits accrue mostly in the highly populated central region. There are multiple channels in
which the increase in the transport productivity is translated into an improvement in welfare and an
alleviation of poverty. Households are better off because the price of goods and services is reduced
because of an improvement in the efficiency of transport. The model assumes that the return on capital
is distributed within the households—the richer ones receive most of the shares. These benefits depend
on the demand for transport in each sector and the final impact of the return on capital in each sector.
The reduction in poverty is a direct consequence on the increase in household revenues.



      Table 6: Impact of 10 percent increase in transport sector efficiency on welfare and poverty

                                                                                                       Far Eastern
                           Central FD   North-West FD   South FD   Volga FD   Ural FD    Siberian FD
                                                                                                            FD
 Income by household QH         1.05%          0.97%      1.06%      0.78%      0.84%         0.91%         1.01%
 Income by household QM         1.02%          0.94%      1.02%      0.76%      0.82%         0.90%         0.99%
 Income by household QL         1.03%          0.96%      1.04%      0.76%      0.81%         0.92%         0.99%
 Mean income                    1.04%          0.96%      1.05%      0.77%      0.83%         0.91%         1.00%
 Poverty intensity             -0.01%          0.00%      -0.01%     -0.01%     -0.02%        0.01%        -0.01%

                                                                                                             46
 Equivalent variation           0.16%          0.12%      0.05%     0.06%       0.13%        0.06%       0.09%
 Atkinson coefficient           1.76%          1.50%      0.81%     2.00%       1.94%        2.86%       1.41%
 Gini coefficient               0.01%          0.01%      0.02%     0.02%       0.02%        0.00%       0.01%
                                              Source: SUST-RUS




1.7    Regional convergence: An equity/efficiency trade-off

Do investments in transport infrastructure facilitate regional convergence and reduce disparities in
Russia? This is a difficult question to answer as there are different factors that interact in a complex way
as drivers of economic growth and development. The 2009 World Development report states this
complexity succinctly: “Interregional infrastructure improvements can bring higher economic
concentration. The potential benefits of improving market access for peripheral areas may instead accrue
to firms in larger agglomerations. And improving transport connectivity can further concentrate economic
activity. Roads and rails run both ways—better transport connectivity not only provides market access to
firms in lagging areas, but also allows firms in leading areas to reach markets. A decline in transport costs
helps competitive firms in leading areas easily scale up production to reach these new markets at lower
cost relative to local producers in lagging areas. So, improving market access may hurt the production of
standardized goods in lagging areas. But lower prices and better access to new products are likely to
improve consumer welfare�? (WDR, 2009, page 252).

Brown et al., 2008 finds that shifting resources from areas with high population to peripheral regions
to support transport infrastructure may not contribute to regional convergence. The analysis is based
on a model of agglomeration economies to study how transport connectivity affects the productivity of
existing and new private firms in the manufacturing sector. The analysis uses data at the firm level
(Russian Enterprise Registry Longitudinal Database), of all large and medium-sized and many small
industrial enterprises covering mining, manufacturing, and utilities from 1985-2004. The data geo-
references each firm down to the third level of Russian administrative units. Such a process allows the
observation of the spatial distribution of firms in two different economic environments: i) pre-transition,
when firm location was a decision made by central planners; ii) and post-transition, when firm location
was the product of profit-maximizing behavior of private entrepreneurs. The authors of this study develop
a measure of market access where the relationship between two places is directly proportional to the
population or some other index of social or economic activity, and inversely proportional to distance —
physical or economic—between them.




                                                                                                          47
                             Figure 24: Market access estimation by decile




                                        Source: Brown et al., 2008

Using the market accessibility index together with the data on firm productivity and also entry and exit,
Figure 26 shows that new firms have not only located closer to markets, but also have higher productivity,
according to this study. The authors of this study are able to conclude that economic distances are
shrinking as firms move physically closer to markets.

               Figure 25: Market accessibility and productivity of new and existing firms




                                                                                                       48
                                             Source: Brown et al., 2008

In their analysis of new and private sector firms, the authors concluded that transport investments are
unlikely to have a major impact on growth in peripheral regions. In this case, shifting infrastructure funds
from central (Moscow and St. Petersburg axes) to peripheral regions reduces the overall productivity of
infrastructure investment while generating little improvement in regional equity. This result does not
necessarily contradict the outcome of the CGE analysis.35 There is no prior reason to expect that regions
that gain the most in terms of productivity will necessarily have the highest gain in terms of growth as a
result of change in transport costs (productivity in the CGE case). The benefits for transport improvement
for remote/poorer regions is not realized in the form of agglomeration benefit, but in the form of access
to basic services. It may be the case that although the gain in terms of productivity, as suggested by Brown
et al., 2008, is the lowest in these regions, the overall effect in terms of growth, as captured by the CGE
model, could be higher than those in the Moscow Oblast.




1.8    Some policy conclusions and areas for future research
This section presents some preliminary policy conclusions from the analysis of transport connectivity and
poverty, growth, and productivity. It also proposes some areas of future analysis to validate the
recommendations and to expand the study to passenger transport connectivity.

a)    Transport connectivity and poverty

While it is difficult to draw a concrete causal relationship, our findings suggest that the level of transport
connectivity is negatively correlated with poverty incidence. The Far Eastern and Siberian Federal
Districts, which border China and Central Asia, have the highest rates of poverty and lowest rates of
transport connectivity. In particular, the main lagging regions in the Northern Caucasus and Volga Federal
Districts face longer travel time for domestic trade compared to leading regions in the Far East, the Ural,
and the North West. For some of these regions there is an obvious case to be made for greater investment
to improve connectivity. Improving transport connectivity, however, can be a double-edged sword for
poor, remote areas. While better connectivity enables producers to expand their trading opportunities, it
exposes them to greater competition from goods produced in cities. The overall impact of connectivity on
poverty would have to take into account the opportunity for migration (and the ensuing remittances)
from remote areas to help reduce poverty.

An increase in transport efficiency could have some positive impact on welfare and poverty reduction
as suggested by the results of CGE model. There are multiple channels in which the increase in the
productivity of transport is translated into an improvement in welfare and poverty. On one side,
households are better off because the price of goods and services are reduced because of the shift in the
efficiency of transport. Also, the model assumes that the return on capital is distributed within the
households—the richer ones receive the most. The benefits depend on the demand for transport and the

35
   It is important to note here that Brown et al.’s study focuses on two sectors only as opposed to the whole economy
in the CGE model.


                                                                                                                  49
impact on the return on capital in each sector. The reduction in poverty is a direct consequence of the
increase in household revenues.



b)   Transport connectivity and growth

The estimates from the CGE model suggest that if the productivity of transport inputs were to increase
by 10 percent and all inputs in the other sectors of the economy were to stay constant, then realized
growth in GDP (output) would be 0.8 percent. This is a significant effect and is in line with orders of
magnitude of effects found in other countries. The spatial distribution of the realized GDP growth rate is
quite revealing. While the poor regions enjoy the largest increase in GRP, the two richest regions in the
country gain the smallest.

This uneven distribution suggests that boosting productivity in the transport sector through, for
example, infrastructure investment, will help regional convergence. However, a word of caution is in
order regarding transport investments’ long-term economic effect. As rightly pointed out by Venables et
al. (2014, pp 16-17)36 “transport investments typically affect the level of welfare and income, not the rate
of growth of these variables. To have an increase in the rate of long-run economic growth, a strategy of a
sequence of transport improvements is needed. While a transport project may not change the long-run
growth rate, in an economy in which the fundamentals of productive capacity—technology and human
skills—are improving, a sequence of transport improvements is typically needed to affect this rate.�?



c)   Transport connectivity and productivity

The productivity gains in the transport sector assumed in our CGE model could come from a number of
sources, including regulatory reforms, technological innovations, and infrastructure investments. All
these channels boost transport connectivity, which is central to the realization of the economic benefits
of scale and agglomeration (density). A typical example of such benefits are productivity gains that accrue
to firms and workers. Studies show that doubling city size (a proxy of density or agglomeration) increases
productivity roughly by 3-8 percent (Rosenthal and Strange, 2004). For new and private sector firms in
Russia, Brown et al. (2008) find that market size, along with proximity to Moscow and regional
infrastructure, are important determinants of productivity. They also find that improved transport has the
highest gains in productivity in areas around Moscow and lowest in peripheral regions, particularly in the
Far East.

The spatial distribution of productivity gains in the agglomeration model appears to contradict the CGE
results in which poorer regions are shown to gain the most in terms of economic growth. As mentioned
above, there is no prior reason to expect that regions that gain the most in terms of productivity will
necessarily have the highest gain in terms of growth as a result of change in transport costs (productivity
in the CGE case). However, in future analysis, it is important to explain the source of such differences to
help policy makers in their decision on the spatial focus of transport investments.



36
  Venables, A., Laird, J.J. and Overman, H.G., 2014. Transport investment and economic performance: Implications
for project appraisal.

                                                                                                             50
Finally, it is important to note that in a country as large as Russia achieving a good level of connectivity
depends both on the density of the national transport network and the level of population dispersion.
There are many regions in Russia where the transport network is thin while the population is highly
dispersed. Connectivity in these regions can be increased either by investing in transport or by
encouraging people to relocate to larger towns. In cases where building more transport infrastructure
comes at a very high cost and small demonstrable benefits, the strategy should be to reduce dispersion.
In the western and central regions where is there is better connectivity, road congestion continues to
hamper urban-led regional growth. While transport investment plays a role in easing congestion in these
regions, it should be directed toward secondary cities to make them attractive destinations for firms and
people.



Further areas of research

Transport connectivity, as defined here, mainly focuses on freight transport and not so much on how
passengers in different parts of the country are able to access transport services. The second phase of this
study could look at passenger transport connectivity at the domestic, regional, and international levels.
Specifically, the following questions are worth pursuing to answer key policy issues: What is the link
between connectivity at the three spatial levels for different modes? How has this link changed over time?
Does the strength of this link differ across the country? While the present study assesses general
relationships between transport connectivity and economic outcomes—such as growth, poverty, and
productivity—a more formal and nuanced approach is needed to establish and estimate a causal
relationship between these variables.

Finally, one possible avenue for future research is investigating the effect of transport infrastructure
between and within regions on the weight and value of bilateral trade between Russian regions. Knowing
these effects will help policy makers in their cost-benefit analysis of transport investments.




                                                                                                         51
Part 2 – A regional assessment of transport connectivity

This section narrows the focus of this report to analyze how access to infrastructure and transport
quality impacts growth and development in the two selected regions. The approach looks for the drivers
of inter- and intra-regional connectivity and the performance of key industries. It focusses on the different
elements that affect sector competitiveness, beyond connectivity and access to markets.

Zabaikalsky Krai and Khabarovsk Krai were selected from among a few regions that were interested in
participating in this study and could readily provide inputs. The two regions were picked based on their
geographical location, markets, network connections, and availability of natural resources. While both
regions are served by trunk railway, Khabarovsk Krai also has access to seaports. Unlike regions in the
European part of Russia, the main trading partners for the selected regions are neighboring countries in
Asia, which is representative for the Far Eastern and Siberian Federal Districts. Each case study looks at
two dimensions:

     •   First, it focuses on inter-regional and international connectivity. Connectivity is explored in
         relation to the existing major sectors of the regional economy, as well as sectors that might be
         unlocked should connectivity be enhanced.
     •   Second, it explores connectivity within the region, covering physical infrastructure, the quality
         of connections, and accessibility to transport.

The case studies37 were carried out through stakeholder interviews and a desktop review of available
information. Representatives of regional government agencies, freight forwarders, business, and
academia were interviewed and consulted. Both regions were visited twice. On the first visit, the team
had introductory meetings with the regional administrations, identified key stakeholders, and collected
background statistics and materials to review. On the second visit, the team carried out in-depth
interviews with stakeholders and visited various sites to address the key questions described above, based
on the preliminary analysis performed after the first visit.

The structure of the case study section is as follows. The case studies of the two regions are presented
separately in the two following sections. They have similar structures. In each case a distinction is made
between economic development and social sustainability. The factors relating to economic development
are treated for each productive sector while taking into consideration the transport and other
infrastructure needs and problems of each industrial sector that have been identified. The factors related
to social needs and the impact of the transport sector are then discussed. Finally, transport infrastructure
initiatives and sector policies that affect economic development and social sustainability of the region are
considered.




37
  While significant volume of quantitative data was also obtained it was not sufficient to support formal modelling
of the causal relationship between connectivity and socio-economic indicators.

                                                                                                                52
2.1   Case study of Zabaikalsky Krai

Zabaikalsky Krai (ZK) is a land-locked region located in eastern Russia, far from major Russian markets
and centers of economic activity. ZK’s total area is 431,892 km2, larger than Germany and nearly twice
the size of the United Kingdom. The region shares extensive international borders with China (998 km)
and Mongolia (868 km); its internal borders are with Irkutsk and Amur Oblasts, as well as with the Republic
of Buryatia and the Sakha Republic.

                                    Figure 26: Zabaikalsky on the map




The region is sparsely populated with average density of less than 2.5 persons per square kilometer.
About two-thirds of its 1.1 million inhabitants live in urban areas, including about 330,000 in the capital
city, Chita. Only two municipalities have densities above 100 persons per square kilometer with Chita
dominating with a density of 650 persons per square kilometer. Moreover, this density is declining in all
but Chita and one or two other urban settlements. The region lost 8.8 percent of its population from 2000
to 2014, in part due to the migration of military personnel and of younger cohorts to the European parts
of Russia or neighbouring regions in Siberia that have higher living standards and better access to tertiary
education. Between 2013 and 2015, the total population declined at a rate of about 0.7 percent per year
while Chita’s population has been increasing at the rate of about 1 percent per year.

The region is relatively poor and its working age population is shrinking. In 2013, GDP per capita in real
terms in the region was 44 percent below the national average, though it increased by 5.9 percent a year
from 2000 to 2013. The poverty level in recent years has been higher than the national average, despite
the rapid decline in poverty (from 23.6 percent in 2008 to 18.0 percent in 2014), while inequality
(indicated by the Gini coefficient) has risen consistently since 2002, reflecting the relatively slow growth
in incomes of the poor.

Investment in the region has been highly volatile. This reflects a recent cutback in investment in two
sectors that had accounted for the bulk of investment—transport and communication (40 percent of total
investment from 2003-2013).

The share of exports in ZK’s gross regional product is low, despite the region’s rich endowment of
mineral resources. This reflects the region’s heavy dependence on the business that it provides for the

                                                                                                         53
Trans-Siberian Railway (an intra-Russian sale) and the low value of the natural resource exports of the
region. Machines and transportation, a part of which is refurbished military equipment, account for more
than 20 percent of the region’s exports. Wood and timber account for 13 percent of exports, and resource
extraction and metals about 11 percent each. Imports are predominantly manufactured consumer goods
and there is a substantial trade deficit in financial terms. With Chita located at a major junction on the
Trans-Siberian Railway serving two alternative routes to China, its major export flows are by rail to China.

ZK’s main domestic trade partners are primarily regions of the Siberian Federal District. Based on the
analysis of trade in 2015, imports from the Siberian Federal District constitute 84 percent in financial terms
of all imports from the Russian regions. These regions are all connected with ZK via the Trans-Siberian
Railway and the federal highway Р255 “Siberia�? and Р258 “Baikal�?. ZK exports mainly to the Republic of
Buryatia, Kemerovskaya Oblast, and Omskaya Oblast in the Siberian Federal District, Sverdlovsk Oblast in
the Ural Federal District, and Amur Oblast and Republic of Sakha (Yakutia) in the Far Eastern Federal
District. The federal highway system and the railway provide connectivity with those regions.

The assessment of freight connectivity of ZK with the main region’s existing markets shows that
although the region is more isolated from the markets of European Russia, it is relatively well connected
with its main existing regional trade partners. An analysis of trade in financial terms over the past three
years shows that ZK’s main trade partners are China, Japan, Mongolia, South Korea, Switzerland38,
Venezuela, and Vietnam. ZK’s main exports are to China. These remained stable and even increased, while
imports from China dropped significantly in 2015 mostly due to devaluation of the local currency. The
largest value of exports is represented by wood and wooden products, minerals, and fuel. In 2015, the
Chinese market opened for grains and other types of foods due to changed sanitary regulations. ZK’s
imports mainly come from China and are largely represented by vegetables, nuts, and machinery.



2.1.1   Development of key sectors of the economy
        a) Mining
Zabaikalsky Krai is one of Russia’s major sources of minerals and raw materials. Most of the ores mined
in the region are multi-metal ores, which produce placer gold and concentrates of other metals. This
should add substantially to the profitability of the mining industry. However, the absence of local
processing facilities means that the exports are of relatively low value compared with those from other
parts of the Russian Far East.

Exploitation of natural resources accounts for the largest share of total industrial output. The
development of new fields requires large investments in transport infrastructure. Although ZK produces
a considerable amount of minerals, there are only a few processing facilities that have been in operation
since the Soviet period. Among them is a plant that is part of the Priargunskoye mining and chemicals
agglomeration in Krasnokamensk (producing uranium oxide U3O8) and the Zabaikalsky mining and ore-
dressing combine. In recent years, however, some mineral-processing plants have begun to be
constructed at newly opened fields; for example, NorNickel has built the Bystrinsky and Bugdainsky plants.

38
  Trade partners are listed based on the three-year turnover. However, Venezuela and Switzerland had only
exports from ZK in 2013 with no trade in the following years. Thus, stable trade partners among those listed are
China, South Korea, Japan, Vietnam, and Mongolia.

                                                                                                                   54
There is also a project to process coal in Krasnokamensk, and gold-recovering factories are being built
(e.g. at the Aleksandrovskoye field, where Dore gold is produced). However, as indicated during interviews
with government officials, considerable power inputs are required for advanced mineral processing. Since
power costs in ZK are high, minerals will continue to be exported elsewhere for processing.

        b) Agriculture

Zabaikalsky Krai is a high-risk farming area that suffers frequent droughts. Until recently it has been in a
state of depression. Large farm producers have left the area, and up to 70 percent of all farming output
comes from private subsidiary plots. The government supports training programs and allocates grants.
Cattle breeding has picked up, and new wheat strains that are more resistant to drought have begun to
be sown. The Priargunsky District bordering China has good yields of durum wheat. A railway line cuts
across the district and there are grain reception centers. Agriculture is making progress in the Akshinsky
District as well; the Darasun-Khapcheranga motorway (�?-167) runs through that area and output can be
shipped by rail.

A major export facility is under construction. Construction work has begun on the first grain railway
terminal, Zabaikalsk-Manchuria, which is a multi-modal grain storage and shipping center. Grain grown in
ZK and other regions of Siberia will be exported to China via the Zabaikalsk-Manchuria grain terminal
(which will have an initial capacity of up to 900,000 tons a year). Private investment is being used to build
the terminal. There are also plans to establish an industrial farm produce processing center on the basis
of the Mogoituisky agricultural holding located in the district that has road and railway connections with
Chita and China.

Expansion of agricultural production to some extent depends on road conditions. According to the
executives of the Zabaikalsky Krai Chamber of Industry and Commerce, the areas suitable for farming have
access to the main network of hard-surface roads. However, a representative of private business said he
decided not to purchase land to grow rapeseed in the Priargunsky District, despite the fact that the area
is famous for its arable land, because of poor road quality.

Transportation problems also hamper the development of meat and dairy farming. Private subsidiary
plots are very small producers scattered over the area. Collecting their produce is costly because of the
poor quality of rural road networks. There are no aggregated specialized centers to receive meat and milk.
Meat packers and milk processers prefer growing their own stock, which does not involve large
transportation costs. For example, in 2015, the Zabaikalskaya Investment Company located in Chita
started its own livestock growing business, selling wool to China and livestock (by motor transport) to the
Amur Oblast and Khabarovsk Krai. The location of the farm next to Federal Motor Road M-58 Amur helps
facilitate the distribution and sale of produce.

Trade regulations largely define the direction for expanding processing in the region. Chinese
phytosanitary concerns remain to be settled. ZK’s government hopes to see a long-term interstate
agreement on livestock breeding products (in particular, on processed meat).

Chinese trade policy is another impediment to the development of local processing. Previously, Russia
only supplied China with maize and soybeans from Primorsky Krai and soybeans from ZK. According to
interviews with business representatives, China has no interest in processed farm produce: Manchuria,
for example, has several factories that produce oil from rapeseed grown in ZK. Produce is shipped from


                                                                                                          55
the krai to China mostly by rail, with the transportation costs amounting to 20-25 percent of the selling
price.

        c) Food processing

The prospects of the regional food-processing industry significantly depend on the Russian-Chinese
trade relationship. It has been asserted that in the Soviet period every district in Zabaikalsky Krai had a
meatpacking factory, a dairy, and a brewery. Today, very few of them operate. The Zabaikalskaya
Investment Company produces beer and soft drinks not only for the regional market, but also for export
to Buryatiya, Irkutsk, Khabarovsk, and Vladivostok as well as to China and Mongolia. However, the slump
in farming in the krai is associated with a more general decline in food processing. On the other hand,
some food exports to China are growing. These include bottled drinking water, mineral water, vegetable
oil, and flour. Further growth of volume and expansion of the product range depends on policy decisions,
namely, on the volume of Russian food exports that China will allow into the country.

        d) Forestry and timber working

Chinese demand for unprocessed timber has remained static over the past few years, though its import
of wood products has been increasing. Apart from that, in 2009 the Russian federal government
introduced quotas and licenses for timber exports (the duty for above-quota export of the main types of
unprocessed coniferous timber amounts to 80 percent of the customs value). For this reason, Zabaikalsky
Krai is now developing wood processing and consistently cutting back unprocessed timber exports.

Local advanced wood processing is being developed. One example of such a development is the
construction of the Amazarsky pulp and paper works “Polyarnaya�? in the Mogochinsky District; the first
stage of the project became operational in 2012. Today, finished products, planks, and profiled log are
sold in neighboring areas and on foreign markets. When the project reaches its full capacity, it will make
unbleached kraft pulp. However, the plant is poorly served by border crossings to its potential market in
China. The nearest border crossing is 100 miles away, lacks a road connection, and is not operational.

        e) Building materials

Zabaikalsky Krai has apparent potential to develop the building materials industry thanks to promising
deposits of appropriate minerals. Investment plans have been drawn up to build a cement plant on the
border between the Olovyanninsky and the Mogoituisky Districts. There are some studies to develop a
cement plant in Krasnokamensk in the south of the region, a location served by both rail and road
connections. However, building materials production fluctuates depending on the construction industry
and has been affected by the economic crisis triggered by the drop in oil prices. For example, the
Zabaikalskaya Investment Company ceramic brick factory, which accounts for about 16 percent of the
total brick sales in ZK, was expanding production before the crisis buying an argil deposit and starting
production of colored brick. The company sells its products domestically and outside the krai, in particular,
in Blagoveshchensk, Vladivostok, Khabarovsk, Ulan-Ude, and Mongolia. As for modal split, shipments to
Mongolia and the Far East go by rail and to Buryatiya by road transport. Based on interviews,
transportation costs amount to 20-25 percent of the price of the finished products.




                                                                                                          56
        f)   Tourism

There appears to be some Chinese interest in tourism in Zabaikalsky Krai. However, most of the natural
and cultural landmarks are far from the regional center, federal motor roads, and railway stations. For
example, the Krasnochikoisky District, which has many archaeological monuments, is a 14-hour drive away
from Chita on a rough road. Nerchinsk’s famed Butinsky Palace and the Daursky Nature Preserve in the
Borzinsky District are not easily accessible by road either. It, therefore, appears difficult for tourism
development prospects to materialize in the short term due to a lack of transport infrastructure.



2.1.2   Transport infrastructure and services

    a) Roads and motor transport

Zabaikalsky Krai has a sparse road network. In a region of 430,000 square km, the road network consists
of 1,840 km of federal roads, 7,547 km of regional roads, and around 20,000 km of municipal roads. It
should be noted, however, that there are still 120 communities in the krai that do not have hard-cover
road connections. The federal roads are controlled, financed, and maintained by the federal budget.
However, until 2012, the maintenance of regional and municipal roads was funded through the general
regional and municipal budgets. While there were occasional injections of capital investment through
special programs, the regional road network was essentially self-supported and poorly maintained.

Overall, the past 15 years have seen the impressive development of a road network in Zabaikalsky Krai
that has led to some positive social impact. The Amur federal highway (Chita-Khabarovsk) has been
completed and intensive reconstruction work is going ahead on regional and municipal roads. The opening
of the Amur federal highway has had a positive social impact on the living standards in the areas adjacent
to the highway, public transport services have improved, and communities have more access to transport.
Small businesses, such as road services (retailing, public catering, and vehicle servicing), have begun
cropping up along the highway. But these appear to be essentially only services catering to the increased
level of road traffic, rather than activities that might be the core of a new sustainable development. There
are arguments, moreover, that the Amur federal highway project was poorly designed, with no exits
planned to communities along the route.

Freight motor transport services are not well developed to fully satisfy the needs of SMEs. They are used
mostly for small batches of goods and express deliveries within and outside the region. Although it is
generally costlier than rail, road transport has the benefit of being able to deliver goods to more than one
location using the same vehicle. There are many small operators on the freight transportation market.
Local producers prefer them over large federal companies because of the latter’s high rates (almost
double those of small companies).

    b) Rail transport

Rail transport is critical for Zaibalkalsy Krai’s economy. As Chita is a major junction in the Tran-Siberian
Railway, the rail system not only serves the regional economy but is also a major source of income for it.
Large shipments of non-express bulk cargoes mostly go out of the krai by rail. In contrast, SMEs appear to
use rail only to ship goods to China and Mongolia.



                                                                                                         57
Major trunk rail movement is well served. Over the past few years, modernization work has been carried
out on the Eastern Siberian railroad through a Russian Railways investment program with the goal of
increasing its tonnage and carrying capacity. However, while this may increase the contribution of the rail
sector to the regional budget, it does not appear to offer a major benefit to regional carriers. Small- and
medium-sized enterprises expressed dissatisfaction with rail service, complaining about having to wait for
a week to book cars for their cargo. Officials said the Zabaikalskaya Railroad welcomes shippers, always
tries to meet their needs, and that it only wants requests for cars to be filed in a timely manner.

Improvements to the rail system, particularly to the Trans-Siberian Railway, have permitted increased
flows of international transit trade, which have, in turn, sustained Chita’s rail-related economy. While
the Baikal Amur Mainline railway in the north of the region is, as yet, of less significance, it does offer a
trunk route to the ports of Vanino and Sovetskaya Gavan in Khabarovsk Krai, to which development of
northern mining areas can be connected. However, it is still a single-line railway, and the prospects for its
development are closely tied to the future of the coal export business. With a declining Chinese market
for coal and an increasing concern about the environmental effects of coal-fired electricity stations, this
might turn out to be far less promising than the federal government currently seems to expect.

The socially important rail passenger carriage sector is declining. Population mobility is constrained by
commuter railway traffic losses and the unwillingness of the Russian Railways to address these issues. The
Zabaikalskaya Commuter Passenger Company is responsible for commuter passenger carriage. In 2011, it
operated 30 commuter routes, but in 2016 only 21 routes (categorized as socially important) remain.
These remaining routes were optimized in terms of the number of cars and time intervals: there are fewer
cars left and only two pairs of trains per day have remained on some of the routes. It should be noted that
some of the communities in the krai, especially in the north, are only connected with other areas by rail.
Additional bus routes have been opened to the communities where commuter trains have been cancelled.

    c) Air transport

Air transport is used mostly for passenger transportation. Air fright is non-existent with only mail and
experimental cargo samples shipped by air. Zabaikalsky Krai has two airports—Chita (private) and Chara
(federal government). There are federally-owned airfields in the krai, but the federal authorities do not
provide funds for repair and maintenance. At present, the krai’s authorities are pressing for the transfer
of ownership of the airfields to the municipalities so that the regional budget can be used to finance repair
and maintenance costs.

Regular international flights are limited. Chita is linked with Hailar and Harbin in China but there are
charter flights to China as well. A Russian operator runs flights from Irkutsk to Manchuria, but these are
subsidized by the government of China. Aeroservice is seeking similar financing to launch a Chita-
Manchuria flight. Some passengers use the Irkutsk and Ulan-Ude airports in neighboring regions, which
offer cheaper rates and a better selection of nonstop flights.

Inter-regional flights are served by regional air companies and often require subsidies to operate. In
2015, the large federal carrier, Aeroflot, left Chita, officially citing an unacceptably low operating margin
as the reason. However, there remain two large carriers, Ural Airlines and Sibir Airlines, and the locally
owned Aeroservice operating in the region, servicing nonstop flights from Chita to Moscow, Novosibirsk,
Yekaterinburg, Vladivostok, and Simferopol, all supported by federal subsidies. Aeroservice operates one
long-distance federally subsidized flight on the Chita-Irkutsk route. Regional authorities would like the

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carriers to expand their operations with direct nonstop flights to St. Petersburg, Sochi, Anapa, and Omsk
and have asked the federal government to consider subsidizing such operations in 2016-2017.

       d) River transport

River transport is limited and the only available mode of transport for some communities. The regional
budget subsidizes river shipping. The municipal enterprise carries freight and passengers during the
summer period only over a 135-km stretch of the Shilka River, from Sretensk to the Nizhniye Kularki
village. The river is the only link to the outside world for 17 communities in the krai with a total population
of between 3,000 and 4,000 people. The main problem of the sector is the age and deterioration of the
steamer fleet. Maintenance is a problem. Sretensk did have a shipyard that was part of the military
industrial complex, but today it is no longer in production.

       e) International border crossings

International border crossings are important for the regional economy. There are nine border-crossing
points on the territory of Zabaikalsky Krai: three on the Mongolian border, five on the border with China,
and one at Chita airport. They are organized separately for motor, railway, and air transport.

The Zabaikalsk-Manchuria customs station has been modernized and works relatively well. About 60
percent of all Chinese exports to Russia go through this station. In recent years, the capacity of the station
has been upgraded.39 Under the Federal Targeted Program, “State Border of the Russian Federation,�? the
station has been modernized, the gauge changeover system on the Zabikalsk-Manchuria line expanded,
the southern line of the railroad to Borzya converted to electrical traction, and Federal Highway A 166
Chita-Zabaikalsk reconstructed. The major physical constraint on the rail traffic is the time taken for gauge
changeover. As for infrastructure constraints on motor traffic, the main problem is that cargo and
passenger traffic flows were not separated.

Other crossing points are poor. Crossing points at the other customs posts have not been rebuilt or
modernized for the past 20 years, nor are there any plans to do so under the federal program. This restricts
tourism and constrains production growth in parts of the krai that are far away from Zabaikalsk-Manchuria
station. It is suggested, for example, that the pulp-and-paper mill, Polyarnaya, currently under
construction in the Mogochinsky District will find it difficult to export its output because transportation
through the Zabaikalsk post will be unprofitable due to a long haul. At the same time, the capacity of the
closest post, Pokrovka-Loguhe, will not be enough because at present it is just an ice crossing and there is
no good road connection with the border crossing. While Russia and China have not yet signed an
agreement on the joint construction and operation of a bridge over the Amur at the Pokrovka-Loguhe
border crossing, the crossing point infrastructure on the Chinese side has been modernized and feeder
roads reconstructed. On the Russian side, there has been no progress on modernization and rebuilding
either the facilities or the roads leading to them.

Some border-crossing improvements are under consideration. For example, there are plans to build a
railway line from Manchuria to Mongolia within the framework of cross-border cooperation between the
three countries—Russia, China, and Mongolia. However, this does not appear to be an immediate
prospect.


39
     The World Bank team did not visit the border crossing. This statement is based on the interviews.

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The problems of border crossing are not only those of transport infrastructure. For non-bulk goods
exported to China either by road or rail, customs procedures are typically very complex and time
consuming despite the development of a specialist freight-forwarding capacity in Chita. Moreover, unlike
the situation in Western Europe, where specialist logistic agencies and freight vehicles operate across
national boundaries, the Chinese and Russian systems are separate.



2.2   Case study of Khabarovsk Krai

Khabarovsk Krai (KK) is located in the central-eastern part of Russia’s Far East. KK borders the Magadan
Oblast in the north, the Republic of Sakha (Yakutia) in the northwest, the Amur Oblast in the west, the
Jewish Autonomous Oblast in the southwest, and the Primorye Krai in the south. On the southwest side,
along 240 km of the Amur and Ussuri rivers and Bolshoy Ussuriysky Island, KK shares a border with China.
On the eastern side, KK borders the Sea of Okhotsk and the Sea of Japan, with a coastline of almost 2,500
km.

Spatial development of the territory is uneven. Economic activities are concentrated along the course of
the Amur River and are sparsely distributed over smaller municipal regions located in inner mountainous
areas of the territory and along the coast of the Sea of Japan and Tatar Strait. KK is a transport transit
center of the Far East, in particular, and Russia as a whole, and its role has been increasing due to the
increasing interregional cargo turnover as a result of growing trade between Russian territories and the
Asia-Pacific Region countries. The transport system holds a prominent place in the structure of GDP of KK.
In recent years, its share has varied between 11 and 14 percent.

                                 Figure 27: Khabarovsk Krai on the map




KK’s population is sparse, aging, urbanizing, and declining. At the beginning of 2016, KK’s population was
1,335,000 and the urbanization rate was 82 percent. The average population density is 1.7 per square km,
which is one-fifth of the national average. Two-thirds of the population is concentrated in Khabarovsk and
Komsomolsk-on-Amur urban districts. The overall population is declining across the territory except in
Khabarovsk. A decrease of 4.6 percent between 2008 and 2014 was entirely due to outmigration.


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The region is relatively poor. The average per capita income in KK increased 2.4 percent from 2008 to
2015, to 38,400 rubles per capita a month. However, the growth of real income was only 30.4 percent.
The ratio of average per capita income to subsistence level in KK was 2.87, compared with 3.2 in the south,
3.37 in the northwest, and 3.87 in the central federal districts.

The region’s international exports are dominated by raw materials and goods with minimum
processing.40 High-value-added products (machines and equipment, pharmaceuticals, etc.) account for
only about 1 percent of the regional exports. However, since 2007 customs statistics do not account for
exports produced in KK if the company’s headquarters or sales division is registered in a different region.

Trade, largely oriented toward foreign markets, has declined in recent years. More than 75 percent of
KK’s exports go to North-East Asian countries (China, South Korea, Japan) and another 15 percent to
Bangladesh, France, Germany, Italy, Thailand, the United Kingdom, and the United States. As a result of
the global financial crisis, as well as a recent slowdown of the Chinese and Russian economies, the region’s
exports have fallen by 43.5 percent (to USD 967.3 million) and imports have fallen by 50.8 percent (to USD
537.8 million) since 2008.

Foreign Direct Investment has been buoyant. As of January 1, 2014, the total foreign investment inflow
was USD 2.6 billion. Between 2009 and 2013, the territory attracted USD 1.25 billion of foreign
investment. This is largely due to the territory’s public policy, which is aimed at creating a favorable
investment climate. The Bahamas, Cyprus, Malaysia, South Korea, and the United States were key
investing countries in the 2009-2013 period. The most attractive types of economic activities for foreign
investments are extraction of minerals, logging, processing (metallurgy, wood processing, and oil
products), transport and communications, real-estate operations, and geological exploration of
subsurface resources.



2.2.1      Development of key sectors of the economy

       a) Forestry and wood processing

KK is the leading producer of forestry products in Russia. Extensive use of resources and high frequency
of fires led to a contraction of the area and deterioration of the quality of forests in the developed part of
the territory where key logging companies are located.

A lack of road infrastructure restricts the development of forestry resources. For effective development
of forestry resources, it is necessary to build up to 600 km of new roads additionally a year and modernize
a significant part of the existing road network. Commissioning of logging roads in 2013-2014 was only 40
percent of real demand.41

       b) Mining industry

KK’s mining industry generates 4.4 percent of gross regional product from a wide range of minerals. The
region has 34 types of minerals, 24 of which are being extracted. Key minerals are precious and non-
ferrous metals, which are important not only for the territory, but also for the country. KK is among the

40
     Unprocessed timber, hard coal, oil products with low refining depth, frozen fish, steel, and metal scrap.
41
     According to the draft Strategy of Socio-economic Development of KT (2015).

                                                                                                                 61
top 10 Russian regions producing precious metals (gold, silver) and is the only region in Russia where tin
is extracted. Between 2009 and 2014, its volume increased 2.5-fold and continues to grow. Besides
extraction of precious and non-ferrous metals, KK has been developing the exploitation of common
minerals (limestone, building and facing stones, brick clay, sand, and sand-and-gravel mixes).42 However,
proven reserves of precious metals are being depleted. According to KK’s draft socio-economic
development strategy, the problem of operation and development of extracting industries is inadequate
supply of raw materials, which has not been resolved.

     c) Fishing

KK is one of the leading regions in fishery and the output of fish products has been growing. Although
output constitutes less than 5 percent of total industrial output in the territory by value, KK ranks fourth
in Far Eastern Federal District (FEFD) by volume of extraction of aquatic biological resources and fifth in
Russia. At present, 135 companies, 95 percent of which are small- and medium-sized enterprises, employ
4,200 persons in fishing, fish farming, and fish processing in KK. Eighty-five percent of the fish caught
belongs to traditional species (pollock, herring, and Pacific salmon), but there is also a considerable catch
of halibut, codfish, smelt, and shellfish. Between 2008 and 2014, the output in physical terms increased
by 57.9 percent, value of output doubled, and the range of products included more than 300 items. Fish
farming is also currently being developed. At present, there are seven salmon-breeding farms, and one
sturgeon-breeding company—the Anyuisky fish farm.

Domestic fish consumption is growing fast and contributes to the budget of the region. The share of
product sales in physical terms in foreign markets fell from 61 percent to 49 percent between 2008 and
2014; the fact that exports grew by 27 percent over this period implies a relatively high growth of domestic
consumption. The fisheries industry also plays an increasingly significant role in contributing revenue to
the territory’s budget. In 2014, contributions to the budget were 520 million rubles, having increased 2.4-
fold against 2008, and the share of tax revenues increased from 0.6 percent to 1 percent.

Deep processing of fish in KK is done primarily in Khabarovsk rather than in the port area. It is argued
that poor development of the road infrastructure hinders the development of port-based fish processing
capacities as there is a risk of spoilage of ready products when they are transported on roads without hard
surface. In addition, because of the difficult ice situation, fishing companies at the Sea of Okhotsk ports
try to ship all catch after the fishing season to warehouses in Khabarovsk or Primorye Krai.

While products of primary fish processing from KK are exported mainly by rail, the railway does not
provide adequate consolidated refrigerated cargo logistics for companies engaged in deep processing.
The logistics system of Russian Railways targets large wholesale lots. As SMEs in KK do not have large
shipments of ready products, they have to reduce the radius of their supplies to 1,000 km—the maximum
distance that can be covered with road transport for such load. Small lots of ready deep fish processing


42
  Large recent projects include construction of mining and processing facilities at gold deposits Albazino, Belaya
Gora, and construction of Amur hydrometallurgical plant. Projects that are in process of implementation: extraction
of hardrock gold at deposits Noni in Verkhnebureinsky area, Svetloye in Okhotsky area, Kutynskoye in Tuguro-
Chumikansky area, Krasivoye in Ayano-Maisky area, commissioning of Festivalnoye tin ore deposit in Solnechnoye
area.



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products are also shipped by air. Due to product storage requirements, such shipments are only made to
cities that have a direct connection with Khabarovsk.

Fishery development will require an investment in port infrastructure. The fisheries industry in KK
appears to have some potential. However, it may be difficult to transform the fisheries industry into a
more highly technological sector of the economy. That would require a substantial investment in
Sovetskaya Gavan port in order to solve the problem of infrastructure bottlenecks in collection, storage,
and transportation of fish products. For this purpose, it would be necessary to build new berthing facilities
in Sovetskaya Gavan as well as port-based storage refrigeration capacities.

    d) Manufacturing industry

The share of manufacturing in KK’s GRP is insignificant and decreasing. Thirty-five percent of the
processing industry’s shipped products of own production is made for aircraft and ship building, 22
percent for production of coke and oil products, 15 percent for food processing, and 12 percent for
metallurgy. Production of non-metal mineral products accounts to 4 percent of output, wood processing
3 percent, and machinery and equipment manufacturing 12 percent.

The main challenge to manufacturing machinery in KK is how to achieve the necessary increase of local
production and development of spatially concentrated clusters for component production. Machinery
manufacturing is highly concentrated. Komsomolsk-on-Amur Aviation Plant (KnAAZ) is the core of high-
technology generation and application in aviation. Amur Shipbuilding Plant and Khabarovsk Shipbuilding
Plant are the maritime engineering centers. The current share of imported components in the territory’s
aircraft construction is 52 percent for a Russian manufactured civil aircraft. The only iron and steel
company in the Far East has been bankrupt since 2013. A shortage and the high cost of raw materials have
been the main factors constraining development of the plant.

The local Far East market is the main market for civil vessel building. This area has a prevalence of frozen
water areas, undeveloped coastline infrastructure over a considerable length of coastline, and availability
of a river network with access to the sea. The need for domestic fleet renewal is high and reaches about
2 million tons in deadweight in dry cargo, fishing, and oil tanker fleet. Ice-going vessels are competitive in
the regional market due to a relatively high level of ice technology development in Russia.

There are some prospects for broadening the high-tech core. It is believed that the designation of
Komsomolsk-on-Amur as a Territory of Advanced Social and Economic Development will encourage this
development. The prospects for development are closely linked to development of a cluster of related
industries—high-tech aircraft building, new materials, instrumentation, and automation. In the high-tech
aircraft-building cluster, space technology has been actively developing. This has included rocket
components, satellite systems, and ground equipment for collection of space information. More
specifically, commissioning of a launching site in Amur Oblast creates prospects for developing a segment
of the rocket and space industry in the territory.

Rail transport is a surprisingly unattractive option to the manufacturing sector. The transport problems
of this sector are exemplified by a machinery company with production facilities in Khabarovsk and
Komsomolsk-on-Amur. Up to 50 percent of its production materials is imported from western regions of
Russia. Products are shipped to all regions of Russia, CIS countries (Belarus, Kazakhstan, and Uzbekistan),
and other European and Asian countries (Bulgaria, India, Poland, Ukraine, and Vietnam). In recent years,


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shipments of ready products have shifted from railway to motor transport and the railway siding at the
company’s facilities has been disassembled. This is explained by the more complicated documentation
required for shipments, with numerous approvals needed, absence of shipment tracking, higher tariffs for
oversized cargo, and no option of payment in instalments. The company has, therefore, transferred its
business to the more competitive road-haulage sector and mainly uses the services of five road transport
companies. For product supplies to APR countries, the company also uses sea transport.

    e) Agriculture

KK is located in an area of high-risk farming. Northern areas are suitable for limited production of potato,
growing vegetables under glass, and breeding livestock. Farming is undertaken by 25 agricultural
organizations (producing more than 20 percent of the total commercial output), peasant farms (producing
less than 3 percent), and household farms (producing the largest share of the output). Currently, there is
a decline in cattle, pigs, and poultry stock. Livestock breeding output has also been decreasing.

The potential for agricultural production in the southern parts of KK highlights the importance of an
export link to China through Bolshoy Ussuriysky Island. The western part of the island was transferred
to China in 2005. This part now has a border post and a bridge to the Chinese mainland where the island
borders Fu Yuan area, which is part of city district Jiamusi. Jiamusi is a large industrial center and transport
hub where important water, road, and railway routes cross. On the Russian side, a road bridge crossing
through the Amur channel has been commissioned, but further development has not been undertaken
due to a lack of protecting hydraulic structures. Completion of the link would potentially create access to
a large Chinese market for agricultural and other produce, and contribute significantly to balanced
development of the region.

The absence of adequate facilities at the Pokrovka border crossing also prevents the export of locally
produced foodstuffs to China. The expansion of food processing will require good access to the Chinese
market to realize its full potential.

Local food processing is not necessarily supported by local agricultural production. For example, officials
at a food processing company that brings raw materials for production of ice-cream from various regions
of the European part of Russia in interviews cited inadequate development of dairy livestock breeding in
KK. In fact, due to better logistics, consolidated refrigerated cargo can be shipped from Moscow. The
company, therefore, uses rail to ship condensed milk and butter to Khabarovsk. Shipping time is up to 20
days, but the cost by railway is lower than by road.



2.2.2   Transport infrastructure and services

    a) The network of federal, regional and inter-municipal roads

Khabarovsk is the junction point of three main federal roads—Amur (Chita-Khabarovsk), Ussuri
(Khabarovsk-Vladivostok), Vostok (Khabarovsk-Nakhodka)—that connect the road network of Russia with
ports of the Far East. With the completion of the 2,100-km Amur section, the trans-Siberian Highway now
offers an all-weather road route to the western part of Russia. The three roads are planned to be
connected, together with the regional road, Komsomolsk-on-Amur, by the Khabarovsk bypass.



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Construction, which is planned to start through a PPP arrangement in 2017, is scheduled to be completed
within three years.

The road network connecting main settlements requires upgrades. Out of 4,000 km of regional and inter-
municipal roads, about 40 percent has asphalt-concrete or road mix pavement with the remaining
network being predominantly gravel and Macadam pavement. This network has more than 1,000 bridge
structures of which one-third are of durable material and the rest wooden.

The existing road network in KK fails to provide year-round connection between the southern and
central areas and the northern part of the region. Three districts of the territory (Ayano-Maisky,
Okhotsky, and Tuguro-Chumikansky) do not have general road connection with the central part of KK. The
Verkhnebureinsky District is not linked by year-round road connections.

    b) Road transport

Freight road transport in KK was boosted with the commissioning of the Amur federal highway (Chita-
Khabarovsk). Prior to that railway had a significant advantage over road transport for connections outside
KK. Large federal freight forwarding companies entered KK’s transportation market after the highway was
commissioned.

Highway improvements have stimulated service development. Completion of 2,100 km of Federal
Highway Amur (Chita-Khabarovsk) has strengthened a competitive alternative to railway. This has greatly
improved service for less-than-rail-wagonload consignments for which the rail system is not well adapted.
A secondary consequence of this is that it has attracted some national freight-forwarding companies to
the region.

Low density of the road network and road conditions constrain the development of intraregional cargo
road transportation, which is largely susceptible to economic changes. Poor road conditions lead to low
operating speeds. The economic crisis is reflected in fewer orders to road carriers and delays in payments
for services. Ruble depreciation resulted in a higher cost of imported spare parts. Fuel and lubricant costs
have also been growing. All these factors significantly decrease profitability of transportation services for
road transportation companies. Fleet age is another problem for development of the sector: about 70
percent of the total number of trucks has been in use for more than eight years. There are no affordable
financing tools to buy new vehicles.

    c) Rail transport

Two main railway lines crossing the region (Trans-Siberian and Baikal-Amur Mainline) serve more than
90 percent of regional cargo turnover and form part of the international transport corridor. They
connect the whole network of Russian Railways with the ports of Khabarovsk and Primorye Krai. The main
lines also form part of a “West-East�? international transport corridor that connects Europe and the central
regions of Russia with APR countries. The length of railway in the territory is 2,126 km where 9.3 percent
is electrified (196 km of the Trans-Siberian mainline) and the rest is diesel-operated.

Investments have increased the capacity of both lines in the recent years. In 2008, Russian Railways
implemented a PPP-based project to facilitate future cargo flows to Vanino and Sovetskaya Gavan ports
with the construction of the Kuznetsovsky Tunnel at Komsomolsk-on-Amur. In November of 2009, Russian



                                                                                                          65
Railways also commissioned the second stage of a bridge crossing over the Amur River near Khabarovsk,
thereby increasing the capacity of the railway by 50 percent.

Passenger facilities are being improved. There are ongoing activities to reconstruct the railroad complex
of Khabarovsk 1 Railway Station, including reconstruction of an underground tunnel and passenger
platforms with pavilions in tunnel exits. The work is expected to be completed in August of 2017.43

Further mainline improvements are planned. Trans-Siberian and BAM capacities are to be increased
through reconstruction of the tunnel under the Amur River, and the construction of a second line of the
Northern Latitudinal Railway, with its further electrification, construction, and development of stations.

More rail capacity is needed to support the development of the Vanino-Sovetskaya Gavan transport
and industrial hub. Low railway capacity on the Komsomolsk-on-Amur-Sovetskaya Gavan section leads to
annual seasonal bunching of trains at access to the seaports.

Freight service quality can be unsatisfactory for some consignors. While bulk freight services appear
satisfactory, many consignors complain about problems when shipping their cargo on the railway. These
problems include long and complicated documentation, long waiting times for wagons, lack of an option
to send consolidated refrigerated cargo, no cargo tracking along the way, and long delivery time to
destination.

Lack of consolidated logistics arrangements for refrigerated freight. In the context of a strategy to
diversify the economy of the region it will be necessary to facilitate the movement of refrigerated
products both south to China and west to the rest of Russia. At the moment, this is very difficult as Russian
Railways do not offer an adequate service for this type of freight, while road movement has been inhibited
by the lack of consolidated logistics arrangements.

Inadequate tracking of rail freight has been identified as a serious impediment to the use of rail to
transport manufactured goods, as well as for obviously time-sensitive goods such as refrigerated
cargoes. The problem appears not so much a problem of tracking technology but one of organization.
Russian Railways’ focus on long-distance bulk traffic, and its ability to fully use existing line capacity with
these bulks, is viewed by many as blinding the organization to the threat posed by developing road
haulage capability. Completion of the Chita-Khabarovsk section of the Trans-Siberian Highway is allowing
many manufacturers to shift away from rail.

       d) Air transport

Air transport is important for both external and internal connectivity of KK. There are 16 airfields of
various categories in the territory—12 are general-purpose airports and four used for corporate transport.

Khabarovsk (Novyi) is the main airport for external connectivity. This is a Class A airport, the largest in
the Russian Far East, and can serve all types of passenger and cargo aircraft, including Boeing-747 and AN-
124. The airport can accept aircraft in any weather. The airport annually serves more than two million
passengers and ranks first by volume of passengers among Russian Far East airports.44 Airside
infrastructure (runway, taxiway, ramp, and auxiliary infrastructure facilities) are federally owned. In 2015,
design works for construction of a new passenger terminal for domestic and international airlines with

43
     http://erofeydv.ru/vokzal-stantsii-habarovsk-1-preobrazitsya-cherez-god/.
44
     http://www.airkhv.ru/index.php?option=com_content&view=article&id=166&Itemid=214&lang=ru.

                                                                                                            66
capacity of 1,900 passengers per hour were completed. The government of KK, together with the Federal
Air Transport Agency and JSC “Khabarovsk Airport,�? are working to create the Far Eastern air
transportation center at Khabarovsk Airport.

Khabarovsk Airport’s regional role is under threat. In 2014, a new airport was commissioned at Fuyuan
Dongjin China, 60 km from Khabarovsk. So far, it has not received the status of an international airport
and only serves flights within China. However, it should be recognized that availability of an airport in
close proximity to Khabarovsk will be one of the challenges for development of Novyi Airport if passenger
crossing at the Russian border in Bolshoy Ussuriysky Island is permitted. Already there have been
complaints about the level of service for freight shipments through Novyi. One freight-forwarding
company pointed to such problems of air cargo transportation citing long transfer-of-cargo waiting time
(up to three hours) and delays in cargo dispatch from the airport (more than a day).

Airports in Komsomolsk-on-Amur also serve some intra-regional flights. Dzemgi is an experimental
airport only for the use by JSC “Sukhoi Civil Aircraft�? in Komsomolsk-on-Amur. Khurba is a joint
deployment aerodrome, acting as a regional airport of Komsomolsk-on-Amur and as an air base for the
Ministry of Defense.

    e) Sea and internal water transport

With a coastline of more than 2,500 km and a navigable river of 970 km, ports are expected to play an
important role in the regional economy. In fact, while Vanino, Sovetskaya Gavan, De-Kastri, Okhotsk, and
Nikolayevsk-on-Amur (a river port situated in an estuary of the Amur River) serve both intra-regional and
international movements of freight and passengers, sea traffic has generally been declining. Ports have
virtually turned into highly specialized hubs for transfer of exports of Siberian coal and oil. The growth of
coal export transshipments in Vanino port threatened cargo handling and shipping to the Sakhalin Island
(cargo traffic in Vanino-Kholmsk direction has reduced by 44 percent).

Few containers are handled at KK ports despite large container terminal capacities. For example,
Khabarovsk consignors occupy only 7.8 percent of the KK seaports’ capacity, and most container cargo is
transferred through the ports of Primorye. Undeveloped trade and logistics services in KK and the lack of
integrated organization of multimodal cargo delivery leads to container downtime in the ports (up to 15
days).

Vanino seaport is the largest transport hub in the region with increasing capacity. It handles more than
60 percent of the cargo volume of all seaports in KK. Total volume of cargo handled in 2011 was 18.95
million tons. The port already has an oil refinery that specializes in maritime fuels and will probably attract
other ancillary maritime functions as its throughput increases. A new project envisages the expansion of
capacity to 24 million tons of coal per year by 2020 to handle the export of coal by companies that are
part of the Volga Group holding to APR countries. The Vanino seaport has extensive transport
connections. The Baikal-Amur Mainline connects it with the entire railway network of the country. The
port is also connected with Khabarovsk by the Lidogo-Khabarovsk road that is under reconstruction and
also connects to Komsomolsk-on-Amur. An all-season railway and road transport ferry operates from
Vanino to Kholmsk on Sakhalin Island.

Sovetskaya Gavan is a fishing and commercial seaport with potential to become a transport hub. It is
located in the natural deep-water bays of Sovetskaya Gavan gulf. The navigable depth of the gulf reaches


                                                                                                            67
23 meters, which allows vessels with deadweight of up to 50,000 tons to enter into the water. The existing
port infrastructure could be increased up to 300,000 tons through adequate development of the port
infrastructure. The port has high potential for repair and refitting of sea vessels and for operating as a
transport hub. The port area is connected to BAM by a railway line and to Khabarovsk by a road. Further
development of Sovetskaya Gavan is constrained by limitations of the existing transport infrastructure.
The maximum axle load of the rail link between Sovetskaya Gavan and Vanino, which is currently about
900 tons, would need be increased to handle heavier freight.

The second port of KK in terms of throughput is De-Kastri. Its main facility is an oil export terminal that
receives oil through a 226-km pipeline from the Sakhalin 1 onshore field, north of Sakhalin Island, and
transfers it into a specially-designed fleet of double-hull Aframax tankers. The remaining cargo of the port
is forestry products. While there is a Selikhino-to-Nikolayevsk-on-Amur road connection, the low density
of the network limits prospects for the port to expand its cargo business.

Passenger flows and cargo volumes transported by river transport have been declining. Water transport
in the region operates in the southern direction to the northeastern provinces of China and in the northern
direction to the Tatar Strait. The largest river ports are in Khabarovsk and Komsomolsk-on-Amur. Volume
of passenger traffic in internal water transport decreased partly due to inadequate capacity of the border
posts. Cargo transshipment at river ports decreased threefold due to lower demand for construction cargo
in the region.



2.3     Findings and policy implications for Zabaikalsky Krai and Khabarovsk Krai
The case studies focusing on two eastern regions, Zabaikalsky Krai and Khabarovsk Krai, tell a more
nuanced story. On one hand, remoteness is undoubtedly a disadvantage in that the costs of remoteness
and low density will impose a burden on the prospects of economic development. Transport costs will be
higher and the benefits of agglomeration less than for denser and better-connected regions. On the other
hand, constraints facing these regions are multidimensional and include various non-connectivity-related
issues, including, most prominently, high cost of energy and trade policies of key partners (such as China).
The case studies also afforded an opportunity to “zoom in�? and look at the intra-regional issues. The
studies highlighted the social exclusion of isolated communities that are poorly connected to their
regional capitals, and mineral deposits and agriculture lands that do not meet their potential due to the
high cost of transport.

2.3.1    Connectivity and economic development

External connectivity issues need to be seen in the broader context of development policy for the
region. As discussed earlier and as set out in a strategy document, this combines a focus on exporting to
China and the APR with a shift to greater local processing of export materials and rejuvenation of the
industrial capacity of the region through attraction of foreign investment in special zones.

External connectivity is not just a matter of physical infrastructure. For domestic traffic, the services
provided on the infrastructure must be appropriate to the needs of the industries being served. For
international traffic both border-crossing facilities and modal transfer arrangements must be efficient.




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Trans-Russia infrastructure links are not the prime problem. In both regions, the major centers of
industrial and agricultural activity are in the south. Hence, for both regions external connectivity with
western Russia and the rest of Europe appear to be adequately provided for through the Trans-Siberian
Railway. Even for road-borne freight the completion of the Federal Highway Amur, part of the Eurasian
international transport corridor Transsib, to a reasonable standard of all-weather possibility creates a link
that will prove increasingly competitive with the rail link for all except bulk movements and containers.
While the Baikal Amur Mainline (BAM) presently has some capacity limitations, it also provides a direct
link to the ports—particularly Vanino, but also Sovetskaya Gavan and the Primorye ports—for bulk coal
and mineral exports from the north of the region and from Siberia. Also, given the plans to expand the
flow of coal and other minerals through Vanino port, and the designation of Sovetskaya Gavan as a Port
Special Enterprise Zone, the dueling and electrification of BAM appears to be a high priority.

However, transport services appear to be generally inadequate for some types of traffic. Russian
Railways do not provide an adequate service of consolidation of refrigerated cargo. This limits the market
for deep processing of fish products to 1,000 km, which is the economic scope of road haulage. Nor does
the rail system provide an adequate system of consignment tracking, which is important for more highly-
valued and time-sensitive consignments. Oversized cargoes are also considered by industrialists to be
difficult to consign by rail. Insofar as the development strategy for the Far East is to move away from sole
dependence on exports of unprocessed raw materials to a more balanced, process-oriented industrial
base, these defects will increasingly constrain the size of the effective market for the regions.

Border crossings. While the number of these crossings is limited in both regions, and there are arguments
for speeding up the development of some crossings into China, a much more pressing need appears to be
the improvement of administrative arrangements. Movement of freight across national borders involves
not only the physical movement of goods to, and through, the border, but also the movement of
information between consignors and transporters, between transport modes, and most significantly
between consignors, transporters, and the customs authorities. Unlike the arrangements for the Special
Economic Zones (SEZ), where the promoters advertise a “one-stop shop�? for freight movements, normal
freight movements across national borders are seriously delayed by existing administrative arrangements.
The fact that simplified documentation is one of the inducements offered as part of the Freeport and PSEZ
schemes shows that it can be done. An important aspect of any attempt to improve connectivity, and
implement the regional development policy, will need to be the simplification of customs procedures and
certainly the development of a common documentation that can see freight move quickly through
international borders. It is also suggested that in all of the SEZ initiatives, including the TASEDs, incentives
should be extended to attract foreign third-party logistics providers.

Information technology and logistics services will be increasingly important as the product of the regions
is diversified and as the importance of bulk raw materials in the exports of the region diminishes. It is
already clear that these services are not well developed as far as processed agricultural and fish products
are concerned. The undeveloped nature of the logistics systems will become an increasing disadvantage
for the region as the federal government’s strategy of diversification is pursued. A regional program
should be introduced to identify the needs for improvement in logistic services and make proposals for
actions to remedy the deficiencies.

Modal interchange is involved in most of the export traffic of the regions. Traffic through the ports has
to be transferred from rail or road vehicles to ships, while the southerly traffic from Zabaikalsky Krai into

                                                                                                             69
China faces a change of mode in the case of rail transport and in most cases a change of operator in the
case of road shipments. To make such flows “seamless,�? which is the case in many border crossings and
modal transfers in Western Europe, there needs to be a parallel flow and exchange of information
between land carrier, customs, and sea carrier, which precedes the physical arrival of the goods and does
not impede their movement.

This is not just a question of information technology. In some cases—for example, the movement of
freight traffic from Russian Railways to the maritime sector—there appear to be systems of advance
information transmission that facilitate the timely physical movement of freight. But more generally there
does not appear to be the degree of standardization of documentation requirements to support an
efficient border-crossing arrangement. This needs to be attended to as part of a strategy to regenerate
the Russian Far East. A similar challenge has been successfully addressed in a number of countries in
Southeastern Europe.

In some cases, the promise of connectivity remains unfulfilled. For example, for the Vanino/Sovetskaya
Gavan PSEZ the local road capacity remains inadequate for a substantial increase in road-borne
manufactured product exports, while both the capacity and the technology of BAM need to be upgraded
to handle the projected increase in coal exports and further development of the potential to export
mineral ores and products. As the success of the strategy depends on the provision of the attractive
conditions for foreign investment, these may have to be given priority status in national policy. It is also
important to consider more integrated planning and development of special economic/energy zones and
port areas in regards to development of transport links and sufficient capacity of infrastructure, modern
logistics services, adequate energy supply and distribution, tax and other incentives.



2.3.2   Connectivity and social sustainability

Both regions have small isolated pockets of settlements. In some cases, these reflect industrial or military
location decisions under the Soviet regime that have been abandoned or have become economically
unsustainable in a more market-oriented economy. In other cases, they reflect the labor needs of
extractive activities that have already been exhausted or are foreseeably of limited life. Also, as for
example at Nikolaevsk-on-Amur, there may be coastal locations with a limited economic base but one
that is unlikely to be developed into a viable cluster of sufficient size to justify the development of land
transport connections. In all of these cases there may be a group of people locked in economically
unsustainable locations.

In more extreme cases, the sensible strategy may be one of assisted voluntary relocation. This issue has
been addressed by the Ministry of Social Services in Zabaikalsky Krai, but only in the case of emergency
response to the sudden withdrawal of the basis of livelihood (for example, relocation of a military unit).
It would seem sensible to explore the economic justification for a wider application of that strategy,
bearing in mind that voluntary relocation may reduce the demands on the budget by maintaining some
form of connectivity if they remain in the original location. Even that policy, however, would be unlikely
to eliminate—at least in the short term—the need to sustain some remote settlements.




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Social sustainability depends primarily on internal connectivity, and particularly on development of the
most economic ways of overcoming the density and distance constraints in the delivery of the social and
economic services required for daily life in remote regions.

For very remote locations, which have land transport infrastructure connections, the focus can be on
maintaining basic land transport service. While it is common in Russian cities (including Khabarovsk and
Chita) for municipal enterprises to be subsidized, and often for private enterprises to be compensated for
the carriage of concessionary fare passengers (particularly students and the elderly), inter-urban transport
typically does not get such favorable treatment.

Where land transport links do not exist air transport services may be the most cost-efficient solution.
In both of the studied regions the public sector had entered the aviation market to supply social services
to some very remote locations. For normal aircraft, even light aircraft, this may be constrained by the
unavailability of an adequate and safe landing strip. In those cases, access may still be maintained through
the use of helicopters, as in Khabarovsk Krai.

Internal connectivity is a perennial problem for the northern remote areas. Connection over the “last
mile�? (which in the Russian Far East may be the last 100 miles) may make or break the viability of new
fields of extraction. Federal joint funding of major infrastructure has already resulted in some new rail
links, which may have wider benefits than those to the mining companies that fund them. The use of
incentives, such as the sharing of the costs of feeder links between the private investor in the resource
exploitation and the federal government, appears to have worked reasonably well and should be
continued in promising cases. However, in the context of a broader strategy for expansion of the region,
it might be sensible to look at lower limits for the minimum industrial investment in infrastructure,
especially where road infrastructure that might serve other settlements is involved. In particular, this
approach might be adopted to address the issues of the inadequacy of investment in logging roads. The
same approach might be adopted to links to the BAM where such links would contribute to the
development of a more viable corridor of development.




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