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Major Russian Investment Projects Are Being Sidelined Due To Sanctions

·4 min read

Sergei had for years been clinging to hope that his hometown of Sovetskaya Gavan, a once bustling port city in Russia's Far East, would soon see better days.

Sovetskaya Gavan had been home to ship construction and repair factories, a vibrant fishing industry, and military personnel of all stripes during Soviet times.

However, the factories closed and the military largely left with the fall of communism and the economic turbulence that followed.

The population of the greater Sovetskaya Gavan area has tumbled by a staggering 40 percent over the ensuing three decades to about 38,000 as well-paying jobs became hard to find.

But plans by Polymetal, one of Russia's largest gold producers, to build a $730 million plant on the outskirts of the city to process ore had raised some hopes of an economic turnaround.

Mayor Pavel Borovsky called the processing plant a launchpad for the city's future development.

The gold plant could have opened the door to further investments in the economically depressed city, including the expansion of the local power plant, Sovetskaya Gavan's largest employer. Ore processing consumes a large amount of energy.

It could have also helped build the case for the extension to Sovetskaya Gavan of the second leg of the Baikal-Amur rail line, the lack of which has kept some investors away, Sergei says.

Now Western financial and technology sanctions imposed on Russia to punish the Kremlin for its unprovoked invasion of Ukraine have upended Polymetal's plans.

The gold company announced in April that it had "suspended indefinitely" plans to build the ore-processing plant in Sovetskaya Gavan and is now studying options to construct one in neighboring Kazakhstan.

"As soon as I found out that the plant would not be built, to be honest, I sat down in the evening, poured myself a shot, and decided: 'Stop living with dreams. It's time for us to leave,'" Sergei told RFE/RL's Siberia.Realities.

"We haven't been bombed, but we too have been destroyed," he said, referring to the war-driven sanctions.

Sergei says he will likely join the exodus from the city and move to Krasnodar in Russia's south, a popular destination for people leaving the Far East.

Mass Project Delays

Similar stories of dashed hope are playing out around Russia, especially in its Far East regions, as domestic companies scale back, delay, or cancel large-scale investment projects due to the financial and technology sanctions, while foreign companies simply leave.

Polymetal had planned to invest as much as $700 million in 2022, according to its February presentation to investors. Two months later, it cut that to $650 million.

Apart from suspending the Sovetskaya Gavan project, Polymetal announced that it would delay the construction of a $450 million gold project in Eastern Siberia by 12 to 18 months and a second ore-processing plant in the Far East by six months.

Russian metals, mining, and energy companies rely heavily on Western equipment and technology to build and operate plants, as well as to develop mines and energy fields, and they are struggling to get access to them amid harsh sanctions and Western firms' fear of doing any business with the country.

Russian imports have fallen by nearly half following the imposition of sanctions.

Related: Kazakhstan Looks To Diversify Oil Export Routes Away From Russia

Polymetal management said it had become expensive and difficult to import equipment directly from Europe. Although the company is not under sanctions itself, Western transportation firms are refusing to deliver containers with equipment and spare parts to Russia, it said.

The gold miner must gather large volumes of documents to show it is not violating Western sanctions when buying equipment. The company said it had been forced to import Western equipment via China, which delays delivery by at least two months.

Polymetal said the trouble importing equipment forced it to delay development of its Eastern Siberian gold mine.

Steep Economic Decline

The sharp drop in imports necessary for investment projects is driving what may be Russia's steepest economic decline in three decades.

Russia's economic output could fall by as much as 7 percent this year and 10 percent next year, German Gref, the CEO of Sberbank, the country's largest lender, said at a state-sponsored business forum in June.

Russia has not experienced consecutive years of economic decline since the early 1990s.

The punishing sanctions are also forcing Russia to turn further to China for trade and investment. And while China has emerged as a major producer of equipment and high technology, the Kremlin can't look to it as a savior, experts say.

Not all Western equipment and technologies have analogues in China, meaning more projects could be indefinitely canceled.

"I have said more than once that China will not be able to replace all the equipment that we imported [from the West]," Natalia Zubarevich, a professor at Moscow State University, told RFE/RL.

"This is impossible, not because China will be afraid of secondary sanctions, but because, in principle, it cannot produce everything. It simply does not have the competencies for everything high-tech."

By RFE/RL

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