Major Russian investment projects are sidelined due to sanctions

Sergei had clung for years to the hope that his hometown of Sovetskaya Gavan, a once bustling port city in the Russian Far East, would soon see better days. Sovetskaya Gavan was home to shipbuilding and repair factories, a vibrant fishing industry, and military personnel of all persuasions during the Soviet era.

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

The population of the greater Sovetskaya Gavan region fell by 40% over the next three decades to about 38,000 people, as well-paying jobs became hard to come by.

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

Mayor Pavel Borovsky called the processing plant a launching pad for the future development of the city.

The gold factory could have opened the door to further investment 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 also have helped make the case for the extension to Sovetskaya Gavan of the second stage of the Baikal-Amur railway line, the absence of which has alienated some investors, Sergei said.

Today, Western financial and technological 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 “indefinitely suspended” plans to build the ore processing plant at Sovetskaya Gavan and is currently exploring options to build one in neighboring Kazakhstan.

“As soon as I found out the factory wouldn’t be built, to be honest, I sat down in the evening, poured myself a drink and decided, ‘Stop living with dreams. It’s time for us to leave,'” Sergei said. told RFE/RL’s Siberia. Realities.

“We weren’t bombed, but we too were destroyed,” he said, referring to the sanctions imposed by the war.

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

Mass project delays

Similar stories of disappointed hope are to play around Russia, especially in its Far Eastern regions, as domestic companies scale back, delay or cancel large-scale investment projects due to financial and technological sanctions, while foreign companies simply leave .

The polymetal had intended to invest up to $700 million in 2022, according to its February presentation to investors. Two months later, it reduced that amount to $650 million.

In addition to the suspension of the Sovetskaya Gavan project, Polymetal has announced that it will 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 metallurgical, mining and energy companies rely heavily on Western equipment and technology to build and operate factories, as well as to develop mines and energy fields, and they struggle to access them at the amid harsh sanctions and fear of Western companies doing any business with the country.

Russian imports fell by nearly half following the imposition of sanctions.

Related: Kazakhstan seeks 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 itself is not under sanctions, Western transport companies refuse to deliver containers with equipment and spare parts to Russia, he said.

The gold miner must gather large volumes of documents to show that he is not violating Western sanctions when purchasing equipment. The company said it has been forced to import Western equipment via China, delaying delivery by at least two months.

Polymetal said problems importing equipment forced it to delay development of its East Siberian gold mine.

Sharp economic decline

The sharp decline in imports needed for investment projects is behind what could be Russia’s steepest economic decline in three decades.

Russia’s economic output could fall by 7% this year and 10% next year, according to German Gref, CEO of Sberbank, the country’s biggest lender, said at a state-sponsored business forum in June.

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

The punitive sanctions are also forcing Russia to look more to China for trade and investment. And while China has become a major producer of equipment and high technology, the Kremlin cannot see it as a savior, experts say.

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

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

“It’s impossible, not because China will be afraid of secondary sanctions, but because in principle it can’t produce everything. It just doesn’t have the skills for everything high-tech. “


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