Putin's gamble on Russian Las Vegas stirs fears of China influx

What happens in Vladivostok stays in Vladivostok.

A phrase that could've captured Soviet obsession with secrecy during the Cold War is gaining new meaning for Vladimir Putin, who's taking a gamble as he aims to turn Russia's easternmost nuclear garrison into a freewheeling center of commerce and casinos to lure investors and bettors from Asia.

Stung by oil's collapse and sanctions, Putin declared the once-closed Pacific city of 600,000 a "free port" last October, slashing red tape and introducing unprecedented legal protections for investors in the hopes of spawning a bustling frontier outpost closer in spirit to Las Vegas than Moscow.

But the plan may also work too well: By chasing foreign money wherever he can get it, he's risking over-dependence on a powerful China. The project is already rekindling age-old fears about encroachment across the Far East, a vast, sparsely populated and resource-rich region that the czars didn't bring fully to heel until the second half of the 19th century when a weakened China ceded control of it.

"The Chinese are coming," said Nikolai Markovtsev, a former lawmaker who runs the local branch of the liberal Yabloko party. "They understand that Russia is weakening, that China is strengthening and that they can gradually take control of these territories in 100 or 150 years."

Putin, who's forging closer ties with China in part to challenge what he considers U.S. global hegemony, has more immediate concerns. He told lawmakers in December that developing the region, where just 6.3 million people live in an area larger than India, is "a national priority" that requires investment from wherever it can be found.

He'll make his case at a two-day forum in Vladivostok on Friday and Saturday that will be attended by the leaders of Japan and South Korea before all three head to China for the annual Group of 20 summit. Billing the city, which is less than 100 miles from China and North Korea and two hours from Tokyo by plane, as a business-friendly gateway to all of Russia is paying off, according to Vasily Markov, a director at the Russian branch of accounting firm Deloitte LLP.

"The application process is smooth and there is a minimum of red tape, which is unusual in Russia," Markov said. "So far the level of interest has been high, but many investors want to see how the zone develops before they move in."

While foreign arrivals to Russia have dropped 21 percent this year, they've jumped 22 percent in Vladivostok, led by China and spurred by the opening of Macau magnate Lawrence Ho's $172 million Tigre de Cristal casino, Russia's largest. Ho's Summit Ascent Holdings Ltd., one of four gaming groups building in the area, is already planning a $500 million expansion.

Companies registered in the zone are entitled to a five-year tax holiday, no tariffs, streamlined customs and, eventually, border-issued visas. These and other incentives have helped boost investment across the Far East by 10 percent, though the region remains economically depressed, according to Deputy Prime Minister Yuri Trutnev, Putin's envoy to the federal district.

"If we maintain this pace for another five years, we can safely say the process will be irreversible," Trutnev told state news service TASS last week. "Then we'll be able to say the Far East will never again be like what it was."

With $2.7 billion in investment commitments and a booming tourist trade, the zone is a rare example of Putin attempting to loosen the state's grip on the economy. But like everywhere else in Russia, success will depend on overcoming a culture of greed and graft that Transparency International rates worse than in much poorer countries like Pakistan and Mozambique.

Putin has admitted that corruption in Primorsk, the coastal region that includes Vladivostok, is bad even by Russian standards and that it deserves its reputation as the crime capital of the country, telling the nation in his annual call-in show in 2011 that criminality there is "worse than any other region."

His latest effort to tame what some call the Wild East came in June, when Vladivostok's long-serving mayor, Igor Pushkarev, was arrested on suspicion of rigging city auctions in favor of relatives. Pushkarev's predecessor, an ex-convict widely known by the handle Winnie-the-Pooh, fled to Thailand for medical treatment after he was charged with abuse of authority. A Vladivostok court ruled in 2012 that he could return to Russia without going to prison.

But it's not like Moscow, seven time zones west, doesn't set an example. Authorities spent $20 billion preparing to host the Asia-Pacific Economic Cooperation summit in Vladivostok in 2012, including a $1 billion span to the barren Russky Island dubbed the Bridge to Nowhere. The main contractor was Arkady Rotenberg, an old Putin friend.

Russia declared Russky Island a special zone after the APEC summit in a bid to attract investment, but shut it down this year after failing to win a single commitment. And an early attempt at creating a free port like Vladivostok, at the nearby oil hub of Nakhodka, collapsed in 2006 after tens of billions of rubles went missing, according to Markovtsev, the former legislator.

But none of this seems to worry the Chinese. With more than 100 million people just over the border in Manchuria, Chinese companies have pledged more than $2 billion of investment in the Far East, mostly for an oil refinery in the Amur region, according to the Far East Development Ministry.

Concerns about an influx of Chinese has stirred controversy throughout the country, fueled in part by the nationalist Liberal Democratic Party, or LDPR, one of four parties with seats in the State Duma, or lower house of parliament.

Last year, after Trans-Baikal, a region on the Chinese border, announced plans to lease 285,000 acres of unused land to a Chinese agricultural company, the LDPR warned of a takeover by Beijing.

"This is an important geopolitical question," said Deputy Duma Speaker Igor Lebedev, an LDPR leader. "The governor of Trans-Baikal will be Chinese in 20 years if this issue isn't resolved."

Russia gained control over most of the present-day Far East, including Vladivostok — which in Russian means "Master of the East" — when China's decaying Qing dynasty signed away the territories in two treaties in 1858 and 1860.

The government in Moscow is seeking to counter public concern over Chinese encroachment by offering Russians free parcels of land in the hopes of spurring a mass migration along the lines of Abraham Lincoln's Homestead Act of 1862.

Far Eastern Hectares, a non-profit that works with the agency overseeing the project, said it's received more than 80,000 queries from Russians from as far away as Bolivia since the government started advertising the program earlier this year. The organization's founder, Yuri Bugayev, said only 80 plots have been allotted, but that will change once the area around Vladivostok is offered.

"They're still working out the kinks, but participation will soar when Primorsk land is included on Oct. 1," Bugayev said.

For now, Russia's relations with the U.S. and Europe have soured so much that Putin has no choice but to court China, according to Alexander Lukin, an Asia expert at the Moscow State Institute of International Relations.

"But Beijing must not be given a monopoly," Lukin said.

With assistance from Irina Reznik, Evgenia Pismennaya and Tony Halpin