Could Putin’s plan seduce you to join the Russian tech revolution?

Posted on 4 Jan 2013

“In some regions the authorities are doing nothing for the development of business, or worse – they are destroying the business environment,” stated Russian President Vladimir Putin.

There are vast differences across Russia that makes some regions business friendly, creating jobs, and some not.

Industrial hubs are springing up with increasing frequency in Russia, a country with a glorious industrial history but behind the curve on modern manufacturing such as lean, its Soviet mindframe on size leaving large inefficient factories that leak energy.  Goliath doesn’t beat David.

The rebirth of the Russian economy after the 1990s may have been down to raw materials and base products such as oil and steel, but Putin has taken the proceeds from these assets and has turned them into tax carrots to lure foreign investment.

And the multinationals have been moving in, particularly in areas surrounding Moscow, such as Leningrad and Kaluga.

Ambitious Putin

Putin has created the national business initiative to be rolled out at a federal level, removing administrative barriers and improving legislation.

“The money and time it takes to complete similar administrative procedures varies significantly from region to region,” said Putin.

“If you want to register property, you will need 19 days in Kaluga and 60 days in Yakutsk. Getting connected to the power grid takes 123 days in Saratov and 360 days in Yekaterinburg. Getting a construction permit, in which we are far behind all OECD countries, takes 150 days in Surgut and 448 days in Tver.”

Automotive companies have been quick to invest, with Volkswagen pumping £680m into the country from now until the end of 2015. But Putin says that many regions are run by individuals and authorities that are either corrupt or inert.

“When an investor comes to a particular region, he faces certain challenges…with certain people who can find a thousand explanations for their inaction and underhanded dealings,” blasted Putin.

Bo Andersson, the Swedish CEO at Russian automotive group GAZ, described the high levels of bribery and difficulty getting building permits as a barrier to growth in the country the last time I was there. He put this down to corrupt local authorities.

But the state will now work with investors to coordinate federal agencies, development institutions and regional management teams to increase the effectiveness of special economic zones and industrial parks.

Map of gold

Putin announced online investment maps showing how infrastructure will be developed, tax benefits available in different regions, plans for developing industrial clusters and training provided in the local area.

The GAZ automotive plant in Nizhniy Novgorod plant, a company owned by Basic Element
The GAZ automotive plant in Nizhniy Novgorod plant, which has a large subcontracting deal with Volkswagen.

In addition to its collaboration with Russian automotive group GAZ in Nizhny Novgorod, an hour’s plane journey east from Moscow, Volkswagen has its own factory in Kaluga, south of Moscow. Kaluga is turning itself into the automotive heart of Russia in the same way that the West Midlands has in the UK. Putin’s plan is to make more Kalugas.

Replicating Kaluga’s industrial success could create new homes for European and American companies attempting to boost sales in the growing BRIC nations. It’s a win-win situation. Russia gets inward investment and companies reach new customers in Russia and the surrounding region.

The possibility of stark tax concessions and the development of specialised zones may be of interest, but Russia’s reputation for corruption, policy stability and questionable human rights must be considered. Personal safety is also a concern with many company executives hiring body guards to ensure security.

But its pro-industrial policies have tempted Volvo and a joint venture between French Peugeot Citroen and Japanese Mitsubishi Motors, resulting in two new factories at industrial parks in the region. Companies are reaping the benefits of improved infrastructure, lower start-up costs and faster administrative procedures and expect large growth in the region where there are 271 cars per 1,000 people. This is fewer than Lebanon, Slovakia, Mexico and Belarus.

Pharmaceutical and healthcare companies are following suit after measures were put in place to support and promote science-intensive projects requiring extensive research and development. Business-friendly measures from the concept stage to the large scale production have resulted in a new biotechnology and pharmaceuticals cluster.

Pharmaceutical companies have invested over £325m in the region so far and Kaluga Governor Anatoly Artamonov believes that the figure could top £620m ($1bn) by 2020.

With British-based drug manufacturer AstraZeneca leading the charge, L’Oreal has set up a £23m factory making shampoo not only sold in Russia, but also in Belarus, Kazakhstan and Ukraine.

Smaller companies are starting to follow suit. Tensar International, which has a site in Blackburn, signed an agreement to build a manufacturing plant in Russia to produce soil stabilisation and ground reinforcements used during construction.

Internal investment

“Our sales into Russia have expanded over recent years. We are seeing growth in demand for our products in transportation projects, utilities and the energy sector,” said Bob Vevoda, president of Tensar International.

Mr Vevoda stated that “a plant in Russia was a necessity” with strong infrastructure growth spurring demand in its soil products. On top of that, the Tensar International president said that “the Customs Union scrapping interstate tariffs and the likely expansion of the Union beyond Russia, Belarus and Kazakhstan, further increased the attraction of a manufacturing facility located in the region.”

The flagship Skolkovo project excludes residents from paying tax, profit tax and property tax, as well as a reduction in the rate of social contributions to 14% for a period of up to 10 years. Boeing, Nokia and Siemens all signed up and Putin will take greater controls across the regions, alongside regional development agencies, to create more favourable conditions for investors.

Putin wants a technology-orientated economy not an oil-orientated economy. And, as has been shown time and time again, what Putin wants, Putin usually gets.