Deputies worried about the fate of the Altai Valley,” read a press release from the local organizing committee in mid-October. The republic of Altai’s local parliament, the El-Kurultai, had been raising the issue of budgetary cuts and alterations to the plans for the region’s tourism and recreation special economic zone, the Altai Valley — also known as Altaiskaya Dolina.
A week before the El-Kurultai presidium, it was announced by Alexander Berdnikov, the head of government in the republic of Altai, that construction on the central feature to the special economic zone, a warm-water artificial lake covering much of the 857 hectares of the planned zone, would be postponed because of financing shortages. Instead, the neighboring natural Manzherok lake is to house some of the new development, reported Federal Press, a Russian news agency. Following this set-back to the project, a new conceptual plan for the zone was “worked out”, the republic of Altai’s government said, although as it stands the plan still requires further approval by the supervisory council of the zone’s committee.
The news for Altaiskaya Dolina comes amid a wider shift in the administration of special economic zones, or SEZs, at a federal level, as President Dmitry Medvedev announced on October 5 that the Federal Agency for Special Economic Zones would be disbanded and its function transferred to the Economic Development Ministry. In all, the agency has two hundred staff, for whom the future remains uncertain, said the agency’s press secretary, Yevgeny Dmitriyev. The agency’s mandate was transferred to the ministry for reasons of “optimization”, the president’s announcement said. The ministry has since said that it will offer all “specialists” from the agency work in the new ministerial apparatus, although whether this will extend to all the agency staff remains unclear.
The ministry did not say that there would be any program cuts within the SEZs, answering instead that “the establishment of the zones will be continued, including the construction of the infrastructure that is necessary to the residents”.
In a letter to REQ, Svetlana Suleimanova, a spokeswoman for the ministry, explained that “the presence of a complicated multi-level system of management reduced the functional efficiency of SEZs and led to the duplication of authorities. Changes in the system of management of the zones are being conducted to increase efficiency and further development, allowing a reactivity to the needs of the investor-residents and a reduction in the outgoings of the budgets on all levels of the infrastructure construction of the zones.”
She continued: “The possibility of transferring a portion of the functions to the administrations of the federal subjects, while still keeping federal control, will considerably stimulate the activity of local authorities in terms of developing the SEZs. Experience shows that the zones give positive results when the management of federal subjects takes an active role.”
The ministry said that this process of restructuring would be completed by the end of 2009.
Similarly, in a government meeting in late October, Elvira Nabiullina, the minister for economic development, said that new ministerial analysis demonstrated that “in the majority of cases, there is considerable potential for an increase in the efficiency of the [zones’] work”. To this end, a number of other measures have already been prepared by the legislature, she said. For example, in the technical-production zones, the threshold for investment is going to be reduced from 10 million to 3 million euros ($14.8 million to $4.4 million); in port zones, they intend to widen the possible investment activities and they also intend to reduce the investment threshold there to 10 million euros — from a previous 100 million euros ($147.8 million).
These and several other changes have already gone through their first reading in the State Duma, Nabiullina said, with the second reading planned for before the end of 2009. Further research into the “perfection of the work of the SEZs” will also be carried out. In addition, Oleg Savelyov, deputy minister for economic development, will be the person within the ministry now responsible for handling matters relating to SEZs, Nabiullina said.
Types of SEZs in Russia are wide-ranging. The zones can be categorized as any one of the following — industrial-production zones, technology-innovative zones, tourist and recreational zones, or port zones. Additionally, there are the Kaliningrad and Magadan regions, which have designated investor zones within them.
Altai in the spotlight
In the republic of Altai, these moves have been greeted with apprehension, as people hope that the implications of the restructuring will not threaten their jobs, said Yulia Chepkina, a spokesperson for Altaiskaya Dolina.
Just two weeks before Medvedev’s announcement, a press tour of Altaiskaya Dolina and its surrounding infrastructure showed REQ that logistical foundations for the zone were well underway. The zone, conceived in early 2007, was designed by strategic consultants Roland Berger and German architects Albert Speer and Partner. According to plans seen so far and those confirmed by the local committee in Altai, it is to incorporate a set of islands around a central feature of the lake that correspond to the four natural elements, upon which will be facilities for over 10,000 tourists at any one time and about 2,400 staff. The islands around the lake’s edge are planned to be of incremental luxury the bigger they are, and hotels are set to range from two-star to four-star, with the majority of facilities lying somewhere between the two poles.
“It does worry me a bit about the lack of international flights,” said the head of Altaiskaya Dolina, Vladimir Poletayev. “I think it’s a necessary feature, but their absence should not hinder visitors.” The problem for the republic of Altai in terms of attracting international tourists, which according to its promotional material is a stated aim of the special economic zone, is that it has no easy means of receiving them directly. As part of the development of the region, one of the infrastructure features to be redeveloped is the local airport in the republic’s capital, Gorno-Altaisk, situated eight kilometers from the SEZ. Currently home to a crumbling series of cabins, the airport is going to benefit from a newly laid runway and up to one billion rubles of investment from the Transport Ministry and additional investors, said the general director of the airport, Viktor Pupyshev. Scheduled to reopen in mid-2010, the airport is not yet ready for use, particularly as the incompleted runway is still littered with machinery and workers.
Pupyshev said that “if necessary”, the runway could be lengthened to accommodate bigger carriers than the current limit of Boeing 737 or equivalent aircraft. This could be quite a big factor in the international attractiveness of a tourist destination like Altaiskaya Dolina, for which currently the nearest international, or indeed domestic, airport is Barnaul, a four-hour drive away along busy, single-lane roads. The new airport is also due to accommodate helicopters, although it seems unlikely that even the four-star guests at the resort would be the type to arrive in this way. Airlines such as Aeroflot, S7, Transaero and VTAir are due to begin operating services to the new airport when it opens, Pupyshev said, who anticipates up to 120,000 passengers per year. In the Soviet era the top levels through the airport were 150,000, he said, adding that in the coming years he expected the republic to top 2009’s level of one million tourists.
All being well with the inflow of tourists, one discernable piece of leisure infrastructure for their arrival is underway in the republic of Altai — the ski resort at Manzherok. This new development lies beside the lake of the same name around which the SEZ is now to be located. The ski resort is not part of the required development for the zone itself, but will act as a supporting element for the overall area. Seven pistes are visibly under construction, which will add to an existing 10 pistes, part of a planned 50 kilometers of ski terrain. The organizing committee said that Manzherok is protected by the UNESCO World Heritage Site status that is applied to the Golden Mountains of Altai, which certainly makes the ecology of the lake a key issue in the development of the area. Sergei Borzilov, the general director of the Manzherok ski resort said that melting snow from the mountains, together with the excess created by snow machines, will actually improve the ecology of the lake, which today is in a moribund state.
Bringing gas supplies to the Manzherok area remains to happen, Borzilov said, but for this Gazprom needs an increased number of users in the area. Manzherok borders Russia’s largest village of over 15,000 houses, Maima, which also lacks gas supplies. And besides a lack of gas there is an excess of traffic in the summer, said deputy manager of the SEZ administration, Denis Vlasenko. But Poletayev, his boss, said this had not deterred investment — there are nine existing, unnamed investors: three from Moscow, two from Novosibirsk, three from the republic of Altai and one from the Altai region. The recent changes to the plans are likely to raise questions from these investors, Chepkina said, adding that “information had also come to light of a number of the investors from Altaiskaya Dolina putting questions to the Russian prime minister, Vladimir Putin.”
Dodging recession fire
In other areas, though, the Russian SEZ story has recently been successful. Alabuga, the industrial-production SEZ in Tatarstan, is the most fruitful of all the zones, a Vedomosti editorial wrote on October 7, citing unnamed experts.
This year it has managed to attract the investment attention of Air Liquide, a French company that is preparing to build a $54 million gas plant in the zone, as well as gaining the interest of 20 new potential investors with whom the management of the zone is conducting negotiations.
“We do see opportunities for investors in the crisis,” said Igor Nosov, head of the Alabuga SEZ. “Construction costs are much lower, helping with greenfield projects, while the labor market is witnessing low costs. Even before the crisis, wages were estimated to be 45 percent lower in Kazan than in Moscow, according to PricewaterhouseCoopers, but the quality of labour is very high — this is as a result of the Soviet education system,” he said.
But Nosov also felt that Vedomosti’s verdict on Alabuga being the sole success in the SEZ domain was unjustified. “There are several very successful projects... Look at Lipetsk, or at Dubna. Alabuga is just one of them — and we all need to work very hard anyway.” Certainly Alabuga has the advantage of being an enormous space: its total surface area is 20 square kilometers, the equivalent of 3,000 football pitches, and, according to Russian legislation, the current maximum size any SEZ can reach. The nine current investors, known as residents, cover only a small proportion of the area, and Nosov estimated that it would be about five years at least before the management needed to consider expansion of the Alabuga SEZ. “If there is any need for expansion, then we have to go to the State Duma and ask for changes to the federal law,” he said.
Alabuga may have just nine residents, seemingly relatively few, but what makes the zone stand out, Nosov said, is the fact that it is an industrial-production SEZ, where any one project space can be enormous. Sollers, one of the residents, has two projects in Alabuga; together the sites cover 200,000 square meters at a cost of seven billion rubles ($240 million). “These kinds of industrials can’t be compared with research and development in terms of scale of project,” Nosov added. A total investment of 11 billion rubles ($380 million) has already been made into Alabuga, and the management of the zone expects this figure to rise to approximately 58 billion rubles ($2 billion) by 2012.
When quizzed about the impact of the new federal system for the zones, Nosov was reluctant to comment, saying only that he hoped “the changes will not make the residents suffer; but then Alabuga started earlier than other zones.” He added: “Currently all I know is the official data, but the new structure is developing and will add efficiency to the federal administration. It will continue to provide a positive investment environment. I am just an employee of the ministry, just doing what I do.”
Another zone where there has been a lot of investment activity in recent months is the research and development SEZ in Dubna, a ‘science city’ in the Moscow region. Alexander Popov, deputy director of the zone, said that from the current total of 55 residents, there is “the chance of expanding to 300 — but this depends on many factors, of course.” In a slightly different tone from his Alabuga counterpart, he seemed more open to the idea of imminent expansion of Dubna’s SEZ, but refrained from giving a specific outlook. Certainly as a town, Dubna has a good reputation for scientific prowess, with the confirmation in September by a team in the United States of a new chemical element first discovered ten years previously at the Joint Institute for Nuclear Research in Dubna.
Meanwhile, another research and development SEZ, composed of two areas within the city of St. Petersburg, is in good health regarding its business activities, even under the conditions of the economic crisis, said Ivan Gritsenko, a partner at legal firm CMS in Moscow. Gritsenko is familiar with the investment procedure that he assists clients with. Indeed, without giving names, Gritsenko said he knew of at least two companies thinking of investing in the Alabuga SEZ.
In the Lipetsk industrial-production zone in late 2008, Yokohoma Rubber, the third largest Japanese tire maker, had a 4.8 billion ruble ($165 billion) investment approved, for production to begin in April 2011. In August, the company announced that the project would be a joint-venture with fellow Japanese company, Itochu. Earlier, in March, another Japanese company, Hitachi Construction Machinery, was said by Vladimir Ashikin, head of the Kaliningrad SEZ, to have proposed building a road construction machinery plant in the region, reported Skrin, a business news agency.
In September, Elvira Nabiullina, whose economic development ministry will now be responsible for the administration of the SEZs, said that the SEZ “mechanism” may be put into place in the Yamal Peninsula, having “already worked out that same idea in detail for Murmansk”. This followed news in March that the Siberian republic of Tuva was also set to become a new tourism and leisure SEZ, the FK Novosti news agency reported at the time.
Weighing up the odds
There has been some good news on SEZs in Russia, yet it remains clear that there is something of an imbalance in their make-up: only two of the zones are industrial-production, four are research and development, while the majority, seven, are tourist zones. The numbers for the more scientific-orientated are seen as healthy by many observers. However, as Vedomosti pointed out in its October editorial, the tourism zones, which were introduced later than the others, require a different infrastructure and need to attract an entirely different set of clients from the earlier SEZ prototypes. This, it seems, might require more work, but Vedomosti also recognized that a bureaucratic-heavy administration, as is the case in some of the tourist zones, including Altaiskaya Dolina, is not a cost-effective way of operating.
The tourism SEZ in the Krasnodar region, Novaya Anapa, “is having nothing done to it for the moment — there is nothing in the budget,” said local construction firm representative, Sergei Shlakhter. Construction had been due to begin this year on the $2.4 billion project, originally designed to accommodate 40,000 people in 40 large four-star hotels.
“Russia’s tourism SEZs are great ideas, and if they could realize them, they would help in attracting a lot of people to Russia,” said Helene Lloyd, director of TMI, a Moscow-based consultancy with a focus on travel, including in the former Soviet Union. “But Russia’s got to be quite careful that the shine isn’t taken off these zones.”
“What they need to do is to market them more internationally. The domestic population might be familiar enough with the areas, but foreigners need to be shown,” she said. This is not the only problem. “There’s the visa situation — if that was eased it would be a huge plus for regions where there are tourism zones. There is definitely a desire, even a pent up desire, among Western tourists to come to Russia.”
By way of comparison, Lloyd turned to Kazakhstan, where a new resort town, akin to Dubai or Las Vegas, is being built by the Caspian Sea. “It’s a city from scratch, but there is less information on SEZs than there is on the Kazakh development. Kazakhstan’s recent hosting of the General Assembly of the UNWTO, the UN’s tourism body, is a good example of how the country is successful at promoting itself in the international arena,” she said.
As they stand since the 2005 legislation, the SEZs are designed to be more effective versions of their “deficient” predecessors from the 1990s, said Anton Kalinin of law firm Salans. The current variations are more clearly defined in their aims and specifications, Kalinin said, adding that “residents are obliged to make substantial capital investments, making them unattractive for purposes of pure tax evasion.”
Meanwhile, as anti-recession tools, the SEZs could be more useful, under different conditions and, indeed, better administration. “SEZs could be potentially interesting to many companies, under conditions of more profound analysis of their location and the focus of their sector, the structuring of infrastructural projects along the lines of public-private partnerships, and the provision of more incentives to residents. It seems that the state management of this process should be more efficient and transparent,” said Alina Zaborovskaya, manager of the corporate finance department at consultancy firm KPMG.
Comparisons with analogous projects in other countries do get drawn, with China one of the first examples people cite. While Russia admits to having used the Chinese SEZ as something of a model in drawing up the 2005 legislation, research since then suggests that ongoing comparisons are of limited use. Tyler Curtis, Shannon Hill and Chih Chia Lin published a report in 2006 showing such limitations. For example, the 1979 implementation in China of SEZs in four designated cities were the first and, at that time, only areas that foreign investors were allowed to invest in China under the communist regime. They also argue that the effectiveness of these zones nowadays is limited, since foreign investment is not so restricted, making the advantages of the SEZs much diluted. Given that Russia’s SEZs were created in an environment of pre-existing foreign investment on a large and widespread scale, a direct comparison would be anachronous. What the government appears to be hoping is that its new federal administration will mean that there is no chance of the SEZs themselves becoming an anachronism. |
