Alabuga or bust

By bne IntelliNews August 18, 2011

Rachel Morarjee in Moscow -

One of the biggest headaches investors in Russia face is navigating the country's labyrinthine bureaucracy; setting up a business can mean months of trekking from one government office to another in search of the correct stamp on the right document. Not so in Alabuga, a special economic zone (SEZ) in the central Russian Republic of Tatarstan.

Investing in Alabuga is a much simpler task, claims Renat Khalimov, head of investor relations at the Alabuga Special Economic Zone. "A one-stop-shop system operates in the Alabuga SEZ and therefore the amount of bureaucratic red tape is significantly diminished, because residents are able to interact with government authorities without leaving the SEZ," says Khalimov.

SEZs are a tried-and-tested method of bringing new streams of foreign investment into a post-Soviet economy and boosting economic growth in a controlled manner. In the late 1970s, China used such zones to lure foreign investors to the country and created millions of new jobs in the process. Shenzhen, the most famous of China's SEZs, was transformed in two decades from a sleepy fishing village on the coast opposite Hong Kong to a boomtown of over 8m people with its own stock exchange and the greatest number of Phds per capita of any Chinese city.

Russia began setting up SEZs in 2005, and the largest and most successful is Tatarstan's Alabuga. Located 200 kilometres from Kazan, the capital of Tatarstan, and about 1,000 km from Moscow, Alabuga offers access to the Russian capital as well as regional Russian markets without the transport headaches and soaring costs of doing business in Moscow.

Gridlocked traffic and sky-high wages have driven many firms out of Moscow and St Petersburg, both foreign and domestic, in search of better places to do business. Tatarstan is proving an attractive alternative, with Forbes magazine ranking the region number one in terms of doing business, while Ernst & Young and Penny Lane Realty named Tatarstan as one of the country's easiest places to work and live.

Over the last five years, the Tatarstan government has invested $480m in the Alabuga SEZ, attracting over $2bn from private investors over the same period. So far, 16 companies are resident in the zone, but authorities expect more than 30 companies to set up shop there by end-2015 and predict the new arrivals will bring in $3bn.

Not taxing times

Investors at Alabuga can benefit from a range of impressive tax breaks. Resident companies are exempt from property tax for 10 years from the moment their property is registered, from land tax when the company obtains title to its plots, and from the regional transport tax. Residents enjoy other tax privileges, including a profit tax rate of 15.5%, some 2 percentage points lower than the federal rate and 13.5 points less than the regional tax rate.

The SEZ is a customs-free zone, with any foreign equipment and construction materials being imported and used within it being exempt from customs duty and VAT. Additionally, manufactured goods, exported from the zone, are exempt from customs duties and a customs zone speeds up processing time for imports and exports. Companies that obtain the SEZ residential status till 2012 will be able to import raw material and components for processing in the SEZ and export finished products with no customs duties and taxes (VAT) if they are sold in Russia, Belarus and Kazakhstan - the three countries that make up the Customs Union.

Ayrat Bashirov, CEO of packaging company Danaflex, said tax breaks are not the only incentive to invest in Alabuga. Not only did the local authorities sell him the parcel of land he needed at a reduced price, infrastructure support has made it much easier for his Alabuga-based business to thrive. "When I invested $80m in a new packaging plant, the government built a new road for us and ensured that we had the electricity connections that we needed to start working quickly. The special economic zone is very well connected for transport links to export our products all over Russia," he tells bne.

Alabuga has built on Tatarstan's Soviet industrial heritage to become an investment hub for various industries. So far, car manufacturing, petrochemical and construction materials manufacturing have driven the development of the Alabuga SEZ, says Khalimov, adding that "the fields of potential activity are virtually unlimited.

Carmaker JSC Sollers began making Fiat Ducato cars at Alabuga in 2006 and this year announced it would launch a 50-50 joint-venture with US motor giant Ford to make Ford Transit vans for the entire Russian market at Alabuga. Ford-Sollers will also make engines, operate a stamping facility that will provide a higher level of local parts content for Ford vehicles built in Russia, and establish research and development activities.

Ford-Sollers' presence has drawn other auto-parts suppliers making parts from gear boxes and diesel engines to seats and brake systems to Alabuga. Global producers Daimler, Fiat, Isuzu Motors, auto design company Magneti Marelli, diesel engine maker Cummins, breaking systems manufacturer Knorr-Bremse, tyre-maker Continental, car part specialist Zahnrad Fabrik, insulation company Rockwool and Scheider Electric have all set up shop in the SEZ.

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