INTERVIEW: Tatarstan's agents of investment

By bne IntelliNews August 25, 2011

Artem Zagorodnov in Kazan -

bne: Russia's leadership has picked Tatarstan as a successful example of how to attract foreign investment. What makes your republic different from other regions of Russia?

The most important factor is a long-term commitment to improving the investment climate on the part of the government, and particularly the president of Tatarstan. [President] Rustan Minnikhanov takes a very personal approach to practically every major project.

The economic infrastructure that's been built over the last several years - industrial parks, special economic zones [SEZ] and several joint ventures - is also significant. In order to continue developing this foundation, our agency - completely unique in the history of the republic - was founded. We guide investors from start to finish on all of their projects and are the only state representatives that they ever have to talk to - the 'one window' approach.

bne: What else does your Agency do?

We have two primary functions - to attract foreign investment and to improve the business climate; they are related, of course. In addition to promoting Tatarstan as an attractive destination for foreign capital and helping investors who come here, we also lobby business-friendly legislation in government. We have all the tools to do this, as we report directly to the president and prime minister.

We're currently working on the creation of a regional investment fund in Tatarstan that would hedge part of the risk faced by investors. This is very important because, unfortunately, despite all our rhetoric, Russia is not the most attractive destination for investment. Tax breaks are great, but poor governance and the perceived high level of political risk still scare off a lot of capital. And many changes have to be implemented at the federal level, as the investment climate in Tatarstan depends a lot on the country as a whole. We hope the legal framework for the fund will be in place by January 2012.

We've been fighting a long time for attracting investment from the Middle East to Russia. This morning I opened the paper and read that one of the emirates of the UAE had decided to invest in a Georgian SEZ. One would think they have a low level of stability, but this example - and many others in Azerbaijan, Kazakhstan and even Ukraine - proves many of our neighbours do a better job of attracting capital than us.

On a positive note, there's a strong feeling that federal authorities have finally come to understand the importance of attracting foreign investment and are taking the necessary steps to improve the business climate.

bne: You mentioned the importance of federal policy. What would you like to see the federal government do to improve the business climate in Russia?

Both Tatarstan and Russia are in very lucrative geographic positions between Europe and Asia. We need to build roads across the breadth of the country to take advantage of it. To demonstrate the seriousness of our intentions to investors, we need to show we are able to provide such basic infrastructure.

I lived in Malaysia in the 90s. They were able to build a network of high-quality roads in a very short period of time and open up previously isolated parts of their country to an influx of industrial parks. China did the same thing and has attained very high levels of economic growth as a result. The Russian government needs to announce such a plan; we've had 'national projects' in healthcare, agriculture, housing and education. They should announce one in road construction. We've done a lot to improve road quality in Tatarstan already.

bne: Your Agency recently successfully lobbied the local government to adopt the Law on Public-Private Partnerships (PPPs). What will this law change?

We needed this law to show investors a legal framework for this type of partnerships, so they would know their rights, opportunities and obligations - and those of the state. We feel this is an important and transparent signal to investors, and since its passage on August 1, I've had the impression that they feel this is a region where we will talk to them in a language they understand. There are entire sectors of the economy that cannot simply be privatised; PPPs provide a logical solution to improving efficiency in these areas.

bne: What are your best success stories so far?

The Alabuga SEZ has attracted scores of Russian and foreign investors to the point that its board is considering increasingly large projects every year. I'm also thinking of [truck maker] Kamaz's joint ventures with Daimler and other companies, [Russian passenger car manufacturer] Sollers' launching a Fiat assembly line with major plans for Ford, and Isuzu.

Fujitsu-Siemens makes hardware and software here and has seen explosive growth. Their clients include some of the world's largest corporations like Volvo and Pepsi. They have created serious competition for similar ventures in India.

We are actively working on developing the major aviation and helicopter factories in Tatarstan, which have been here for decades and offer enormous potential for generating value-added products and developing the local scientific base. That is why we call on investors not to see us only as a source of chemicals and raw materials, but also as a hi-tech and manufacturing hub with a highly skilled workforce.

bne: How long does it take for most investment projects to become profitable? Which sectors offer the highest profit margins?

If we're talking about small and medium-sized businesses, this is somewhere between two and seven years. Larger projects - like those in the Alabuga SEZ - usually take from seven to 12 years.

I think while profit margins are about the same in all Russian regions, the differences occur in the ease of doing business and the level of risk. These two factors impact the timeframe we're discussing.

Petrochemicals are probably the most profitable, like the Khimgrad technopark in Kazan. The services sector and hi-tech companies also offer good profits.

bne: The biggest impediments foreign investors have cited to do business in Russia include corruption and red tape. Does Tatarstan score better or worse than the average Russian region in this regard?

An independent report conducted by PriceWaterhouseCoopers among investors in Tatarstan found a lack of skilled employees, expensive utilities like electricity and water and Kazan's low global brand recognition as their primary complaints. This suggests we do better in regards to corruption and red tape than other regions.

bne: What are the main misconceptions foreign businesspeople have about Russia?

Unfortunately, there is a major lack of information on the opportunities for investment. Foreigners know almost nothing about the massive privatization going on at the federal level, which offers stakes in some of the most profitable companies in Russia. In Hollywood, Russia is all spies and mafia wars.

bne: Kaluga Region Governor Anatoly Artamonov has been known to give out his personal mobile number to businessmen who work in his region. Can investors expect a similar level of support in Tatarstan?

I've seen nothing but complete personal dedication from the president of Tatarstan. He doesn't just wait for complaints, but frequently visits various projects and asks the investors about the problems they're having.

However I would argue that while from a PR perspective giving out the governor's cell phone is probably a wise move, effective governance on the part of regional investment agencies like ours would eliminate the need for such an approach.

bne: A number of globally significant sporting events - the 2013 Universiade Games, 2015 Swimming Championship and 2018 World Cup - will take place in Kazan in the coming years. How will they affect your Agency's work and the investment climate overall?

These events help Kazan to become a globally recognised brand. Sports have become something like an ambassador for our region.

They have also created a huge demand for all kinds of infrastructure: not just stadiums, but also roads, hotels, restaurants and other service-oriented facilities. This demand creates a stimulus for investors to come and build many of these objects. I hope we won't miss this golden opportunity to become popular among international investors.

Finally, this infrastructure will increase the likelihood that we will continue to regularly host sporting events of a global or, at least, European level and will become an important part of the service economy.

bne: How will Russia's entry into the Customs Union along with Belarus and Kazakhstan and the World Trade Organization affect Tatarstan?

It's an opportunity and a challenge at the same time. The access of our goods to Belarus and Kazakhstan is a great opportunity, but the increased competition from those countries is a major challenge. If we do not court investors as effectively as Belarus and Kazakhstan, investors will go there instead of Tatarstan.

The example of other trade blocs has shown that countries usually successfully compete with each other to improve the overall investment climate. For Russia this will likely mean reforming our tax policy; many taxes are twice as low in Kazakhstan as here.

bne: How will Tatarstan look in 2015 from the point of view of an investor?

I hope by then all investors - foreign and Russian - will have a clear understanding of what opportunities we offer and a transparent and easy passage through all legal requirements for conducting business here. I also hope by then we will have accumulated a whole series of 'success stories' from satisfied businessmen that will constitute the best evidence that Tatarstan is a good destination for investment.

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