Ben Aris in Moscow -

Russia's business environment can be harsh, but investors have been flocking to the balmy islands of industrial parks that are springing up around the country, where there is little red tape, no corruption and every sort of infrastructure a factory manager could wish for.

The federal government passed laws to create Special Economic Zones (SEZ) several years ago in the hope of repeating China's success at attracting foreign manufacturing by offering a raft of tax breaks and incentives. However, the success of Russia's parks has more to do with the energy of the governors that set them up, rather than any fiscal bribes the federal government can offer. "There are three types of park: those that have been set up privately with privately funded investment; those that are a project of the local governor and run as a special purpose vehicle; and the federally backed Special Economic Zones," says Maxim Ivanov, chairman of the Russian Association of Industrial Parks, which is attempting to coordinate their development. "However, three-quarters of the investment into industrial parks don't go to the SEZ but the regional or privately run parks. The key for a company is if the park offers what it needs to work, rather than any tax breaks."

Suits you, sir

Industrial parks appeal to investors, as they offer a highly localised investment climate that is very different from Russia as a whole. Most regions have a "one-stop shop" for investors into a park that cuts through the bureaucracy and brings corruption in the parks to "zero", says Ivanov. With the Russia-specific problems removed, companies are left with simple business considerations when choosing which park best suits them.

Typically, companies first look for basic things like infrastructure, then being close to both their customers and suppliers. Amongst the most successful regions in Russia are Kaluga and St Petersburg, which have both been pro-business and enjoy a large customer base on their doorsteps.

Thanks to the port, St Petersburg is an obvious location for any manufacturing company, and both foreign and Russian firms have flocked to the city and its surrounding region. Both the city government and Leningrad region (which have different administrations) has set up several parks, including the Tosno industrial park in the Leningrad region, which has made St Petersburg Russia's leading manufacturing and automotive hub.

There is nothing special about Kaluga, but located only 182 kilometres from Moscow it has emerged as the country's second largest automotive hub simply on the back of the hard work of the governor, Anatoly Artamonov, who should be more appreciated than he is. According to foreign companies working in region, Artamonov hands out his mobile phone number with invitations to call anytime the company has a problem it can't solve. The local business climate is so convivial that increasingly privately run parks are also appearing like the Finnish-owned Lemmikäinen park, which also has a branch in St Petersburg.

Probably Russia's most proactive and business friendly place Kazan, the capital of Tatarstan, is further away from Moscow (863 km), but within a 1,000-km circle live over the 80m people of the Volga basin, equivalent to the size and population of Germany. The government has set up the Alabuga Special Economic Zone in an example of an industrial park that is both park and SEZ. Likewise, Kazan has attracted significant foreign investment and is home to both the Russian truck maker Kamaz and a Ford plant, which form the core of its emerging automotive hub. The region also has significant aviation and agriculture production, as well as a highly educated population thanks to its well-respected local universities.

These are all well-established industrial parks, but new players are entering the game. An up-and-comer is the Kuznetskaya sloboda industrial park in the Lipetsk region, famous for Novo Lipetsk Metal Kombinat (NLMK), Russia's most profitable steel mill. And Moscow is preparing a string of business and technology parks as part of its new development strategy that will be ready at the end of this year. However, in Moscow's case the tax breaks will be more key, as the cost of labour in the capital is up to six-times higher than in the rest of the country. "The character of the region is emerging as a key to success, as increasingly the regions are finding themselves in competition for inbound investment," says Ivanov. "They have to work hard to persuade an investor to set up shop in their region."

Ivanov says that part of the association's job is to tour the regions and set up seminars to share with the less advanced regions the incentives and deals that the more successful have offered. From this, regional clusters are emerging: at the annual Kazan Investment Summit last year, amongst the biggest of the region investment conferences, the administrations of neighbouring Ulyanovsk and Bashkortostan sent delegations to showcase their investment story to the assembled foreign investors. All three administrations are hoping the Volga basin regions will emerge as an industrial powerhouse that will serve the whole CIS region.

"Industrial parks have come a long way in the last two years and there has been a dramatic change in the way they go about attracting business and creating a new corporate quality of life in Russia regions," says Ivanov. "We won't be able to change everything overnight, but we are very optimistic. The fact that most of the investment is not going into the SEZ, but choosing parks on the basis of their benefit to a business should be taken as one of the most encouraging signs, as promoting normal business is the whole point of the parks."

Source: E&Y