Russian regions are trying hard to attract investment, including from abroad, as macroeconomic conditions steadily improve. However, there is still a long way to go before many of the country's 85 regions can become investor-friendly.

Last year, President Vladimir Putin set local governors and republican heads the task of establishing a uniform high-quality business environment in all of Russia’s regions.

“Creation of comfortable conditions for business is one of the key conditions for sustainable growth and stable development of the economy and social sphere,” Putin told a meeting of the State Council’s presidium in Yaroslavl in November.

However, despite the quest for uniformity, Russia’s huge diversity is a constant challenge: the task of attracting investors differs across regions, from offering highly  business-friendly treatment to steering potential investors into a bureaucratic quagmire.

The disparity became increasingly noticeable in June when the Leaders’ Club, an association of entrepreneurs operating across more than 40 Russian regions, revealed its rating of investor attractiveness of individual subjects of the federation.

Tatarstan on top

In the rating, the republic of Tatarstan took the top slot, followed by the Sverdlovsk, Belgorod, Novosibirsk and Samara regions, the republic of Bashkortostan, Vladimir region, Khabarovsk district, and the Voronezh, Pskov and Chelyabinsk regions.

Tatarstan’s dominance came as no surprise as for the last few years the Volga republic has been specifically focused on attracting foreign investment. It has two special economic zones, Naberezhnye Chelny and Innokam, and a number of technoparks and business incubators.

As of January 1, 2017, a total of $2.7bn was pumped into Tatarstan’s economy as foreign investment. The highest-profile projects include collaboration with US company Accuray in the area of medical technology, joint projects with Italian congolerate Maire Tecnimont, and US industrial mineral producer OMYA.

Meanwhile, the bottom slot of thirty regions in the rating went to Ivanovo, with Bryansk just a notch above.

Growing appeal

Foreign investment in Russia’s regions has lately been on the rise, Andrei Belousov, an aide to the Russian president, said at the presentation of the rating.

“Previously, there were about 10 regions that were known for their good work in attracting investors,” he said. “Now we are talking about 50 to 60 regions that created teams and began to work with investors.”

“[Foreign] companies have begun to invest,” agreed Alexander Kalinin, president of the All-Russian Non-Governmental Organisation of Small and Medium-Sized Businesses ‘Opora Rossii’. “This is a good situation for entry. Real estate rates are low, the labour situation is also positive as quite a lot of people have been laid off in construction or in finances, and it is easier for businesses to find qualified personnel.”

And while there is room for improvement even for the top-ranking regions, there are basic steps to be taken by those trailing behind.

“To attract investors, a region has to have a clear and concise development strategy,” said Kalinin. “There should also be specialisation, and regions should tell investors, in which specific areas they want them to put their cash.”

Adds Kremlin advisor Belousov: “What is most important is that not institutions but people work with investors, and they should know how to do it, there need to be clear rules, people need to be properly trained, motivated and there should be a system of control.”

Foreign investors have been more active in Russian regions, but before they are ready to invest their cash, some specific requirements are yet to be met, say others.

“From regions’ governments, we still expect more than just access to infrastructure and tax privileges,” said Philippe Pegorier, President of Alstom Russia and a member of the board of the Association of European Businesses (AEB).

“We expect governors to fight corruption,” he added. “This is vital. A foreign investor will never invest in a region where there is corruption. There should be zero tolerance.”

According to Pegorier, regional governments will also have to ensure physical safety of investment, working closely with law enforcement agencies. Foreign investors by themselves don’t know how to deal with law enforcers.

He also suggested that governors could try to get federal contracts that would be passed on to foreign investors.

Mobility issues

Meanwhile, people’s lack of mobility between regions is another factor that strikes foreign investors. As the majority of Russians live in apartments they own and are permanently registered in, they are unwilling to move to another region even if they are offered better jobs there.

“We sometimes want to invite people, but people don’t want to move because of registration and accommodation,” said Pegorier. “And regional governments can help in that respect by providing accommodation.”

“Foreign investors mostly trust not the governor, but those who have already arrived and are working on the ground,” noted Nikolai Lubimov, acting governor of Ryazan Region.

“Today, investors are chasing projects that are structured, packaged, figured-out, and have clear financial parameters,” said Sergei Kelbakh, chairman of the board of Russian Highways, a state-run road-construction corporation. “The organisational and legal elements and risk assessment, including the risk of the executive authorities’ intervention, are also important.”

Lagging infrastructure

Meanwhile, one of the most important factors investors consider when making a decision regarding investment in a specific region is the state of its infrastructure. And in that respect, much is yet to be done.

According to Kelbakh, too little attention is being paid to the road infrastructure. “Without a developed road infrastructure, no positive results can be achieved,” he said, adding that pilot projects for regional road networks are currently under way in Nizhni Novgorod and Samara regions.

But despite the shortcomings, state officials insist that now is the best time to invest in Russia.

“Anything Russian is a superpopular asset with international investors,” the Kremlin’s Belousov said at June’s international economic forum in St Petersburg. “In Russia, the basic interest rate is 9%, the annual inflation rate is 4%, and this is an extremely favourable time for investing in Russian assets.”

“Of course, a large part of cash comes from speculative investors, but serious strategic investors also come to the market, which IPOs and sales of corporate bonds show,” Belousov added.