Special Economic Zones in Russia

Монография по экономике с переводом (35 тыс. знаков)

Перевод данного текста стоит 1000 руб.

Свяжитесь с нами: englishworks.ru@gmail.com

icq (аська) 577847471.

Оплату можно произвести любым известным вам способом на один из наших счетов яндекс.деньги, webmoney, visa, paypal, карта Сбербанка

Монография: Special Economic Zones in Russia

– What do the zones offer for foreign firms?

Монография называется: Особые экономические зоны в России

Что они предлагают иностранным компаниям?

Special Economic Zones in Russia

– What do the zones offer for foreign firms?

Electronic Publications of Pan-European Institute 2/2009

Special Economic Zones in Russia

Executive summary

Approximately 20 special economic zones (SEZs) have been founded in Russia. Four of them are innovation zones, two manufacturing zones, seven tourism zones, three port zones and two old zones of the 1990's, namely the Kaliningrad SEZ and the Magadan SEZ. Additionally, four gambling zones are to be opened by July 2009.

The Russian SEZs currently produce more plans than results i.e. unrealistic plans characterise the contemporary Russian SEZs. Only the Kaliningrad SEZ and the Magadan SEZ can be classified as fully operational, and therefore, it is far too early to make any firm conclusion on the economic impact of these zones on the Russian economy. On the other hand, it is highly recommendable that a follow-up of the Russian SEZs will be carried out in 3-5 years from now, since the results of today do not necessarily describe the potential of tomorrow.

Despite the slow progress of the Russian SEZs, some indicative findings can be presented. First, the tax privileges offered by the Russian SEZs lower the investment barrier for foreigners but the benefits alone are not sufficient to attract foreign firms to invest in Russia. Furthermore, Russia's poor reputation on immaterial rights, stagnant innovation system, the low-tech image of the country, a lack of R&D-related finance, and administrative inertia downplay the advantages provided by the zones.

The growing role of the military-industrial complex in innovation building distracts both the Russian private companies and foreign firms from the innovation activities. I strongly believe that the adaptation of the military-led innovation system does not start the diversification of the Russian economy, since the military-led innovation systems are by nature expensive, inefficient, and corrupt due to their secrecy, bureaucracy and noncompetition.

The ICT collaboration between the Saint Petersburg innovation SEZ and the Nordic companies would be natural, and the close distance may create an additional competitive advantage, if the Nordic companies are not afraid of taking risks involved in Russia's poor

respect of immaterial rights. In order to promote the Finnish-Russian R&D co-operation, some Finnish innovation facilitators, such as Technopolis and Finpro, have already entered in St. Petersburg.

Although the Kaliningrad region is unfamiliar to most of the Finnish investors, I advise that Finnish companies considering an investment exceeding EUR 4 million in Russia would make a feasibility study of the investment possibilities in Kaliningrad. Besides considerable tax benefits, the administration of the Kaliningrad SEZ has a good reputation for being investor-friendly, and furthermore, Kaliningrad is close to Central European markets.

Should Kaliningrad truly manage to become Russia's leisure centre on the Baltic Sea, it is self-evident that high-quality construction companies from the West, including those from Finland, may find additional demand there. A need for wooden summer houses is definitely growing in the region, when the current financial crisis is over. Additionally, if Kaliningrad is serious with its nuclear power plant project, some Finnish construction companies recently involved in building the fifth nuclear unit in Finland might find the project in Kaliningrad worth studying in more detail.

There are no major Finnish companies operating in any of Russia's SEZs for time being, though one company with a Finnish name has been registered in the Saint Petersburg SEZ.

1. Introduction

This report is rather unconventional, since it does not describe the plans, priorities, and privileges offered by Russia's Special Economic Zones (SEZs). As the earlier studies have dealt with the aforementioned issues, a reader is recommended to familiarise themselves with the study conducted by Mannisto in 2007 and a short follow-up carried out by Tuominen and Lamminen at the end of 2008. In addition, earlier reports of the Pan- European Institute (PEI) have dealt with the Kaliningrad SEZ (Liuhto 2007; Usanov 2008) and the Saint Petersburg SEZ (Lisitsyn 2007; Zashev 2008).

Instead of the description, this report jumps directly into the SWOT analysis on Russia’s SEZs and summarises the opportunities these zones provide for foreign firms, particularly for Finnish ones. In order to aid a reader to comprehend the current state of the Russian SEZs, in the following a brief historical background is given and the main types of the SEZs are introduced.

The SEZs are no novelty in Russia. The first steps in developing special zones were already taken in Soviet Russia at the end of the 1980's. In the 1990’s, some 10-20 SEZs3 operated in Russia. These SEZs received a lot of criticism, since they were accused of having become legalised places for illegal business. As some Russian firms used the SEZs for tax evasion and bribed the SEZ administration to maintain their privileges, the federal authorities decided to terminate the SEZs. United Russia policy has further emphasised that the Russian market should operate under the same legislation, and thus, the privileges granted earlier to some regions of Russia have been taken away4.

In 2005-2007, Russia passed several laws related to the SEZs, and hence, there are six main types of SEZs: (1) innovative zones; (2) manufacturing zones; (3) tourism zones; (4) port zones; (5) "old zones" of the 1990's; and (6) gambling zones. Until the beginning of 2009, 22 SEZs have received permission from federal authorities to operate in Russia. Four of them are innovation zones, two manufacturing zones, seven tourism zones, three port zones, two "old zones", and four gambling zones.

The innovation zones have been established in St. Petersburg, Tomsk, and two in Moscow, namely in Dubna and Zelenograd. The Saint Petersburg SEZ specialises in analytical instruments, Tomsk in industrial electronics and biotechnologies, Dubna in information and nuclear technologies, and Zelenograd in micro- and nano-electronics.

The manufacturing zones are located in the Lipetsk region and in the Republic of Tatarstan. The first concentrates mainly on domestic and industry appliances and the latter on automobile industry components and products of the chemical industry.

The tourism zones have been opened in Western Russia (Kaliningrad), Southern Russia (Krasnodar and Stavropol), and in the Asian part of Russia (Buryatiya, Irkutsk, Republic of Altay, and the Altay Territory). All the tourism zones have been placed in extremely beautiful natural locations. However, it seems that these zones have not been developed for mass tourism but rather for elite tourism. One should not be over-optimistic that foreign tourists will find these zones, excluding perhaps the tourism zones of Kaliningrad and Krasnodar. The current financial crisis may postpone the development plans of the tourism zones, and therefore, one should not expect any major macroeconomic results prior to the middle of the next decade i.e. these zones do not create any major cash inflows for the regional administration to solve regional problems often caused by the peripheral location of these regions.

The port zones have been established to develop logistical hubs in Russia. These logistics hubs can be established around sea and river ports plus airports (RIA 2008).

These zones offer customs benefits and tax privileges to both the Russian and foreign companies which operate in the privileged ports. Until now, zones have been established in Krasnoyarsk (East Siberia), Ulyanovsk (Volga area), and the Sovetskaya Gavan Port in the Khabarovsk region (Far East). It is interesting to note that Ust-Luga, the colossal sea port to be erected in the Gulf of Finland, has decided not to apply for SEZ status due to the large investments required (over Ђ 100 mn) and non-clarity related to the governance of the port SEZ (Ust-Luga Company 2008)5. To sum up, the ultimate goal of the Russian Government is to attract private capital, including foreign capital with tax privileges, to aid the Russian Government to build modern logistics hubs in the country.

"The old zones" of the 1990's do not operate under the general legislation on SEZs passed in the middle of this decade, but they follow their own legislation passed in the 1990's. These special economic zones of the 1990's operate in Magadan, situated in the Far-East of Russia and in Kaliningrad, the Russian enclave sandwiched between Lithuania and Poland. Kaliningrad has been extremely successful in getting special economic zones.

I assume that the success of Kaliningrad is based on the special location of the region rather than on any personalised criteria, i.e. current Prime Minister Putin's wife originates from Kaliningrad.

The gambling zones will be the only legal places to gamble in Russia. The gambling law should come into force in July 2009 allowing gambling in only four Russian regions, namely in Altay, Kaliningrad, Krasnodar, and in the Primorie District in Russia's Far East. Even if the gambling zones should commence their operations soon, there are considerable doubts how the law can be executed since the gambling zones are not prepared to accommodate gambling activities, gambling companies are not ready to leave their current sites, and the Russian Government is unlikely to close down a business segment worth USD 8 billion with 500,000 employees (MT 2008).

Table 1. Special economic zones in Russia at the beginning of 2009

2. Special economic zones (SEZs) in Russia

The current state of Russia's SEZs is here analysed via a SWOT analysis. The first section of the chapter focuses on the innovation zones, though also manufacturing, tourism, port, and gambling zones are briefly dealt with.

The Saint Petersburg SEZ is briefly discussed in the second section since this SEZ might be of special interest to Finnish firms.

The old zones of the 1990's, namely Kaliningrad and Magadan, have not been included in the analysis conducted in the first section, since their operational reality differs from those zones established in the middle of this decade. The third section focuses on the Kaliningrad SEZ due to its potential interest to EU-based firms. The Magadan SEZ has been designed for collaboration with Asian companies, and therefore, it has not been analysed in this report.

2.1. SWOT analysis on new SEZs in Russia Strengths

The legislative basis of the SEZs is sufficiently clear and the legislation is on a federal level, which protects the SEZ residents (companies registered within the SEZs) from sudden and unexpected legislative changes on a regional level. As a sound legal foundation was missing in the 1990's, only a few serious companies started their operations in the SEZs, as they were afraid that these zones will be terminated, which in matter of fact was what occurred.

The SEZs offer customs advantages, tax benefits and other privileges, which give SEZ residents some competitive advantage. According to the Russian Ministry of Economic Development and Trade, the benefits give a SEZ-based company a 20-30% tax advantage. Even if the benefits offered by the SEZs are concrete, the tax benefits alone do not make foreign firms want to invest in Russia, i.e. the SEZs lower the investment barrier for foreigners but the SEZ benefits alone are not sufficient to attract foreign firms to invest in Russia. This can easily be seen when one analyses the backgrounds of the SEZ residents.

Leading foreign high-tech firms have not invested in the Russian SEZs, and it is anything but certain whether the entry boom of global high-tech companies into Russia will happen, unless the SEZ administration seriously starts to attract leading foreign high-tech companies into the zones (stronger marketing activities required) and the general image of Russia as a FDI-friendly country improves. Russia's investment climate has seriously deteriorated since the middle of this decade as some foreign firms have been treated strangely by the Russian authorities and the Russian Government has started to restrict the operations of foreign firms in so-called strategic sectors (Liuhto 2008).

The SEZs act on the basis of the "one window" principle, which reduces the bureaucratic burden of investing firms. The SEZ administration can be extremely valuable for a foreign investor, but on the other hand, the administrative special service may leave room for subjectivity in the bureaucracy, i.e. enhance corruption. So far, no corruption cases related to new SEZs have hit the headlines. Though the SEZ administration should be active in attracting firms in the SEZs, some Finnish firms have expressed their dissatisfaction with bureaucracy and a lack of business-orientation in the SEZ administration (Peltola 2008).

Russia offers an abundant educated workforce, which is cost-competitive compared to the researchers in western countries. Despite the higher wage levels in the West, their better functioning innovation environment has still supported the competitiveness of innovation work in the developed countries. In addition, some Asian tigers, such as China and India, are far ahead of Russia in producing qualified experts with lower salary requests. Furthermore, the brain drain from Russia to the West weakens the human resource base of Russia and the SEZs can hardly stem the intelligence outflow from Russia in either the short or medium term.

The tourism zones have been placed in extremely beautiful natural locations.

However, the remote location of the Baikal region and the enclave location of Kaliningrad, continue pushing Russian tourists towards their natural sites i.e. the shores of the Black Sea and the Azov Sea6, and the lakes of the Karelian Republic, or even those of Finland. Strengthening existing tourism destinations would have been a more rational way to build the tourism zones rather than to create new zones to support regional policies.

Weaknesses

The Russian SEZs remind one more of Soviet-type "plan factories" rather than real activity centres, i.e. unrealistic plans are a typical characteristic for the Russian SEZs. The macroeconomic results, such as additional GDP and employment generated, innovations and new patent-applications created, are non-existent. In fact, only a few SEZs have begun their operations as initially planned.

The Russian SEZs do not form an integrated network but the SEZs can instead be regarded as isolated innovation-oriented oases in Russia's low-tech desert. The innovation system of Russia is stagnant, i.e. the interaction between the state, research institutions and universities and private companies is based on bureaucratic collaboration rather than on business-driven goals (Dezhina & Zashev 2007; Peltola 2008).

The R&D organisations together with the state agencies form a mammoth research network7. The analysis of the Russian innovation system indicates that Russia does not lack innovation-related agencies, but it definitely lacks innovation-related activity. Currently, Russia's innovation sector reminds one more of Soviet bureaucracy rather than a business-oriented innovation-promoting cradle. The European Commission (2007) phrases the aforementioned statement a bit differently, i.e. "R&D system structure and mission as a whole does not correspond to the economic and social needs."

When Russia is developing its innovation-related activity, it should be extremely careful what will be the role of the state in innovation building, as Russia's bureaucracy is notorious for its inefficiency and wide-spread corruption. In this context, one should remember that only 30% of the Russian R&D expenditure is financed by enterprises. The respective share in the EU is over 50%, in the USA approximately 60% and in Japan close to 75% (Dezina & Peltola 2008).

Russia’s national image as a low-tech country does not support the development of the SEZs. To illustrate the low-tech image of Russia, one could ask a reader to name three famous non-military-related innovations designed in Russia and used widely in the developed West. Not an easy task, even for an expert.

The SEZ are often located outside the city centres, which decreases the attractiveness of these zones in the eyes of the workforce and companies.

The marketing activities of the SEZs are weak inside Russia, and non-existent outside the country. In fact, it is difficult to find any public information on these zones, even if one would be aware of their existence. The administration of the SEZs and the federal agency coordinating their activities should take much more active role in promoting these zones both inside Russia and abroad.

The SEZs do not provide foreign investors with any special advantages compared to the Russian firms operating inside the SEZ.

The earlier references by the majority of SEZ residents are unconvincing, and therefore, one should not expect any rapid technological break-through in Russia comparable to that of China, if the SEZ administration acts as Soviet-era bureaucrats instead of business-oriented innovation facilitators.

As a brief conclusion on the gambling zones, one can only state that it is gambling to support regional policies using casinos. Casinos will find their Russian clientele even if they would entirely be terminated in Russia. Gambling will transform itself or else go underground, but it does not abandon major Russian cities. Gambling zones, if ultimately opened, may attract sex tourism in Russia, but I doubt whether that has been the original goal of the gambling zones.

The port zones should be located in natural sites, where they may one day survive without administrative privileges. At the moment, only the maritime port placed in the proximity of Japan meets this basic criterion. It is interesting to note that the port SEZs are absent in logical hubs, such in the regions of Kaliningrad, Krasnodar, Leningrad, and Murmansk. As logistics is an extremely logical sphere of business, supporting anything unnatural with administrative benefits will turn out to be expensive and non-sustainable. In reverse, supporting something unnatural distorts the evolution of natural competitiveness. Furthermore, large infrastructure public-private partnerships have traditionally been extremely vulnerable to corruption, and therefore, the public-private partnership does not necessary materialise in the synergistic combination of private effectiveness and the state's strategic vision.

Opportunities

The image of the SEZs has improved among the Russian workforce, companies and particularly among the Russian decision-makers, i.e. the SEZs are no longer regarded as special zones created for money laundering and corruption. However, it will take plenty of time before the Russian SEZs become known among foreign business circles (Giannella & Tompson 2007).

The SEZs may become an additional tool in strengthening regional centres, but this would require that the development speed should be accelerated tremendously. At the moment, the SEZ suffer from a common virus in Russia, i.e. a good idea at the federal level does not materialise in efficient implementation at the regional level. The SEZ administration, with a few exceptions, has seldom enough experience on assessing the development of global demand on high-tech goods, the competition involved, and make future visions needed for supporting innovation building. If the regional administration is not fully aware of the global demand and competition, it hardly can create the conditions needed for attracting globally-recognised innovators into Russia. I doubt that the administrative top-down innovation policy can create any major innovation revolution in Russia, unless Russian private firms themselves become more innovation-oriented and start to invest more in R&D.