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“Not the first day on the market”

06.10.2014 “Not the first day on the market”

“Not the first day on the market” was the heading of an article in the current issue of the business magazine “What does Smolensk talk about?”.
Last week the Governor of the Smolensk region Аleksey Ostrovsky came to an agreement with the first vice-prime minister of the Republic of Belarus that the Belorussian party will preserve all the current orders to 2 Smolensk auto-aggregate plants on a full scale.
“The Belorussians will even increase some orders which will, in turn, ensure constant employment for the staff of these plants and regular wage payment”, - added the head of the region, making comments on the outcomes of the negotiations. This example clearly illustrates one of the ways how an enterprise can avoid the procedure of financial recovery – with the help of sales stabilization. There is still another way, which, though, is more suitable in case of a favourable and stable current financial standing of a company, namely, investment to the capital stock. We will discuss what problems can be solved by attracting both outward and domestic investments with the head of the Department for Economic Development of the Smolensk region Viktor Kozhevnikov. 

- Viktor Dmitrievich, why is a favourable investment climate vital for the Smolensk (and not only Smolensk) economy? 

- The main integral components constituting success of any enterprise are increase of labour performance and gaining new sales markets. Increase of labour performance is hardly possible without introducing some changes in the capital stock of a company and without launching new kinds of goods. Consequently, investments imply change of equipment and construction of new facilities. What do we need them for? The quicker these changes are made, the better is the development of the region. It is commonly considered that if the ratio of the investment volume in a region or a country to its gross domestic product is more than 25–30 percent, than this region or country develops efficiently. 

- If, for instance, the gross domestic product amounts to 10 billion rubles, then investments should be minimum 2.5–3 billion rubles.

- Right. In order not just to change the capital stock, but to keep developing. I’d like to point out that in the Smolensk region this ratio is about 30 percent, which is higher than the average Russian index. 

- When people usually talk about investment, they most often imagine construction of a new plant somewhere in an open field. However, investment may even not be clearly seen at all. For instance, the Smolensk “Izmeritel” plant has undergone retooling and modernization and although these changes are not seen on the surface, in fact the overall investment into its capital stock is several dozens of million rubles. Such a large investment, in turn, benefits the whole region.

- Indeed, some people really limit investments just to construction of something new. It is not exactly true. Major part of investments is made up by investment into current production, retooling and modernization of certain equipment, sometimes building additional facilities at operating enterprises. The main purpose of any investment, I repeat, is either launch or development of a new product (which then can be promoted on the market), or introduction of new technologies (which will allow to decrease the cost price of the produced goods, thus, increasing their competiveness).

- What literally stands behind the expression “looking for an investor”? How is this search carried out? Do they come to your office themselves or do the authorities cast some magic spells to attract them?

- There is no magic. Any enterprise realizes that to survive in present circumstances it has to invest in itself. In this situation the authorities can only create some favourable conditions, for instance, providing this or that tax relief. The same situation takes place on the federal level: say, there has been no property tax on new equipment for several years already.

- For how long is new equipment not levied with the property tax?

- In principle. In respect of newly installed equipment there is no property tax. By the way, there used to be a law on property tax in the Smolensk region which prescribed to levy new equipment with a lower property tax. So, it seems that we were the first to tackle this issue in the Russian Federation.

You mentioned construction in the open field. What is needed for it? Not just an open field, but land plots where there can be access to basic utility systems: electricity and gas. And, naturally, it would be good to have a road to this land plot. So the authorities have to find such land plots, and in case there are not enough land plots (or they don’t fully meet the investor’s criteria), their task is to provide due assistance for establishment of the needed infrastructure.

For instance, since 2009 the Smolensk region in cooperation with the Investment Fund of the Russian Federation has been implementing an investment project in Igorevka. The administration of the Igorevsky woodworking plant came to a decision that taking into consideration good sales of panels of medium density fiber board which are mainly exported from abroad there was an urgent need to construct additional facilities at the plant. To achieve this goal the road had to be renovated and electricity provided – all was accomplished on the terms of public and private partnership. 

- Not long ago the Governor A. Ostrovsky visited the plant and they assured him that “all would be good” and the plant would create about five hundred new working places. Why do investors prefer to go to some districts, while almost ignoring others?

- Apart from the infrastructure issue, there is also an issue of understanding a sales market. Take for example the Gagarin district - it is located in close proximity to the Moscow region and, thus, the Austrian company “EGGER” manufacturing particleboards geographically feels superb there, as its major consumers are also located within the Moscow region. The “EGGER” company is, by the way, interested in promoting furniture production in the Smolensk region, because there is a short haul of delivery.

The same can be said about meat production enterprise “Gagarin-Ostankino”. Its main consumer is Moscow.
Huge attraction for investors also have highways and railways. Naturally, it is logistics.

- Do you have a goal to saturate the whole territory of the Smolensk Region with investment projects evenly or “you cannot chop the wood with a penknife”?

- You know, if you want, you can discover some unique potential in every district of the Smolensk region. Each has its own advantages. Let’s assume, there are territories ideally suitable for manufacturing development, but you will never go there with your family to have a rest on holiday. On the whole, the strategy for the regional development made up in 2007 is being currently implemented, and it prescribes both industrial (cluster) development and diversification of the economy, i.e. branch and territorial. Simply put, it is preferable and more beneficial to develop agrarian business and tourism.

At the present time a programme document with the title “Investment strategy for the development of the Smolensk region” is being worked out. Not the overall strategy, but only an investment one. To be fair, I would like to point out that even the strategy 2007 regarded investment promotion as the main scenario for the regional development. That’s why the investment strategy is so significant for us. It was launched just last autumn. The author of the strategy is a Moscow company “Key partner” quite known on the consultancy market. It prepared all the analytical data and drew major conclusions concerning the strategy for the period of 2013–2025. These days the public airing is coming to an end. After that we will continue working with the development contractor on the basis of the suggested proposals and comments. Then we will submit the strategy for discussion to the Council on Economy and Investment which includes many famous public people and entrepreneurs.

Apart from it, there is the Federal standard regulating the activities of executive bodies pertaining creation of investment entrepreneurial climate. It was worked out by the Agency for Strategic Initiatives established by the Russian Government and adopted by the State Council. The standard embraces the best practices of advanced regions of the Russian Federation as well as of foreign countries and it comprises some beneficial recommendation for implementation. This standard, if you like, is a set of actions made by the regional authorities in order to attract foreign investors. Some aspects may not seem important for us, whereas for an outward investor they are often vital. For instance, the Investment declaration.

- In what sectors of the economy do you foresee growth?

- There are priorities and, naturally, development of goods production is among them. The reason is that this issue is both economic and social. The priority is given to the development of the processing industry. These economic branches take out and export goods and attract finance to the Smolensk region. (Unlike trade and services, they redistribute the existing means and resources throughout the region considerably). Our goods production is primarily aimed at cooperation with other regions and even with some of the CIS states.