Investment Opportunities in the Urals region of Russia

International Business Center, Yekaterinburg, Russia

Russia has been described as a puzzle, inside a mystery, wrapped in an enigma. The Urals region lies at the very heart of this anomaly. Until 1990, the entire region was completely off-limits to foreigners, and as a result, remains a mystery to the outside world.

The Urals region is currently undergoing tremendous economic and social changes following the fall of Communism and the break-up of the Soviet Union into the Commonwealth of Independent States.

There is now great demand for contact with Western businesses that can supply investment capital, access to foreign markets, production technology, technical assistance, marketing expertise, and management training. In return, Western business can profit from the enormous mineral wealth of the region, and a huge new market clamoring for all types of goods. With such incredible opportunities for trade and investment, the Urals is ready for a gold rush of economic development even greater than those seen in Moscow and St. Petersburg.

Central Russia's Urals region covers an area 20 times larger than the Netherlands, and is home to over 40 million people. It is one of Russia's two most resource-rich regions (the other being Western Siberia) with vast quantities of minerals, fossil fuels, and timber. During the Soviet period, the Urals region was a leading center of heavy industry (metallurgy and machine-building), as well as defense and aerospace plants. This means that the region already contains the infrastructure necessary for industry. Today, those industries remain concentrated in the Chelyabinsk, Perm, and Sverdlovsk Oblasts.

Ekaterinburg has been the official center of the Urals Federal Okrug since 2000, and the capital of Sverdlovsk Oblast.

Sverdlovsk Oblast

Sverdlovsk Oblast, with 4.6 million residents, is one of Russia's most urbanized areas. Its capital, Ekaterinburg, with 1.8 million inhabitants, is Russia's fourth largest city. Sverdlovsk has the largest GDP of any oblast outside of Moscow, producing 5% of Russia's industrial output. Heavy industry, ferrous metallurgy, and machine building form a large portion of Sverdlovsk's economy, much of it defense-related. Services have grown to 40% of regional GDP.

The Sverdlovsk Oblast leads the Urals in attracting foreign investment. The oblast's top exports include steel, copper, chemicals, aluminum, titanium and radioisotopes. Non-ferrous metallurgy remains a growth sector, and the world's second-largest titanium producer (VSMPO) is located here. Growth has occurred in transport, telecommunications, and food services. Another key growth sector is food production and processing, with firms seeking foreign equipment to upgrade production.

Demographics

The Sverdlovsk Oblast has 4.6 million residents, which comprises 3.2% of Russia's total population. It is one of Russia's most urban areas with 87% of the population living in cities.

Ekaterinburg has 1.8 million inhabitants, making it one of Russia's four largest cities.

Economic Reform

The majority of Sverdlovsk's industries have been privatized, as over 75% of enterprises are at least partially privately owned. The process of privatization is on-going.

The Sverdlovsk oblast is one of the only nine Russian Federation government bodies that are net contributors to the Federal budget.

The International Agency Standard & Poor's has provided a higher rating for Sverdlovsk Oblast from SD to CCC in the fall of 1999, which is higher than Russia's overall investment rating.
80% of retail sales and 90% of industrial output in The Sverdlovsk Oblast is generated by private enterprises.
32,000 small and medium businesses are currently registered - up from only 12,000 in 1994. Small businesses comprise about one-third of the construction, trade, and foodservice sectors. They produce 8% of Sverdlovsk Oblast's GDP.

GDP and Foreign Trade

The Sverdlovsk Oblast has the largest GDP of any oblast in the Urals, producing 5 percent of Russia's industrial output and ranking second only to Moscow Oblast in that category.
GDP composition has changed markedly. Services have grown to comprise up to 40 percent of regional GDP, up from only 16 percent in 1992. Most of the growth has been in the transport, construction, telecommunications, and food services sectors.
· The Sverdlovsk oblast holds 3rd place with 4.85% of the total Russia's industrial output.

Industries

Heavy industry, ferrous metallurgy, and machine building form the bulk of Sverdlovsk's economy, much of it is defense-related.
· The defense industry continues to occupy a significant role in the oblast's economy, with more than 40 enterprises. The first military show in the Urals region was held July 2, 1999 in Nizhniy Tagil and attracted a number of foreign businessmen. Defense enterprises signed contracts for USD18 million.
Non-ferrous metallurgy remains a growth sector. The Verkhnaya Salda titanium plant (VSMPO) is the largest titanium works in Russia and the second largest in the world. Boeing signed a ten-year titanium supply contract valued at $200 million with the VSMPO titanium plant in 1997.
A second growth sector is food production and processing, with many firms purchasing foreign equipment to upgrade production. Many of Ekaterinburg's leading food processors -- including the Konfi chocolate factory, Myasomoltorg ice-cream plant, Myasokombinat meat packing plant, and Patra brewery -- have remained financially stable and sell their production all over Russia

Agriculture

Sverdlovsk oblast produces annually up to one million tons of grain, 1.1 million tons of potatoes, 310,000 tons of vegetables, 900,000 tons of milk, 150,000 tons of meat, and 1.3 billion eggs. The Sverdlovsk oblast is self sufficient in potatoes and vegetables, eggs, and diary products. Local production of meat products accountes for 50 percent of total consumption.
Sverdlovsk oblast's agricultural production ranks fifth in the Urals region after Chelyabinsk, Orenburg, Kurgan, and the Republic of Bashkortostan. The industry includes meat and dairy production, cattle, pig and poultry breeding, and vegetable farming. Arable land totals six million acres.
Private farmers realize the necessity for new agricultural technology and machinery to raise production and seek used machinery and equipment and the latest technologies. They say they lack professional training.

Infrastructure

Ekaterinburg is one of central Russia's major road and rail transportation hubs, and features regularly scheduled air service to several European and Asian cities. Apart from Aeroflot and other Russian airlines, Lufthansa operates three flights weekly from Ekaterinburg to Frankfurt and back. KLM flies from Amsterdam to Ekaterinburg through Prague and Budapesht. As well, British Airways has recently begun twice weekly flights to and from London.
Since 1998 the situation with hotel accommodation has changed considerably for the better. Presently there are several hotels: The Atrium Palace 5*, The Trans 4*, The Premier 4*, The Hermitage 4*, The Ural 4*, and The Oktyabrskaya 3* that correspond to the worldwide quality standards.
Telecommunication is well developed with three mobile communication providers in the city: UralTel (GSM-900), BeeLine (AMPS/D-AMPS), and Uralwestcom (NMT-450). There are around 50 Internet providers offering any type of Internet connection and more than 10 paging companies.
Banking infrastructure in Ekaterinburg is the best in the Urals, with 31 banks and 17 branches of commercial banks from other regions. Visa, Master Card, American Express, and Diners Club payment systems have become common for local banks, and major shops and restaurants of the city.
Local bankers state that it takes 1-3 days to transfer money to any country in the world.
Over 18,000 trade outlets, including 11,400 shops and 6,900 small retail outlets, were registered in Sverdlovsk oblast in 1999. Within only the first three months of 2001 in Ekaterinburg alone, 5 shopping complexes were opened.

Opportunities for foreign investment and trade

Within 8 months of the year 2001, the volume of foreign capital investments into the economy of Sverdlovsk Oblast reached $US 270 mll. That is 3.5 times more than for the same period of the year 2000. The most active investors are Belgium, USA, Germany, and Cyprus.

In August 23, 2001 the international rating agency "Standard & Pîîă's" raised the long-term credit rating of the oblast to "CCC+". Being a positive prognosis, it shows the possibility of further growth. The factors influencing this rise are: non-dependence of the oblast from the federal budget revenue return, well-developed economic and taxation system, independence from a small group of tax payers, 11% economic growth in the year 2000, and a profit in the oblast budget.

Overall Foreign Investments

Over 890 joint stock companies and branch offices of foreign companies are registered in the Sverdlovsk oblast. By now, Dutch companies have invested 12,7% of the total JVs capital. Among them are: DHL International, Smith Klein Beecham Helthcare JV, Van Leer Packaging, and others.
By the end of year 2000, 156 representative offices of foreign companies were registered in The Sverdlovsk Oblast. The Dutch examples are: Philips, Uniliver, Phillip Morris Management Services, TNT Express Worldwide, Greendown BV, S.L. Trade Export-Import, Kraft Jeycobs Sushar Central, and Eastern Europe Services, etc.
Major investments were made in ferrous metallurgy ($35.0 million), machine building ($1.2 million) and the food industry (7.1 million).

The major investment projects carried out in Ekaterinburg and oblast are:

Both Pepsi-Cola and Coca-Cola companies have constructed soft drink plants in Ekaterinburg that were opened in 1998.
Reconstruction and modernization of the Koltsovo airport (Ekaterinburg). The project development is entrusted to the "ADP - Aeroport de Paris" company (France), technical implementation of the project is carried out jointly with the "TISSEN" concern (Germany).
Boeing signed a ten-year titanium supply contract valued at approximately 200 million dollars with the VSMPO titanium plant.
Within the frameworks of the Russian-Swiss enterprise "Geodetic Instruments Ekaterinburg" production of tachometers was organized. The Swiss party represented by the Leika AG Concern supplies the know-how and equipment.
The largest machinery-engineering plant "Uralmash" cooperates with the Caterpillar Company, US, which has already invested $US 13.5 million in joint production of oil-well drilling equipment. Another part of the project is the plant reconstruction carried out by the specialists of the Mitsui & Co. trading concern, Japan.

Foreign Trade

Overall trade turnover of Sverdlovsk Oblast is valued $2.28 billion, with $1.8 in exports and $0.4 billion imports.

In 2000, the U.S. imported products valued at $9.1 million including major imported products: synthetic India rubber ($0.9 million), medical equipment and devices ($0.8 million), pharmaceuticals ($0.1 million).
Imported products from the Netherlands are valued at $5 million, the major being: food products (30.8%), machinery (24.9%), chemical products (24.4%), metal and metal products (13.9%), tools, glass and ceramics, furniture, toys, etc. (3.9%)

Major exported products in 1999 were: chemicals ($314.5 million), non-processed aluminum ($50.2 million), titanium and titanium products ($29.9 million), wood products and plywood ($7.1 million), and copper alloys ($3.0 million).

In 2000 the export turnover of goods coming from Sverdlovsk oblast to the Netherlands was $US 501 million: metals (94.6%), chemical products (5.2%), machinery, medical products, paper, leather, and ceramics.

Opportunities for small and medium size businesses

Local experts indicate that the following businesses show the most promise for future growth:

Transfer of technologies (agriculture, energy saving, etc.)
Education and consulting.
Transportation and logistics.
FMCG export and production.
Import of marble slabs and stone-cut goods.

There are two key factors that should play a decisive role in making final decision to expand your business to the Urals:

1. Labour force

80% of the working population are people with higher education (Ekaterinburg hosts 5 Universities and 12 higher education establishments)
20% speak English fluently, 40% have moderate level of English (speaking and understanding)
Salaries are good from the point of view of a foreign investor

2. PSO project (Programma Samenwerking Oost-Europa)

In the frameworks of this program, the Netherlands Ministry of Economic Affairs finances the transfer of knowledge and expertise by Dutch companies, and institutes projects with a Russian counterpart. In other words, if a Dutch company has, or is going to have a JV, or any other form of mutual business with a Russian company, it can apply for project-base economic aid. For more details, please refer to the PSO Internet site at www.senter.nl/PSO

Fortunately, The Sverdlovsk oblast has become one of the three Russian regions in which the Netherlands government carries out the PSO program.

In fact, opportunities lie in any sphere of activity, but prior to entering the market, a thorough market analyses should be carried out. As they say: “The bad news – gold lies deep in the mine, but the good news is there is lots of gold”. To find this gold you need experienced and qualified assistance. That is where the International Business Center (IBC)/Ekaterinburg can help you.

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