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Where are foreign investments going?

From tomatoes to oil: what projects in the Far East actually turned out to be attractive for foreign business

The state strategy for the development of the Russian Far East is based on the desire for economic integration of the region with the largest economies of the Asia-Pacific region. The efforts made simultaneously mean stimulating the export activities of existing enterprises and creating competitive conditions for attracting foreign business. Today, this work begins to bear fruit.

Where are foreign investments going?
Photo: / Sakhalin oil and gas projects - the largest example of international cooperation in the Far East
The main principle of the Ministry for the Development of the Russian Far East is to create competitive conditions for investment and business in the Far East. According to the Minister of the Russian Federation for the Development of the Far East Alexander Galushka, this practically means that “income tax, for example, we should have no more than 11%, as in the Republic of Korea, insurance premiums - no more than 10%, as in Japan. The deadline for obtaining a building permit is no more than 26 days, as in the USA, and customs procedures are as in Singapore. This is practical competitiveness. "

New economic regimes in the Far East - territories of advanced development and the Free Port of Vladivostok - allow businesses to significantly optimize the economic model when working in the Far East. In addition to the widely used incentives to optimize income tax and property tax, these regimes have, for example, such benefits as the optimization of social payments to the payroll fund. Residents pay insurance premiums of 7,6% instead of 30%, which provides tangible savings, especially for projects that employ highly qualified and highly paid personnel. In general, the attractiveness of priority development areas is due to three main elements. The first is tax breaks. The second is the availability of infrastructure. The third component is a special management system for such territories. The Ministry for the Development of the Russian Far East defines the basic principle of this system as follows: "The investor is always right."

Interestingly, companies from small to large can apply for such support, having received the status of a resident of the Free Port or TOP. The minimum investment threshold is 500 thousand rubles for ASEZs and 5 million rubles for the Free Port. At the same time, both new companies starting a business from scratch and existing enterprises investing in technological modernization or expansion of production can apply for benefits. Practice shows that small and medium-sized businesses are really starting to enjoy benefits: among the existing residents there are companies in which only 10-15 people are employed.

Today, the Agency of the Far East for Investment Promotion (IPA) has developed investment development strategies for all 9 subjects of the Far East, and in the portfolio of well-developed investment projects there are more than 400 projects structured in terms of investment and industries. Many of them may be of interest to foreign companies and are already offered to them at various venues. Significant expectations for the IPA are related to the creation of country investment platforms. One such - the Russian-Japanese platform - starts work this year, the Japanese Bank for International Cooperation, JBIC, is partnering with the Japanese side. It is planned to create similar investment platforms with China, India and the Republic of Korea.

Data of the Agency of the Far East on attracting investments

The largest international project in the Russian Far East today remains the development of oil and gas fields on the Sakhalin shelf. Companies from the USA, Japan and India are participating in the Sakhalin-1 project; in the Sakhalin-2 project - companies from the USA and Japan. The share of the Chinese business is in the Sakhalin-3 project. The extracted raw materials are sent for export, as well as for processing on the domestic market. At the same time, already today, thanks to government measures to support business in the Far East, new, in many ways significant projects of international cooperation are starting on the territory.

So, in the active stage today is a project to create by Indian investors coal mining enterprise in Kamchatka. Interest in the Krutogorovsky coal deposit in the region was shown by the holding TATA Group. TATA Power intends to produce coal for export in Kamchatka, including to provide fuel for its own generating assets.  

Investment in the project is estimated at $ 560 million. The volume of project financing from Sberbank is estimated at about $ 400 million, and financing will begin in 2018. A precondition for the entry of Indian business into the project was a system of preferences, which provide investors in the Far East with new development tools, in particular, the opportunity to receive TOR preferences and the necessary infrastructure. According to the project, after reaching full capacity, the field will produce up to 10 million tons of coal ready for sale per year.

This is not the only new Indian business project in the Far East. Today, dynamic preparations are underway for the launch of a diamond cutting enterprise in Vladivostok of the largest Indian holding KGK. The investor received the status of a resident of the Free Port of Vladivostok, the necessary equipment has already been delivered to the facility, and after the launch, the investor will be offered the services of the Eurasian Diamond Center - a specially created infrastructure for the storage and customs processing (export) of valuable goods, including diamonds.

Cooperation with investors from Japan is developing no less dynamically. One of the brightest projects with the participation of a large Japanese consortium is the reconstruction and development of the international airport in Khabarovsk. The consortium includes Sojitz Corporation, Japan Airport Terminal Co., JOIN investment fund of the Ministry of Land, Infrastructure and Transport of Japan. The capacity of the new airport will be up to 3 million passengers per year. The total cost of the project is about $ 70 million.

In the interests of investors, a number of unprecedented decisions have already been made, in particular, the approval of the FAS of the values ​​of long-term tariffs for the infrastructure facility. Work is also underway to include the city of Khabarovsk in the zone of the Free Port's economic regime. After the adoption of the relevant law, investors will be able to take advantage of all the tax benefits that this regime gives, and the airport itself will fall into the zone of a simplified visa regime for foreign citizens.

In this regard, it should be noted that every third of the projects signed in December last year during the official visit of Russian President V.V. Putin to Japan, geographically belongs to the Far East. In total, these are 27 projects, including 10 projects in the field of resource extraction, 15 projects for industrial development, 1 project in the field of urban development and 1 project in the field of medicine and health. At the same time, most industrial projects are focused on exporting products.

Within the framework of the new mechanisms for the development of the Far East, projects involving investors from the Republic of Korea are also being launched. This country is today the largest exporter of fish and seafood from the Russian Far East. Therefore, it is not surprising that Korean investments come to the fishing industry. 

So, in Kamchatka, Korea Traiding & Industries Co. invests about $ 7 million in the construction of a fish processing complex with a capacity of 10 thousand tons of products in the TOP. The project itself (City 415, is being implemented on parity terms with a Russian partner) has already received preferences from a resident of the advanced development area, in 2017 the investor plans to start building a quay wall, and the entire complex should be commissioned by 2020. Export orientation of the created production is assumed.

In total, Korean investors are currently implementing 6 projects in the Far East. The total investment in these projects is about $ 70 million. In addition, a company from the Republic of Korea intends to take part in the construction of the Kamchatka Regional Hospital. The volume of investments will be about $ 200 million.

The domestic market of the Russian Far East is quite small. Nevertheless, it allows developing economically effective projects in different sectors. Such projects, based either on import substitution or on technological modernization, can give the investor a guaranteed and stable profitability, even if the production itself will not be of a large scale. The success of such projects largely depends on the level of technology with which the investor comes. That is why projects in this sphere are of interest among foreign partners.

So, it was the domestic market that focused on one of their first projects implemented in the territory of the advanced development, the Japanese greenhouse complex JGC Evergreen. The greenhouses built in the Khabarovsk TOR produce tomatoes and cucumbers for the domestic market. The investor chose a successful marketing strategy: the cost of the product is lower than that of Chinese imports, and the quality is higher. As a result, greenhouses only have to compete with the seasonal output of local farms.

The Investment Promotion Agency today systematizes the needs of the Russian domestic market and offers investors projects by industry. 

Firstly, it is the urban infrastructure. The potential investment in the renovation of the worn-out infrastructure of housing and communal services in the largest cities in the Far East is estimated at almost $ 1 billion. The economy of projects is based on tariff regulation, while the Far East already has experience in fixing tariffs for a long time to ensure return on investment.

Secondly, it is local energy. This process is already underway - projects on energy efficiency, as well as on reducing the dependence of local generation on expensive imported fuel, are already being implemented and are giving investors the expected commercial result. It’s no joke to say that due to the deterioration of equipment and problems with fuel logistics at individual power plants, the cost of electricity generation reaches 2 dollars per 1 kWh. The Russian authorities are ready to preserve the existing amounts of subsidies for the payback period of projects, which allows the investor to “put down” the project's economy and get his economic result.

Thirdly, the IPA invites investors, including foreign ones, to invest in the development of retail chains and logistics. The year 2017 was significant in many ways - a hypermarket of a large retail chain of construction and household goods Leroy Merlin opened in Khabarovsk. The investment capacity of the industry, according to IPA analysts, today is over $ 1,1 billion. Fourth, the market for the creation and development of high technologies in the Far East is promising, for example, for the deep processing of local raw materials. The investment capacity of this market is over $ 3 billion. In this regard, the experience of the Korean company Gideon Sistek together with the Russian City Transport Company is interesting: investors, having received the status of a resident of the Free Port of Vladivostok, are investing over $ 30 million in the development of a smart payment system for urban transport in the capital of Primorye.

Another interesting opportunity, which opens the Russian Far East for foreign investors, is the local climate. The conditions of the sharply continental climate of Yakutia or the specific conditions of the coastal regions of Kamchatka is an opportunity to develop and test new technologies that will then find application in many countries, in the Arctic and Antarctic. This is not a new story - for example, the Yakutsk airport is traditionally used by the leaders of the world aircraft industry for testing and approbation of technologies in extreme cold conditions. 

The experience of Japanese power engineers is interesting: thanks to the support of the Japanese state organization NEDO, modern high-tech wind power generation complexes were built in Kamchatka. For engineers at Komaihaltec, working in Kamchatka was a real challenge. Technologies that allow the equipment to "survive" at temperatures up to minus 40 degrees Celsius, were specially developed for this project. The increased climatic requirements have touched all: both metal constructions, and a construct, and features of construction of the power scheme of delivery of the electric power. But thanks to the implementation of the project, the Japanese company, in fact, opened its way to a new market - the wind power generation market in the Arctic. Technology developed in Kamchatka is a competitive offer that can now be applied not only in Russia, but also in other northern countries. Moreover, the Japanese side is interested in finalizing its technology for even more severe conditions and, for this purpose, intends to implement another wind power generation project - this time in the village of Tiksi (Yakutia), on the coast of the Arctic Ocean.

Another example is the Sayuri greenhouse complex built in the suburb of Yakutsk with the participation of the Japanese investor Hokkaido Corporation. The initiators of the project brought the Japanese technology of growing vegetables to the permafrost, additionally modifying it taking into account local climatic conditions. This was the first experience of using the equipment in frost conditions reaching minus 60 degrees Celsius. It is worth noting that the operation of the equipment is monitored around the clock by the Japanese side: massive amounts of telemetry are broadcast online to Japan, and the Japanese side decides on the exact settings of the equipment (heating, ventilation, watering). The very first "wintering" of the greenhouse gave an impressive result: the equipment passed all climatic tests, the greenhouse yields a crop, there is a stable demand for the crop - all produced products are consumed by the local market. 

Today, thanks to state support for the advanced development of the Far East, similar projects for the development of new technologies, as well as the creation of testing grounds for existing equipment, will multiply. The territory of Yakutia is especially promising in this regard, because polygons for climatic tests can be formed where there is already a full-fledged infrastructure: a railway, a highway, the city of Yakutsk with a high scientific base, etc. Already now, among the potential residents of the TOP Industrial Park Kangalassy ”there are foreign companies that are considering the possibility of building test sites for their products. 

Published in the bulletin Economy of the Far East

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