RS Main Special Areas of Economic Growth

Special Areas of Economic Growth

December 2013

The Russian government tries to resist the outflow of capital by active investors in the Special Economic Zones (SEZ): At the end of October, the Ministry of Economic Development of the Russian Federation approved investment projects worth more than 1 billion rubles for the implementation of the 'SEZ'. Experts believe that with the crisis conditions in the Eurozone, that it makes sense for the foreign investors to approach the prospective market and cheap labor resources that the SEZ in Russia provides.

The development of SEZ began in Russia in 2005. SEZ investors receive budget infrastructure provided at the state's expense for business development: it allows companies to reduce expenses for their new production. There are 4 types of SEZ zones - industrial production, techno-innovation, port, and tourism and recreation. Within Russia there are mostly touristic zones (14), industrial (4), and Innovative (4), and port (3). The geography of SEZ is very extensive: starting from the Moscow region(innovative SEZ of Dubna) and stretching to the Primorsky territory. In 2012, there were some changes in the order of formation of SEZ: the concept of a 'cluster' was introduced, that is the set of special economic zones of one or several types. As an added note, SEZ has been in existence for 49 years.

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Special Economic Zone Lipeck
Special Economic Zone Lipeck

In order to attract investors to SEZ, the government guarantees considerable privileges: reduction or exemption from property taxes, income tax (16% instead of 20%) – despite the fact that these taxes are the most "lucrative" for the Russian government. Also, investors are enticed with a decrease in the rate of insurance contributions (14% instead of 30%). Residents of industrial zones are exempt from paying land and transport taxes. The customs duties on imported semi-finished products and raw materials are partially or completely cancelled. For SEZ development, the government grants 'soft loans' and investment subsidies, lowered rates on payment of housing services and public utilities and rents on commercial premises. The favorable conditions are created also in respect of administrative procedures: the simplified procedure for the registration of enterprises (so-called "one window"), a simplified procedure for entry and exit of foreigners, as well as unrestricted repatriation of profits for those living abroad.

In order to attract investors to SEZ the government guarantees considerable privileges: reduction or exemption from property tax, income tax, land and transport taxes, and reduced insurance rates

SEZs are under the jurisdiction of the Federal Agency for Management of Special Economic Zones (RosOEZ), under the supervision of the Ministry of Economic Development. It supervises the work of the companies in SEZ and is engaged in preliminary analysis of the projects eligible and applying for support from investment fund - investment subsidies are provided through these investment grants.

During its existence, the government has invested in SEZ in the amount of 45 billion rubles. The greater part of these funds has gone toward the innovative zones in the amount of 26 billion rubles, which is not all that surprising: the innovative economy and its modernization were proclaimed as priority for the country during Dmitry Medvedev's presidency (from 2008 to 2012). 15 billion rubles were invested in industrial zones and 2.5 billion in touristic zones.

According to official data, during 6 years (from 2006 to 2012), more than 340 investors were involved in SEZ from 25 countries. These are such multinational corporations, like Yokohama, Isuzu, Itochu, Sojitz, Bekaert, Novartis, Plastic Logic and others. The volume of these investments alleged by residents is more than 430 billion rubles (in light of the recently alleged projects).

The rate of return for SEZ investor companies, including privileges is estimated to be 30-35% by experts, and sometimes 40% a year. Reducing Payback periods by 2-3 times the amount.

'Alabuga', one of the areas within SEZ, is considered to be one of the most successful projects in Tatarstan. From industrial production is the largest type in SEZ (20 square kilometers).

Within the region, undergoing the first stage of construction, there are 200 hectares of free land.

In another part of the region, currently undergoing the second stage, there are about 700 hectares, excluding infrastructure facilities. The entire region of the SEZ is roughly divided into modules area of 3, 5, 10 or more hectares. Each resident portion is connected to communications: roads, railways, engineering networks, electricity, heat, gas, water, sewer, high-speed communication lines.

SEZ operates within the area's industrial site, which was initially created in 1985 for the Kamsk tractor-technical plant, which was then redeveloped into the Yelabuga automobile plant.

Special Economic Zone Alabuga
Special Economic Zone Alabuga

The area has been in existence in its current form since 2005, and only 36 residents have been registered in all this time. These are plants and enterprises that make up part of the world industry leaders: Ford-Sollers, Saint-Gobain, Air Liquide, Rockwool, Sisecam, Hayat Group and others. According to SEZ general director, Timur Shagivaleev, 25.34 billion rubles are physically disbursed by residents today, nearly 3 thousand jobs have been created, and products worth an estimated 39.2 billion rubles are manufactured. Only last year the volume of the claimed investments into 'Alabuga'-SEZ increased by more than 60 percent and were an estimated 79.7 billion rubles. Alabuga's secret appeal is due to its income tax rate. Its republican share (i.e. the amount that contributes to Tatarstan's overall budget) is equal to zero percent. And this standard extends for the first 5 years of a resident's employment within the SEZ zone. Thereafter, the rate increases to 5% for the next 5 years.

Therefore, it is no wonder that 'Alabuga' makes up 52% of all the investments in SEZ (27 billion rubles), 60% of tax assignments (3.7 billion rubles) and 71% of manufactured production. Lately the list of residents of 'Alabuga' has increased: according to the MED advisory council's decision which was adopted in October, the engineering center was accepted, and has managed to create 15 new experimental prototypes of power tools within its testing center, for about a year.

Anastasia Matveeva,
Exclusively for Russian Survey RS

Natalia Samoilova, the head of the analytical department of “Golden Hills-Capital-АМ” investment company:

'SEZ zones are, in principle, very attractive for business, and given the stated interest and respectively the willingness of the state to promote the development of such zones and certain sectors of economy, the appeal and interest in SEZ zones increase exponentially.'

A vivid example of the advantages that such institutions can bring – from the government, to the ordinary citizen, was demonstrated by China which in the 80s, began the creation of "special economic zones". Their quantity began to grow immediately and at present, almost all the east coast of China is literally 'sowed" by SEZs. As a rule, these are export-oriented production areas, the greater part of which (about 170 - 180 billion. dollars monthly) are made mainly for the USA, the European Union, and the Pacific Rim countries markets'.

As for the specific character of Russia, more than one government official, and the president of the Russian Federation, declared that the direct investments are required for the country, outside of the raw commodity sector, those are import substitution, and high technologies. Besides, certain SEZ are encouraged to fight against poverty in some regions of the country. Respectively the areas where there is an interest of the government in development of this or that industry, there will be interest to conduct certain types of businesses.

Today, residents of SEZ, corporate residents include companies with dominant names usually as joint ventures: Ford Sollers-Yelabuga, General Motors-Avtovaz, Avtec (supplier of Daimler, Mitsubishi, Ford, GM, etc.), AAR (repair of Boeing, AirBus), international conglomerate 3M, Cherkizovo. Besides constantly new unknown names appear in such spheres as nanotechnologies, biotechnologies, the high-precision equipment, light industry and a great number of others".

Igor Dombrovan, the managing director of the office of Saxo Bank in Russia

Business development in special economic zones is still favorable to all – that is, producers, the consumer and the state when speaking of the creation of new businesses. SEZ are essential to foreign investors with respect to the protection of their rights. Given the lack of prospects for recovery in the euro zone and the relatively favorable situation in Russia, it makes sense for foreign investors to approach the prospective market and cheap labor resources that the SEZ in Russia provides, and is happening, as is evident. This applies mostly to industrial SEZ, which provides the greatest long-term benefits to all three sides.