A Specter is Haunting the Titanium Valley

21.02.2011 — Analysis

In March, 2011, the Sverdlovsk region will begin to create a special economic zone, the Titanium Valley. The government expects to use it to help attract investment to the region from major industrial corporations like Boeing. But the business community doubts that these plans will materialize. So far no one has found the money to build the infrastructure, the future of the development of the industrial site has not been clarified, and it is not even known exactly what all the future residents of the Valley will do. Experts have assured this columnist for "RusBusinessNews" that this special zone will most likely turn into an ordinary offshore financial center, which will allow businesses to bring imported goods into Russia without paying customs duties.

The Russian government decided to create a special economic zone (SEZ) in the Sverdlovsk region in December, 2010. It is to be located on 750 hectares between the cities of Nizhny Tagil and Verkhnyaya Salda. The necessary infrastructure will be created in two stages. Initially, in 2011-2013, 10 billion rubles will be spent to supply power to the site. Then, some social infrastructure facilities will have to be built. According to officials from the Sverdlovsk region, there are plans to construct a residential village of thirty houses, sports and cultural facilities, a four-lane highway, and high-speed rail lines between Nizhny Tagil and Verkhnyaya Salda. It has also been proposed to reconstruct Salka, the former military airfield, so that it can become part of the supply chain for the Titanium Valley, bringing in goods from abroad.

The special economic zone owes its name to VSMPO-Avisma, the supplier of titanium products to the world's leading aircraft manufacturers. It is assumed that VSMPO-Avisma's business partners will be the Valley's first residents. According to Viktor Dolzhenko, the deputy minister of the economy of the Sverdlovsk region, four letters of intent have been signed with companies that process titanium and manufacture metal-working equipment. There are also 12 letters of application from other partners of VSMPO-Avisma, which are involved in the Ural Boeing Manufacturing joint venture. They all must still defend their business plans at the Russian Ministry of Economic Development, and then they will receive resident status in the SEZ.

Participants in the Titanium Valley project will receive significant tax and customs incentives - companies that propose projects worth more than $3 million and spend $1 million during the first year will be exempt from property, land, and transportation taxes. In addition, their income tax will be lowered to 4.5% and they will not be charged value-added tax and or have customs duties levied on their imported foreign goods.

Representatives of the Sverdlovsk regional government claim that within two months a management company will be created and the economic concept of the SEZ will be completed. By March they will break ground on an ambitious construction site. Of course, it's also true, as Viktor Dolzhenko reports, that there is a lack of funds to plan and promote the Titanium Valley, and money for it was not included in the regional government's 2011 budget. Nor is any federal funding anticipated for this year.

Entrepreneurs say you don't need government funding to begin building infrastructure, but in order to do that, you have to have a clear picture of the future plans of the administrative bodies of the SEZ. At present, that picture is not clear. Members of the Union of Industrialists and Entrepreneurs of the Sverdlovsk region, who were discussing the future construction of the Titanium Valley, were unable to get answers to a single one of their questions.

David Gaidt, the head of Gazprom Transgaz Ekaterinburg LLC, wanted to know, in particular, whether residents of the zone would have to pay for network connections, and, in general, if it wouldn't be better to just build energy-generating capacities on site, instead of spending money to bring in electricity. He thinks that if the Valley is going to need 150 MW, it's simpler to just build a power plant there, rather than expand the entire electrical system of the Sverdlovsk region and then bring power lines directly out to the SEZ. The business community is interested in building the new power facilities, and this will make it possible to forgo government subsidies. There are similar questions regarding natural gas supplies for the special economic zone, but so far there are no answers from the government. According to Viktor Dolzhenko, the Ministry of the Economy has made an assessment of the power supply that might be needed, but isn't ready to give exact numbers. The officials need detailed information on the residents before they can come up with a complete picture of the potential load demand.

Dmitry Pumpyansky, the chairman of the board of directors for Tube Metallurgical Company (TMK), OJSC, wonders if it is worth investing in the infrastructure, when there are currently still so few applications from potential residents. According to his data, a lot of money has been invested in the special economic zone in the Lipetsk region, and the returns there are still quite modest - a glass plant has been built as well as a number of component factories. Dmitry Pumpyansky hasn't gotten an answer to his question, either. The officials merely advised him to propose some ideas and projects, so that he could quickly defend his business plans at the Ministry of Economic Development.

The illusory reconstruction of the transportation infrastructure is looking pretty spectral as well. According to Viktor Dolzhenko, no one seems to know exactly what's happening with the airfield at Salka. Nor has there been any progress on the issues of increasing the traffic capacity of the highway between Nizhny Tagil and Verkhnyaya Salda. Experts believe that a four-lane highway will be ruinous for taxpayers. In 2010, it cost an average of $17.6 million for Russians to build one kilometer of paved road. This can be compared with costs of $6.9 million in the EU and $2.2 million in China. It's obvious that part of the money that is supposedly being spent on roads is instead being appropriated by the people in charge of disbursing the administrative resources. This makes experts confident that any economic project in Russia will founder as long as officials have more interest in taking their cut than in making sure quality infrastructure is built at a reasonable price.

The business community thus has the right to ask, since the future is unclear, the infrastructure is not ready, and most of all, no one knows where the money is coming from to build it, then what is the justification for breaking ground on this project? Dmitry Pumpyansky explained to his colleagues that this is a long-term project and, with a reasonable approach, it could really stimulate the development of the mining areas of the Sverdlovsk region. He appreciates the value of the economic incentives that are being offered, especially not having to pay VAT or customs duties on imported goods.

The authorities of the Sverdlovsk region claimed that companies that present business plans before June, 2011 and register as residents of the Titanium Valley SEZ before the end of next year will have the opportunity to sell their products in the member countries of the Customs Union (Russia, Belarus, and Kazakhstan), without paying customs duties on imports or taxes. These incentives are in effect until January 1, 2017.

Experts believe that businesses will be interested in the Titanium Valley until that date, because they will be able to buy components in China, use them to assemble finished products, and then sell the duty-free goods in these ex-Soviet countries. The chances are very good that is exactly what the residents of the Valley will be doing for the next five years. After that, it's anyone's guess. This is not yet the right time in Russia to make high value-added products with long production cycles.

Vladimir Terletsky