A bird in Russia's hand is worth two in the bush

20.05.2011 — Analysis

Russia is getting ready to launch the Export Credit and Investment Insurance Agency. The government expects that this step, along with soft lending offered to foreign customers, will help domestic machine-builders to build up exports of their products. In the meantime, experts argue that insurance against risks is the least important problem for manufacturers and is going to bring them only increased expenses. As manufacturers have told the "RusBusinessNews" columnist, the production of competitive machine-building products in Russia is impeded by corruption and absence of political will that must be inherent in government top executives.

Russian Prime Minister Vladimir Putin announced at the congress of the Union of Russian Machine-Builders that the Export Credit and Investment Insurance Agency "will accept part of financial risks and help our exporters to build up their competitiveness". The insurance amount scheduled for this year will not exceed 1 million US dollars; however, by 2013 it is planned to cover more than 15% of the total Russian export of machines, equipment and vehicles for the total amount of more than 14 billion US dollars.

Manufacturers responded the premier's initiative without any enthusiasm. Mikhail Barinberg, Deputy Sales Director at the Ural Turbine Factory, CJSC, has informed "RusBusinessNews" that the only foreign customer of the factory is Kazakhstan, and supplies to it are well established. The Ekaterinburg factory used to sell turbines to China, which, however, built nine manufacturing facilities of its own within a short period of time, and the cooperation discontinued. To get into markets of the European Union and other developed countries, Russian manufacturers need to have qualitatively new products. The Ural turbine manufacturers have this objective on their agenda, but its accomplishment is impossible without heavy investment and support from related industries. During the Soviet period, the government summoned up manufacturers when wanted to commercialize a new type of machinery. Today, this function could be performed by a properly structured cluster; however, building of sophisticated systems and arrangement of investment flows mean a lot of problems that are difficult to solve in Russia; therefore, machine builders are still not able to attract big money.

Andrei Bukhmastov, Director of the Union for Machine-Building Enterprises of the Sverdlovsk Region, says that with reference to the well-known triad - price-time-quality that, in fact, determines that company's share of the market, Russian factories are able to compete only in one category: the price. It is not possible to enhance quality of sophisticated products without interest-free loans given to manufacturing factories, improvement of investment climate in the country and without the government's participation in development of the infrastructure.

Alexander Kotelnikov, Managing Director of Mashprom, a research and development enterprise, has no doubt that until Russia has world-level technologies there is no sense in talking about competition with leading machine-building companies. Contrary to the established opinion, foreign companies are willing to enter into joint ventures with Russian partners. For example, flagship companies having the lead in manufacturing of metallurgical equipment offer to localize manufacturing of required components in the Urals in order to win the tender for re-equipment of Uralmashzavod. The experts of Mashprom estimated that their factory is ready to manufacture one third of components and parts; and without taking into account automation systems and a number of other components, which are purchased by all manufacturers from the same companies, localization might reach 90%.

A. Kotelnikov believes that cooperation with world-branded companies would help Russian engineering firms to move manufacturing of their equipment to a qualitatively new level and to start head-to-head competition. This strategy, for example, was applied by China that through its joint ventures as able to move technologically far ahead and started to receive orders from leading companies.

However, it is extremely difficult to put this scenario into effect in Russia. For example, it turned out that it is not profitable to sell localized products within the country due to the value added tax imposed on sellable products, eroding the competitiveness of Russian manufacturers who are at a disadvantage to the Chinese. There are no other markets for depressed machine building.

Russian engineers appear to be much more concerned about taxation and technological problems rather than about insurance of export credits. According to Alexander Kotelnikov, commercial and financial risks do not cause problems: They are completely covered by the bank guarantee, which can be easily received by the companies that have good credit history and marketable products. Consequently, there is no need in credit insurance that means additional burden shouldered by importers and exporters. The benefit goes only to insurance companies, whereas machine builders could be motivated by revision of customs regulations and changes in VAT payment practices.

While alluding to irrelevancy of the government's initiative, manufacturers, however, admit that lending of foreign customers helps Russian companies to penetrate into international markets. Elena Venediktova, Marketing director at the Ural Turbine Factory, thinks that the company, using this instrument, would be able to find new customers in Ukraine and Belarus where money issues are quite substantial. Belorussian manufacturers are not very happy about the products supplied by Chinese companies that are moving fast into CIS markets due to the received loans.

Andrei Korzhubaev, head of the department at the Institute of Economics and organization of Industrial Production at the Siberian Branch of the Russian Academy of Sciences, sees customer lending as an important method of support to machine-building exports; however, a lot depends on actualization of the concept in real life. Russian officials are capable of causing damage to the most advantageous initiatives of top executives of the state through their inertness and lack of supervision. The system of related lending bears fruit when the country's governing authorities show political will and take control over export and import banks. For example, in China, Eximbank operating under supervision of the country's premier provided financing for the transaction, under which Russian oil companies are sold the equipment that underperforms based on a number of parameters as compared to the Ural drilling rigs.

Russia has its "Eximbank", but the experts have never heard that it did anything useful for the country. More than that, government agencies and officials often operate openly in favor of foreign countries. According to A. Korzhubaev, Russian generals do not conceal their acting as agents of influence from the part of foreign manufacturers of military equipment, criticizing loudly home-made products and pushing manufacturers to upgrading of the obsolete machinery instead of new equipment.

Problems of Russian machine-building are well-known to everybody: Poor motivation of innovative research and technology, unprotected intellectual property, outdated management, lack of specialization in manufacturing components for different types of production, incompetent marketing, etc. It takes time and investment to solve these longstanding problems. However, the ruling class of Russia is not willing to give either of them, preferring to have a bird in its hand rather than two in the bush.

The elite prefer to earn its small but existing margin through two ways: Some are lobbying interests of foreign manufacturers, while the others try to do their simple business using government infusions and financial structures. Such economy allows talking about export only with reference to mineral resources.

Vladimir Terletsky