The Bottomless Titanium Valley

27.03.2013 — Analysis

Officials in the Sverdlovsk region have asked the Russian government to fund some of the construction expenses for the Titanium Valley special economic zone. The regional authorities are counting on federal assistance to significantly speed up the project, which has already been incubating for over two years. The columnist from RusBusinessNews has learnt that the delay in establishing the infrastructure could cost the Titanium Valley dearly - the future industrial cluster between Verkhnyaya Salda and Nizhny Tagil already nowadays have to fight not only the Chinese, but also the more dynamic Russian regions for the residents who are willing to invest.

The Russian government made a decision to establish the Titanium Valley special economic zone in December 2010. Since then only three resident companies have registered to locate there, investing a total of 2.5 billion rubles. They intend to produce energy-efficient high-voltage equipment, fiber-optic cables, and composite fiberglass pipes at this industrial site.

Despite the name of the special economic zone, there are no projects on manufacturing titanium products there, which is odd - the SEZ is located right next door to the world's biggest titanium producer, the VSMPO-Avisma Corporation, which supplies components to Airbus, Boeing, and General Electric.

According to Sergei Lednov, director of business development of VSMPO-Avisma OJSC, the company's production of that metal has risen 14% in the last five years, and the quantity of machined parts – by three times. The market will continue to grow - contracts have already been signed to manufacture airplanes with a total mass of 10,000 tons, which will require 350,000 tons of titanium. For comparison - the world currently consumes no more than 130,000 tons of the metal every year.

The prospects of the aviation market are leading an increasing number of manufacturers to begin working with titanium - processing facilities have emerged in Korea, China, Poland, and other countries. But VSMPO-Avisma is holding fast to its market niche: aircraft manufacturers rarely change the supplier of their titanium products before the mass production of a particular plane comes to an end. It is true that fierce competition is forcing the world's leading metallurgical companies to take the extra step and provide Airbus and Boeing with preassembled modules instead of just stock materials. Sergei Lednov feels that this is the development path the Russian corporation must follow - creating more advanced production facilities in the Titanium Valley.

But the special economic zone currently lacks even infrastructure. After 2.5 years and spending 400 million rubles, the management company has succeeded only in doing land surveys, drafting design and cost-estimate documentation, and putting in a temporary road. According to Artemy Kyzlasov, the general director of the Titanium Valley SEZ, OJSC, 1.2 billion rubles will be needed to build infrastructure and let the residents into the construction site. But the Sverdlovsk region has only budgeted 500 million rubles of investment in 2013.

The region's leaders have appealed to the Russian government for help and expect to receive federal funds in 2014. Aleksei Orlov, the deputy chairman of the government of the Sverdlovsk region, claims that the idea is for the region to pay 49% of the construction costs of the special economic zone and the federal government 51%. But the official emphasized that if Moscow doesn't come up with the money, the regional treasury will have to foot the bill.

The deputies in the Sverdlovsk regional Duma were less than pleased with that prospect. Andrei Alshevskikh, member of the Communist party, expressed his doubts openly during the parliamentary hearings. Hundreds of millions of rubles of public money are allocated each year to the Titanium Valley and its construction has not yet even begun. He complains that each year the representatives of the management company claim that it's "about to get going" and ask for more money. The spending has been scheduled as long as 49 years in advance and broken down into five-year plans, which the deputy finds quite troubling, "Not a single one of our strategies has been brought to fruition as planned. But the money has been allocated. Even by 2020 I'm not sure what the situation will be like, for the Titanium Valley or for us."

Dmitry Ionin, deputy, noted that the Sverdlovsk region is extremely far behind in its creation of an industrial cluster. The Kaluga region announced the construction of its special economic zone only in 2012, but it has already collected investment proposals worth 9.2 billion rubles from residents. Thirty-three residents have registered in the Alabuga SEZ (Republic of Tatarstan), with current projects valued at a total of 86 billion rubles. There is no lack of investors in these parts of Russia. In the Kaluga region, for example, it's not the tax benefits that are drawing them, but the special entrepreneurial environment.

Mr. Ionin suggests that the Sverdlovsk region will be unable to compete with these Russian regions (much less with China, which is building not only infrastructure in special zones, but also production facilities), if the residents are not offered more advantageous terms. Tax concessions alone are unlikely to attract investors who are more interested in the investment climate, living conditions, availability of qualified workers, and so on.

Experts claim that Verkhnyaya Salda lacks surplus labor, and if specialists are brought in from out of town there is currently nowhere for them to live. It's true that the management company has already begun planning a residential village, but it's not clear where the money will come from to build it. D. Ionin suggests offering state guarantees to the banks that are providing credit lines for the SEZ, without the right of recourse, in order to prevent the budget of the Sverdlovsk region from being decimated. This could possibly be effective, given the absence of adequate state funding, but will it have time to bring results before the competitors get hopelessly far ahead?

No one can promise anyone anything about the future of the Titanium Valley. However, officials in the Sverdlovsk region are firmly convinced that in 49 years, 225 billion rubles will have been invested in the special zone and 10,000 new jobs will have been created. That's why the experts find solace in black humor, "Even if we don't catch up with the competitors, at least we'll get warm..."

Vladimir Terletsky