New route from China to Europe

16.07.2012 — Analysis

In a couple of years the Celestial Empire and the Old World will be connected through a new Silk Road – across the Ural Mountains. The novel transportation route has gained robust support from the Shanghai Cooperation Organization and Russian President Vladimir Putin. The route is expected to invigorate trade between Russia and China, and will, undoubtedly, help to reduce delivery time and cost. The presentation of the project was made personally by Mikhail Yurevich, the governor of the Chelyabinsk Region, during his business visit to China where the meeting of the SCO Council took place in June this year. It was the central theme in the interview given by the head of the region to the news editor of RusBusinessNews.

- Mikhail Valerievich, the year 2012 can be referred to as the Chinese Year in the South Urals. The region signed an important agreement with the Xinjiang Uyghur Autonomous Region, the regional delegation was invited to the meeting of the Council of the Heads of the SCO Member States...

- The agreement signed with the Xinjiang Uyghur Autonomous Region – China’s territory neighboring the Chelyabinsk Region, Kazakhstan, Tajikistan and Uzbekistan, is of strategic significance to us. Certainly, we will develop trade, economic and investment cooperation as well as cooperation in agriculture and food industry. However, our main project is to create a new viable transportation corridor between China and Russia through Kazakhstan and the Chelyabinsk Region. Its end point is Western Europe. We introduced this project to the heads of member countries of the Shanghai Cooperation Organization.

- What should be done to launch the transportation corridor named as the new Silk Road?

- We are planning to build two trade and logistics complexes. One of them will be located in the South Urals; the other complex will be in Urumqi in China. The development of the South Ural Trade and Logistics Complex that will occupy 180 hectares in the Uvelsky District will take 5-7 years. The investment scheduled for the initial stage of the project will amount about 120 million euros solely from Russian companies. The project of the complex gained approval and support from the Ministry for Regional Development and the RF Federal Customs Service.

- The project involves many participating parties — which of them benefits most?

- Both Russia and China are interested in the project that will provide the shortest route between them. Due to the project, traffic flows will be optimized, transportation costs will go down, and the cost of transported goods will decrease. The railroad will also be at advantage, having an additional load.

Besides, the northwestern areas of the Celestial Empire, which are located far away from sea ports, will have new market outlets. The South Urals also have commodity freights that we can deliver to China. At present, the Russian and Chinese goods turnover is quite impressive — at the end of 2011 it exceeded $60 billion, and the Chelyabinsk Region accounted for $381.4 million. I think that with the launching of the transportation corridor our performance indicators will be very different.

International practices show that it is economically profitable to use large logistics centers as locations for companies operating in machine-building and processing of agricultural products. Our region will receive an additional investment site. The social significance of the project should not be neglected — it will bring two thousand jobs.

- Is the issue of loading the transportation corridor being taken care of?

- Although the multimodal transportation and logistics complex exists only "on paper" so far, the work on future freight container flows is in full swing. At the end of May, Logic Land, LLC, the company that spearheaded the project of the South Ural Trade and Logistics Complex, entered into an agreement with the Chinese company, Beijing Ru-Cn Instruments Technology Co. Ltd. and the Chelyabinsk Mechanical Plant, OJSC. It will not only provide the required freight flow, but also will help to optimize freight handling and to reduce the delivery time by more than 4 times - to 15-20 days.

Another important achievement is the agreement with the Xinjiang-based company operating in international logistics – Eurasian Continental Bridge. The company will be responsible for contracts for delivery and servicing freights in the amount of not less than 2 million tons a year. The similar contract has been signed with Haier, a Chinese corporation – it will provide a freight flow of 500 thousand tons a year. Negotiations are also being conducted with other companies.

- Are China and the South Urals linked only through transportation and logistics plans or does this bilateral cooperation cover other areas?

- Today, we are working not only with the Xinjiang Uyghur Autonomous Region, but also with the Heilongjiang Province. The future plans include sharing of medical experience and opening of a Chinese medicine clinic in our region. The South Ural Region opened its representative office in the free economic zone of Harbin where it will deal with attracting of Chinese investors. Chinese manufacturers of elevators are already interested in cooperation with the Chelyabinsk Region.

It should be noted that today there are many international companies operating in The Celestial Empire; however, the lack of knowledge of foreign languages impedes the movement of Chinese companies to the world and Russian markets. Russia has the same problem. In addition, Russian business people are still cautious about Chinese products, remembering their reputation of low-quality goods. The Chinese are aware of the problem; they are interested in closing down or restructuring the Chinese market outlets operating in Russia to stop grey imports. In my opinion, it can be done. Relocation to professionally equipped pavilions will legalize retail operations and will increase the tax base of local budgets.

- Turning back to investment …. After you took the governor’s office, starting from the middle of 2010, the Chelyabinsk Region embarked upon the course of attracting investors. What results have been reached over that time?

- Fixed capital investment of large and medium-sized enterprises operating in the region has reached 174.3 billion rubles, having increased by 6.2% as compared to 2010. The amount of foreign investment in the Chelyabinsk Region increased by 14.1% over 2011, totaling about $3.8 billion. Within last year, 208 production facilities were revamped and put into operation in the South Urals. The major investment projects include the reconstruction of the hot-rolling mill - Mill-2500 – at the Magnitogorsk Metallurgical Integrated Plant, OJSC, the construction of the Mikheyevsky Mining and Processing Integrated Factory. In 2011, Standard & Poor's confirmed the ВВ+ long-term credit rating of the Chelyabinsk Region and the ruAA+ national rating. The forecast was given as "Stable".

- What countries are most interested in doing business with the South Urals?

- First of all, I must say that we do not count solely on foreign investors; we have our own strong entrepreneurs who start new production operations or upgrade the existing facilities. However, foreign technologies have moved far ahead, and we need them to stay competitive. As for foreign business, I will give a few examples. Siemens VAI, a German company, opened its representative office in Chelyabinsk in spring of 2012. We expect that Siemens will place its orders with machine-building enterprises of the South Urals.

Danieli, an Italian company, a reputed leader in design of equipment for metallurgy, intends to open a 9 thousand-square-meter service center in the capital of the South Urals. The amount of investment in the construction will total about €50 million. It is an important project for the Chelyabinsk Region with its well-developed metallurgical sector.

Excellent opportunities have been opened by the agreement with PriceWaterhouseCoopers – the world’s largest network providing consulting services. We count on the reputation strength of this company in selection of strategic investors and in training our managers in accordance with the established world standards.

We are conducting negotiations with Aviagen, a British firm, and Hubbard, a French firm, about construction of a nucleus in the South Urals with the capacity of 10 million breeder eggs annually; the estimated amount of investment is 900 million rubles.

- At what stage of progress is the project for development of the Suroyamskoye iron ore deposit with participation of Fleming Family & Partners, a British management company?

- The agreement for the 104 billion rubles investment project was signed by the government of the Chelyabinsk Region about one year ago. At the moment, the detailed exploration of the Suroyamskoye deposit is coming to an end — the investment in this exploration amounted to about $30 million. If the investor is satisfied with the ore reserves, and according to our data, the reserves are sufficient for more than 100 years, the next step will be the decision on construction of a large mining and metallurgical complex. Furthermore, only 40 kilometers away from the deposit there is one more, poorly-explored, deposit of iron ore with the similar chemical composition, and it may be interesting to the British company.

- Foreign diplomats often point out that business cooperation can be boosted up by availability of direct flights...

- I totally agree with them. Previously, when individual entrepreneurs or delegations visited the South Urals, they had to fly to Ekaterinburg and then go another 200 kilometers by car to get to Chelyabinsk. From the image perspective, it was our weakness. Since 2011 we have been working intensively to promote our airport to the aviation arena. The airport infrastructure has been fundamentally changed: There is a new lounge for international airlines and a "green" customs corridor. The route network has been extended to include flights strategically significant to Chelyabinsk, such as flights to Dusseldorf, Vena, Burgas, Dubai, and Harbin. The airport intends to reach the service performance of 1 million passengers this year. Though the number is quite decent, but we should keep in mind a higher, say, 3 million level.

The interview was conducted by Valentina Mazharova