Russian Industry Turned Off Profit Generator

24.12.2009 — Analysis

The Sverdlovsk Oblast economy stopped being dependent on the domestic market as only a quarter of the metal produced in the region is consumed in Russia. The rest is exported, predominantly to China. The technologically outdated Urals enterprises, however, are finding it harder and harder to compete with foreign competitors. Aleksandr Misharin, the Oblast Governor, sees the way out in the modernization of industry and the reduction of imports of goods made of metal. The RusBusinessNews observer, however, found out that this goal does not go very well together with the social responsibility of business and tax increases in 2010.

Aleksandr Misharin, the Governor of the Sverdlovsk Oblast, at a meeting of entrepreneurs criticized the industrial policy of recent decades in the region under the Governor Rossel. According to him the classic raw-material economy has formed in the Mid Urals; 57% of products are made by the metal making sector and only 17% by the machine building companies. Moreover, in the metal making sector products of the low level of processing dominate; these include slabs, rolled metal, cathode copper etc. Commodities with high added value made of the Urals metal are produced either abroad or in other Russian regions.

The restructuring in region, numerous discussions on the topic notwithstanding, has never happened. Accordingly, the labour productivity and wages in the Sverdlovsk oblast are amongst the lowest in Russia. According to Mr. Misharin, only 80% of enterprises can work within modern standards. More than a quarter of a million of the people of the Sverdlovsk Oblast work at plants which would not survive without the State support as they are incapable of competing even in Russia.

The Sverdlovsk Oblast Economy is only staying afloat due to the growth of metal prices in foreign markets. The Russian industry is capable of consuming no more that 25-30% of metal made in the Mid Urals. The region is heavily dependent on exports which is very noticeable now when some countries reduced their metal purchases by a third. It should be pointed out that the Sverdlovsk Oblast chose its destiny well before the global financial crisis; in 2006 the production of steam turbines in the Sverdlovsk Oblast amounted only to 19% of that in 1990 and the production of diesel generators was just a measly 4%.

In these conditions, reckons Mr. Misharin, it is difficult to talk about the creation of machine building clusters, establishment of the intraregional cooperation, or development of small business in the real sector.

Andrei Kozitsyn, the President of the Union of Metallurgists of the Sverdlovsk Oblast, agrees that the sector is not competitive but points out that investments are needed in order to catch up in terms of technology. Getting the needed resources together is hindered by the ongoing growth of tariffs for services provided by monopolies. For instance the level of prices in Russia for electricity is very close to that in the US where prices of gas and coal as well as wages are significantly higher than in Russia. In the meantime, against the backdrop of the reduction of the consumption of electric power Russian energy companies managed to make a good profit. We have a similar situation, claims the expert, with JSC Russian Railways which leads to the loss of the competitiveness of industry.

Andrei Kozitsyn reckons that the State must quickly improve the attractiveness of Russia for investment. New high-tech production facilities should be freed of all taxes for five years, he thinks, except for the social and personal income taxes. Moreover, it is necessary to organize the financing with the interest rate of 5% for 10 years which would require the total reconsideration of the role of banks in Russia.

The Governor, in his reply to the entrepreneur, recalled that bank interest rates depend on the level of inflation in the country which is formed not in a small measure by tariffs in inefficient energy sector. He promised not to support loss making generation capacities of the region which are hindering the development of the rest of sectors of economy and to start working for the modernization of the transport infrastructure, implementation of new technologies in core sectors and nanotechnologies. Aleksandr Misharin did not say anything about the upkeep of utilities and social facilities in monocities by the business or laying off the excessive staff. He just made a promise to help those who carry out the social mission.

Business, however, is expecting a different kind of support from authorities. As Mr. Kozitsyn pointed out, monocities today are not interested at all in the generation of profit since all of it simply goes into the State's coffers and then gets distributed manifestly not in the interests of territories where the plants are located. The established practices, however, allow the officials to form the regional budget with far too much freedom. In particular, the revenues were consciously overestimated a year ago and underestimated this year. All this is done for the sake of making sure that public cannot monitor spending of fairly significant sums of money. The expert is convinced that the budget deficit in the Sverdlovsk Oblast for 2010 can be brought down to zero and any revenue exceeding the spending should be channelled into the measures for the modernization of the economy.

The Governor replied to this that compared to the financial activities of industrial enterprises the regional budget is specimen of total transparency. Mr. Misharin suggested that business should disclose all information of its activities on the internet as a complimentary initiative. The intention of authorities to help only those who are transparent may be an incentive for this.

Experts, in the meantime, reckon that the destiny of Russian business is determined to a greater extent by federal, rather than regional, officials. Aleksander Shokhin, the President of the Russian Union of Industrialists and Entrepreneurs (RSPP), reminded that in 2010 the unified social tax is getting abolished which will lead to the increase in the tax on the wages fund (up to 10% in some sectors). According to the expert this may further undermine the financial standing of enterprises which are forced to keep the excessive staff. The endurance reserves of many of them have been exhausted, as the Head of RSPP reckons.

Aleksander Shokhin is of the opinion that tax and administrative concessions may serve as incentive for investment, innovation, and modernization of economy, and not the monetary handouts to banks and enterprises which just increase the corruption and entrepreneurial risks.

The events of 2009 force us to remember the old appeals of economists to the Russian Government suggesting spending some of the accumulated petrodollars and declare a tax holiday for business in the country. Officials did not want to spend the money and now are forced to hand out money out of the Investment Fund to ineffective enterprises in much less favourable conditions. The greedy, as we know, pays twice.

The freedom will still have to be given to business, experts are convinced, as it is impossible to set two contradicting goals to be socially responsible and at the same time competitive. If the authority's thought work inertia wins again, Russia will remain behind everybody in terms of technology.

Vladimir Terletski