Russian State Wants To Make Money On Cleaning Up Monocities

22.01.2010 — Analysis

Russian Government jointly with the State-owned corporation Vnesheconombank conducted a seminar in Ekaterinburg which publicised amounts and conditions of funding of projects in monocities. The following sources will be used for their development: 10 billion in the federal budget, the same amount in the Investment Fund (this money is targeted at the support of newly established businesses). Vnesheconombank is prepared to finance large projects costing more than 2 billion roubles with the payback time of no less than five years.

Irina Makiyeva, the Head of the Governmental Working Group on Modernization of Monocities, reckons that the money reserved should be enough to provide assistance to all 37 municipalities selected by the Ministry for Regional Development. Yuri Osintsev, a State Secretary of this Ministry, however, stressed that underdeveloped projects will not be funded which will "thin" the number of the programme's participants.

Viktor Gorbunov, the Deputy Minister for Economic Development of the Murmansk Oblast, has almost no doubt that all projects will turn out to be "underdone". His region's main headache is the village of Revda where the Lovozersky Mining and Processing Combine is located, it specialises in the extraction of loparite ore (used for the production of tantalum, niobium, whose key consumer is the military industrial complex). During soviet time the raw material was shipped to the Baltic republics and to Solikamsk Magnesium Plant (the Perm Krai). The collapse of the defence industry meant the bankruptcy of the combine. The connections to the Baltic republics were severed, the Solikamsk Magnesium Plant started dictating prices. Everything ended with JSC Silvinit that owns the Solikamsk enterprise purchasing one of the production sites of the Lovozersky Mining and Processing Combine. Other capacities remain unwanted.

Out of the three thousand people who worked the mines no more than a thousand remain employed. The Murmansk Oblast administration is aware that some people have to be relocated to other villages but Vnesheconombank would not give any money for that. And it is very difficult to come up with ideas for new production facilities compatible with the combine. It would be hard even to get budget money for the establishment of small and medium sized companies as the Ministry of Health and Social Development of the RF allocating money for the retraining of the employees being laid off demands the submission of very strict schedules of what type, when and how many jobs the region is going to create. It is impossible to design high quality projects without involvement of specialists. Mr Gorbunov is at a loss "I do not understand why the Ministry for Regional Development gives no money for this. In our region we have about 17 subsidies for small businesses, this includes subsidies for project development. Integrated plans should also be funded jointly by the region and the Federation. This would enable us to gave good projects. As it stands, they will be well underdeveloped."

The federal Government, however, is only prepared to fund a half of the costs involved in the already developed business project. If these projects adhere to the Vnesheconombank's criteria the interest rate for enterprises will be set lower than commercial banks'. Irina Makiyeva, however, was not able to tell us how much it would differ fro the refinancing rate of the central bank of the RF. The rate will be set no sooner than March when it becomes clear in which projects the corporation is prepared to take part.

The lack of clarity with the cost of borrowing is concerning entrepreneurs. Viktor Gorbunov doubts that the joint stock company Kovdor Mining and Concentration Combine, a part of EuroChem Mineral and Chemical Company, would be interested to work with Vnesheconombank that cannot even make its interest rates known. Business would not go anywhere without knowing where it is going. Moreover, Kovdor is not far from border with Finland and Norway where loans can be taken out for 2% annual interest. Kovdor has connections with these countries and banks do not impose any limitations on them.

Heads of municipalities see another problem which they will encounter when implementing integrated plans. Nikolay Tikhonov, the Mayor of Verkhnyaya Salda, reckons that the expectations for the production diversification of the Ministry for Regional Development are, certainly, correct, only the real production will be able to pay taxes into the budget. He fears, however, that while these production capacities are being set up monocities will lose a rather significant part of its human resources. This is why, says Mr Tikhonov, there must be money channelled into infrastructure and social projects during the transition period.

Meanwhile the experts are convinced that simply allocating money for the support of monocities will not yield any result. This also was pointed out by Vladimir Lukin, the Deputy Head of the Expert Department of the Fund for Housing and Services Reform. According to him Shcherbinka (the Moscow Oblast) is listed as a monocity due to the deplorable state of the local lift building plant. The Fund gave regions money to replace lifts in housing blocks in order to support the Moscow Oblast plant. It was established, however, that in the Sverdlovsk Oblast practically a half of lifts replaced has been purchased abroad, in the Chelyabinsk Oblast this figure reached 90%.

The federal officials appeal to monocities to support each other. Regional authorities object that in order to sell lift they should be made so that people want to buy them. Without a radical reform in the financial system and established favourable business environment in Russia this is impossible. One of key causes of non-competitiveness of Russian products is in vast costs dictated by high tariffs imposed by monopolies and unaffordable borrowing which hinders production modernization.

Experts say that if Vnesheconombank does not set the rates at the same levels as offered by Western banks then it can without any further thought just buy US securities with the money reserved for the development of monocities as this money is unlikely to find much demand in Russia.

Vladimir Terletski