Sverdlovsk Authorities Want Cluster

28.01.2010 — Analysis

The timber industry in the Sverdlovsk Oblast is in a profound crisis. Production indicators have seriously dropped in comparison to Soviet times: in 1990 28 million cubic metres of timber was procured in the region and now only 7-8 million. Timber processing is not developing, the production of end products is dropping: in the previous year only 30 thousand square metres of housing was constructed out of timber which is only 3.7% of the total volume of low-rise construction.

The key causes of the slow down are well known: there is the lack of investment, infrastructure is underdeveloped, there are problems with sales of high processing level products. Viktor Kralin, the Manager of the Timber Housing Construction Association of the Sverdlovsk Oblast, does not quite understand what is happening: there is a demand for timber (in Finland alone the timber shortage amounts to 300 thousand cubic metres), there are the raw materials, equipment, people and timber processing companies are "on their beam ends". According to the expert, even companies with problems as hard as the OJSC Lobva with its accumulated debts of 8 million roubles just on wages could easily be revived. All that is needed is to give a company a loan at 10-15% annual interest or defer payments for forest resources for a year. In half a year's time Lobva Forestry and Timber Works will be able to pay the borrowed money back.

The problem is in that nobody gives this loan to Lobva for reasons including the bad reputation of the proprietors of the company who in the nineties sucked the company dry of the working capital. Small logging companies have also contributed to the creation of a bad image of Russian timber industry sector by failing to fulfil their obligations to the timber consumers, so now not a single plant, even a large one, can get an advance payment from their counterparts.

The authorities see the way out in joining the market participants into a cluster and the introduction of the listing procedure which is designed to stop the crooks. The established horizontal structure of the production and service companies and research facilities will make it possible to produce cheaper and better products, build sales chains, and modernize, reckons Andrei Mekhrentsev, the Head of the Timber Industry Sector Department of the Ministry for Industry of the Sverdlovsk Oblast.

The formation of clusters normally happens from below, the experience of developed countries demonstrates that cluster is a more sustainable scheme than a vertical structure, that with this it is easier to achieve the goals the industry is facing. However in some countries the state does not wait for entrepreneur to grow ready for cooperation. France, for instance, has established 75 innovation clusters in 2005 having provided state funding for them. Business started to like the prospect straight away: according to Natalia Shpak, the Manager of the Administration for Investments of the Ministry of Economy and Labour of the Sverdlovsk Oblast, around 2000 proposals have been submitted and 750 production facilities have been created. The amount of investments exceeded 1.5 billion Euro 960 million out of which was invested by the state. 14 thousand new jobs have been created in the hi-tech sector.

Sverdlovsk entrepreneurs hope that they will not be forced to join a "collective farm". Some experts, however, reckon that the issue is not of principal importance as no cluster is going to work in the current state of the Russian economy.

Vladimir Novak, the Vice President of the Union of Small and Medium Size Business of the Sverdlovsk Oblast, claims that a cluster, although a lopsided one, already exists in the sector but there is little use of it so far. Companies constituting it are struggling without the working capital. Investors do not come to Russia, or, to be more precise, they do come but having studied the legislation and the administrative practices leave rather fast. At the moment, according to Vladimir Novak, it is not profitable to increase the level of processing and that there are no capacities for it.

The high end product cost hindering the construction of housing is formed mainly due to the increasing tariffs and encumbrances imposed on business by the state. Similar practices can be seen not only in timber housing construction. OAO Sukholozhskcement, controlled by the German Dyckerhoff AG, had to invest 600 million roubles into the organisation of their electricity supply in order to be able to start up their new production capacities which is nonsense, according to experts, electricity producers are interested in new consumers and should build power lines and substations and pay for it themselves as it is done all over the world. Russia, unfortunately, is not America where plots for development were sold with utilities already connected as long ago as in 1935, and even not China, where they have managed to do it comparatively recently.

Yuri Chumerin, the Executive Director of the Union of Construction Companies, reckons that housing prices can be reduced by several times. All that is needed for it is to set the goal. About one million square metres of housing is commissioned annually in Tatarstan at a price of 22 thousand roubles per square metre whilst the Russian national average is 46 thousand roubles. Yuri Chumerin claims that the Sverdlovsk Oblast can build housing at the same prices. However, instead of prices falling we see the reduction of construction volumes in the region. At the same time officials in the Oblast Ministry for Construction and Architecture suggest to companies not to look for cost cutting mechanisms but for schemes enabling the consumers to pay for expensive housing.

It is obvious that in the majority of Russian regions economy is monopolised by certain companies and authorities do nothing to establish real competition in the market. In these conditions the establishment of a cluster will change nothing as the products will still be insanely expensive, sales will approach zero which will not affect the change in the investment climate.

In the conditions of the lack of investors and investments is it totally unimportant what the economic structures are called - be it clusters, holdings, or corporations. As we know, it does not matter how many times you say the word "chocolate" you still won't have sweet taste in your mouth.

Vladimir Terletski