Urals industrial landscape: the number of survivors are just a few

12.04.2010 — Analysis

Anatoliy Gredin, the Chairman of the Government of the Sverdlovsk Oblast, made an announcement at the meeting of industrialists and entrepreneurs that in 2010 the amount of investment into the real sector of economy must reach 350 billion roubles, out of which 100 billion should be allocated for the manufacturing of innovative products. The Head of the regional cabinet has criticised businessmen who according to him work inefficiently and do not increase the production of science intensive and competitive products. The potential of regional design organisations is not used to the full potential and machine building enterprises are left without orders. The regional cooperation programme, the Prime Minister acknowledged, does not work well because design bureaus when drafting their designs do not take into account the products made in the Urals already.

Vladimir Borovskiy, the Executive Director of the Union of Project, Research and Development Enterprises of the Sverdlovsk Oblast, is in agreement with the head of the government that the designers do not come up with the state of the art products but at the same time points out that the modernization of enterprises is hindered through the fault of the State as well. The country lacks a flexible system of tax incentives; on the other hand, there exists a cumbersome legislation that introduces disharmony to the market relations. For instance an entrepreneur in Russia has to pay for the construction of power grids and substations and then transfer ownership to power engineering companies who regularly raise prices for electric power making high profits. The majority of industrial enterprises are balancing on the verge of bankruptcy due to owing funds to banks. In these conditions it is meaningless to talk about the equality of the subjects of the market, just as meaningless as to expect new developments form designers. Machine building enterprises simply do not have any money for this.

Aleksandr Balandin, the Director General of Pumori-SIZ Ltd, reckons that domestic tool making plants are not able to come up with competitive products without support. The plants in the sector have been built either during the World War II or immediately thereafter. Tool making in Russia has almost gone and now it has to be restored virtually from scratch because the global producers of high speed cutting tools are armed with new technologies and new materials.

In Russia we have to build plants that are minimally manned and equipped in accordance with the latest developments, employing specialists whose training radically differs from the conventional standards. Such plants work efficiently in Germany, Japan, and India. The equipment for these plants is supplied by the world leading machine tool building companies. Russian designers will not be able to make these machines in the foreseeable future because the machine tool building sector lies in ruins. This is why the Pumori-SIZ Corporation in its decision to build a state of the art tool making plant near Ekaterinburg is counting on obtaining tied loans in countries with the developed machine tool building, these include Japan, Germany, and the US.

There is hope to get into the Federal targeted and other programmes which fund production of innovative products. The amount of spending including the construction of the plant is assessed at 2-3 billion roubles which is not a very large amount; however, Pumori-SIZ does not have an investor so far.

Anatoliy Pavlov, the Director General of PSM-HYDRAULICS® Ltd., is asking the authorities to be realistic: Russia is short of even foundry plants. Only a few companies are capable of making good quality foundry products and these are overloaded with work. Products made at the Sverdlovsk Oblast plants the entrepreneur calls "Demidov crap". Machine builders spend a lot of time on the machining of castings. Foreign companies hike up prices and PSM-HYDRAULICS® decided to build their own foundry plant with the annual production capacity of 20 thousand tons. Marketing research demonstrates that its capacities will not be enough to cover the needs of companies of the Chelyabinsk and Sverdlovsk Oblasts. Russia needs at least ten such plants. However, even the construction of one is hard to start: investment of 1 billion roubles is needed. Mr Pavlov claims that there are no investors in the Sverdlovsk Oblast.

However, there is money in regional banks. According to Valentina Muranova, the Chair of the Urals Bank Union, registered capitals of banks in 2009 have grown by 43% and deposits by 26%. It is interesting that proprietors - industrial enterprises - have taken more than 4 billion roubles out of the main business for the support of banks during the crisis. But even with the decrease of "financial turbulence" banks are extremely cautious in lending to the industry without seeing the required signals from the State.

This summer bankers might make the requirements to borrowers even tougher. In July the time limit for the restructuring of loans issued in 2007-2008 for the sum total of 100 billion roubles runs out. Unless the Central Bank allows for the deferment of loan repayments, banks will be forced to review risk criteria and reserve more resources. This will lead to further shrinking of lending.

Bankers reckon that the Russian budget must make its contribution into the overcoming of the economic crisis. The Union of Industrialists and Entrepreneurs of the Sverdlovsk Oblast holds a similar view. According to Dmitri Pumpyanskiy, the President of the Union, less than one percent of companies in the Sverdlovsk Oblast received support from the State. The money was mainly given to large companies in the region creating jobs for staff with low qualifications as a rule. What is needed are the universal systemic measures which would support all companies, including those of little staff which develop through new technologies and highly educated specialists.

The lack of competitiveness of the Russian enterprises, according to Mr Pumpyanskiy, is due to the excessive material and temporal costs imposed on companies when they have to interact with bodies of authority. The Union made a statement that a hotline has to be established to assist the fight against the pressure of the State, using which any entrepreneur can pass information on corruption amongst officials.

Whether this measure is going to help the increase in the production of high processing level products, the nearest future will tell. Aleksandr Misharin, the Governor of the Sverdlovsk Oblast, insists that by 2020 the share of high tech goods produced by companies in the region must reach 35%. This is a very tough deadline, taking into account the fact that the share of machine building sector products in the Sverdlovsk Oblast does not exceed 17%.

Vladimir Terletski