Adding up Regional Strategies

Russia will never accomplish the national task of doubling the GDP unless similar ambitious goals are also set at the regional level. Today, less than a forth of Russia’s regions are ready for such a task.

The investment approach to development

The results of the first three quarters of 2003 seem to indicate that last year’s recession is over. However, only a move to an investment-based development approach will ensure stable growth. Every country has its own way of interpreting this approach. At the same time, the experience of other countries demonstrates that certain economic relationships must almost always be present:
- investment should equal 20-25% of the GDP (the level of capitalization);
- direct foreign investment should be no less than 15-17% of the total domestic investment;
- fixed asset depreciation should not exceed 30-35%.

In other words, it will not be possible to double the GDP at the national level unless Russia sees a stable influx of significant amounts of investment, according to our estimates at least $1.11 trillion, including at least $170 billion in direct foreign investment for 2004-2013. This means that the overall amount of investment in fixed assets must double and the amount of foreign investment must quadruple compared to the average yearly investment rates of 1995-2002. (See Table 1 and Chart 1)

How do the regions figure into this context? This remains unclear. In 2002 the majority of Russia’s regions had yet to achieve any significant increase in their rate of economic growth. Compared to 2001, the regions where industrial production declined already number nineteen. Only two out of 89 regions demonstrated the coveted 7% increase in their GRP over the last five years. There is still hope that the situation is actually a bit better than it seems. The State Statistics Committee has yet to release its data on gross regional products for 2001-2002.

Twelve regions have already achieved the necessary level of capitalization (the general range ran from a hopeless zero to an excessive 65%, a serious call for concern). Things look a bit worse in terms of foreign investment, as only five regions were able to attract the necessary proportion of foreign investment.

Thus, investors will make all the difference, especially as the international investment market is looking up for Russia, despite the YUKOS Affair. Russia’s recent investment-level rating will also make it more attractive to foreign capital. But are regional authorities ready to take advantage of this chance for renewal through investment, which could even go as far as to “reindustrialize” Russia?

In this year’s rating we did not merely attempt to evaluate the investment climate in various regions in order to guide investors; we also determined the efficiency of regional administrations and their efforts to reduce investment risk and bring investment to their regions.

Welcoming investors

Our years spent observing investment processes in Russia’s regions has led us to make two conclusions. The first seems banal at first glance: it is impossible to significantly improve the investment climate without developing a strategy for social and investment development of Russia’s regions and municipalities. When even the municipalities in a region have an investment strategy or development program, things are far better for both investors and regional authorities.

While this first conclusion may seem banal, the second is almost paradoxical: only about two dozen regions (less than a forth!) have any kind of strategy. The remaining regions have put no effort at all into moving toward investment-based development. We have tried to figure out what unites these twenty more progressive regions. It turns out that they all have the same problem. Before adopting new strategies, all these regions experienced a decline in investment. It seems that everyone else is waiting for the other shoe to drop.

According to the Ministry of Economy and Development, the strategies and programs of eight regions have already received federal approval, including those of Kabardino-Balkaria, Mari El, Khakasia, Krasnodar and Stavrovol Territories, and Voronezh, Rostov, and Tula Provinces. The strategies and programs of Bryansk, Ivanov, Kaluga, Kursk, Novosibirsk, and Tomsk Provinces are currently under review. Khabarovsk Territory, and Yarslavl, Penza, Perm, and Vladimir Provinces, as well as a variety of other regions, are now working on strategy documents.

Why have these strategy documents, once so unusual for Russia, become so significant? Most likely because by working on strategic plans and programs, the regional administration systematizes its information about the region and increases its understanding of the current situation. Often, officials only find out how things actually stand by creating such a document. As a consequence, afterwards they make better founded, more correct administrative decisions regarding investment policy.

In addition, strategy is an important factor in increasing a region’s attractiveness to investment. It simplifies negotiations with investors significantly. Based on strategy documents, investors can determine the region’s strategic development goals, its resources and potential, its priorities and areas of economic growth, and the measures the region is taking to implement this strategy, including investor benefits. Investors can evaluate the region’s market and imagine their place in it and their business prospects. For this reason, it is no coincidence that major investors began to call on Yaroslavl, Ivanov, and Penza Provinces the moment they heard that their administrations were developing strategy documents.

Moreover, the moment regions developed and began to implement strategies and programs, 80% of them lowered their investment risk back in 2002-2003. They increased their ranking in terms of risk, moving up one spot (Kaluga and Penza Provinces) or as many as sixteen (Udmurtia and Novosibirsk Province). Yet among those without strategies only 47% regions were able to lower their investment risk.