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Russia's mightiest companies to move to Siberia in three years?

By Bear in the Market
29 April 2013

If you want proof of Russia's business gravity moving east, go no further than a proposal from the country's top woman politician Valentina Matviyenko, head of the Federation Council, the upper house of parliament, to move the head offices of major state companies to the provinces.

Russia's mightiest companies to move to Siberia in three years? Pictured: Irkutsk city centre, by The Siberian Times 

The proposal - which won backing from President Vladimir Putin on 26 April - has stunning implications for Siberia. 

'Gas in Moscow is only in the kitchen, and therefore the head office of Gazprom should be moved to Tyumen', she said.

Rosneft should also move its HQ to Siberia. And RusHydro should have its main offices in Kransoyarsk.

Other major companies would be sent to other areas of Russia, for example Russian Railways to the Urals and RusaNano to Kaliningrad.

Once the decision is taken, the moves should happen within three years in a potentially gigantic boost to the regional economies.

Sales of the assets of these mammoth companies in Moscow would fund the construction of new head offices in Siberia and other regions, she made clear. 

The companies would be headquartered in regions where their main business was based and meanwhile they would maintain small representative offices in Moscow, she said. 

President Putin's reaction? Positive, as long as care is taken with the change to Moscow's economy.

'The idea is correct,' he said. 'The only question is how to avoid doing it abruptly so as not to empty the coffers of Moscow. But it is absolutely certain that we need to move in this direction.'


How to tap into Russia's huge eastern promise?

This is a summary of an intriguing recent discussion at the Russia Forum 2013, sponsored by Sberbank. 

'Eastern Siberia and Russia's Far East have unique development potential thanks to their super-rich resource bases and proximity to key economic centres in Southeast Asia.

What steps does Russia need to take in order to tap into the macro-region's potential and transform it into an economic growth engine? What is holding the region back: inadequate infrastructure, insufficient workforce, legislative hurdles, financing difficulties?

What roles should the state and private investors play in developing Eastern Siberia and Russia's Far East?

Should the government focus on attracting FDI or developing a domestic investor base? How best to stop the depopulation trend and stimulate an inflow of new workers to the macro-region?

Should economic incentives be introduced to boost the Far North's population, or should the Canadian model of shift labour be used to tap into its resource base? What needs to be done to create a powerful manufacturing hub in Eastern Siberia and Russia's Far East, converting the region's natural resources into high value-added products?

Irkutsk city centre Siberia


Tyumen city centre Siberia


Omsk city centre Siberia

How to tap into Russia's huge eastern promise? Pictured, top to bottom, Siberian cities Irkutsk Tyumen and Omsk, all by The Siberian Times 

Andrey Donskih (Deputy Chairman of the Board, Sberbank) started the discussion stating that Russia's Far East and Siberia are blessed with an enormous endowment of resources and a favourable geographical location due to their proximity to Asian growth markets and access to the sea.

The challenges involved in tapping these are just as great due to infrastructure bottlenecks, a lack of labour, harsh weather and a high cost of living.

The region's development is one of the government's top 10 priorities, but it needs to create a favourable legal environment, attract private capital and expertise, and create industrial, business and social infrastructure, our panel participants argue.

Artem Volynets (CEO, En+ Group) thinks the government should mobilize all available measures, including investments in infrastructure, a preferential tax regime, and attracting foreign investment.

Infrastructure is paramount, and this is more than just physical infrastructure like railroads and bridges, but also business and social infrastructure to attract and retain human resources. He is also convinced that ties with the high-growth potential Southeast Asian neighbours should be strengthened via pipelines and electricity transmission lines to China.

By creating a favourable business and social environment, internal demand will grow in the region, which would push economic growth.

Pavel Grachev (CEO, Fund for the Development of the Far East and the Baikal Region), as a representative of the government, stressed that the Russian state understands that investment in infrastructure is difficult to attract from the private sector due to the sub-optimal risk/reward profile (high cost of development, and long period of return), and thinks the government should take the lead and shoulder infrastructure development costs.

Therefore, the state is developing the legal framework for concessions, creating long-term visibility in tariffs and increasing the attractiveness of these investments for the private sector. 

Andrey Donskih Sberbank

Andrey Donskih (Deputy Chairman of the Board, Sberbank) started the discussion stating that Russia's Far East and Siberia are blessed with an enormous endowment of resources and a favourable geographical location due to their proximity to Asian growth markets and access to the sea. Picture: Andrey Donskih, finparty.ru 

Igor Zyuzin (Founder and BoD Chairman, Mechel) said his company was one of the first to move ahead with infrastructural development without government assistance (for its Elga project), and it felt the full brunt of the region's challenges, including insufficient labour and the high cost of material and transport distances.

He sees the availability of rail infrastructure as one of the key problems facing Mechel in the longer term, as coal output from Elga will reach 27 mln tpy and getting this to international markets will still require massive investment in railroad links by Russian Railways.

Pavel Maslovsky (Founder and Honorary President, Petropavlovsk) explained why only the gold industry has been able to develop in Russia's Far East over the past decade. This industry has fewer infrastructure requirements, as shipping gold is much different than shipping iron ore. He thinks the government should be more aggressive in creating a favourable environment to attract investment from foreign players, as well as businesses already operating in the region, by providing tax breaks.

Vitaly Nesis (CEO, Polymetal) is convinced that government investment is inefficient since it crowds out private investment. He illustrated his point by giving an example of a state financed road in Magadan that led to increasing contractor rates and higher material costs, while the road itself was not vital to the development of the businesses. He disagreed with Pavel Maslovsky on tax breaks in case of gold, since he believes that it will not help to increase efficiency. Conversely, he calls for the government to revise its approach to the legal framework and ease licensing procedures, which take from two to five years in Russia and are the biggest hurdle for the development of the gold industry.

Vadim Shevtsov (CEO, Sollers) talked about why Sollers opened an auto manufacturing plant in Russia's Far East. Since western Russia is saturated and low-growth, the company decided to penetrate a growth market and opened its plant in Vladivostok. While he sees enormous potential for growth in the region, he mentioned the lack of social infrastructure and tough relation with the local authorities as the key bottlenecks hindering rapid expansion.



Green fuel breakthrough by Siberian and Mongolian scientists

Smokeless fuel based on lignite - or brown coal - has been developed by scientists from the Institute of Chemistry of Solid States of Objects and Mechanical Chemistry, Siberian Branch of the Russian Academy of Sciences and their colleagues in Mongolia.

The chairman of the Siberian Branch of the Russian Academy of Sciences, Alexander Aseev, said the technology involves removal of organic substances from coal, with the resultant semi-coke forming into a fuel briquette. 



Gas pipe could avoid Baikal, say scientists

How to get gas from the Kovykta field to China? 

A plan is for the pipeline to  a route similar to the Eastern Siberia-Pacific Ocean (ESPO) scheme - namely, through the north shore of Lake Baikal. Scientists at the Melentiev Energy Systems Institute of the Siberian Branch of the Russian Academy of Sciences have come up with a different option, reported Interfax. 

'Our Energy Systems Institute has developed an alternative scenario for supplies of Kovykta gas for export,' said the branch's chairman Alexander Aseyev.

'We need gas to go along this southern variant and to be used for gasification - that is, to raise the level of comfort in the Irkutsk region, the Republic of Buryatia and, very importantly from the geopolitical point of view, our neighbour Mongolia,' he said.

This suggested alternative would run through  Sayansk, Naushki and Ulaanbaatar before reaching the city of Erenhot in China.

Kovukta has been in pilot development since 2011, and should be ready for commercial production in 2017.



About Siberian Business Plus aka SibBiz+

We're monitoring key developments in business across Siberia at a time when experts predict it could be one of the big stories of the next 10 or 20 years. 

Getting in touch with the east was clearly signaled in President Vladimir Putin's election campaign last year. 

Mega investment into the long neglected Siberia and Far Eastern regions is not only predicted but becoming a reality. 

Political events such as last year's APEC summit in Vladivostok and the recent visit by new Chinese President Xi Jinping to Moscow all underpin this. 

We will highlight business news and gossip which the catch eye of our own pundit Bear in the Market as being significant for Siberia and the Far East. 

We will also welcome informed experts to give their views on crucial business developments - please email editor@siberiantimes.com, in Russian or English. 

Comments (8)

A good example can be given by British companies like Rio Tinto, which headquarters are in London even if the natural resources are in Australia (which was Britain´s Siberia), where comapnies like Rio Tinto...even if it is true that the large BHP Billiton (consequence of the merger of Broken Hill Propietary and the British company Billiton) has its headquarters in Melbourne, Australia. So, some could head East, and other just keep a large brach in the East...
Enrique, Spain
26/06/2013 08:52
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The Far East lacks new oxygen-based Pulp and Paper Mills able to manufacture goods with a higher value added than timber. If there are branches of Russian paper and energy companies in Central Russia (Siberian federal district) and the Far East, that would be great. New private companies will develop over time if the conditions are established. At the same time, many foreign companies , especially Asian, could have their Russian headquarters in the Far East.
Enrique, Spain
26/06/2013 08:09
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Large private companies will stay in Moscow even if there is a new capital of the Russian Federation, same way as New York or Sydney are the financial centers of the U.S. and Australia even if the capital is in Washington DC or Canberra. A new capital of the Russian Federation cannot be too far away from the hub of Russian population (Central Federal district) or too far away from the Caucasus. The only large Russian city which is at the same distance from the European Union (Finland) as from China (Xingjiang), at the same distance from Russia´s population hub (Moscow) and from Russia´s natural resources (Krasnoyarsk), and close to Astana (new capital of Kazakhstan) is Yekaterinburg. But Moscow should hold the headquarters of many Russian Corporations if Russia wants to play a role among the World financial centers.
,
26/06/2013 07:55
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Only Moscow can become a global financial hub, and if so it is thanks to have the headquarters of many corporations, same as Paris, Seoul or Tokyo. That creates "economies of scale" as different companies can reach agreements in Moscow. But, of course, the capital of Russia should be moved to the East, to a city like Yekaterinburg, and some natonal companies which want to be close to the Government will go with it (same as Deutsche Post did in Bonn)
Enrique, Spain
26/06/2013 07:47
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I don´t agree because it is a contradiction with Vladimir Putin will to make Moscow a global financial center, a business hub. If Paris, Seoul or Tokyo are financial hubs it is because there many Corporations have their headquarters...Same way, Moscow is the ONLY Russian city with capacity to become a financial hub in Russia, precisely as a consequence of bine the headquarter of many companies from different areas (energy, aerospace, telecom...) But of course, I don´t have any doubt that the Capital of the Russian Federation should be established in a more Eastern city like Yekaterinburg. Also in Brazil, U.S., Canada, Australia or Kazakhstan, the largest city is not the capital of the country.
Enrique, Spain
26/06/2013 07:40
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Interesting that the images posted to 'sell' Siberia were, essentially, 'bling and beaneries', and the hope that Russian companies can build, and do, the hard stuff with other people's money, a dangerously American attitude.
Arklight, Las Vegas, Nevada,m USA
08/06/2013 04:02
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v interesting to see if it actually happens; nice pictures of Siberian cities
Tadd, Australia
03/05/2013 13:13
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from today's FB jokes: '....and the tube in Krasnoyarsk is really close - only 12 hours by train to Novosibirsk!'
Svetlana, Russia
29/04/2013 18:17
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1

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