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Far East is the future of Russia’s economy
“The only possible way to pull our nation’s economy out of a rut and turn our country into a developed one ranking among such markets as China, America, Japan is by developing the Far East. Our economy’s future lies through the Far East. That’s why what is being done now is laying the groundwork for our state’s development,” said Sergey Tsivilev, Chief Executive Officer, MC Kolmar.
The Far East’s path to growth is by boosting export to the Asia-Pacific Region
“Businesses in the Far East are operating in quite a lucrative region neighboring with the Asian-Pacific countries. That is why the only way for further growth is to boost its export potential to the countries of the Asian-Pacific Region. In order to boost export potential, it is necessary to attract investment. The Far Eastern Federal District accounts for less than 0.5% of all investment made by the countries of the Asian-Pacific Region,” said Oleg Goshchansky, Chairman, Managing Partner, KPMG in Russia and the CIS.
Infrastructure needed to unlock Far East’s export potential
“The focus on infrastructure should become a breakthrough story from the viewpoint of unlocking the Far Eastern Federal District’s export potential,” Oleg Goshchansky said.
Investors lack state support
“Investors have been mostly forced to either construct on their own or pay natural monopolies for facilities to link up with energy sources and railway infrastructure,” said Artur Niyazmetov, Deputy Minister for the Development of the Russian Far East.
Regional budgets fall short
“A disturbing fact is that regional budgets are lacking, since they have both to develop infrastructure and participate, but on the other hand, their financial support is less than the federal one,” noted Pyotr Zolotarev, Deputy Chairman, Bank for Development and Foreign Economic Affairs (Vnesheconombank).
“The amount of budget funds is limited. We can increase funds allocated for supporting one sector, but we will inevitably run into a certain deficit in other fields. Let’s say an investor arrives, gets a huge amount of subsidies in a certain region or area of the country, this however causes a substantial, one-time reduction in the local entity’s own budget revenues, which in fact could be as much as 8%,” stated Iliya Trunin, Deputy Finance Minister of the Russian Federation.
Obstacles put up by regional authorities
“Sometimes regional authorities provide restrictions that may hinder or even make it impossible to implement a regional investment project. The region is reluctant to use the regional investment project mechanism, because this would make it lose revenue, and it has no idea how to compensate for it,” said Pavel Grachev, Chief Executive Officer, PJSC Polyus.
Flawed tax system
“Say a facility has been constructed which cost 10 bln rubles. So, transferring it technically still means selling it, even though we would not be compensated for the transfer. And that means we’d end up having to pay all the necessary taxes for no reason at all. On the other hand, if we hold on to the facility we will also pay property taxes,” Pavel Grachev explained.
Mechanisms for providing state support to business created
“This allows us to draw up reciprocal obligations as opposed to the budget investments that we provide. After selecting projects, two agreements are made. The first one is an investment deal that outlines the key deadlines and parameters on implementing the project itself. The second one is an agreement on providing a subsidy that outlines the delivery time of the project’s infrastructure part. The state takes over the responsibility for providing it in full and within the set time limit, while a private investor shoulders the responsibility for making sure the project will be implemented,” Artur Niyazmetov said.
“During the session, a new mechanism for dialogue with the business sector was proposed implying that investors do the same thing, with the only difference being that they are not directly provided with a budget subsidy, but have the right to a tax subsidy matching the funds spent on infrastructure for its investment project,” Artur Niyazmetov said.
“Together with our colleagues from the Ministry for the Development of the Far East we have offered a new mechanism of co-financing investors’ expenses on public infrastructure from the budget. It implies two tax break options: the first is tax cuts and the second, recovery of capital investment made directly into new production or upgrading existing facilities out of future taxes,” Iliya Trunin said.
Improving the Far East’s investment climate, sorting out competitive sectors
“In order to boost export potential, it is necessary to virtually improve many infrastructure issues and change the investment climate. It is necessary to sort out the most competitive sectors that can successfully compete. In our view, there are several such sectors: agriculture, fish business, machinery-production industry. Regarding agriculture, it is necessary to start with an inventory of farmlands. If we speak about fish business – the return of a great number of de-facto Russian ships back under the Russian jurisdiction,” Oleg Goshchansky said.