Region Capitalizing on 'Spoiled' Capital

Although the city of Moscow remains the favorite destination for investors in Russia, its less-cosmopolitan neighbor is gaining momentum and this year expects to double to $1 billion the amount of investment it attracted in 2000.

Total domestic and foreign investment in the Moscow region, which surrounds but does not include the capital, grew 13 percent last year to more than $500 million, with $291 million of that coming from abroad.

But while its richer neighbor, the city of Moscow, drew more than $4 billion in foreign investment last year — 37 percent of the national total — the encircling region is poised to take a bigger slice of the pie because it offers a variety of incentives to businesses that the capital does not, region officials told foreign businesspeople last week.

The region's pointman on foreign investment, Mikhail Amirbegishvili, told members of the American Chamber of Commerce that the advantages the region has over the city boil down to "three C's: cheaper, cleaner, and more cooperative."

"We monitor projects with the intention of creating favorable market conditions for foreign investors," Amirbegishvili said.

Amirbegishvili called the region the "most dynamically developing region in Russia, and the headquarters for companies that together produce 27 percent of Russia's industrial output."

While there are few statistics by which to judge how "dynamically" a region or city is developing, it is true that the regional government negotiates individually with every foreign company that wants set up shop there and can customize its policies to meet the needs of each. "I can reassure you the government of the region will provide all forms of assistance to any investor," Amirbegishvili said.

The region is already home to about 700 companies, 70 of which are foreign "partners," as officials like to say. These include heavyweights like PepsiCo, Danone, Procter & Gamble, Lockheed Martin, Heinz and Bristol-Myers.

Expert magazine, which publishes a nationwide investment rating, recently named the Moscow region as one of only four in Russia that combines high investment potential with low investment risk.

It also ranks among the nation's top five destinations for foreign investment.

Compared with Moscow, the region's main attraction is lower prices, said Lennart Dahlgren, a country manager for the Swedish furniture giant IKEA, which is building a second store in the region that will bring its total investment there to $150 million.

"The city [of Moscow] could not offer sites in the price range we were looking for," Dahlgren said in a telephone interview. "In the region, we found the price level that was acceptable."

The region also offers tax incentives to convince more foreign and domestic investors to vote with their wallets.

Mars, a U.S. confectionery and pet-food conglomerate, has also taken advantage of some of the savings by building a modern plant in Stupino, a small town 120 kilometers south of the capital.

"Mars came to Stupino in 1995 when it [was economically ruined], so we have resurrected the town's economy," company spokesman Oleg Rumyantsev said.

Mars now employs more than 1,000 people in Stupino.

"In turn, the regional government rewarded us by creating a favorable climate through a series of local tax breaks," he said, declining to specify what those breaks were.

Amirbegishvili said the regional government has a special tax package that is the basis for negotiations, but specific tax incentives vary depending on the total sum of investment.

In fact, the region's tax law offers breaks to companies that spend more than $1 million to create fixed production assets or upgrade existing assets by more than 30 percent of their book value.

Companies can also qualify for a profit tax discount of 5 percent, a 50-percent discount on the highway user's tax, and a 50-percent property tax discount on production investment assets within the first three years after a project is completed.

Moscow, by comparison, has no similar tax breaks for general investors, said Andrei Goltsblat, managing partner at Legal Practice, which consults Mars.

Under current tax legislation, certain groups of businesses operating in the Moscow region can qualify for additional tax benefits. These categories include dairy farmers, bread makers, meat processors, metal manufacturers and baby food producers, among several others.

Goltsblat was quick to point out that while lower taxes are enticing, Moscow region's main trump card is infrastructure that the capital just cannot compete with: a vast network of railroads, low tariffs on services, a cleaner environment and responsive government officials.

"You will run into much more bureaucracy in Moscow — the city is spoiled," Goltsblat said.

The region also has a 123-hectare special economic zone called Sherrizone around Sheremetyevo Airport for hard-to-impress investors.

While its land prices are slightly higher than in other parts of the region, the zone offers exceptional tax breaks: a 75-percent cut in regional profit and property taxes for the first five years, by half for another five years, and by a quarter thereafter for a total of 15 years.

The zone's tax incentives do not include federal tax obligations.

Officials say they hope Sherrizone blossoms into a sort of Russian version of Hong Kong or Singapore. Although Sherrizone was created in 1993, officials only began negotiating with potential clients in 1998. Since then, some $220 million in contract commitments have been signed by foreign and domestic producers, including PepsiCo.

"The idea is to create a favorable environment for the first 15 years because that's about the time it takes most businesses to take off," said Valery Lynnik, Sherrizone's general director. "We are making it easier for businesses to take the first step."

Amirbegishvili said boosting the region's investment attractiveness is one of the government's top priorities.

"The investment potential of the region is vast," he said. "Annually, we can digest anywhere between $1 billion and $2 billion that can bring investors weighty returns."

Despite its success, the Moscow region, according to the State Statistics Committee, still lags behind three other regions: The Krasnodar region received $979.5 million in foreign investment last year; the Omsk region attracted $791 million; and the Leningrad region, which surrounds St. Petersburg, captured $305.6 million.

Overall foreign investment in Russia totaled $10.96 billion last year, an increase of 14.6 percent over 1999.