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. Last Updated: 07/27/2016

Zarya: Using Russian Labor to Produce Italian Shoes

While many Russian businesses complain about the cut in state subsidies and ask for more, Zarya, one of Russia's biggest footwear producers, has thrived in the new market environment.

Once heavily subsidized by the government, Zarya has formed a successful partnership with an Italian shoe company IGI-IGI in order to stave off collapse.

"Today nobody is going to give us hard currency, but we proved we can earn it", said Pyotr Limorov, foreign economic relations director for Zarya.

"We will make 700, 000 pairs of shoes this year for our partner and will be paid enough to live without subsidies".

Limorov, who wears Western suits and speaks fluent Italian, and who spent more than two years representing Russia's leather goods industry in Italy, exemplifies a new brand of Russian manager who successfully combines an insider's knowledge of the Russian economy with market vision gained abroad.

He said that under an agreement with IGI-IGI, signed last August, Zarya makes shoes from Italian shoe materials which IGI-IGI then sells abroad.

For its efforts Zarya does not receive any sales profits but is paid a set fee for labor.

The income from the joint project, however, allows Zarya to purchase spare parts for its imported equipment and pay for superior imported shoe materials. The company can also pay its workers competitive wages of about 120, 000 to 140, 000 rubles ($100 to $117).

"Our profits from the deal are very modest so far, but cooperation with the Italians gives us a chance to enter the Western market", said Limorov.

He also said that the Italian technicians, who supervise the production at the factory help raise the skills of the Russian workers to Western standards.

Zarya is also unusual because of the way it is being privatized. The process is not yet complete but it is planned that Zarya will be the holding company for eight factories in the city of Moscow and the Moscow and Tula regions, which employ over 10, 000 people and supply the Russian market with 20 million pairs of shoes annually.

Zarya will own 20-percent stakes in each of the eight factories and collect 25 percent of their production. In turn, it will finance the upgrading of the factories and arrange orders from abroad, allowing them to earn hard currency.

Besides the project with IGI-IGI, Zarya has set up two small joint ventures with German companies, which produce shoe-making equipment.

Limorov said, that only two years ago Zarya produced 30 million pairs of shoes but production has shrunk over the past two years due to the cut in subsidies.

"After the government stopped subsidies for children's shoes, we scaled this part of the production down to almost zero, because it became totally unprofitable for us", says Limorov.

But he said that the drop in production was in a sense a positive change. He said that the huge production volumes imposed under the Soviet system by the state plan had often forced Zarya to overlook quality.

"We were suffocated by the plan", said Limorov. "Now we do not have any state order and produce just as much as we can sell".

He said Zarya has no problems with domestic sales, as it maintains relatively low prices, ranging from 10, 000 to 35, 000 rubles a pair. Zarya sells mainly through its own chain of 16 stores across Russia.

Under the agreement with IGI-IGI, Zarya also sells the factory seconds from the production designed for the Italian market, which, Limorov said, account for 1 percent of the total production.

He said that shoes made for the Russian market were unfortunately low in quality, not through any fault on Zarya's part but because of the poor quality of Russian materials.

He said that shoes made from the Italian materials cost at least twice as shoes made from Russian materials but Zarya still plans to purchase glue, leather and other materials abroad for its own use once it has enough funds.

"The quality of domestically produced shoe materials does not come close to Western standards", said Limorov.