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. Last Updated: 07/27/2016

Krasnodar Wants More Than Pipelines

MTNatalya Boyeva of the Kaloria dairy.
Staff Writer

KRASNODAR, Southern Russia -- Ten years ago, a small wooden barn in a village near Krasnodar was pretty much all there was of a 60-year-old dairy employing a handful of people. But in 1991, when most Russian enterprises started to go downhill, this one started to grow -- and the reason was Natalya Boyeva.

"She just worked and worked, and so did we," said Galina Filobok, one of about 700 employees who now works at the Kaloria dairy in Staroderevyankovskaya, which processes up to 220 tons of milk a day to make 180 different products. "She was completely devoted to the business."

Kaloria, which last month won a regional contest for the quality of their products, now holds 10 percent of the regional dairy market, second among more than 30 local producers only to Moscow giant Wimm-Bill-Dann. After purchasing the biggest dairy in the region, Wimm-Bill-Dann holds 18 percent of the 4.5 billion ruble a year regional dairy market, according to the Krasnodar regional administration.

Boyeva, 50, the director of Kaloria, is one of more than 100 applicants from the Krasnodar region seeking investment under a new federal program. The proposed investment projects, along with hundreds more from other parts of the Southern Federal District, will be presented to potential Russian and foreign investors at a symposium in Moscow that begins Wednesday.

Kaloria is seeking $724,000 to buy equipment to expand production. The dairy, which is owned by the workers, has so far funded its expansion solely through its profits, but the sum it is now seeking is too large, and Boyeva says a commercial loan is not feasible because local banks charge high interest.

"We could form a joint venture -- whatever the investor, a Russian or a foreign one, would like," she said.

The Krasnodar territory, historically known as the Kuban, has one of the best climates in Russia and its Black Sea coast used to be among the favorite vacation spots in the Soviet Union. But many Russians now prefer the better facilities and services of Bulgaria, Cyprus, Egypt and Turkey to Sochi, which neighbors the unstable Georgian republic of Abkhazia.

In recent years, Krasnodar has been attracting foreign investment for the first time and has hopes of attracting much more. The region, which is roughly the size of the Czech Republic, has some of Russia's best agricultural land. It now produces about 80 percent of the country's rice, 60 percent of the grapes, 20 percent of the sunflower seeds and 10 percent of the grain.

Krasnodar also has a relatively well-developed infrastructure, which should facilitate foreign trade. Its eight ports account for 40 percent of Russia's port capacity. It has five airports, including three with international flights, and is crisscrossed by highways and railroads.

Only $15.3 million in 1997, annual foreign investment in Krasnodar reached $980 million in 2000, including $959 million in foreign direct investment, according to the State Statistics Committee. Troika Dialog estimates that this year's investment will total $1.2 billion.

Foreign investors seem encouraged by the election a year ago of a new governor, Alexander Tkachyov, who says promoting investment is one of his priorities.

About 700 enterprises with foreign investment operate in the region, and the largest direct investors are firms and banks from Turkey, Cyprus, Germany and the United States.

Most foreign investment, however, is linked to only two large projects -- the $2.9 billion Blue Stream project led by the Dutch-registered consortium of Gazprom and Italian ENI and the $2.6 billion oil pipeline from Kazakhstan to Novorossiisk, opened last week by the Caspian Pipeline Consortium.

Russian investment is much smaller. It dropped last year by 14 percent to only 1.87 billion rubles ($66 million), of which 27 percent came from the local enterprises themselves, according to the Krasnodar territory's statistics committee.

The region expects better results this year.

"We have hit bottom and are now recovering," Vladimir Lybanev, deputy mayor of the city of Krasnodar, said in an interview. "It is just impossible with our resources to stay as low as we were during the many years that the whole Russian economy went awry. We are at the starting point now, but I could believe that in a year's time we will have so much investment that we will not know what to do with it."

Lybanev may be being overly optimistic. Any investor considering coming to the region will likely first talk with those who are already there, and two big foreign investors -- Cargill and Kuban-Knauf -- have unpleasant stories to tell.

Kuban-Knauf is a subsidiary of Knauf, a German manufacturer of building materials that has now invested more than $200 million in three operations in Russia: in Krasnogorsk in the Moscow region, St. Petersburg and Krasnodar.

In 1995, Kuban-Knauf had just assembled its equipment at a plant in the Krasnodar village of Psebai, in which it had purchased a controlling stake, when the local administration decided to take over the plant.

Knauf was literally thrown off the premises and branded "German occupiers." Later, when the company restored its operations in 1997, it became known that those who had participated in the protest action against Knauf had been paid by those who took over the plant.

"It was a huge scandal," said Mikhail Velegotsky, leader of the local Yabloko movement, in an interview with Moskovsky Komsomolets in 1999. "The German president sent a telegram to [President Boris] Yeltsin, he talked to [Prime Minister Viktor] Chernomyrdin, but everything depended on [Governor Nikolai] Kondratenko's position. Only after several rounds of major negotiations did Kondratenko soften his stance. The enterprise was then called 'an example of mutual cooperation,' but it cost the Germans a lot of blood."

Cargill, a U.S. grain trader, also puts much of the blame for its troubles on Kondratenko, who was known for his nationalist and anti-Semitic statements.

Cargill purchased a controlling stake in a grain elevator in Bryukhovetsk from private shareholders in 1998 but is still battling in court over its investment.

Dominique Le Doeuil, of Cargill Enterprises in Moscow, said in an interview that with the new regional administration, "We are a little bit more positive about the fairness of the court, but it is still not perfect."

Le Doeuil said the initial investment of about $500,000 was a "testing ground" for his company, which had planned a more significant agricultural project but would not go forward with it until the case was resolved.

"We still find it difficult to do transparent business here, but I hope that with the new administration, which is much more business-focused, we are looking at a different outlook in the future," he said.

Tkachyov, the Krasnodar governor, said at a Nov. 22 meeting in Moscow organized by the European Chamber of Commerce for members interested in investing in the region that providing good conditions for investors was one of his priorities.

"Such incidents as took place with Knauf are not possible anymore," he said. Tkachyov told Le Doeuil that he is prepared to give Cargill any assistance it needs.

The governor is already helping Knauf.

Knauf spokesman Leonid Los said that soon after his inauguration Tkachyov visited the factory and "seemed very interested."

"He promised to help us with our major problem -- a lack of freight cars to transport our products -- and he is doing it," Los said in a telephone interview from his Krasnogorsk office. "Things in the region seem to be getting better for investors.

"I still remember what Tkachyov said after he was elected -- that patriotism is not in not letting foreigners at Russia's territory, but in trying to improve the situation in the region with the help of foreign investment."

Jennifer Galenkamp, head of external corporate affairs at Nestl? Food, said at the European Chamber of Commerce meeting that her company is satisfied with the business climate in Krasnodar, where Nestl? has invested $10 million into two facilities that produce ice-cream and pack coffee.

"We are satisfied with the cooperative spirit of the local and regional authorities. And, because the proof is in the eating, we do plan to expand our facilities in Krasnodar in the years to come," Galenkamp said. Since purchasing a controlling stake in the Rossiya chocolate factory in Samara in 1995, Nestl? has invested $200 million in seven factories in five Russian regions.

Although Tkachyov and foreign companies working in his region are upbeat about the prospects for investment, Krasnodar is part of the Red Belt -- one of about 40 regions where the Communist Party is strong -- and the governor himself represents the party.

It remains to be seen how prepared Tkachyov is to go forward with market reforms, but just last month he spoke out aggressively against President Vladimir Putin's plans to allow the sale of agricultural land.

"Land must not be sold in Kuban," he told a party conference in November. "Otherwise, as I told the president, if a land market is introduced in Kuban, the people of Kuban will take pitchforks and I will be with the people. More than that, I will lead this process.

"We will take serious measures and will throw out all dissidents and all those who came from other places," Tkachyov said.

Cargill's Le Doeuil said the right to buy and sell agricultural land was key. "We would expect a region that is as important as Krasnodar to Russian agriculture to be, in fact, a leader in the program for making land available for people to buy and sell. I understand that there are other interests at stake, but for us this is the only way that one day we would have a completely transparent agricultural sector -- that is when land will be freely tradable.

"I don't think we will be a company that would be acquiring huge parcels of land, but we would see it as a very important change in the way people look at an agriculture project."

For those investors who are prepared to lease land instead of buying it, the regional administration offers technical support and tax breaks.

In 1999, the regional legislative assembly passed a law on promoting investment that allows it to exempt investment projects from all taxes to the regional budget for up to three years. A commission formed by the regional administration reviews major investment projects and passes its recommendations on to the legislative assembly. Eleven projects have already been approved and six more are in the process of receiving approval, according to the administration.

Under the law, investors may also be awarded concessions for the use of land and other natural resources and given preferential terms for the purchase or lease of real estate belonging to the region.











St. Courtesy of ochakovo

Kochetov says Ochakovo invested in Krasnodar because of its favorable conditions.




Among those to take advantage of the law was the Moscow-based Ochakovo beer and beverage firm, which invested about $200 million into production lines in Krasnodar and recently started to make beer here in addition to kvas and other beverages. Ochakovo said it intends to capture 30 percent of the regional beer market.

"We had lots of proposals to invest from different regions," said Alexei Kochetov, general director of Ochakovo. "But we decided to invest in Krasnodar after the regional law on state promotion of investment was passed."

The regional administration believes that Krasnodar's investment potential is much larger than what it is digesting now. "It could take in about $7 billion worth of investments," said Igor Vdovin, co-chair of the nongovernmental National Agency of Direct Investments, which is organizing the Moscow symposium.

Among the projects to be presented is one by the Development Yug construction corporation, which builds houses and cottages in Krasnodar and recently won a tender to build a $1.8 billion dispatcher office for Gazprom's Blue Stream project. It will be asking for 500 million rubles to build a factory to produce its own high-quality bricks.

The local Compressor Manufacturing Plant, which builds compressors for oil and gas exploration and for repairing wells and holds more than 90 percent of the market in Russia, is seeking 1.5 million rubles to make a new compressor that would be four times more powerful than its latest version.

"It is safe to invest in our project," said the plant's general director, Anatoly Kryukov. "Even if oil prices go down, oil extraction volumes will still be at about the same level, while Russian companies -- and foreign, too -- will start to prefer our cheaper machines because their profits will be going down, too."

Other projects to be presented to potential investors include construction of three power plants, a plant for producing lubricants and a salt factory, and reconstruction of a brick factory.

Agriculture projects include the reconstruction and equipping of a pig farm, expansion of a poultry farm, completing construction of a meat processing plant and expansion of a sparkling-wine production facility.

Some of those projects could well be picked up by the Vostok-Zapad group, which recently announced that it is prepared to put $100 million into agriculture projects in Krasnodar.

The recent Interros creation Agros, which announced that it will invest $200 million in agriculture, is also looking into opportunities in Krasnodar.

A number of Russian firms, especially those with processing facilities in the region, are already busy buying up the best farms or establishing long-term cooperation with the most profitable farms.

Vdovin said that he expects that up to 50 projects from Krasnodar should be able to count on finding investors. But, he said, there is a problem that needs to be addressed if the region is to attract medium and small investors.

Krasnodar's legislation offers tax breaks and other privileges only to large investors, but even they are subject to much bureaucracy.

Kochetov of Ochakovo said, "An official is always an official. Wherever we go with our investments, our first request to the administration is to protect us from the bureaucrats. Bureaucracy rules in any region, including this one -- it is a reality of our time and I must say that I am very grateful to the Krasnodar [city] and regional administrations that they are helping us and not standing in our way.

"They just pounded the table with their fist and told their bureaucrats to get out of our way. I think any investor should go first to the administration -- whether it is a small, medium or large investor. He must first discuss his business with the administrations of the city and the region -- and there is nothing wrong in that," Kochetov said.

"Otherwise, it is always possible to find something that would completely block the investment."

Johnny Stroemvoll, general manager for the CIS for Norway's Hydro Agri -- one of the world's largest producers of plant nutrients -- said in an interview that investors need "attention and coordination" from the Krasnodar administration.

"What we would like from the administration is coordination -- that they collect all of those working in this market and find out who is doing what," Stroemvoll said.

Vdovin said his agency, in cooperation with the Krasnodar administration and the regional Chamber of Commerce, is working on creating a mechanism to help firms of all sizes find out where and how to invest in the region.

The Chamber of Commerce is preparing a database of investment projects in the region, and Vdovin's agency is assisting it in providing expertise and preparing Western-style business plans.

Boyeva of Kaloria, however, said she does not need any assistance from the regional administration. "I just come to see them sometimes if I want to cry a bit on their shoulder about the federal taxes that are too high," she said.

Outlines of the projects can be found on the web site of the investment symposium [www.iis2001.ru/rus/ip.wbp], which runs Wednesday through Saturday.