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. Last Updated: 07/27/2016

Investors Yet to Hit Siberian Bull's Eye

Novosibirsk by the Numbers
Growing Industries*
Oil production300
Enriching equipment240
Declining Industries*
Chemical equipment -28.4
Electrical equipment -24.6
Wood and Paper -20
Semiconductors -20
Heavy Machinery -9.1
Accumulated Foreign Investments**
(in millions of U.S. dollars)
Germany 0.1
*Increase/decrease in first quarter 2002 from first quarter 2001
**As of Jan. 1, 2002
Source: Regional administration
NOVOSIBIRSK, Western Siberia -- It may have been designed as the bull's eye of Russia, but foreign investors have so far missed the mark.

Situated in the very center of the country, equidistant from the farthest points west and east, Novosibirsk was developed in the late 19th century as a major junction on the Trans-Siberian Railroad and quickly became a trading hub. Later, in Soviet times, it became an important industrial center, producing military goods such as tanks, aircraft and naval equipment.

Today, Novosibirsk is capital of the Siberian Federal District and of the Novosibirsk region, which measures 178,200 square kilometers -- half the size of Germany -- and is home to about 2.7 million people.

The city is ideally placed to harness the natural wealth of Siberia, which accounts for 70 percent of Russia's natural resources and 50 percent of its export revenues -- mainly derived from oil and gas, ferrous and nonferrous metals and timber.

But most of the sectors that stimulated growth and provided jobs during the Soviet era are stagnating.

Although industrial production in Novosibirsk rose 7.6 percent year on year to $1.6 billion in 2001, production of chemicals and electronics fell by more than 20 percent in the first quarter of 2002 compared with the same period last year. The wood and paper industry dropped by a similar amount. Only a few areas of the economy, such as the high-tech and retail sectors, have bucked the trend and shown signs of expansion.

One of Novosibirsk's most pressing problems is that, since 1998, foreign investors have largely stayed away.

Courting Investors

In 2001, Novosibirsk regional government figures put accumulated foreign investment at $145.5 million, of which $130 million was direct investment.

This was down on 2000 figures, when Novosibirsk attracted $152 million in foreign direct investment, according to the Expert RA rating agency. In the same year, Moscow drew $1.47 billion -- almost 10 times as much.

When compared to the rest of the country outside Moscow, Novosibirsk's figures appear in a more positive light -- the region ranked sixth in foreign direct investment in 2000, drawing 3.43 percent of total foreign investment in Russia. But the regional administration recognizes that there is considerable room for improvement.

Dmitry Verkhovod, deputy governor and head of the region's property committee, said Novosibirsk is trying hard to attract investors, particularly from Germany and the United States.

"We have very close relations with German and American business associations," Verkhovod said. "Novosibirsk is an industrial, trading and scientific center, so we have a lot of investment opportunities."

Hugo Deis, head of the Delegation of German Enterprises in the Siberian Federal District, said the Novosibirsk administration organized a seminar for German investors in the region in June.

"We have had several presentations of the region already, and we want this to be a constant dialogue rather than just occasional meetings," Dies said.

The American Chamber of Commerce has organized a presentation about the region in Moscow and is planning to take a delegation of U.S. investors to Novosibirsk in September.

In 2001, the leading foreign investor in Novosibirsk was Cyprus, which pumped a total of $93.3 million into the region, although most of this was Russian money returning from the country's leading haven for capital flight.

Belgium and Switzerland followed with $5.5 million and $2.9 million, respectively, while French, German and Chinese accumulated investment amounted to less than $1 million each.

Before the 1998 crisis, Germany was one of the biggest investors in the region, but since then it has provided very little.

Deis said the only major new German investment has been a $60 million project to build a Krasny Vostok brewery in Novosibirsk this spring.

Other large investments have come from Coca-Cola, which built a plant near Novosibirsk earlier this year, and Mars, which recently began producing pet food in the region.

High-Tech Boom

Perhaps the brightest spot on Novosibirsk's economic landscape is the high-tech sector, which has been expanding vigorously.

Novosibirsk has long been famous as an important research hub. The Siberian branch of the Russian Academy of Sciences was one of the strongest in the Soviet era, and the region's famous Akademgorodok, or academics' town, still attracts some of the best scientists in the country.

Tekhnopark Novosibirsk has taken advantage of this pool of scientists, housing 150 small high-tech companies with a total of 6,000 employees at a complex just outside the city.

Tekhnopark director Yury Shokin said that although the complex is state owned, it gets no financial support from the government.

"The only thing the government gave us was a 16,000-square-meter building in 1995, which had broken windows and no heating," he said.

Shokin said Tekhnopark has had to survive through developing innovative technologies and has shown it can flourish. "We have already entered capitalism, and we are learning to work in the capitalist environment," he said.

The private companies operating in Tekhnopark specialize in telecommunications and software, biological and laser technologies. They also produce medical and conservation equipment, as well as new chemicals for use in a variety of industries.

Tekhnopark companies paid $6 million in taxes to the regional budget last year, Shokin said.

Vladislav Ilin, head of Bio Vesta, which makes bacteria to produce yogurt and employs 40 people, said Tekhnopark would probably be more effective if it was privately owned. But "at the current stage of development, maybe it is good that there is no money from the state. Through the lack of government interference, Tekhnopark is only thinking how it can better serve [the companies' needs]," he said.

"We treat all companies like partners and try to help them as much as we can," Shokin said. "But state status helps us get more serious treatment abroad."

Tekhnopark companies appear at at least two international expositions a month, but the most interest in their products, particularly in biotechnologies and new chemicals, has come from China. "Tekhnopark helped us find partners in other countries," Ilin said. "Now we have a joint venture with Chinese investors."

Sergei Golushko, Shokin's deputy and also head of the Innovative Technology Center operating in Tekhnopark, said: "Many people say it is bad that Russian brains are working for China. But science can't survive without investments, so with the money we get from the Chinese, Russian companies can work on new projects."

Shokin said China is more interested in working with Russia than other countries because it is easier for the two nations to understand each other.

"The mentality of the Chinese is similar to that of Russians because both countries had socialist systems for such a long time," he said.

Verkhovod, the deputy governor, said Novosibirsk is more bound to the East than to the West but that the region is ready to work with everyone.

Europeans have also shown some interest in Novosibirsk's high-tech sector. A dozen enterprises in the region are doing outsourcing work for Swiss and German companies, Shokin said.

The minimum salary at these companies is $500, while most salaries range from $1,000 to $2,000. The average salary in the region is 3,210 rubles ($100), a little below the national average, the Novosibirsk government says.

Russian companies in the energy, railroad and oil sectors also have placed orders with Tekhnopark companies, but demand from these companies is still low, Shokin said.

Regions Shows Promise

High-tech is not the only sector in Novosibirsk showing growth.

Oil production, although not very large in the region, has risen 300 percent since March 2001, while production of enriching equipment, widely used in ferrous and nonferrous metals production, grew 240 percent in the same period.

Meanwhile, furniture production is up by 35.8 percent, and the retail and services industry has grown by about 30 percent.

Irina Vasyukova, who owns a small sewing factory with 40 employees and a monthly turnover of 1.5 million rubles ($50,000), said: "The demand for local goods is increasing, but I still have to compete with Chinese clothing, which is usually lower quality but much cheaper."

Novosibirsk is overflowing with Chinese and Turkish goods, mainly cloth and leather. The city serves as a regional center, with traders coming to buy goods to resell in neighboring cities.

For Eric Shogren, an American investor living in Novosibirsk who owns a furniture workshop, however, China should not be seen as a competitor but as a potential market.

"It would be a mistake for Siberia not to think about China as a potential partner," he said.