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. Last Updated: 07/27/2016

Investors Tout Low-Risk Tatarstan

MTSergei Gusev showing off TVT's state-of-the-art satellite dishes in Kazan, Tatarstan.
KAZAN, Tatarstan -- Sergei Gusev clicks a remote control and flips through the 30 channels offered by TVT, the cable television company he heads. He then shows the inferior quality of some of the same channels when received through a TV antenna.

"People pay for quality and service," he said.

The quality he offers comes from banks of high-tech U.S. and German equipment that clean up the satellite signals before putting them onto TVT's hybrid fiber-optic coaxial network. The service comes from TVT staff, who can be reached at any time of the day or night.

TVT, a subsidiary of the privately owned Tatar-American Investment Fund holding, offers video-on-demand, an electronic games store, Internet, IP-telephone connection and fire and security alarms, and it could become a platform for e-business development.

It has an innovative marketing program. Gusev's promotion team drives to blocks of sorry-looking Soviet-era high-rises and plays music. Residents come out to see what the racket is about, and TVT signs them up. Then their neighbors become interested.

"A lot of the reason people sign up is to keep up with the neighbors," Gusev said.

It costs just $10 to connect and $3.50 per month after that for TVT's television service. In its first eight months of operation, TVT has attracted 15,000 subscribers, and by the end of this year, Gusev plans to have 50,000. A longer-term target is for TVT to cover 200,000 private, public and business customers in Kazan, a city of 1 .1 million, by 2005.

To fulfill its plans, TVT is looking for a U.S. investor. And if Tatarstan's track record with foreign investors is any indication, TVT should not have to wait long.

Tatarstan is one of Russia's economic powerhouse regions, with several large export industries and a significant share of national production in several sectors. About the same size geographically as Ireland, it was ranked third out of the 89 Russian regions in industrial and agricultural output in 2001, and it exports much of its production. Its economy has been growing faster than the nation as a whole, with a 7.4 percent growth in industrial output last year.

The republic produces 100 percent of the nation's film, 95 percent of its gas turbines, 50 percent of diesel trucks, 40 percent of polyethylene, 30 percent of synthetic rubber, 30 percent of car tires, 20 percent of benzene, 20 percent of watches, and 20 percent of perfume, according to the Tatar government.

Tatar President Mintimer Shaimiyev, who is serving his third term, has proven to be a predictable leader and has helped Tatarstan earn the status of one of Russia's least risky regions.

"The republic remains one of the economically strongest regions in Russia on the basis of its natural resources and powerful industrial base," Moody's Investors Service said in a report in June.

Expert magazine last year ranked Tatarstan as the ninth-least risky region to invest in, down from fifth the previous year and third the year before that. The drop largely reflects the republic's hassles with a burgeoning debt.

Expert rated Tatarstan as the region with lowest political risk last year.

While the local regime has technically bowed out of many privatized enterprises, it in fact controls many through golden shares or through stakes in the region's largest companies, in which it plays a behind-the-scenes role greater than its nominal stakes would imply.

This means that the opportunities for foreign firms to buy controlling or lesser stakes in Tatarstan enterprises are limited. Also, the stakes can be unattractive; the region's laws forbid privatization tender winners from cutting staff. Involvement in Tatarstan's aviation industry is limited by federal law to no more than 22 percent because the companies are part of the nation's defense capacity.

Nevertheless, there is room for foreigners in the republic's modernization program, in which foreign machinery is being imported to make local enterprises competitive. And the republic's administration is spending heavily on reconstruction as Kazan prepares for its 1,000th anniversary in 2005.

A visitor can hear French and German spoken in the Hotel Safar, currently the city's top hotel, and several well-known multinational hotels are operating in the republic. Turkish companies are active in the construction sector, Japanese equipment is being installed at automaker KamAZ and Chinese firms are supplying telecommunications equipment.

Lufthansa has connected Kazan to Frankfurt and beyond since 1997 and currently flies three times a week.

French giant Bouygues is reconstructing the enormous Kazan Hotel, and French firm Alstom is bidding to supply $40 million of equipment to the Kazan subway system, which is under construction.

German chemical giant BASF is in a 50-50 joint venture called Elastogran GmbH with petrochemical plant Nizhnekamskneftekhim for the manufacturing and sale of polyurethane systems and polyurethane precursors.

Some foreign firms have been in the republic for much of the past decade. One of the oldest is Fujitsu-ICL, which was founded in 1991 and has a controlling stake in ICL-KMECS, a computer company focusing on software development and system integration.

ICL-KMECS recently won a tender worth some $6 million to supply 7,000 computers to Kazan, Yoshkar-Ola, Saransk, Penza, Cheboksary and Nizhny Novgorod as part of the Electronic Russia modernization program. Last year, the company delivered 9,000 PCs to Tatar schools.

In December 1995, General Motors and the federal government agreed to a $1 billion joint venture to produce Chevrolet Blazers and Opel Vectra compacts in Yelabuga. Heidi McCormack, general director of GM CIS, said GM from 1996 to 2001 had a 25 percent stake in the joint venture with the remainder owned by the Elaz Corp., a company owned by the Tatar government. She praised the cooperation of the administration, management and staff but said sales were so hard hit by the 1998 financial crisis that GM decided to pull out.

U.S.-based Pioneer Hi-Bred was involved in a multimillion-dollar project in the republic from 1992-96, providing seeds, pesticides and agronomy services.

"We had about 100,000 hectares in corn and 20,000 hectares of sunflowers per year," said Peter Tuz, Pioneer's representative in Russia. "At that time, the average yield of the corn in Tatarstan was higher than in [leading agricultural region] Krasnodar."

Tuz said the project had been highly successful, but the Tatar government had started to have problems with payments as it tried to fund an upgrade of the region's airports and restructure KamAZ. Pioneer ceased operations after the debts reached a critical size.

The debt has since been cleared, and Pioneer wants to return to the republic, but probably on a smaller scale and on a commercial basis, Tuz said.

Debts also weighed down KamAZ, the Soviet-era car and truck giant, and its production has fallen from some 150,000 units per year to just 20,000.

In 1994, U.S. investment firm Kohlberg, Kravis, Roberts & Co. signed a contract to attract investors for a revamp of the plant in Tatarstan's second city of Naberezhniye Chelny. The European Bank for Reconstruction and Development was the only taker and invested $100 million. KamAZ, meanwhile, racked up more than $1 billion in debts to various Russian state-owned banks, the Pension Fund and the tax authorities. The EBRD itself became a creditor, and KamAZ's debt to the EBRD was eventually restructured. KKR and the EBRD each hold stakes of about 6 percent.

Swedish furniture retailer IKEA said it has had a good experience in Tatarstan. It started working in the republic in 1996, purchasing plywood from the Povolzhsky plywood factory, or PFMK, and began buying furniture here in 1997. The purchases have steadily grown from $1.57 million in fiscal 1999 to a projected $7.31 million in 2002. IKEA loaned $1.25 million to PFMK in 1999 for machinery to boost production, and IKEA is discussing further investments at the moment. "Tatarstan is an interesting area for IKEA because it has a developed industry," said Willy Steinert, commercial representative of the IKEA Russia Trading Service Office.

Advantages of working in Tatarstan include the availability of raw materials, low labor costs, skilled and business-oriented management and skilled staff, he said. Drawbacks include freight costs for the long hauls to Europe and Asia and the low efficiency of production, he said.

Pratt & Whitney Canada, a division of U.S. company United Technologies and its local subsidiary P&W-Rus, has two of its main programs in Russia in partnership with the Kazan Helicopter Plant. The plant's Ansat helicopter and the Mi-38 being developed by the Euromil consortium, which includes the plant, are both to be powered by Pratt & Whitney engines. In addition, P&WC intends to make more than a quarter of its engines for the Ansat light multipurpose helicopter and for the Mi-38, a twin engine, 30-passenger helicopter, at the Kazan Aviation Production Association.

The biggest player in Tatarstan is No. 5 oil firm Tatneft, which produces 9 percent of the nation's crude, or about 60 percent of the republic's exports, and is the region's biggest taxpayer, accounting for at least 30 percent of its budget.

A regional law on production-sharing agreements contains a list of 27 oil fields that could be developed in Tatarstan with a foreign company. Tatneft already works with France's TotalFinaElf, Germany's Mineraloel-Rohstoff-Handels GmbH and U.S. Ocean energy in successful ventures.

"TotalFinaElf is extremely pleased with its cooperation with Tatneft that extends now over more than a decade," said Francois Rafin, general director of TotalFinaElf E&P Russie. "Tatarstan and Tatneft have a long history in oil production. They are good professionals and trustworthy partners."

"We are proud to be among the handful of truly successful petroleum joint ventures in Russia," said Dean Gaddy, director of Russian operations for Houston-based U.S. independent oil company Ocean Energy, which is in Tatex, a 50-50 joint venture with Tatneft. The venture began about 12 years ago and was originally developed for a project to reduce hydrocarbon emissions into the air while retaining additional liquids for production.

Since then, the venture has added two oil fields from which production exceeds 10,000 barrels per day. "Tatex ... operates within its cash -- a rare phenomenon in Russia," Gaddy said.

Since defaulting on its bonds in 1998, Tatarstan has paid off its debts and striven to put its financial house in order. Standard & Poor's recognized Kazan's efforts in November, raising its rating from SD (selective default) to CCC+. Moody's followed suit in March, raising its rating to B1 from Caa1.

The same period has seen the elevation of Vladimir Putin to president and his insistence on federal laws being enforced in all regions, a campaign that has nipped Tatarstan's drive for more autonomy from Moscow. However, while political independence has been largely extinguished under Putin, the republic's push for economic independence continues. "Some financial flows that used to be controlled directly by the republic's government and from 2001 could have been controlled by the federal government, now are being transferred to Tatneft," the Urals Tacis Local Support Office wrote in a recent report to the European Commission.

Tacis identified a series of transactions starting in 2000 in which Shaimiyev's administration handed over stakes to Tatneft in return for the oil company investing in them or forgiving regional government debt. The enterprises involved were tire maker Nizhnekamskshina; Zavod Tekhnicheskogo Ugleroda, a major supplier to the tire maker; Transuglevodorod, a major extractor, transporter and distributor of coal in Tatarstan; and the republic's leading bank, Ak Bars. "Because it pursued its own privatization policies, the government of Tatarstan still controls most of the republic's key enterprises, including Tatneft," the Tacis office said. "Trying to prevent outsiders from gaining access to the republic's wealth, the government of Tatarstan blocked the entry of Moscow-based banks into the republic."

While these policies appear to be aimed at preventing Moscow from dipping too deeply into the republic's pockets, they also limit foreign investment opportunities.

However, this situation may well be about to change after an announcement in June that Ak Bars and Moscow-based Zenit Bank are to merge. Zenit, once Tatneft's sole bank, has reregistered in Moscow, away from the influence of Tatarstan's government.

Tatarstan attracted more than $1.138 billion in foreign investment by the end of 2001, according to Flura Shaikhutdinova, head of the foreign investment department of Tatarstan's Trade and Foreign Economic Cooperation Ministry. Last year, foreign investment totaled $650.9 million, of which only $8.5 million was direct investment, $91.9 million was portfolio investment and $550.6 million was classed as "other," a category that includes loans.

Companies attracting the most investment included Tatneft, Ak Bars, KamAZ and Nizhnekamskneftekhim.

In 2001, 49.7 percent of foreign investment came from Switzerland, 24.9 percent from Britain and 19.4 percent from Germany, Shaikhutdinova said.

Vedomosti reported that in the first six months of 2002, Tatarstan received $292.5 million in foreign investment, 3.2 percent more than in the same period last year. Some of the funds appear to be Russian money returning home.

Last year, the republic's trade turnover passed $3 billion for the first time, reaching $3.108 billion, of which 88.5 percent was exports. Oil accounted for 63 percent of exports, oil products and petrochemical production accounted for 5 percent, machine tools for 10 percent and rubber 4 percent, Shaikhutdinova said.

Eighty-five percent of exports went beyond the CIS, while 67 percent of imports were machinery and equipment that will be used to improve the efficiency of existing industries, she said.

The regional administration does not have the funds to finance redevelopment on its own, opening the door to numerous investment opportunities. The administration has developed a special compensation program for approved investment projects in big industrial companies in which it compensates up to 75 percent of the interest rate. A big company, supported by the administration, can raise funds in dollars at an annual interest rate of 10 percent, slightly cheaper than in Moscow. With the government paying 75 percent of the interest, the company pays just 2.5 percent.

Late last year, Tatneft signed two such loan agreements with foreign banks: One was for $125 million over two years in a loan syndicated by Commerzbank, Moscow Narodny Bank, International Moscow Bank and Hypovereinsbank; the other for $100 million from BNP Paribas (Suisse) SA. Regional focus: Republic of Tatarstan, Russian Federation