Passengers boarding domestic flights in Russia are often a curious blend of Armani-clad oligarch wannabes, elbow-ready, gloomy-faced frequent flyers and jolly travellers who have had one drink too many on their layover. One thing usually missing from this mix is foreigners – regional flights tend to be a very Russian affair.

But this is not in the case on a mid-September evening flight from Moscow Sheremetyevo Airport to Nizhnekamsk, a central Russian city with a population of 234,000. The flight is full of German, British and American travellers. Given Nizhnekamsk’s limited appeal as a tourist destination and the fact that many of the passengers are sporting suits, it is easy to guess they are not just adventurous tourists. Indeed, most of them are on their way to Special Economic Zone Alabuga (SEZ Alabuga) located in Tatarstan, between the cities of Yelabuga and Naberezhnye Chelny, and a 40-minute drive from Nizhnekamsk.

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From the ground up

While it might appear that there is little to see in a Nizhnekamsk, up until recently there was even less for an intrepid traveller to view on the outskirts of Yelabuga, other than forests, wide plains and the green banks of the Kama River. In the 1980s, Soviet authorities planned to build a tank and tractor-producing complex in the tiny town of 70,000, which was then forecast to grow at least five-fold, putting it on an even footing with neighbouring city Naberezhnye Chelny, home to truck manufacturer Kamaz. Things did not go according to plan, however, as the Soviet Union fell apart before the project was completed.

The only visible remnant of this aborted project visible today is a heating station with a '1991' – the year of its completion and the collapse of the Soviet Union – inscribed on its chimney. Yet, although the project never materialised, there is no shortage of economic activity across the road from the plant, where the entrance to the special zone is located.

Companies investing here include Ford Sollers, a joint venture between a Russian and a US car firm; Rockwool, a Danish producer of stone wool; 3M, a Minnesota-based conglomerate; and Huhtamaki, a Finnish packaging producer. As 70% of SEZ Alabuga’s area is already occupied, the zone management announced a decision in September to double its size to 40 square kilometres. The zone has also received an honourable mention in the European category of fDi’s Global Free Zones of the Year for 2014.

Big ambitions

Since opening, SEZ Alabuga has attracted 42 companies that have invested an estimated $3bn in the area. Now, it aims to have 120 companies and $12bn invested by 2020. “Sure it is an ambitious goal, but when we started and said we want to attract a billion dollars, we might as well have said a trillion,” says Timur Shagivaleyev, SEZ Alabuga general director. “In 2006 all we had was a pen, a snowy field and a masterplan. Not even employees or cars.”

Mr Shagivaleyev recalls that shortly after the zone opened, a group of 40 Japanese businessmen paid him a visit. “I did not invite them and I am not sure who did. But we showed them what we have, we showed them our masterplan and told them what we are planning on doing. They just looked at me, smiled and said ‘good luck’,” he says.

Investors now do come to SEZ Alabuga, lured by generous incentives offered to any company (bar tobacco and spirits-related investments) willing to invest more than $3m and happy to locate their manufacturing in the zone. SEZ Alabuga’s incentives package includes 10-year long tax holidays, no value-added tax and import duties on equipment imported into the zone, land sold at a discounted price, and access to utilities and customs infrastructure. The zone authorities have also recently opened an international school close to SEZ Alabuga and are in the process of finishing a modern housing complex to appeal to expats working in Alabuga.

Popular place

Yet, while there is no shortage of free zones in Russia, all offering incentives, investment into SEZ Alabuga accounts for 72% of all capital allocated in federal zones in Russia, according to the zone’s estimates. Why such popularity in a place that, as Mr Shagivaleyev says, only a couple of years ago was just a “big field with a couple of abandoned Soviet buildings”?

Andrei Chumakov, a Moscow-based tax and law senior associate at consultancy EY, says: “There are 16 SEZs in Russia, [but] not all of them really do something. Alabuga is one of those that has active operations. Its main advantage [apart from incentives] is that it is supported by the local government. It also has active management that is really interested in the development of this SEZ.”

Michael Wright, strategic project manager with Armstrong World Industries, a Pennsylvania-based producer of floors and ceilings, is among those who recently had a chance to see whether Mr Chumakov's assessment is correct. “I came here in October 2012 and back then our plot was just a snowy field with trees,” says Mr Wright, recalling his first visit to SEZ Alabuga. And although it was just the beginning of Mr Wright's assignment in Russia, it did not mark the beginning of Armstrong's presence in the country, given that Russia is the company's third largest market after the US and China and it has been selling products in the country for more than 20 years.

Several years ago, Armstrong was planning on moving to Russia, but difficulty in finding the right site kept the company at bay. With a renewed push for a move to Russia in 2010, the company scouted 16 different locations across Russia and finally decided to settle in Alabuga.

“We feel we made the right decision,” says Mr Wright. “SEZ Alabuga administration does things legally and ethically, and has an understanding of local procedures here. If it were not for their coaching, constructing this plant would have been a much more difficult and longer process.”

The biggest obstacle that Armstrong faced when going ahead with the project, says Mr Wright, was weather conditions, given that in Tatarstan, as in the most of Russia, construction work usually stops between October and April due to difficult weather conditions. Apart from that, according to Mr Wright, his project was shielded from issues often associated with investing in Russia, such as corruption, problems with getting construction permits and access to utilities.

And that is no small matter when it comes to Russia. According to the World Bank's 2014 Doing Business report, Russia is among the worst places in the world when it comes to dealing with construction permits (178th out of the 185 countries ranked), the country ranks 117th in terms of access to electricity and, according to the most recent ranking published by anti-corruption watchdog Transparency International, Russia ranks 127th in the world for corrupt business practices, tied with Pakistan and Mali.

Political problems

Yet, while Armstrong's construction was under way, another problem emerged – Russia's controversial foreign policy and its involvement in the conflict in Ukraine that led to the deterioration of relations between Russia and the West, and ultimately resulted in sanctions imposed on Russia by the US and EU.

Investors began to wonder whether investment conditions in Russia would deteriorate in the process as well. According to Lotta Moberg, adjunct scholar at the Institute for Global Economic Growth, the current situation should not have a lasting impact on investment conditions in Russia's economic zones, and the country in general. “The [current situation] will not make that much of a difference. I think it would if the government there would choose to exclude foreigners from investing, [but] I don’t see that happening,” she says.

Mr Wright in the meantime is busy getting Armstrong's $78m plant ready for production. “We are very watchful of the changing conditions, but so far it is business as usual for us,” he says.

Additional reporting by Helena Ball.