Eschewing economic shock therapy, Tatarstan managed the post-Soviet transition better than most regions of Russia. Socially sensitive market reforms and an early independence in tax legislation maintained higher levels of employment and social welfare, and enabled the government to invest in a massive slum clearance and housing construction programme that boosted economic growth and avoided mass poverty.

“We have had our own social welfare protection since 1992,” says presidential aide Raphael Khakimov. “Welfare help is targeted. Our aim is to have no families under the minimum living standard.”

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Stable tax base

The republic is beginning to reap the benefits of the broader and more stable tax base it has created, and it remains one of the handful of Russia’s 89 republics, provinces and territories that are net contributors to the federal budget. Russian Audit Chamber chairman Sergei Stepashin has described Tatarstan’s latest five-year programme of social and economic development as “the most successful, the most efficient implementation of a specially designated federal programme since the collapse of the Soviet Union”. So Tatarstan stands well prepared for 2009, when, under current plans, 40% of the federal budget is to be transferred for distribution by local administrations.

Government strategy

Despite this promising state of affairs, Tatarstan’s policy-makers are not resting on their laurels. Under president Mintimer Shaymiev and prime minister Rustam Minnikhanov, the government has formulated the Programme for Social and Economic Development of the Republic to 2010 (PSED), a realistic strategy with clear and attainable goals that makes the most of the republic’s competitive advantages.

The strategy is founded on the overall goal of improving the quality of life across the population, principally through increasing economic prosperity and targeted social welfare programmes, including poverty reduction. It envisages maintaining steady high growth with the aim of doubling gross regional product (GRP), from $26bn in 2005 to more than $50bn by 2010, which is expected to facilitate the doubling of budget revenues over the same period.

“To implement [the strategy] successfully, we are directing our efforts towards the development of high-tech production, the promotion of investments, the support of small businesses and the attraction of investments,” says minister of trade and foreign economic co-operation Hafiz Salikhov.

Unlike many other oil-rich states, Tatarstan’s GRP growth will not be based on increasing crude oil production, but rather on developing products and processes that enable significant additions of product value, notably in the petro-chemicals and mechanical engineering sectors.

Structural changes

The government will continue to drive through the necessary structural changes to the economy. It has divested itself of direct stakes in many former state enterprises, putting the shares of a dozen of them on the market in 2005 alone.

Concern that offering shares in a state enterprise directly to the public would result in crooked businessmen gaining overall control has prompted the government, in most cases, to put its shares into holding companies, with the expectation that the respective managements would subsequently lead controlled buy-outs.

Some enterprises are reluctant to let the government bow out entirely, in part because good political connections can help them do business across Russia.

Small businesses

Another main plank of the PSED is the investment of public money in the infrastructure necessary to underpin effective entrepreneurship, especially at the level of small and medium-sized enterprises. This includes not only technology parks and business incubators, but also support infrastructure such as advisory services, legal consultants and logistics.

Likewise, government programmes to improve the mechanisms and lower the cost of borrowing are encouraging the banking sector to refocus from its customary role of servicing large enterprises towards crediting SMEs.

By smoothing the path for the establishment and growth of SMEs, the government aims to intensify innovation, in particular in high technologies with applications in the economy’s most promising growth areas, notably oil and petro-chemicals and mechanical engineering (see page 9). It plans to create conditions that will help clusters of SMEs to evolve around anchor businesses in the various sectors (for example, Kamaz in the automotive sector, Kazanorgsintez in petro-chemicals), providing SMEs with a ready market for innovative products and production methods, driving modernisation of the larger enterprises and accelerating growth for both.

The federal government’s choice of Tatarstan as the location for a special economic zone from 2006 was a major boost for the innovation cluster concept (see box overleaf).

“We believe that by 2010, the annual growth of GRP through innovations will be at least 2%”, says Mr Salikhov. “The main condition to achieve the projected level of development is the build-up of the strong scientific, technical and educational potential accumulated in Tatarstan.”

The republic has long been renowned as an educational centre and is home to more than 100,000 students. As well as the 200-year-old Kazan State University, it boasts several of Russia’s most prestigious technical institutes among its 26 higher education foundations. Many students from across Russia and abroad find work in the republic after qualifying, a practice the government is keen to consolidate in the future to ensure a flow of high quality graduates into innovative enterprises.

Industrial projects

Alongside its drive to boost SMEs and innovation, the PSED also envisages the construction of a number of national industrial projects underwritten by the government. Under the auspices of Tatneftekhiminvest-holding, the part-state-owned holding company that consolidates projects in the oil, gas and petro-chemicals sector, a new Tatneft refinery with a capacity of seven million tons annually is under construction at Nizhnekamsk at a cost of $3.2bn.

Meanwhile, negotiations for financing the republic’s third refinery (with a five-million-ton capacity) are in train with the European Bank for Reconstruction and Development. Both are expected to use locally produced Tatneft oil, adding significant value by transforming a sour crude grade that would otherwise sell at a substantial discount to Brent crude.

The ministry of transport and roads is investing ?470m to build a new 140-kilometre toll road between Alexeyevskoye and Almetyevsk, improving access to the south-east of the republic, and a further ?175m to create a logistics centre in Kazan.

In comparison with industry and innovative technology, agriculture is not a high priority of the PSED. Accounting for just 8% of GRP, agricultural output has nevertheless grown steadily, with grain, sugar beet, meat and milk being the primary products. Though the private farming sector is in good shape, the government intends the future trend to be towards bigger agro-industrial enterprises – to which the broad flat expanses of Tatarstan are well suited – to improve overall yields and quality, and thereby facilitate competitive exports.

Another long-term plan for the agricultural sector is the extraction of seed oil for cosmetics. A ?50m oil extraction plant under construction by Nefis Cosmetics is expected to turn a net profit within five years.

Likewise, the construction sector is not a key priority of the PSED, but is nevertheless healthy. Housing construction reached a peak as the government’s Obsolete Housing Demolition Programme drew to a close in 2004, with a total of 1.75 million square metres of housing space built that year. This fell back slightly in 2005, though private construction continued on its upward trend and accounted for about 46% of the total, probably due at least in part to the availability of cheaper mortgages.

Roaring trade

Tatarstan’s foreign trade turnover has more than tripled in the past five years and now exceeds $10bn annually, with more than 100 trading partners across Europe, south-east Asia, Africa and Latin America. Soaring prices gave oil an 85% share of exports by value in 2005, while most imports were mechanical equipment. The active policy of encouraging inward investment looks set to give new impetus to foreign economic relations during 2006.

With solid achievements behind them and a well-thought-out strategy for the future, there is an optimistic mood running through the government, ministries, businesses and banks of Tatarstan, summed up by Linar Latypov, first deputy minister of trade: “Buldirabiz! It’s our motto: We shall do it!”

SPECIAL ECONOMIC ZONES

Tatarstan’s new special economic zone (SEZ), construction of which started in January, is a feather in the cap of the republic. It is one of only six SEZs established across the whole of Russia, won after stiff competition among 72 entries. The federal government’s involvement means it is in Moscow’s interest as well as Tatarstan’s to make it a success.

Situated at Yelabuga, beside the Kama River in the north-east of the republic, the SEZ covers 20 square kilometres close to the important industrial centres of Nizhnekamsk – home of the petro-chemicals industry – and Naberezhne Chelny – home of the Kamaz truck plant. As an industrial SEZ, it is designed to attract production facilities that can exploit the republic’s competitive advantages in the petro-chemicals and mechanical engineering sectors.

Utilising the republic’s significant production of polyethylene, polypropylene, synthetic rubber and other petro-chemicals in the manufacture of plastic products, for example, could take advantage of Russia’s significant potential market for plastic goods and would find ready local buyers. Likewise, with the majority of Russia’s automotive production located within 400km of Yelabuga, investors in the SEZ could tap into a demand for automotive components estimated to be worth $3bn a year.

Existing infrastructure in place around the SEZ includes water, power, gas supply, and links to the M7 highway, the rail network, major inland waterways and the international passenger and freight terminals at Begishevo airport, which is 20km away. The federal, regional and local governments are investing $100m in the construction of new utilities, transportation and social infrastructure inside the zone.

Guaranteed for 25 years, the SEZ will be a free customs area into which foreign commodities may be brought and used without the payment of customs duties and VAT. Russian commodities may be brought into the zone subject to the payment of excise duties. The SEZ also gives investors a range of tax breaks, including profits tax reduced to 20% (from the standard 24%), a 10-year holiday on property tax (usually 2.2%), accelerated depreciation of assets, and no vehicle excise or land tax (usually 1.5%) for its residents. The abolition of VAT (18%) is also planned for the zone. “These are not the best tax breaks in the world, but they are the best in Russia,” says Linar Latypov, first deputy minister of trade and foreign economic co-operation.

The SEZ has been established with the advice and experience of Singapore. It will be run by a government-backed management company overseen by federal and republican agencies. Businesses wanting to set up in the zone will have to invest at least €10m, with at least €1m of that being put down in the first year.

Although prime minister Rustam Minnikhanov says that the existence of the SEZ will not drastically change Tatarstan’s underlying economy, it will nevertheless bring the republic worthwhile new opportunities. In particular, it is likely to act as a catalyst for innovation and for attracting new businesses, and will stimulate Tatarstan’s drive towards international standards of openness and transparency.

GROSS REGIONAL PRODUCT OF TATARSTAN

Source: Tatarstan Ministry of Trade and Foreign Economic Co-operation

FOREIGN INVESTMENT IN TATARSTAN BY SECTOR (1993-2005)

Source: Tatarstan Ministry of Trade and Foreign Economic Co-operation