“Scratch a Russian and you will find a Tatar,” Napoleon is supposed to have said during his failed effort to conquer Imperial Russia. Today, visitors to the autonomous Republic of Tatarstan can look forward to a warmer welcome than the one Napoleon received.

Home to Russia’s second-biggest ethnic minority after the Slavs, oil-rich Tatarstan is one of Russia’s most prosperous and peaceful regions. Although the majority of Tatars are Muslim, prime minister Rustam Minnikhanov points to the sparkling new mosque that sits cheek by jowl with the Orthodox cathedral inside the ancient Kremlin walls as a testament to the peaceful co-existence of the region’s two main faiths.

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Stability reigns

“We enjoy political and economic stability in a multinational and multi-confessional population. We have suffered none of the problems that have affected the other parts of the Russian Federation but enjoy the fruits of hard work and the natural riches of the region,” says Mr Minnikhanov.

Mr Minnikhanov effortlessly reels off the statistics of the region, which is located on the eastern frontier of Europe at the confluence of the Volga and the Kama rivers: 800 kilometres east of Moscow, with 3.8 million residents – 2% of Russia’s total population – just under half of whom are ethnic Tatars. The territory covers 68,000 square kilometres, which makes it about the same size as Ireland, and it is endowed with a cornucopia of natural resources, chief of which is oil. In short, Tatarstan is one of Russia’s bigger and wealthier regions.

After taking office in 2000, Russian president Vladimir Putin pushed through fiscal reforms that led to a net loss of revenue for Tatarstan. However, the regional government has successfully expanded the tax base and it is one of the few in Russia that is regularly running budget surpluses. Ratings agency Fitch acknowledged the healthy state of the republic’s finances with an upgrade in May.

“The ratings reflect the republic’s sound and improving budgetary performance based on sustainable growth of the regional economy, tight control over operating expenditure as well as low level debt,” the agency said in a statement. “They also reflect the republic’s growing dependence on its own revenue sources that are concentrated in oil and petro-chemical industries, increased social expenditure pressure as a result of social benefits system reform, and forecast of increased contingent liabilities from guarantees to be issued.”

Oil for growth

If oil is the engine of the region’s growth, Tatneft is the driver. The sixth largest oil company in Russia in terms of production, Tatneft was originally founded in 1943 and looks forward to celebrating the extraction of its three billionth ton of oil next year.

The largest volumes were extracted in the 1970s, when the company was churning out more than 100 million tons a year, but volumes have fallen to 25 million tons as its fields reach maturity. However, even at these reduced rates of production, the company still has reserves to maintain the current production levels for another 15 years.

“The backbone of the local economy is crude oil production and we extract about 30 million tons per annum,” says Mr Minnikhanov. “After that comes machine tools, automotive, aviation, petro-chemical, food processing and so on.”

The gradual fall in oil production has led the government to focus on getting more from less, and diversifying. The main problem that Tatneft faces is its oil is very ‘sour’ – it has a high sulphur content, which must be removed before it can be used to make products such as petrol.

The Security Council of Tatarstan gave the go-ahead for construction of the Nizhnekamsk refinery and petro-chemical plant last year, which will treat Tatneft’s crude and add to the region’s existing petro-chemical base. (Tatarstan also accounts for a big slice of Russia’s synthetic rubber production.) Construction is expected to be finished in 2008 and the plant will be able to process seven million tons of crude a year. Mr Minnikhanov, who is also the chairman of Tatneft, contributed 5% of the company’s shares, worth $485m, to the Jersey-registered holding company to show potential investors that the region was serious about raising money for the construction project. Merrill Lynch has already been hired to help raise the estimated $3.2bn needed to finish the job.

Big on trucks

Tatarstan’s other famous export is the giant Kamaz truck. The trucks do most of the donkey work for Russia’s industry and the army. Producing just over a third of the trucks on Russian roads, Kamaz has been one of the few Russian automotive producers able to fight off the rising tide of imports. While the other Russian car makers struggle to keep their heads above water, the company is having a good year.

Kamaz’s revenues rose by about 30% to $450m in the first three months of this year, compared with the previous year, while profits soared by 54% in 2005, according to international accounting standards, and it is on course to do even better this year.

The regional authorities have an ‘open arm’ policy to foreign investment, most of which has gone into the oil and gas sector: foreign investors have spent a cumulative total of $1.5bn since 1991. In the most recent deal, Kamaz signed joint venture agreements with US company Cummings and the German firm Voith to make gearboxes.

Diversification

Away from the headline projects, the regional authority’s policies to encourage diversification are also paying dividends: three years ago small and medium-sized enterprises accounted for just 7% of local GDP. This year that figure has risen to 18% and the government hopes to boost SMEs’ share of the economy to a third of local GDP by 2010.

The local investment climate is expected to improve further as a consequence of the Russian government choosing the region as home to one of six special economic zones earlier this year. The zones come with decade-long tax holidays for companies and are designed to bolster investment to industrial and high-tech branches of the economy.

“The cost of energy and labour is low, but our people have good skills and, with strong transport connections, there is a possibility to export production to international markets,” says Mr Minnikhanov.