This is a place where you can make money grow

The city of Kaluga, which was originally famous for its local charm and for its aerospace industry, has become one of the most attractive regions for investments in Russia

The city of Kaluga, which was originally famous for its local charm and for its aerospace industry, has become one of the most attractive regions for investments in Russia

Not long ago, the Kaluga region was primarily associated with Konstantin Tsiolkovsky, a maverick scientist from the end of the last century who pioneered work on rockets. Now the Region has a reputation as one of Russia's hotspots for foreign investment thanks in part to an energetic public relations campaign and considerable tax incentives.

The regional administration has attracted an investment portfolio of 36 agreements worth about 3bn euros ($4bn) and is in talks with new investors on projects worth an additional 2.5bn euros, said Kaluga deputy governor Maxim Akimov.

"We wanted to double the portfolio from the current level in the next three years," he explained. "With the crisis, the prognosis has been extended to five years." Some prospective investors may decide to hold off on deals, he said, but the companies that had already agreed to set up shop in Kaluga are sticking to their investment plans. "We were surprised ourselves."

Located about 100 kilometres southwest of Moscow, the Kaluga Region is less industrialized than some nearby regions. In the Soviet period, it became Russia's "astronautics cradle" and was one of the centres for space and nuclear research.

But with good transportation links to the capital and a population of just over a million people who aren't used to earning Moscow-level salaries, regional leaders say Kaluga has room to grow. Akimov, 38, was mayor of Kaluga from 2004 to July 2007, when he was appointed deputy governor. That year, the Region established an economic development corporation to oversee projects and attract more money. "The investment climate in the region changed substantially," said Nadezhda Khotina, the corporate affairs director for SABMiller RUS. The company became the fi rst major foreign investor in the Region after buying an old brewery near Kaluga in 1998. It now employs about 900 people and is the Region's biggest taxpayer.

The Germans are here When Volkswagen was looking for a Russian production site in 2006, it chose Kaluga over two other locations on its shortlist because of enthusiastic support from the regional government, said Dietmar Korzekwa, a spokesman for VW Russia. "The conditions for moving there concerning infrastructure and taxes are fairly typical for Russia."

Since then, foreign investment has snowballed, with projects from companies including PSA Peugeot Citroлn, Samsung and General Electric. In 2008, the Region saw industrial growth of more than 30pc, compared with the national average of 3.7pc, according to the State Statistics Service. The Region offers tax cuts to investors based on a sliding scale of the total amount invested.

Last year, new legislation also introduced subsidies for strategic investors, making them eligible to get back profit taxes for up to nine years. In addition, there are breaks on property taxes for up to four years. After successfully signing Volkswagen, the Region decided to focus on industrial parks that connect to engineering and transportation networks. So far, there are four such parks, located mostly near Kaluga and in the north.

"We decided to offer investors a specifi c product to fit their needs," Akimov said. Last summer, the region signed a deal with Vneshekonombank to receive almost 5bn roubles over the next 10 years for Kaluga's "auto manufacturing cluster". The Region is to invest another 1.9bn roubles.

"We have more residents in our industrial parks than Russia's special economic zones," Akimov said, referring to 15 areas chosen since 2005 to attract investment in industry, technology and tourism. "And with 10 roubles in private investment for every rouble put in by the government, we're essentially doing the job of the Investment Fund." Volvo and Renault opened a 15,000-capacity truck plant in January. PSA Peugeot Citroлn and Mitsubishi will open a joint production site next year. New auto clusters like Kaluga also stand to benefi t from a controversial increase in import tariffs, as foreign producers say they'll move toward domestic production and away from importing assembled vehicles. And with lots of room in industrial parks, producers say they are now expecting auto-parts makers to move to Russia as well.

"There is more opportunity for synergy in localising," said Korzekwa, of VW, which has signed a number of contracts with component producers such as Spain's Gestamp and France's Saurecia and has about 200 hectares next to its plant for others to move in.

PSA will also have 50 hectares for auto-parts makers, spokesman Cicolella said.

"We'll decrease imports once the factory is finished and only import cars in other segments," he said. "The crisis has not affected our plans." The regional administration, too, says the fi nancial downturn won't do much damage to its long-term plans.

"Market leaders realise the economy is cyclical, and objectively there's room for growth in investment and consumption on the Russian market," Akimov said. "The region doesn't depend on raw material extractions as much, so we hope to go through this period of contraction less painfully than some." But the region does still receive around 10pc of its budget revenues in federal subsidies, according to Fitch Ratings. The share of federal money in the budget has decreased from 25pc in 2003. "Right now, the Region's economy is not very strong compared with [industrial] regions like Lipetsk, but they have a good chance of improving in three to fi ve years if more auto-part makers move there," said Vladimir Redkin, an analyst at Fitch who gave the Region a long-term BB-rating in late October. "So far, the actions of the administration have proven effective," Redkin said. "They don't view the automotive cluster as a panacea and are looking at long-term perspectives of up to 10 years from now."

This article first appeared in the Moscow Times

The quote
"We're still hoping and counting on a market volume of 2.2m vehicles this year. Of course, we're aware of other scenarios including a fall to 1.8m or even 1.5m, [but] no one really knows. But I'm sure of one thing: no matter how the market changes, we'll grow our share.

"The international crisis has hit suppliers hard. But we have signed our first seven contracts, and the major suppliers that we need in order to establish local supplies intend to invest.

"The regional authorities are now preparing a site, and we're proceeding on the basis that the first earth-movers will appear there at the beginning of the summer."
Dietmar Korzekwa, Director-general Volkswagen Group Rus, in an interview with RBC Daily, March 26, 2009

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