Reprinted with permission from Business Net - Irkutsk at www.irkutsk.com

The city of Irkutsk was founded in the 17th century during Russia's long push east. It is located in south-eastern Siberia on the banks of the Angara River, only an hour by road from Lake Baikal, but five time zones and 3,000 miles east of Moscow. The city has a population of 635,000 and the oblast 2.8 million. Most of the oblast's population is in the south, while the far north contains "only a few thousand people." Five cities have the population over 100,000 people each: Irkutsk (the regional administrative center), Bratsk, Angarsk, Ust-Ilimsk and Usolie-Sibirskoye. By the census of l989, 88.5 percent of the population are Russians, 3.4 - Ukrainians, 2.7 percent are Buryats. Due to a low fertility rate and high mortality rate and migrations outside of the region, population decreased in the nineties. The registered unemployment rate is 4.l percent of the active population or 51,200 people (in Russia, this rate is 3.8 percent.) The Baikal area continues to be the base of Russian economic expansion towards Far East. Any Russian territory north or east of Irkutsk region is less industrially advanced. Moreover, a number of cities, first of all, Irkutsk, enjoy rich cultural traditions and great scientific and educational potentialities.

Around Irkutsk are miles and miles of forest land, interrupted by a few small villages and farms. It is a neighbor with Saha Republic (Yakutia), Buryatia, Tyva, Krasnoyarsk region and Chita region. Downtown Irkutsk has attractive 18th and 19th century buildings, but few have been refurbished. A potentially attractive city is marred by disrepair and air pollution. Other than a moderate amount of dacha and mansion building just beyond the airport, there was little new construction underway in the city and little evidence the population had money to spend. Hours spent walking the center of town revealed none of the upscale shops often seen in regional centers of similar size and only a sparse supply of Western consumer goods. Food and other necessities (including imported fruit, such as Dole bananas) were in good supply, but were sold by street vendors or by little changed post-soviet "privatized" stores. Officials said that all but 27 of the city's over 600 retail establishments had been privatized. Officials said the number of registered small businesses in the oblast had increased to over 12,000 in 1995, but there was little visible evidence of new businesses operating in Irkutsk. Irkutsk had a few small, simple private cafes, but real private restaurants were not in evidence.

Major Industries

Irkutsk could build a future around its resources, and its lake. Resources include forests, gold and other precious metals, and large oil and gas deposits, and 80% of these resources are sold on the export market. Transportation costs from Irkutsk are one of the toughest problems the region faces. Key industries are forest product processing (paper in particular), chemicals, machine tools, and aluminum. In addition, Irkutsk could eventually develop a successful tourist industry around nearby Lake Baikal.

Economic Conditions

Although local officials boasted that the region's economy had been improving for almost a year, new commercial activity and signs of a boom were not much in evidence. Officials insisted that the region's resource-based economy was one of the top performers in Russia, with most agreeing that resource exports and cheap energy were fueling an industrial recovery. Unemployment was described as low, though one official admitted that it was 5% or higher (many people either do not bother to register or find being officially unemployed embarrassing.) Average wages were reported to be R600,000 per month ($130), 60% or more above the national average, but there was little visible evidence of such strong purchasing power.

Officials later admitted that the industrial picture is not all that positive and acknowledged that the paper, chemical, and machine tool sectors are troubled. Lack of cash strains many large industrial firms, and the 10,000 employee chemical plant in Sayansk has shut down, embassy officers were told.

The region concentrates a considerable wealth in deposits of gold, coal, oil and gas, rare metals (niobium, tantalum, lithium, rubidium), 47 kinds of precious and semi-precious stones (lazurite, charoite etc.), common salt and potassium carbonate, iron ore, manganese, titanium, and mineral building materials (magnesite, dolomite, etc.) Around 76 percent of the territory is covered with forests. The resource of timber amount to 8.3 billion cubic meters or over 1 l percent of all the Russian timber. Irkutsk region is one of the largest industrial timber bases of this country - second in size after the Krasnoyarsk region. The region is unique by quality parameters of timber - variety of trees, their concentration and accessibility. On the list of deposits of federal importance there are the deposits of Verchnyaya Chona (oil), Sukhoy Log (gold), Kovykta (gas), Nep (potassium carbonate), Belaya Zima(niobium, tantalum), Savinskoye (magnesite), Mugun (coal).

Lake Baikal contains 20 percent of the planet's fresh water. The availability of energy, timber and mineral resources gives shape to the industrial complex, which consists of 4,500 large, medium and small enterprises, and concentrates over 60 percent of fixed assets.

A timber industrial complex puts out 13.5 percent of the regional production.

Irkutsk region is the first in Russia by the amount of forest exploitation and cuts about half of the timber in East Siberia. By amounts of timber export per resident, the region surpasses the average Russian reading by 5 times. The region produces 8 percent of Russian cardboard and over 50 percent of pulp, almost 100 percent of cord pulp and over 50 percent of viscose pulp. The regional share in the total volume of the timber production in the Russian Federation increased from 12.5 % in l994 up to 15.3% in l 995. The largest enterprises are Bratskkomplexholding, Ust-llimsky concern, Baikalsk pulp factory. The region is one of the largest consumers of electrical and thermal energy in Siberia.

Baikal area produces almost a quarter of the Russian aluminum. Two large aluminum makers in Irkutsk and Bratsk are operating. Angarsk oil and chemical joint-stock company produce 3l percent of the regional production which uses West-Siberian oil. The region produces around 70 percent of oil-derived products used in East Siberia. A considerable amount of product goes to Far East. The enterprises Usoliekhimprom,Sayans-khimprom and Angarskhimreaktiv, and, partly, Angarsk and Bratsk Timber Industrial Complex concentrate the production of polymerized plastic, artificial fiber and mineral fertilizers. The share of commercial production put out by Irkutsk regional chemicals exceeds the half of the amount of chemicals produced in East Siberia.

Engineering, metal processing and consumer goods industries are less developed. Along with natural resources and industrial potential, an important condition for dynamic development is political stability and "advancement".

Irkutsk region is numbered among the country's 12 regions with the most developed securities market. In Baikal area, around 700 joint-stock companies are operating which produce almost 74 percent of the total production. Small and medium-size businesses produce 17.7 percent of commercial production, which is higher than anywhere in East Siberia.

Non-ferrous metallurgy, wood processing, oil and chemicals, as well as infrastructure industries (communications and commerce) are quite attractive for foreign investors.

The situation in the regional economy is, however, ambiguous. Trends for industrial and financial stabilization failed to be consistent. in 1996, the total recession in production resumed. This was how a tough anti-inflational policy of the government influenced the regional economy, the market structure of which was still quite undeveloped. In 1996, the industries that worked steadily were non-ferrous metallurgy (with the volume index of l03%), energy and food industries. As a whole, the production decreased by 11.9 percent in comparison with 1995. The decrease in consumer goods industry was 42.3 percent, in construction materials industry - 41.9 percent, and 19.1 percent in timber complex. The crisis was not overcome in the agricultural sector which is entirely situated in the risky agriculture area.

The reduction of capital investment is continuing. The flow of financial resources in financial sector out of the production is growing, partly to cover the budget deficit. A non-payment crisis, inter-industry price disproportions, narrowing purchasing power of the population, and the situation on the world market unfavorable to some export positions brought about a serious worsening in the financial situation of enterprises, as well as decreasing profits, increasing losses and as a result, a shrinking taxable base.

A decrease in the budget income, in turn, aggravated the above-mentioned processes. The introduction of "currency band" in 1995 also played a negative role for the economy of the region which is an export-oriented primary producer. It only partly depends on macroeconomic factors of developing situation in Russia. To keep up the political stability and, at the same time, create conditions for dynamic economic development, specific regional problems should be taken care of.

One of them is the tolling scheme of operations into which the major regional enterprises switched. The main taxpayers, primarily, Angarsk Oil and Chemical (ANKhK) Company and Bratsk Aluminum Plant changed their de facto owner (ON EXIM bank in the case of ANKhK and Trans World Group for BRAZ) switched to processing raw materials without participating in selling the finished product. The tolling scheme allows keeping jobs in large cities, provide a minimum income to the regional budget but a considerable amount of profit goes to the owner. So, the flight of profits from energy-consuming enterprises outside of the region in case of Angarsk chemicals or outside of the country in case of BRAZ levels a potential gain by the region from inexpensive energy.

The location of environmentally dangerous productions according to the tolling scheme stresses basically the colonial nature of the economy of the Irkutsk region. Along with macroeconomic factors, the tolling scheme blocks the renovation of obsolete technologies and sharpens the struggle for the access to raw materials in the export-oriented industries. Another "long-playing" problem is the dispute between Irkutsk region and the federal government over the issues of ownership and rates in power industry.

Introducing the power plants on the Angara to the whole- sale market can cause closing down of energy- consuming enterprises and galloping unemployment.

Whether another aluminum maker in Ustllimsk will be built or not, is dependent on the solution of this problem. Another important question is, should the regional primary industry be coal or gas oriented? On one hand, Vostsibugol, the largest regional coal producer, is a stable operation. On the other, depletion of old deposits necessitates getting new ones into operation. An environmentally grave situation in the regional industrial centers (Baikalsk, Angarsk, Shelekhov, Bratsk, Usolie-Sibirskoye, Cheremkhovo, Irkutsk) can be improved by using natural gas instead of solid fuel in thermal power plants and boilers. So, what is better? - investment in coal extraction with one of the lowest costs in Russia, or development of the condensed gas deposit in Kovykta? Either response can gravely influence the relationship between "coal" and "oil-and-gas" teams of the regional elite.

Another problem worth mentioning is conflicts between strategic owners of the enterprises on which the whole towns are dependent and urban communities (Menatep Bank in Ust-llimsk). The reasons for the conflicts are not only a clash of interests, but also bad management. There are also strictly objective difficulties: high transportation rates are caused by geographical location of the region in the center of Eurasia and by its remoteness from "sea gates." "The climate is a problem for development of international travel industry.

The public policy of the regional interests is still non-existent, and, in our opinion, for a deeper reason than just experts' negligence. There is no such policy because there is no civil society in Russia, and specifically, in the region.

Only through the realization of their interests by major social groups, the existence of developed political institutes and the tradition of democracy allow for shaping social demands to be addressed to the authorities and executed under public control. While these factors are absent, the regional leaders are very subjective in interpreting the will of the people and the notion of "regional interests." The "regional interest" often hides an industrial lobbyism and attempts to promote clan interests for public ones.

The situation will take some time to change.

Best Export Prospects

There are several promising export sectors. These include: consumer goods (particularly processed food and toiletries); clothing; automobiles; low-cost building products; low-cost computers amd pharmaceuticals.

Active U.S. Companies

Commercial officers detected little U.S. company presence in Irkutsk. The most prominently displayed U.S. brand names were, as is often the case: Mars, Kodak, and Gillette. Local officials claimed nine U.S.-Russia joint ventures. However, one of these turned out to be a Russian company that had incorporated in California as a way to avoid local taxes. U.S. West was described as the most visible U.S. partner in the region. (By contrast, local officials reported 42 Chinese joint ventures, and both Chinese products and many Japanese cars were visible on the streets.)

Last Updated: June 10 1999. Copyright Russian-American Chamber of Commerce® 1995-1999. All rights reserved.