The Krasnodar Region This information is provided by The Krasnodar Business Development Agency and Daily Test Enterprise Limited. Courtesy Olga P. Andreeva. Overview The region of Krasnodar, colloquially named “the Kuban”, is home to just over 5 million people (3.5% of the national total). The region extends to 75,500 square kilometers, which is a little over 4% of the total landmass of the Russian Federation (in simplistic terms it is the combined size of Holland and Denmark, or approximately the same size as the Irish Republic). The region derives its name from its capital city, Krasnodar. The region’s area is above average for European Russian regions and represents over 1.5% of the portion of national landmass considered most suitable for human habitation. Its economic base has been founded on agriculture and transport. It remains the “breadbasket” of the nation and is a southern gateway to the world, based on its ice-free ports. Favorable political and investment climates have attracted many multinational companies to the region, including Cargill, Petrak, Conagra, Monsanto, Tetra-Pak, Danone, Coca-Cola, Phillip Morris, Boyuges, Radisson, and LaRoute. History and Geography The Krasnodar region is located approximately 1,000 miles south of Moscow and is bisected by the Kuban river. The neighboring regions are Rostov Oblast in the north, Stavropol Krai to the east, Georgia to the southeast, Turkey (across the Black Sea) to the south and the Ukraine (across the Azov Sea) to the east. In addition to the capital Krasnodar, other well-known cities are Sochi and Novorossiysk. The region sits astride the main transit routes from Europe, the Ukraine and central Russia to the Caucasus, the trans-Asian territories south of the Caucasus and Central Asia, and vice versa. At the top of the Black and Azov Sea Basin, it is located at the frontier of Europe with Asia and the Middle East. It is also at the frontier of Commonwealth of Independent States (CIS) and North Atlantic Treaty Organization states, assuming as a consequence a very high military and strategic importance for the nation. Political Climate The Krasnodar region has undergone enormous change since 1990. In terms of population, it is the fourth largest region in the Russian Federation, after Moscow city, Moscow Oblast and St. Petersburg. It is also the fourth most important electoral region of the Russian Federation by number of registered voters. Although it has distinct characteristics within its borders, the Krasnodar region is one of a number of sufficiently conservative regions of the Russian Federation that have helped define national ideas and values during the 1990s, and it looks set to continue to do so during the 21st century. In what turned out for many to be a surprising result of the 2000 presidential elections, Vladimir Putin was elected in the region by 51.5% of the votes, with Gennadi Zuganov (the Communist presidential candidate) winning a mere 31.39% of the votes. Elections for the regional governor (head of the regional administration), which took place in December 2000, were won by a new candidate, Tkachev who stood with a block of support from all main political parties. Tkachev won by 82% of the popular vote (3.8 million people) in an election that was remarked as lacking an array of quality candidates. Tkachev was formerly a Deputy of the Federal Duma and Chairman of the Nationality Relations Committee. Investment Climate According to information published by Expert magazine, the investment climate in the Krasnodar region is among the ten most attractive regions of the Russian Federation. The investment environment is being improved step-by-step by the regional government. In March 1999 the regional government produced the Law on State Induced Investments in Krasnodar Region, which was aimed at attracting investments on the basis of a regime of most favorable treatment of investors through local tax concessions, preferential terms for land tenure/ownership, preferential transfer of regional property to the investment object, providing state expertise and assistance, issuance of development bonds to finance priority investment projects, and issuance of regional state guarantees on the investment, together with a formalized structure to implement the law in practice. In addition, in 2000, a comprehensive regional economic analysis and development plan was created by Krasnodar Business Development Agency with the assistance of experts from Moscow State University and methodological input from the University of California. Although focused on domestic consumption and action, elements from this plan are expected to be of significant interest to inward investors. Business Opportunities by Sector Most international business in the region combines different elements of trade and direct investment. It is a region that offers many different facets of opportunity for international business. Agriculture. Prime areas of interest to international companies are contract growers, regional farmers are prepared to grow crops for third parties as contract growers. This can be an extremely profitable source of internationally traded commodity produce (such as vegetable oilseeds). By financing the crop in this way, it is estimated that profit margins for international commodity crop traders are above average. Farm machinery. The demand for new farm machinery is as large as the ability to buy it is small. However, a number of agricultural equipment companies have introduced their equipment leasing and financing schemes, and a few are also looking at licensing local manufacture. Equipment pools and equipment rentals (with operators) are also areas of interest. Food Processing There are numerous opportunities in this sector to reach the national market, the regional market and its tourist sector. Since 1998 an increasing number of international food companies have entered the local market to produce, in order to retain their market share following the financial collapse and the reduction in the national ability to import foodstuffs. The opportunities are in all branches of the industry: dairy produce, meat and poultry, fish, confectionery and biscuits, wheat and grain products; vegetable oils, juices, brewing, canning, freezing, and packaging. Food processing opportunities can also accompany contract growing opportunities in the agricultural sector. Companies such as Tetra-Pak have had a presence in the region, including a manufacturing site, for over a decade. Oil and Gas Refining and Transportation Although the region produces oil and gas, and like Baku was one of the original sources of oil and gas in Tsarist Russia, little investment has been made in the extraction industry in the last half century. Similarly, little has happened in the upstream refining industry. There are two oil refineries, one at Afipsky near Krasnodar, and the second at Taupse on the Black Sea coast, and both are in need of updating and re-equipment. Major infrastructure projects in the oil and gas sector are likely to continue over the next five years. These represent serious opportunities for international business. The Caspian Pipeline Consortia (CPC) has completed the construction of a pipeline from the Caspian Sea to Novorossiysk. Work has started on the Blue Stream gas pipeline project to Turkey. Major logistics projects have been won by international companies operating through regional operating companies. International construction companies such as Boyuges and others are active in the region. Further major infrastructure projects related to oil and gas transportation are at various stages of readiness and are likely to come to fruition over the next five years. Manufacturing The region is a base for small and medium-size manufacturing industries. There are a number of interesting opportunities in subcontract work and production under license for international companies that are being developed more easily, particularly encouraged by the proximity of the ports. Subcontract manufacturing. A number of plants manufacture items such as irrigation equipment and pumps, compressors, refrigeration units, gears/reducers, specialist vehicles (such as ambulances), aluminum window frames, farm machinery, and so forth. Subcontract textile work. There are a number of regional companies manufacturing clothing, fabrics, woolens, and other textiles. A number of smaller production units, together with medium-size companies in this sector, have subcontracted work from international companies and this trend is likely to increase. Construction and Building Materials The region is well endowed with high quality building materials such as sands, limestones and marbles. The foothills of the Caucasus overlooking the port of Novorossiysk are home to a major grouping of cement plants that have direct conveyors to the port for product export. This cement was used to build the Aswan Dam on the Nile. Forest Products Given the rational forest conservation policy of the regional government, there are interesting business opportunities for international companies prepared to partner with local companies to add value to primary timber felling and preparing. Larger-scale forestry concessions are available and are accompanied by strict requirements on re-planting and the development and maintenance of logging roads. There are a number of high quality regional parquet manufacturers whose products have been used in restoration work of national historic buildings and who are increasingly exporting to southern Europe and the Middle East. Infrastructure Telecommunications. The regional telecommunications systems have been developing over the past decade, particularly in urban areas. Rural telecommunications remain inadequate however. Regional cities have extensive cellular phone functionality with a number of competing networks on the GMS-900 cycles. There are a number of regional Internet service providers (ISPs); Internet usage is rapidly gaining ground, primarily through widespread use of workplace personal computers. Plans are being laid for the fast implementation of e-commerce and specific business-to-business (B2B) exchange developments. These represent opportunities for specialist new technology companies. Energy. Apart from natural gas, the region is energy deficient, consuming significantly more power than it generates. Most energy is oil-fired generated power wheeled in from the Rostov and Stavropol regions. With the break-up of the Soviet Union, the south of Russia lost its energy connection to the Ukraine - its then principal power-generating source. Likewise, power transfers from the Ukraine to Georgia via the Krasnodar region have ceased. Transport. The combination of increased demand for exports, the development of the tourist industry and growth in the agricultural/food sector are all placing increasing demands on the transport infrastructure. There are substantial opportunities for international transport businesses to work within the transport infrastructure of Russia’s “southern gateway” as access routes into the population heartlands of the nation. Toll road development on a build-own-operate-transfer basis has been discussed, as has the private development of the railways. Ports and Shipping The port and shipping sectors offer a variety of opportunities for international companies. Major port development and hinterland transport projects are planned. A number of smaller-scale port development projects have started. Particular opportunities therefore fall into the following areas: Port/terminal development. Of interest to bulk terminal developers, port equipment suppliers, mechanical handling device suppliers, marine traffic management and safety equipment/systems, construction companies, underwater clearance and dredging companies, marine fire and pollution control companies, container management specialists, and port management companies. Shipping and freight forwarding. In need of freight forwarding and freight unit tracking systems; freight and terminal software systems; multi-modal logistics and transport operators; shipping agencies and ship operators; navigational aids, equipment and systems; container terminal operators; and inter-modal transport training specialists. Tourism This broad sector is starting to be recognized as a sector of opportunity for international business. Attracting a high percentage of Russia’s emerging middle class with a propensity to spend on vacations, a number of Greek and Turkish companies have invested in hotel and other vacation developments along the Black Sea coast. Other investors have been large national organizations such as Gazprom, which has developed four-star hotels and aqua parks along the coast. The US hotel group Radisson has ventured with a local company to operate the Radisson-Lazurna five-star hotel in Sochi. The pick-up in tourism is extending to the Azov Sea coast also, particularly the beach resorts near Yeisk. Economy Economic overview. For the Krasnodar region, 1999 and 2000 were years of increasing opportunity and optimism. The drop in ruble value after the August 1998 financial crisis increased the resistance of national consumers to the purchase of now more expensive imported foodstuffs and other luxuries. This coincided with a national drive to increase valuable export earnings, underpinned by a strengthening of world market prices for primary commodities. Thus the main “planks” of the Krasnodar regional economy - agriculture, food processing, transportation and tourism - were provided with a large incentive to seize substantial opportunities in the national markets that hitherto had appeared to have eluded them. It would be fair to say that the August 1998 financial debacle was a blessing in disguise for the regional economy, as it was for the economy of many regions of the Russian Federation. According to national economic indexes, the Krasnodar region holds a strong position. Its per capita output is well above national average. It is one of the top ten regions of the Russian Federation in terms of net contributors to the federal budget and has one of the highest records for tax collection of all Russian regions. It is an as yet unsung jewel in the national crown of Russia. Agriculture With the highest quality soils and blessed by a favorable climate, the Krasnodar region has always been the principal “breadbasket” of the Russian Federation. It has 3% of all ploughed lands in Russia. It also has Russia’s only specialized agricultural university. The region produces approximately 6% of meat and dairy products, 10% of all-Russian grain, 30% of fruit production, 60% of oilseed production, 90% of rice production and 97% of wine production. On each agricultural indicator, it is always in the top few, often leading the pack. The agricultural significance of the region has only truly emerged with the break-up of the Soviet Union and the consequential “expatriation” of the large agricultural belts of the Ukraine and Kazakhstan in particular. That significance has not led to rapid agricultural development. The growth in the agricultural economy is still emerging after an initial spurt in 1999 caused exclusively by the 1998 economic collapse. The strain of a decade or more of acute agricultural depression is quickly noticeable. Old farm machinery is cannibalized for spare parts, and old farm buildings are patched up to improve or provide temporary on-farm storage facilities. Some crop-spraying aircrafts are in action again, buzzing around the Kuban fields like angry hornets on a summer’s day after a decade of enforced idleness. In the summer of 2000, the fields were better planted, the crops denser packed, more of the marginalized land areas under cultivation again, and the harvest “buzz” stronger than at any time over the past decade or more. In the period 1996-1998, 74% of agricultural companies were unprofitable, while in 2000 that figure was down to 25%. There is a mood of cautious optimism in this sector for the first time in many years. The caution is justified as investment in capital stock is just 2% of the total volume of investment in the country. The exploitation of the region’s true agricultural potential has a long way to go. Food Processing Given the strength of the prime agricultural sector of the Krasnodar regional economy, unsurprisingly over 43% of the food processing industry of the Russian Federation is located in the region, linked to the primary producers. With canned and bottled products, wines, spirits, vegetable oils, fruits, meat and poultry, fish (freshwater and seawater), juices, vegetables, pickles and spices, the spectrum of this industrial sector in the region is impressive. Food processing represents over 50% of the total industrial base of the region and is the largest employment sector of the regional economy. Tourism The Krasnodar region contains the only concentrated resort sector in the Russian Federation. Stretching in particular along the Black Sea coast from Sochi to Anapa and beyond, the resort facilities are concentrated along some 400 kilometers of picturesque coastline with a mountain backdrop of the West Caucasus chain. The subtropical microclimate of the region, the famed beauty of the Sochi hinterland, and the sandy beaches of Anapa are well-known and extremely popular national tourist destinations. To cater for high demand the region is home to 25% of all registered hotels and resorts in Russia. The last decade has seen a fairly rapid transformation of resort complexes from Soviet-style workers holiday camps and sanatoria to more family-oriented hotels spanning the range of accommodation necessary along any major tourist resort coast. Transport The Krasnodar region is the prime sea gateway to the Russian Federation. It is known as the “southern gateway” to Russia. Overall, the Krasnodar region provides some 40% of all Russian port cargo handling capacity. The regional port infrastructure is focused on export capacity, primarily of bulk dry and liquid cargoes with some 95% of cargoes handled for export. The region is the exit point for much Russian- and Caspian-originated oil and natural gas products. The two oil terminal ports of Novorossiysk and Toapse are connected to the Russian pipeline systems. In addition, oil from the Tengiz field in Kazakhstan is transported by the new Caspian Pipeline Consortia (CPC) pipeline to a terminal near Novorossiysk. Work is beginning on the Blue Stream pipeline to transport Russian natural gas to Turkey under the Black Sea, which will traverse the region. Further oil and gas infrastructure facilities are likely to be developed in the region. There are eight commercial seaports along the Black and Azov Sea coasts. Together, these ports handle 68.6 million tons of cargo, both liquid and dry. Novorossiysk has the largest port in the Russian Federation in terms of cargo throughput, handling over 52 million tons per year. With its oil terminal accounting for a significant tonnage of liquid crude, other major terminal facilities handle timber, general cargo, building materials, vegetable oils, fertilizers, coal, and metals. The port is the base for a number of international cargo management and logistics companies, such as LaRoute and Petrak Limited. In addition, companies such as Chevron Neftegaz Inc have offices in this city. Banking and Financial Services Since 1991 the Krasnodar region has had a relatively strong regional financial services sector. By the mid-1990s the region had four banks in the “Top 100” strongest Russian banks. It was the only region in Russia outside Moscow and St Petersburg with such a concentration of influential banks in the listing. However, by the end of 1998, like elsewhere in Russia, the regional banking sector had been decimated by the financial crisis. The insurance industry is gaining some strength but insurance as a risk mitigation concept has not yet taken firm root. Insurance company reserves remaining in the region are not yet of major financial significance, although they are growing. Many insurance companies are headquartered in Moscow. Transportation Infrastructure Krasnodar airport is located on the northern outskirts of the city, approximately 120 minutes drive from the city centre. The airport has an international customs department, which expeditiously handles both incoming and outbound international flights. Travel between Krasnodar and Europe is possible on non-stop flights to Frankfurt on Kuban International Airways (two flights per week) to Thessalonika (Greece), Istanbul (Turkey) and Larnaca (Cyprus). The latter also operates flights to numerous cities in Russia and the CIS countries, in addition to airlines from other Russian and CIS cities also operating flights to Krasnodar. There are several flights to and from Moscow every day and also daily flights to St Petersburg, served by Krasnodar and Moscow airlines. Flight time is 90 minutes between Moscow and Krasnodar and three hours to Europe. The time difference is three hours ahead of London and eight hours ahead of east coast United States, thus placing it in the same time zone as Moscow. Anapa airport is located some 25 kilometers to the west of Novorossiysk in the resort town of Anapa. Anapa airport is served by regional and national airlines with a higher number of flights in the summer months to meet tourist demand. The airport is busy as the main airport for Novorossiysk seaport. Travel between Anapa and Europe is possible on non-stop flights to Vienna (three flights per week), with direct onward connections to other major European cities using Austrian Airlines. Regional airlines also serve Greece and Turkey. Adler Airport in Sochi is a busy seasonal airport with a significant volume of internal flights to all parts of the Russian Federation for holidaymakers. Regional airlines also serve Turkey, Greece, Cyprus and Israel on a regular basis Regularly scheduled trains travel between Krasnodar and Novorossiysk and almost all cities in Russia. The train system in the region is convenient and accessible year-round. Express trains are reliable and usually run on time, presenting a low-cost way to travel. Express trains travel daily to and from Moscow and St Petersburg, with an 18-hour journey time each way. Three sea passenger terminals in Novorossiysk and Sochi together handle over 150,000 passengers a year, primarily for Black Sea destinations and cruises. The Krasnodar region is situated on the link route between the Danube basin and the internal waterway system of Russia and those stretches leading to the Caspian Sea. The Volga river, the largest waterway in Russia, links northern and southern ports: on the White, Barents and Kara Seas in the north; the Caspian Sea, Sea of Azov, Black Sea and Mediterranean Sea in the south; and the Baltic and North Seas in the west. Regional ports on the Azov Sea such as Yeisk and Temryuk are bases for river/sea boat fleets. Much of the cargo transported is oil and oil-based products. The Russian-American Chamber of Commerce® is a nonprofit, nonpartisan organization acting to promote American business interests in the Russian marketplace. The Russian-American Chamber of Commerce® Last Updated: March 22, 2002. Copyright the Russian-American Chamber of Commerce® 1995-2003. All rights reserved.