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Kari Liuhto
Special Economic Zones in Russia
– What do the zones offer for foreign firms?

Electronic Publications of Pan-European Institute 2/2009

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Executive summary

Approximately 20 special economic zones (SEZs) have been founded in Russia. Four of them are innovation zones, two manufacturing zones, seven tourism zones, three port zones and two old zones of the 1990's, namely the Kaliningrad SEZ and the Magadan SEZ. Additionally, four gambling zones are to be opened by July 2009.

The Russian SEZs currently produce more plans than results i.e. unrealistic plans characterise the contemporary Russian SEZs. Only the Kaliningrad SEZ and the Magadan SEZ can be classified as fully operational, and therefore, it is far too early to make any firm conclusion on the economic impact of these zones on the Russian economy. On the other hand, it is highly recommendable that a follow-up of the Russian SEZs will be carried out in 3-5 years from now, since the results of today do not necessarily describe the potential of tomorrow.

Despite the slow progress of the Russian SEZs, some indicative findings can be presented. First, the tax privileges offered by the Russian SEZs lower the investment barrier for foreigners but the benefits alone are not sufficient to attract foreign firms to invest in Russia. Furthermore, Russia's poor reputation on immaterial rights, stagnant innovation system, the low-tech image of the country, a lack of R&D-related finance, and administrative inertia downplay the advantages provided by the zones.

The growing role of the military-industrial complex in innovation building distracts both the Russian private companies and foreign firms from the innovation activities. I strongly believe that the adaptation of the military-led innovation system does not start the diversification of the Russian economy, since the military-led innovation systems are by nature expensive, inefficient, and corrupt due to their secrecy, bureaucracy and non-competition.

The ICT collaboration between the Saint Petersburg innovation SEZ and the Nordic companies would be natural, and the close distance may create an additional competitive advantage, if the Nordic companies are not afraid of taking risks involved in Russia's poor respect of immaterial rights. In order to promote the Finnish-Russian R&D co-operation, some Finnish innovation facilitators, such as Technopolis and Finpro, have already entered in St. Petersburg.

Although the Kaliningrad region is unfamiliar to most of the Finnish investors, I advise that Finnish companies considering an investment exceeding EUR 4 million in Russia would make a feasibility study of the investment possibilities in Kaliningrad. Besides considerable tax benefits, the administration of the Kaliningrad SEZ has a good reputation for being investor-friendly, and furthermore, Kaliningrad is close to Central European markets.

Should Kaliningrad truly manage to become Russia's leisure centre on the Baltic Sea, it is self-evident that high-quality construction companies from the West, including those from Finland, may find additional demand there. A need for wooden summer houses is definitely growing in the region, when the current financial crisis is over. Additionally, if Kaliningrad is serious with its nuclear power plant project, some Finnish construction companies recently involved in building the fifth nuclear unit in Finland might find the project in Kaliningrad worth studying in more detail.

There are no major Finnish companies operating in any of Russia's SEZs for time being, though one company with a Finnish name has been registered in the Saint Petersburg SEZ.

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