Identifier
Created
Classification
Origin
06MOSCOW4353
2006-04-24 13:10:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Moscow
Cable title:  

KOMI: SOCIO-ECONOMIC SITUATION IMPROVING FOR

Tags:  ECON ETRD PGOV PREL RS 
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VZCZCXRO2533
RR RUEHDBU RUEHLN RUEHVK RUEHYG
DE RUEHMO #4353/01 1141310
ZNR UUUUU ZZH
R 241310Z APR 06
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC 4730
INFO RUCNCIS/CIS COLLECTIVE
RUEHXD/MOSCOW POLITICAL COLLECTIVE
UNCLAS SECTION 01 OF 03 MOSCOW 004353 

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD PGOV PREL RS
SUBJECT: KOMI: SOCIO-ECONOMIC SITUATION IMPROVING FOR
REMOTE RUSSIAN REGION

UNCLAS SECTION 01 OF 03 MOSCOW 004353

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD PGOV PREL RS
SUBJECT: KOMI: SOCIO-ECONOMIC SITUATION IMPROVING FOR
REMOTE RUSSIAN REGION


1. (SBU) SUMMARY. Economic progress is visible in the
resource-rich Komi Republic, we found on a recent trip to
that remote region. Its economy is doing well, in part
because of global price gains in oil, gas, and metal, but
also because of its growing paper and furniture industries
and budding retail sector. Although the regional government
seems to be working hard to promote small and medium-sized
enterprises, corruption is a strong countervailing force.
Prospects are uncertain for significantly reducing
corruption, although the federal government has stepped in to
address that issue. Despite such problems, we found that
locals tend to be upbeat about the future. END SUMMARY.
.
Background
--------------


2. (SBU) On a recent trip to Syktyvkar, capital of the Komi
Republic, we found a prospering city in a resource-rich
region. Originally a crossroads of trade and the location of
dozens of Soviet gulag camps, the republic, in European
Russia's northeast, has an ethnically and religiously diverse
population of just over one million people. European virgin
forests cover over 60 percent of the republic's territory and
represent the first natural UNESCO World Heritage site in
Russia. Komi's economy is based mainly on energy extraction,
mining, and forestry, which together make up more than 70
percent of the republic's output. Komi is home to Europe's
largest paper mill and cardboard factory; other plants
produce pre-cut boards and furniture parts. To modernize and
diversify its economy, Komi is seeking to develop its retail
and tourism sectors ) ecological and extreme sport tourism
is becoming popular in its national parks, drawing a small
but growing number of foreign tourists. Western-style
shopping centers are appearing in Syktyvkar and Komi's other
major cities. (NOTE: For more information on the
geographical, sociological, political, and economic make-up
of the Komi Republic, see www.rkomi.ru and www.komistat.ru.
END NOTE)
.
Komi's Financial Situation Positive ... For Now
-------------- --


3. (SBU) Recently appointed Regional Head Vladimir Torlopov
has touted his 2006 budget as "socially oriented," but

members of Komi's Public Chamber and independent media told
us the budget underfunds healthcare -- one of President
Putin's national projects -- and programs to fight poverty
and unemployment. In Komi, 16.6 percent of the population is
below the official poverty line (somewhat better than the
18.9 percent for Russia as a whole),and unemployment is 2.9
percent (versus 3.4 percent for Russia). The republic's
municipalities are almost completely financially and
politically dependent on subsidies from the republican
authorities, our interlocutors said. Outside of the
subsidies, supplemental funds to support the municipalities
are distributed competitively based on detailed business
plans. Because developing such plans requires specialists
and money, however, only a few of the wealthier
municipalities have the resources to compete for these funds.
Accordingly, the municipalities that usually receive such
funds will continue to do so, increasing the divide between
the municipal haves and have-nots.


4. (SBU) Although it is a net contributor to the federal
government, Komi is on course to run an anticipated regional
budget deficit in 2006 of 1.5 billion rubles (USD 53.6
million). The republic's overall debts are nearly as large
as its annual budget, and further increases in debt without
serious sources of new income could lead to financial
problems. Despite the spending pressures, high dependency on
the primary sector, and resulting vulnerability to commodity
price fluctuations, Fitch Ratings changed Komi's outlook from
stable to positive in 2005 and affirmed its international
long-term and short-term foreign currency ratings at B and
B, respectively. Likewise, Moody's Investors Service raised
Komi's domestic and international borrowing ratings from B1
to Ba3, with a stable prognosis.


5. (SBU) After a seven-fold rise from 1998 to 2004,
investment dropped in 2004-2005 to approximately 20 billion
rubles (USD 714 million). The largest investment inflows
took place from 2001 to 2004, up to 90 percent of which came
from Austria in connection with the investment programs of
Mondi Business Paper, which dominates harvesting and
processing in the forestry sector. Aside from Mondi the bulk
of investment in Komi's industry comes from Severstal, which
is modernizing Vorkuta's coal mines, and SUAL, which
continues to invest in the development of local bauxite mines
and processing. The other major corporate investor, LUKoil,
is moving much of its refining activity from the city of

MOSCOW 00004353 002 OF 003


Ukhta to the neighboring Nenets Autonomous Okrug, because it
is more profitable to process oil there.
.
SME Sector Growing But Bureaucracy Is a Problem
-------------- --


6. (SBU) Regional Head Torlopov has spoken out frequently in
support of developing SMEs to diversify the republic's
economy. Most SMEs in Komi are retail shops, creating jobs
and improving the selection of Western-style goods and
services. Almost 90 percent of small businesses are located
in Komi's major cities, and fifty-three percent of them are
in Syktyvkar alone. From 2000 to 2005 the number of small
businesses increased by one-and-a-half times: from 2700 to

4500. On average, a small business employs 13 people. The
median salary for one worker is 8,400 rubles per month (USD
300),which is one-third less than in large and medium-sized
businesses. Small businesses wield considerable influence on
the republic's socio-economic development, generating almost
80 percent of the turnover of retail trade, 25 percent of
consumer services, and almost 50 percent of construction
work. In 2005 revenues from small businesses increased 38
percent over 2004, and investment in small business increased
1.8 times. More than half of the investment (55 percent) was
in Syktyvkar, and 48 percent of that was in construction.


7. (SBU) The republic administration has sought to help SMEs.
It worked with the Komi Chamber of Commerce, for instance,
to turn an abandoned factory into a business incubator for 38
up-and-coming businesses at a time. Beneficiaries receive
reduced rent, training, and commercial information. SMEs
also pay regional taxes at more favorable rates than larger
companies. However, SME entrepreneurs complain about the
administrative hurdles they must overcome to be able to
start, conduct, or grow their business. Chamber of Commerce
officials told us, for example, that the Syktyvkar government
mandated that all businesses replace the aging concrete
sidewalks in front of their buildings with brick. The brick
had to be purchased from a certain supplier so it would be
uniform, and there was a citywide deadline established for
all walks to be finished. The sidewalks would remain the
property of the city after the upgrade, but the building
owners had to pay all of the costs associated with the
installation and upkeep. Businessmen were further outraged
when they found out that over eighty separate administrative
approvals (both at the city and regional levels) were
required to make the change. Our interlocutors said that
pursuing these approvals took the average businessman an
entire workweek.
.
And Corruption Remains a Problem
--------------


8. (SBU) Such excessive bureaucratic hurdles are often rife
with corruption opportunities. There are no regional or city
programs to combat corruption, although in March a
parliamentary roundtable recommended creation of a regional
Anti-Corruption Commission. In 2005, about 4,500 officially
recorded economic crimes -- worth about 165 million rubles
(USD 5.9 million) -- were committed in Komi. According to
komistat.ru, the number of economic crimes in the republic
grew 16 percent in 2005 and is up 30 percent since 2000.
Komi entrepreneurs told us that almost all SMEs enjoy the
protection ("krysha" or "roof") of bureaucrats and law
enforcement agencies, and that this is essential to
commercial success. Local authorities have been reluctant to
attack the problem because they would essentially be giving
up a key source of income.


9. (SBU) Additionally, entrepreneurs say they are expected to
sign "contracts" with government entities to cover the
"costs" of fire, health, sanitary, and security inspections.
Normally, these inspections would happen once every two
years, with the costs covered by the budget. In Komi,
however, businesses pay for these "contracts" when they first
register and then are told to expect "inspections" every
month or so, paying a "fee" each time. As long as the
contract is current, the business will likely pass the
inspection, but the business's profit margins are squeezed
because they are paying both legitimate taxes and these
"contract fees."


10. (SBU) Arson appears to be a favored mode of intimidation
or retribution in the republic. Ukhta authorities are
prosecuting a case against an organized crime group that
extorted a significant sum from businessmen to support
imprisoned colleagues. The criminals not only threatened the
businessmen but even burned one of their cars to intimidate
them. Stores have been set on fire in Usinsk, apparently
because their owners refused or were late in paying

MOSCOW 00004353 003 OF 003


extortionists. In the most extreme case of arson, in July
2005, a fire in a shopping center killed 25 people in Ukhta
because no one could escape through the metal grills on the
windows.
.
Federal Government Gets Involved
--------------


11. (SBU) Federal authorities appear to be growing tired of
waiting for local officials to adopt decisive anti-corruption
measures and remove barriers for SME development. After
Russia's General Procurator issued an August 2005 order
requiring regional procurators to provide more oversight in
implementing laws defending SME rights, the Komi procurator
created a working group to execute that order. Reporting on
the group's first month of operation, a procuracy official
said that investigators found evidence that criminal groups,
government officials, and policemen were extracting bribes
from businesses. Procurators have filed several criminal
cases as a result. For example, an official in Ukhta faces
charges for soliciting a USD 25,000 bribe from an
entrepreneur seeking to rent municipal property, and a Komi
Interior Ministry investigator and a former tax police
official face charges for seeking bribes in return for
stopping an investigation against several businessmen. In
April, the Komi Prosecutor's Office opened a criminal case
against a deputy industry and energy minister for taking a
USD 1.8 million bribe from a company director and town
council deputy in Troitsko-Pechorsk in exchange for
assistance in the wood-processing business. Charges without
convictions tend to be commonplace in Komi, however, and this
new initiative appears to be no exception. Indeed, Syktyvkar
Deputy Mayor Vladimir Pystin was charged with embezzling over
three million rubles (USD 107,000) in computer equipment
meant for regional schools, but managed to evade conviction
by returning the embezzled money to the regional government.
.
COMMENT
--------------


12. (SBU) Given its solid industrial base and relatively
well-developed infrastructure, the Komi Republic seems to
have good economic prospects. Syktyvkar has a strong
entrepreneurial feel to it, with housing and commercial
construction booming and foreign-made cars crowding the
streets. Customer service approaches Western standards in
the main hotel and restaurants. With an improved tourism
infrastructure and better marketing, Syktyvkar and the
republic in general could capitalize on their many cultural
and natural attractions. Lack of economic diversification,
budget woes, and corruption remain nagging problems that even
federal intervention will be hard-pressed to eliminate.
Nonetheless, our visit suggested that the typical Komi
citizen's attitude is upbeat and positive about the future.
BURNS