Guide to Investment Republic of Karelia

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Guide to Investment: Republic of Karelia Инвестиционный климат

PwC Russia (www.pwc.ru) provides industry-focused assurance, tax, legal and advisory services. Over 2,600 profession- als working in PwC offices in Moscow, St Petersburg, Ekaterinburg, Kazan, Rostov-on-Don, Krasnodar, Voronezh, Novo- sibirsk, Yuzhno-Sakhalinsk and Vladikavkaz share their thinking, experience and solutions to develop fresh perspectives and practical advice for our clients. Contents PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Together, these firms form the PwC network, which includes over 195,000 employees in 157 countries. Please see www.pwc.ru/en/ Welcome message by Alexander P. Khudilainen, Head of the about/structure.jhtml for further details. Republic of Karelia and Executive Secretary of the State Commission for Preparing Celebrations of the 100th Anniversary of the Republic of Karelia...... 2

Introduction by David Gray, Managing Partner, PwC Russia...... 4

I. Overview of the Republic of Karelia • Facts and figures...... 6 • Karelia’s principal competitive advantages ...... 6

II. Economic potential • Gross regional product ...... 8 • Karelia’s key industries ...... 10 • Foreign trade activity...... 16 • Priority development areas by industry sector...... 17 • Natural resources ...... 18 • Recreational resources and tourism infrastructure...... 19 • Transport, business and public utilities infrastructure...... 21 • Workforce and scientific and technical potential...... 26 • Karelia’s long-term economic development priorities ...... 28

III. Investment climate • How Karelia ranks in independent ratings...... 29 • Investment activity...... 29 • Governmental support for innovation-driven activity ...... 30 • The Republic of Karelia’s 100th anniversary as a driver of the region’s further development...... 34 • Karelia’s priority investment projects by industry sector: • Forest products...... 35 • Mining...... 35 • Agribusiness...... 36 • Engineering and metallurgy...... 36 • Construction...... 37 • Energy...... 38 • Tourism...... 39

IV. Contact information ...... 40

This Investor’s Guide has been prepared jointly with the Republic of Karelia Ministry of Economic Development and the Euro-Asian Centre for Economic and Legal Cooperation Non-Profit Partnership with financial support from Open Joint Stock Company Joint Stock Financial Corporation Sistema.

The information contained in this publication is as of November 2014. PwC Republic of Karelia 1 Welcome message by Alexander P. Khudilainen, Head of the Republic of Karelia

Dear friends, capital, we are currently facing a fundamentally new challenge that calls for a fresh, new strategy. Today, Karelia’s government authorities, It comes as no surprise when the economy of a given region enjoys strong business community and civil society institutions, together with the State capitalisation and an intensive pace of development thanks to abundant Commission for Preparing Celebrations of the 100th Anniversary of the mineral and natural resources enriched by human labour. Moreover, we Republic of Karelia, created by Russian presidential decree, are united in learned long ago that devoting the time, talent and hard work necessary their efforts to stage a worthy celebration to mark this milestone event. to attract investors can help produce excellent results in the task of We see this event as a unique “driver” for the development of the regional modernising a region’s economic environment across the board. economy, which offers the regional government and business community the All of Russia’s regions have three types of wealth: the beauty of nature, opportunity to mobilise their resources and achieve measurable success in historical monuments, and skilled people with diverse talents. The beauty transforming our republic into an engine of social and economic development of Karelia’s natural environment is well known to all. Karelia is a land of in Russia’s North-Western Federal District. This is our goal. And, we are breath-taking landscapes spotted by the unique charm of tens of thousands confident that our work will result in an improved quality of life for our people, of lakes, fantastic cliffs and rock formations, and pristine northern forests. greater confidence among business in carrying out various projects, and a shift Since the times of Peter the Great, this land has been a focus of attention. toward advanced technologies in managing the development of our region. It is for good reason that Karelia is home to Russia’s first health spa, the Our strategic plans do not neglect the need for further industrial development, Marcial Waters Resort. The islands of Kizhi and Valaam, which represent while striving to make our industries more environmentally friendly, and for one of Russia’s most unique cultural and historical treasures, are located expansion of fundamental and applied research. Yet, we see our main objective in Karelia. As well, the region’s White Sea coastline offers the most direct as protecting our natural environment, and historical and cultural monuments, route to a third shrine of great cultural significance – the Solovetsky so as to make these treasures open and accessible to all of Russia and the world. Islands, which are part of the neighbouring Arkhangelsk Region. This Guide demonstrates that Karelia is committed to creating all necessary Petrozavodsk State University is the pride of our region’s educational conditions for investors. We seek to encourage investors to visit Karelia again system. As well, we are home to the Karelian Branch of the Russian and again, to meet its people and enjoy its unique environment. This Guide is Academy of Sciences. Both institutions boast a capacity for innovation an essential tool to help us carry out this task. We are pleased to welcome you that has received deservedly high assessments both in Russia and abroad. to the Republic of Karelia, and look forward to working together with you to We also have a conservatory that trains music teachers for all of north- promote development and create prosperity for all. western Russia. As well, we have a number of first-class museums that are a source of inspiration for all who visit them. Alexander P. Khudilainen In short, while our region possesses a wealth of remarkable human Head of the Republic of Karelia

2 Guide to Investment PwC PwC Republic of Karelia 3 Introduction by David Gray, Managing Partner, PwC Russia

Dear readers, In addition to their ongoing programmes, the region’s executive and The Republic of Karelia offers the remarkable combination of a pristine legislative authorities are now intensively engaged in carrying out the landscape, rural communities that retain the flavour of a traditional landmark Karelia-100 Project, a large-scale initiative devoted to celebrating Karelian village, and cities and towns with a highly developed urban the 100th anniversary of the establishment of the Republic of Karelia in infrastructure. 2020. The Karelia-100 Project is intended to fundamentally change the image of the republic by 2020 through modernising its economy and social The region’s favourable geographical location, abundant forest and water sphere, thus giving a fresh impetus for developing its investment capacity. resources, and, importantly, government support for investment activities open up a wide array of opportunities for investing. This Guide will help potential investors to accurately assess the economic opportunities that Karelia has to offer, so as to select the most promising Hundreds of kilometres of motor, rail and water routes traverse Karelia, investment projects that can contribute to the region’s successful further connecting Russia’s regions with neighbouring countries and maintaining development on beneficial terms. the republic’s status as a key link not only in the domestic Russian transport grid but also in the global transportation system. PwC has prepared this Guide with the support of the Government of the Republic of Karelia, in particular the regional Ministry of Economic The Government of the Republic of Karelia continues to make a concerted Development. effort to foster a favourable investment climate. This includes improving local legislation and introducing more and more advanced mechanisms David Gray for streamlining the investment process, making it as straightforward and Managing Partner easy as possible for Russian and international investors alike. PwC Russia

4 Guide to Investment PwC PwC Republic of Karelia 5 Overview of the Republic of Karelia Kostomuksha Production of crushed stone and high-quality The Republic of Karelia possesses unique natural resources and strong iron ore pellets for the metals industry potential for the development of tourism and industry. As a border region, Karelia enjoys an advantageous geopolitical position given its location between other economically developed regions in both Russia and Europe, and thus plays an important role in fostering and strengthening Segezha economic links between them. Production of cut timber, paper, and paper bags and packaging Murmansk Region Facts • Total area: 180,500 sq km • Climate: Atlantic continental climate zone and figures • Capital: The City of Petrozavodsk (population: 272,100 Kostomuksha Kondopoga as of 1 January 2014) Arkhangelsk Region Manufacturing of newsprint and wrapping • Population: 634,400 (79.2% are urban dwellers) (as of 1 January 2014) paper, packaged office paper (sizes A3 and • The regional economy’s key industries: A4), container board, ceramic bricks, and Segezha paving slabs • Forest products, Finland • Mining, mainly production of iron ore and natural stones, Kondopoga • Agribusiness, mainly fisheries and fish processing, • Tourism. Sortavala Petrozavodsk • Karelia’s gross regional product (GRP) in 2013: RUB 167.5 billion (0.25% of Russia’s overall GDP) Petrozavodsk, • Official investment website of the Republic of Karelia: Leningrad capital of the Republic of Karelia www.kareliainvest.ru Region Vologda Region Wood processing, machinery and equipment manufacturing, shipbuilding and foodstuffs

Sortavala Karelia’s principal • Significant resource potential, primarily in the forest products Lumber and timber production, ferrous metals, and mining industries. production of non-metallic construction materials, foodstuffs competitive • Advantageous geographical location as a transit link between Russia’s advantages industrially developed regions and European countries (via Finland) provides access to markets and offers attractive opportunities for development as a logistics hub. • Extensive opportunities for developing the region’s rich tourism and recreational potential, which is currently underutilised. • Karelia is rich in biological resources, which in turn offer broad Republic of Karelia potential for developing the food industry, especially fisheries, as well as biotechnologies.

6 Guide to Investment PwC PwC Republic of Karelia 7 Economic potential

Gross According to preliminary estimates, in 2013 Karelia’s gross regional product (GRP) amounted to RUB 167.5 billion, or RUB 263,500 per capita. regional product

Gross regional product in 2008-2013

110 200 104.4 102.2 101.5 97.0 99.0 162,003 87.6 154,954 167,500 150 90

115,208 120,511 105,924 100 60 Breakdown of Karelia’s economy in 2013 (by added value, %) 50 30 Agriculture, hunting 2 and forestry 8 4 1.3 4.6 Fishing and ﬁsh farming 13.2 0 0 Mining 11.9 Manufacturing (estimate) in current prices, RUB million Electricity, gas and water production 10 and distribution % versus the prior year in comparable prices Construction 9.3 Wholesale and retail trade 3.9 Hotels and restaurants 4.7 Transport and communications 11.7 1 14.4 Real estate, leasing and services Public administration Education Healthcare Other production

8 Guide to Investment PwC PwC Republic of Karelia 9 Economic potential Economic potential

Karelia’s Forest products Mining key industries The forest products industry continues to be a leading sector in Karelia’s The mining sector is one of Karelia’s fastest-growing industries. The economy. Forest products enterprises account for more than 50% of the expanding production of building stone and materials has been driven by total volume of Karelia-made products shipped. both the availability of mineral resources and growing demand for heavy- duty Karelian crushed stone used in the construction of housing, roads As of 1 January 2014, the region’s total forested area was 14.9 million and airfields. Currently, the main products of Karelia’s mining industry hectares, including 14.5 million hectares of forest fund lands. The include iron-ore pellets, crushed stone for construction purposes, block commercial forest fund covers 11.4 million hectares. Valuable softwood stone, stonecast raw materials, and products made of shungite. species predominate in Karelia’s forest fund. Altogether, Karelia has 26 iron-ore deposits and 69 iron-ore occurrences As of 1 January 2014, the total area of forest plots leased out across as well as 1 deposit and 7 occurrences of chrome ores, five deposits and Karelia for timber-harvesting purposes was 9.5 million hectares, four promising occurrences of titanium, 27 deposits and occurrences of representing 83% of the commercial forest fund. vanadium and vanadium-bearing ores, and 8 deposits and 30 occurrences of molybdenum-bearing ores.

Production output of the forest products industry in physical terms, 2009-2013 5,860 5,662 6,000 5,518 5,284 5,406 Production output 5,000 of the mining industry

4,000 25,000 21,800 20,800 21,200 20,383 3,000 20,000 19,370 20,000 17,800 17,344

2,000 15,000 12,704 12,072 1,000 647 690 670 622 688 383 406 410 391 393 10,000 129 91 114 112 106 0 5,000 2009 2010 2011 2012 2013

Raw timber, thousand solid m3 0 2009 2010 2011 2012 2013 Timber sawn or split lengthwise, cut in layers or peeled, with a thickness of more than 6 mm; untreated wooden railway Ferrous metal products (pellets and concentrate), thousand tonnes or tram sleepers, thousand m3 3 Chips for wood pulp and ground wood production, thousand m3 Non-metallic construction materials, thousand m Chips for other production operations, thousand m3 A key mining enterprise in the region is OAO Karelsky Okatysh, Russia’s third-largest producer of iron-ore pellets which accounts for 20% of the In the past few years, several large-scale projects to build new wood- country’s total output of pellets. processing facilities or upgrade existing facilities have been launched. Investment activity in this area peaked in 2012, when RUB 3.2 billion was Currently, the region has over 80 producers of building materials. The invested in wood-processing projects. fastest-growing companies are those businesses that carried out projects to expand existing production facilities or build new operations in 2012- 2013. As of 1 January 2014, cumulative foreign investment Key enterprises ОАО Segezha Pulp and Paper Mill in Karelia’s forest products industry amounted Currently, the mill makes the following to USD 516.4 million, of which: Fast-growing companies products: wrapping paper, sack paper and Currently, OAO Mosavtodor Quarry Management’s annual production capacity is one million cubic metres of paper bags. The mill’s products are sold in OAO Mosavtodor Quarry Management. Russia, the CIS countries and abroad. crushed stone. The company has the widest range of products in the North-Western Federal District. OAO Kondopoga OOO Lafarge Non-Metallic Materials and Concrete. Currently, Lafarge Russia owns four non-metallic quarries that produce high-strength crushed The Kondopoga Pulp and Paper Mill is Wood processing gabbro-diabase, granite, quartzitic sandstone and limestone. Its products are used in manufacturing concrete mixtures, reinforced concrete and asphalt, and in the one of the largest newsprint producers in construction of high-speed roads. The company’s products are also certified for usage in railway ballast. Pulp and paper Russia and Europe. 234.3 262.8 OOO Prionezhskaya Mining Company. The company produces crushed gabbro-diabase at a re-opened quarry at the Chevzhavara gabbro-diabase deposit OAO Pitkyaranta Pulp Plant Logging (Padozero Railway Station, Pryazhinsky District) and supplies various fractions of gabbro-diabase to construction companies in Russia’s North-Western and Central (since 2012, OOO Pitkyaranta Pulp) Federal Districts. Currently, the plant makes market pulp OOO Karel Trans Nerud. The company is developing the Lyaskelya quarry located in the settlement of Lyaskelya. The quarry produces high-quality crushed and wood-chemical products. The plant granite. sells to the CIS countries, as well as Central and Western Europe, south-east 19.3 OAO Porfirit. The company mines pyroxene porphyrite at the Khavchozersk deposit, which is subsequently processed into production feedstock of various fractions to Asia, Africa and South America. produce mineral heat insulation materials and stonecast items. In addition, the company produces crushed gabbro-diabase for road pavement.

10 Guide to Investment PwC PwC Republic of Karelia 11 Economic potential Economic potential

Karelia’s Engineering and metallurgy Construction key industries In 2012-2013, the Government of the Republic of Karelia adopted Karelia’s construction industry is enjoying a positive growth trend. This a number of initiatives to support critical enterprises, specifically heavy is largely due to the implementation of several federal and regional engineering companies. programmes, including: Company owners and management teams are keen to implement new development models and carry out asset restructuring, which opens up • Federal Target Programme (FTP) «Clean Water»; new opportunities for investors. • FTP «Developing Physical Fitness and Sports in the Russian Federation in the Period 2006–2015»; • Regional targeted programme for resettling residents from unsafe housing; • Targeted financing from the Investment Fund of the Russian Federation; • Regional programme for stimulating development of housing construction in the Republic of Karelia for 2011–2015. • Targeted Investment Programme of the Republic of Karelia.

Construction volumes

200 15,000 13,992 12,343 12,182 12,000 10,910 150 119 9,000 8,457 143.1 102.9 100 84.2 6,000

50 3,000

0 0 2009 2010 2011 2012 2013

Construction volume in current prices, RUB million in % versus the prior year in comparable prices

Karelia’s construction sector includes over 50 enterprises. Listed below are the fastest-growing companies that carried out projects to expand existing production facilities or build new facilities in 2012-2013.

Key construction companies: OOO Stroyindustria KSM Karelia’s leader in the prefabricated reinforced concrete and ready-mix concrete market segment. The company produces large-panel building structures, ready-mix concrete with delivery to the construction site, cored floor slabs, and a wide range of reinforced concrete products: piles, road slabs, etc. Key enterprises Kalevala Wood Processing Mill (WPM) OAO Petrozavodskmash Kalevala WPM is one of the region’s priority projects in developing the forest products sector. The A major Russian power-plant engineering company, Petrozavodskmash supplies equipment for the nuclear power, petrochemical and other industries. mill produces oriented strand boards (OSB) and OSB-based products. The enterprise is located on the shore of Lake Onega, enabling it to ship large-size equipment and machinery by water to almost any country around the world. Currently, OAO Petrozavodskmash’s equipment is used in over 40 countries. OOO Onezhsky Tractor Plant One of Russia’s oldest industrial enterprises, what is now Onezhsky Tractor Plant was originally established in 1702 by order of Tsar Peter I. At the time, it was called the Petrovsky Plant and gave its name to modern-day Karelia’s capital city, the City of Petrozavodsk, which has grown up around the plant from its origins in the original Petrozavodsk settlement (in Russian: sloboda). Since 2007, OOO Onezhsky Tractor Plant has been a member of the Tractor Plants Concern Machinery and Industrial Group, which combines over 20 enterprises in 10 Russian constituent regions. Currently, the Tractor Plants Concern is aggressively rolling out a new business development model under which manufacturing of all timber-harvesting machinery will be transferred to Petrozavodsk from other production sites. The Onezhsky Tractor Plant has been actively renewing its product line of machinery; over the past two years, it has launched about a dozen new tractor modifications. Nadvoitsky Aluminium Smelter Currently, this enterprise is a member of the RUSAL Group; it produces primary aluminium and aluminium-based alloys using the Soderberg process.

12 Guide to Investment PwC PwC Republic of Karelia 13 Economic potential Economic potential

Karelia’s Agribusiness The region’s food processing industry includes the following major key industries segments: milk processing and fat-and-oil production, meat processing, Agribusiness is an important sector of the region’s economy. In recent years, baked goods and confectionery, liquors and spirits, and food canning. agribusiness has accounted for about 9% of total GRP, with agricultural There are over 100 businesses operating in the republic’s food industry. products accounting for 3.5-4.0%, followed by fisheries and fish-farming (1.0- 1.2%), and processed food products (4.0-4.5%). Agribusiness’ key indicators

6,000 107.6 110

5,000 99.2 99.8 96.2 100 4,000 94.4 3,000 90

2,000 80 1,000 3,809 4,255 4,693 4,262 5,575 0 0 2009 2010 2011 2012 2013

Agricultural products in current prices, RUB million in % versus the prior year in comparable prices

Fish farming and processed fish products

80,000 69,200 70,000 57,000 60,300 60,000 55,600 50,900 50,000 Percentage of locally As of 1 January 2014, Karelia’s agricultural land fund consisted of 197,100 40,000 hectares. In 2013, the actual area under crop cultivation was only 32,100 30,000 produced agricultural 20,000 10,602 8,887 10,332 10,315 9,798 hectares, or 16.2% of the total agricultural land fund. Currently, the 10,000 0 products consumed republic’s output of agricultural products meets 44% of local consumer in Karelia, % demand for milk, followed by demand for meat (18%), vegetables (42%), 2009 2010 2011 2012 2013 and potatoes (85%). Live, fresh and refrigerated ﬁsh Canned ﬁsh, tonnes 44 18 Nineteen agricultural organisations and over 1,000 farms are engaged in producing agricultural products. 85 42 Karelia’s fisheries sector includes 241 businesses.

The republic’s biggest Number of businesses in the fisheries sector agricultural businesses by specialisation by turnover OAO Ilyinskoye Breeding Farm an Ayrshire cattle breeding farm Freshwater fishing OAO Megrega State Breeding White Sea fishing 127 Farm Oceanic fishing an Ayrshire cattle breeding farm 30 Commercial production ZAO Pryazhinskoye an Ayrshire cattle nucleus breeding farm Shore processing 16 OAO Agrarny State Farm an Ayrshire and Kholmogory cattle nucleus breeding farm 57 OAO Vidlitsa Agrofirma 11 an Ayrshire cattle nucleus breeding farm ZAO Medvezhyegorsk Dairy Plant an Ayrshire cattle nucleus breeding farm

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Foreign trade activity In 2007-2013, approximately 30% of all industrial products made in Karelia Priority development areas were exported. by industry sector According to the North-Western Customs Department, the Republic of Karelia demonstrated the following foreign trade performance in 2009-2013:

Key indicators of foreign trade activity

2,000 1,833 1,708 1,564 1,459 1,499 1,500 1,279 1,254 1,322 1,041 1,088 1,000

333 310 500 238 249 234 0 2009 2010 2011 2012 2013

Foreign trade turnover, USD million Exports, USD million Imports, USD million

Non-CIS countries, primarily Finland and Turkey, account for over 90% of the region’s exports and imports.

Foreign trade turnover in 2013 broken down by country

19.2% Finland 35.9% Turkey On 24 July 2013, the Government of the Republic of Karelia approved the policy document «Priority Areas in the Netherlands Economy of the Republic of Karelia for the Provision of Governmental Support for Investment Activity»: India 13.2% USA Estonia China 1. Forestry, including forest cultivation, coppice forest and commercial CIS countries timber cultivation, cultivation of New Year trees, cultivation of plant 4.6% 9.1% Other materials for canework, cultivation of tree and shrub seedlings 3.7% 4.3% 4% 6% 2. Reproduction of fish and aquatic and biological resources 3. Production of food products, including beverages, but excluding spirits Breakdown of commodity 4. Wood processing and wood products manufacturing exports in 2013 5. Manufacturing of machinery and equipment 6. Manufacturing of electrical, electronic and optical equipment

4.1% 7. Manufacturing of medical equipment, measuring devices, optical instruments and apparatus 7.9% 8. Shipbuilding and manufacturing of other transport vehicles 9. Processing of secondary raw materials, excluding processing of waste 36.6% metals and ferrous, non-ferrous and precious scrap metals, and processing 29.5% of precious stone scrap 10. Water, air and land transport operations, excluding taxis 11. Organisation of comprehensive tourism services 12. Manufacturing of brick, tile and other construction products made of burnt clay 5.4% 16.5% 13. Cement production 14. Electric power, gas, steam and hot water production, transmission and distribution Food products Mineral products 15. Water collection, purification and distribution Metals and metal products Timber and wood products Pulp and paper products Other

16 Guide to Investment PwC PwC Republic of Karelia 17 Economic potential Economic potential

Natural Altogether, 54.5% of Karelia’s territory is covered by forests, 23.2% by Recreational resources and tourism infrastructure resources water reservoirs, and 1.1% by cultivated land. Forest resources mainly include fine coniferous species. Given its advantageous geopolitical location, extensive recreational resources, and centuries-old cultural and historical heritage, Karelia occupies a special place in the tourism market. The region has proven to be a popular destination for Russian and foreign visitors alike.

With its unique northern nature, architecture, churches and cathedrals, museums and other sights, Karelia attracts tourists from all over the world. Karelia’s natural environment harmoniously combines forest, lake and coastal landscapes.

The republic has a number of nature reserves and national parks. Karelia is a tourism hub within Russia’s North-West Federal District, as it has around 4,000 cultural, historical and natural monuments. A unique environment has been formed in the region for recreation and tourism of various types: cultural, educational, event-focused, natural, environmental, sporting, water and rural tourism.

It is also a popular destination for religious pilgrimages.

The region’s most prominent monuments and sights are:

Karelia’s mineral resources include 494 proven fields, yielding 31 Karelia boasts over different types of minerals with reserves recorded in the National 61,000 lakes, about Register. Minerals include: iron ore, titanium, vanadium, molybdenum, Paanajarvi 27,000 rivers, and National Park noble metals, diamonds, mica, construction materials (granite, 29 water basins. The greenstone, granular limestone), ceramic raw materials (graphic granite, total surface area of spar), apatite carbonate ore, and amphibole asbestos. the region’s lakes is 18,800 km2. Eighty Kalevala Solovetsky Archipelago (Arkhangelsk Region) percent of Lake Onega National Park and 40% of Lake Dormition Cathedral Seitas on Kuzova Ladoga are located in in the town of Kem Islands in the White Sea Karelia. The region is a huge source of clean Kostomukshsky State fresh water. Nature Reserve The White Sea petroglyphs

Vodlozersky Dormition Church National Park (1774) in the town Petroglyphs on the eastern of Kondopoga bank of Lake Onega

Kivach Waterfall Kizhi State Open-Air Museum Ruskeala of History, Architecture Mountain Park and Ethnography Marcial Waters health resort

Valaam Island Vazheozersky Monastery of the Transfiguration of the Saviour

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Recreational Developing tourism has been recognised as one of the most promising Transportation, business and public utilities infrastructure resources and tourism areas for economic development in Karelia. Official statistics show that in 2013 inflows of organised tourists to Karelia amounted to infrastructure Karelia is well-positioned to access attractive markets. To the west, Access 595,000 people, or 10% more than in 2012 (540,000 people). Taking the republic borders on Finland, while to the south its neighbours to major markets into account independent tourists, the total number of visits is estimated are the Leningrad and Volgograd regions of Russia. Karelia shares its at the level of 1.9 million people. northern and eastern borders with the Murmansk and Arkhangelsk regions, respectively. To the north-east the republic is washed by The Strategy for the Republic of Karelia’s Social and Economic the White Sea. The region’s western border, which runs along the Development in the Period Through 2020 sets the following objective: international border between Russia and Finland, is 798.3 km long. by 2020 the tourism industry should become a driver of the regional The distance between Petrozavodsk and Moscow is 1,091 km, while economy, together with forestry and mining, while the annual number St Petersburg is 412 km away. The international Blue Road motorway of official tourists visiting Karelia should grow to 3.5 million people. to Finland stretches 350 km. To this end, measures are being taken to unleash the region’s existing tourism potential, improve its competitive position, and attract The region’s geographical and geopolitical location helps promote investment in the sector. close relations between Russian and its neighbours.

Distance to potential markets

Murmansk (930 km)

Finland

Helsinki Republic of Karelia

Petrozavodsk St Petersburg (412 km) Arkhangelsk (1091 km)

The following facilities were commissioned in Karelia in 2011-2013: Type of facility Objects

4* Onego Palace, Petrozavodsk, for 200 persons Vologda (788 km) Hotels 4* Park Inn, Petrozavodsk, for 400 persons 3* Onezhsky Zamok, Petrozavodsk, for 66 persons Completion of reconstruction of Ruskeala Mountain Park (Sortavalsky Theme parks municipality). Visits have increased to 50,000 people per year Moscow (1091 km) Ekaterinburg (2476 km) Lamberg (Sortavalsky municipality) Kazan (1730 km) Zaonego.Ru (Medvezhegorsky municipality) Raduga (Pryazhsky municipality) Recreation centres The Thirteenth Cordon (Pitkyarantsky municipality) Shishki (Kondopozhsky municipality) Sonostrov (Loukhsky municipality) Ust-Vidlitsa (Olonetsky municipality) The Arctic Circle Diving centres Nereis Other facilities Green Dockage for cruise ships on Pellotsaari Island in Sortavalsky municipality ** distance is shown for road transport

20 Guide to Investment PwC PwC Republic of Karelia 21 Economic potential Economic potential

Rail transport plays an important role in the republic’s economic Railways development. It accounts for over 90% of freight transportation. The total length of railways in Karelia is 2,225.6 km. Railway routes to Murmansk, St Petersburg and Helsinki traverse the republic.

The regional government is working to enhance the rail transport sector in cooperation with OAO Russian Railways (RZD). The key project in this area will be the opening of a new route from Petrozavodsk to Finland. In 2013 Russian Railways invested RUB 1.6 billion in railway infrastructure in the republic, and by 2015 investments will amount to RUB 5.3 billion.

Three airports, 3 airfields, 11 landing grounds and a helicopter Airports aerodrome operate in Karelia. Petrozavodsk International Airport is a critical transport hub for Russia’s North-Western region.

Expanding relations with Northern and Western Europe in the industrial sector, tourism and culture have given fresh impetus to developing the region’s air transport capabilities, especially at the Petrozavodsk airport. Engineering structures are currently being rebuilt and renovated at the airport complex.

Passenger flights are available to the following cities: Moscow, St Petersburg, Kostomuksha, and Helsinki. Plans call for establishing regular air service between Petrozavodsk and Pudozh, Solovki, Sochi and Gelendzhik.

Lakes, rivers, and channels form a developed transport system in Karelia, Shipping industry giving the region access to the White Sea, Baltic Sea, Caspian Sea, Black and water transport Sea, and Mediterranean Sea, as well as to world oceans.

Two main waterways are used for navigation: the White Sea-Baltic Sea and the Volga River-Baltic Sea. Altogether, waterways provide access from St Petersburg on the Baltic via Lake Ladoga and Lake Onega to the White Sea, to the town of Belomorsk and further to the Barents Sea, or to the Black Sea in the south. Transport Several important thoroughfares traverse Karelia, connecting Russia’s infrastructure industrially developed regions with the northern warm-water port of Murmansk as well as with Europe via Finland.

The White Sea-Baltic Sea Canal also runs through the republic.

Motor roads Karelia’s network of roads is developing in line with the growing demand for auto transport. Top priority has been given to building access roads to large cities and transportation hubs, as well as to motor roads that will promote the gradual development of transport corridors integrated into a unified Eurasian transport network, including seaports.

The total length of the republic’s motor roads is currently 12,463.2 km, including: public roads (7,869.2 km) and roads under the control of a government agency (4,594 km). Roads totalling 11,271 km are hard-surfaced.

The Kola federal highway (St Petersburg – Petrozavodsk – Murmansk – Pechenga – Borisoglebsky) is 1,073.7 km long.

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Border and customs The region’s well-developed border and customs infrastructure is a infrastructure key element in successful foreign trade activities and international cooperation.

The Karelian section of the border between Russia and Finland is 798.3 km long (representing over 60% of the Russo-Finnish border’s total length).

The Karelian Customs Office of the North-Western Customs Authority operates in the republic, including 13 customs stations, five of which are located at border checkpoints. The border is serviced by three international checkpoints for motor vehicles, two international checkpoints for rail transport, and two simplified checkpoint for motor vehicles. The Petrozavodsk international air checkpoint also operates in Karelia.

A customs and logistics terminal has been established near the Vyartsilya international checkpoint for motor vehicles. Similar terminals are expected to be opened at three more checkpoints.

Freight traffic through the Karelian section of the international border depends on the foreign trade environment and amounts to 7-8 million tonnes annually. Passenger traffic is still growing and Energy and public Lacking its own hydrocarbon reserves, the Republic of Karelia seeks has recently exceeded 2 million people. Therefore, another checkpoint for utilities infrastructure to meet it energy needs and eliminate energy deficiencies by working motor vehicles at Syväoro is expected to open in the next few years. actively to bring in power generating companies and promote alternative energy sources.

Its major energy sources include peat, wood waste, and renewable Business infrastructure Karelia’s main business infrastructure facilities are concentrated in energy sources. The demand for electricity, gas, coal and oil products in Petrozavodsk. The following major Russian banks have branches in the city: Karelia is met by large vertically integrated energy companies with the Vozrozhdenie Bank, VTB24, Sberbank of Russia, and Uralsib, among others. direct involvement of federal authorities.

Insurance company are also present in Karelia, including RESO- The investment projects overseen by the Republic of Karelia are focused Garantia, ROSNO, Moscow Insurance Company (MSK), Ingosstrakh, mainly on small-scale power generation, energy supply from renewable Rosgosstrakh and others, as well as a number of business centres and energy sources, energy conservation and upgrading utilities. business platforms. To ensure reliable, high-quality power supplies, the regional government has approved a Programme for the Long-Term Development of the Electric Power Industry in the Republic of Karelia through 2018. It involves implementing top-priority measures to build, reconstruct, and Key business centres and business platforms re-equip the region’s power supply network. Business centre Contact details Address: 21 Lenin Street, Petrozavodsk To improve gas supplies for public utilities and transition industrial Tel.: 8 (8142) 76-39-65 Severnaya Hotel Business Centre Email: [email protected] enterprises (boiler houses) and municipal housing to run on natural www.severnaja.onego.ru gas, the Government of the Republic of Karelia has launched a set Address: 2 Gyulling Embankment, Petrozavodsk of gasification measures. The Gas Supply and Gasification Master Tel.: 8 (8142) 73-33-33 Plan for Karelia, as developed by OAO Gazprom Promgaz, calls for Karelia Hotel Business Centre Email: [email protected] providing gas supplies to the Olonetsky, Pitkarantsky, Sortavalsky, and www.karelia-hotel.ru/business.php Lakhdenpokhsky municipal districts through the construction of gas Address: 5 Kirov Street, Petrozavodsk Sweden-Karelia Informational pipelines. Tel.: 8 (8142) 76-92-57 Business Centre Email: [email protected] Address: 1 Gogol Street, Petrozavodsk By 2015, 84 facilities are expected to have been refitted to run on gas. OOO Expocentre Tel.: 8 (8142) 76-38-21 About 1,430 individual houses, apartment blocks, and over 10 boiler houses in Petrozavodsk, and the Kondopozhsky and Priosnezhsky districts are to be connected to gas supply system by this time.

24 Guide to Investment PwC PwC Republic of Karelia 25 Economic potential Economic potential

Workforce Karelia’s economically active working population numbers 328,100 Glazunov Petrozavodsk State Conservatory (Institute) Major universities people. Among the region’s economically active population, 25.4% in Karelia and scientific hold university degrees. The level of unemployment is 8.2% (versus an The Petrozavodsk State Conservatory is a recognised training centre and technical official registered unemployment rate of 1.9%). for highly skilled musicians, as well as a leading concert, performance potential and instructional research centre in Karelia and northern Europe. The Republic of Karelia has 19 universities (including branches of Russia- The Conservatory is highly rated in Russia in terms of its academic wide educational institutions), in which 23,700 students are enrolled, and creative potential: out of 126 teachers on staff, 28 are professors including 3,000 students of technical disciplines. and doctors of science, while 47 are associate professors and doctors of philosophy. More than 40 faculty members have received various Major universities Petrozavodsk State University honorary titles and awards in Russia and Karelia. The Conservatory has in Karelia trained over 4,000 specialists who work all over Russia and abroad. Petrozavodsk State University (PSU) is a prominent centre of research in programming, IT, plasma, microelectronics, mathematics, physics, medicine, biology, history, philology, political and social sciences, law, economics, forestry, construction, and agricultural sciences, among other disciplines. The university has been recognised as a leading university in Russia’s North-Western Federal District in terms of the development of international cooperation. Currently, it has 99 international agreements with foreign universities, research organisations, and research and production companies from Finland, Canada, the United States, Great Britain and Italy. Each year, PSU carries out about 30 international projects with financial support from various international foundations, programmes and organisations. Several bilateral student exchange agreements with foreign partners The region’s scientific capabilities are mainly represented by academic Scientific and technical have been in place for over 20 years. research, with a leading position held by the Karelia Research Centre capabilities of the Russian Academy of Sciences. This integrated R&D centre includes Currently, the university has 80 chairs, nine academic departments seven institutes with a single management and shared infrastructure, (Agricultural Engineering, Mining and Geology, Mathematics, research, support and production units. The Centre has signed over Physics and Engineering, Philology, Ecology and Biology, Economics, 80 international agreements and contracts with partners from more than Law, and Continuing Professional Training), seven educational 40 countries. institutes (institutes of History, Political and Social Sciences; Forestry, Engineering and Construction Sciences; Pedagogy and Psychology; Medicine; Foreign Languages; Physical Training, Sports and Tourism; The Centre’s main areas of research include investigating the biological resource potential in forest and marsh ecosystems, and developing methods for their integrated use; studying the ecological and physiological fundamentals and the Karelia Regional Institute of Management, Economics and of plant and animal productivity; researching water regimes and resources and their sustainable use and protection; Law). PSU also maintains a Kola Branch in the town of Apatity in the formulating a scientific framework for developing Karelia’s mining industry; developing mathematical and informational Murmansk Region, and eight research institutions. The research and models for solving complex scientific, technical and environmental tasks related to optimum management of natural Break down of workforce teaching staff at Petrozavodsk State University consists of 1,000 people, resources and economic structures; developing fundamental elements of the region’s economic policy; and studying and by level of education including 508 doctors of philosophy, 118 doctors of science, and four protecting the history, language and culture of Karelia’s indigenous peoples. Recently, Karelian scientists have been deeply engaged in innovative research and technological development. associate members of the Russian Academy of Sciences. Over 14,800 in 2013 In particular, research is being conducted to develop new nano-structured products based on schungite. As well, students are enrolled at the university. technologies are being implemented to reclaim industrial land, remove heavy metal from soil through biological 4.6% 0.3% treatment, improve the tolerance of feed crops and agricultural plants to heavy metals, and use biological indicators PSU is also home to the Karelian State Pedagogical Academy (KSPA), to monitor soil condition in case of industrial waste utilisation. New research areas include biotechnologies and which is one of the oldest teacher training institutes in Russia’s North- microbiological R&D. Thus, cloning technologies for valuable and rare plants have been developed and implemented, as well accelerated tree growing technologies for economically valuable species, and forestry waste recycling technologies 15.3% Western Federal District and laid the foundation for higher professional 25.4% for generating new types of products and fuel. Genetic mechanisms of cardiovascular and oncological diseases education in the Republic of Karelia. With a new faculty and research progression are being studied, and diagnostics and treatment methods for these diseases are being developed. staff structure, KSPA has maintained its authoritative position as a recognised resource centre for innovative development and support for pre-school, general, and professional education in the region. 26.5% 27.9% The PSU faculty has also made a significant contribution toward the internationalisation of Russian higher education and its effective Innovation-driven businesses in Karelia have a good track record of Financing integration into the single European educational and scientific working closely with the Russian Fundamental Research Foundation, the for innovation-driven Russian Foundation for Liberal Arts, the Foundation for Assistance to Small environment, thus driving the implementation of a sustainable projects partnership between Russia and the EU. Innovative Enterprises in Science and Technology (Bortnik Foundation), Higher vocational education the Zvorykin Project, etc., as well as with private venture funds and centres. Secondary vocational education Basic vocational education General secondary education Basic general education Elementary general education or no elementary general education

26 Guide to Investment PwC PwC Republic of Karelia 27 Economic potential

Innovation The Republic of Karelia has built a mature infrastructure for innovation- infrastructure driven development. It includes the following organisations: Investment climate • The Regional Innovation Complex and IT Park at Petrozavodsk State University • The Ukko Innovation Centre According to a study by RIA Rating, in 2013 the Republic of Karelia How Karelia ranks ranked 67th in terms of the amount of investment per capita and • The Karelia Technology and Innovation Transfer Centre at the in independent Karelian Research Centre of the Russian Academy of Sciences 44th in terms of the amount of foreign investment per capita. • The Karelia Business Incubator ratings In a 2013 rating of Russian regions’ investment attractiveness by the Expert-RA rating agency, the Republic of Karelia was rated 3В1 Karelia’s The region’s economic development priorities and objectives have been (decreased potential – moderate risk). defined in accordance with the Strategy for the Republic of Karelia’s Social long-term economic and Economic Development Through 2020 as follows: development • Raise Karelia’s profile as a leading border area in Russia’s North- Fitch Ratings credit rating priorities Western region in terms of economic, R&D, and cultural interaction 2011 2012 2013 between Russia and its neighbours among countries in northern International scale rating BB– BB– BB– Europe and the European Union National scale rating А+ А+ А+ • Streamline the social sphere and develop human capital Rating outlook stable stable stable • Promote public-private partnership arrangements • Carry out technological modernisation and diversification of the economy, improve Karelia’s competitive position through developing The Government of the Republic of Karelia has set the objective traditional and innovation-driven sectors, taking into account global of improving the region’s investment climate as part of activities economic trends and increasing domestic consumption linked to Karelia’s large-scale anniversary celebration. • Create efficient land and property markets, facilitate improvement • of Karelia’s investment attractiveness and development of entrepreneurship • Upgrade infrastructure and enhance the region’s spatial organisation, Based on 2013 results, the total amount of investment in Karelia was Investment concentrate and distribute future resources RUB 32.1 billion (up 8.4% against the previous year), including activity • Strengthen Karelia’s image as a Russian region with a well-developed RUB 2.2 billion in foreign investment. information space and mature civil society, and as an attractive destination for living, investment and joint projects. As of early 2014, accumulated foreign investment totalled RUB 42 billion (USD 764 million). In the total amount of 2013 investments, Finland accounted for 32% of total foreign investment, while Cyprus accounted for 20% and Germany for 17.5%. During the past five years, Finland has also been one of the investment leaders in the Karelian economy. The neighbouring country’s investments in 2009-2013 totalled RUB 8.17 billion (USD 148.7 million), making it second only to the Czech Republic, which has accounted for investments worth RUB 11 billion (USD 201.3 million). However, this amount was generated primarily thanks to major investments made in 2011–2012.

Breakdown of 2013 foreign investments in the Republic of Karelia by source country

32%

Finland

69.5% Cyprus Germany 20% Other countries

17.5%

28 Guide to Investment PwC PwC Republic of Karelia 29 Investment climate Investment climate

Governmental Forms of support for investment activities Support for investment projects currently being support for implemented and/or slated for implementation Karelia provides governmental support for investment activities in the Republic of Karelia innovation-driven in the following forms specified in the Republic of Karelia’s Investment Declaration: activity Investor’s message/statement • Granting tax incentives on regional taxes: discounted profits tax and property tax rates; • Granting benefits in the form of setting a discounted corporate Ministry of Economic Development of the Republic of Karelia profits tax rate for the portion of taxes allocated to the Republic of Karelia’s budget; Specialised Authorised Organisation* • Granting regional government guarantees for investment projects on a competitive basis; • Granting subsidies from the Republic of Karelia’s budgetary funds The Republic of Karelia’s for partial reimbursement of interest expenses on loans obtained Information on government for financing investment projects; support measures for tax benefits Specialised • Granting investment tax credits on corporate profits tax at the investors is provided. Discounted rate Authorised Investment sites are selected Investor under Republic of rate set for such tax payments to the Republic of Karelia’s budget, Standard rate Organisation* from the available database. Karelia Law No. and on regional taxes; 384-ЗРК • Granting preferential terms for use of land and other types of real Profits tax property; The investment project charter 20% from 13% to 16% • Granting subsidies from the Republic of Karelia’s budgetary has been drafted; a presentation has been prepared. Property tax funds for partial reimbursement of expenses related to cadastral 2.2% from 0% to 1.8% activities. Ministry of Economic Development of the Republic of Karelia

The project is being reviewed by a task force on assistance in attracting investments to the Republic of Karelia.

Interdepartmental Commission for the Development and Deployment of Production Resources in the Territory of the Republic of Karelia

A presentation of the investment project has been held in the presence of the investor. The project’s Executive Sponsor has been designated. Legal status of investment activities

The Republic of Karelia has ensured adequate legal status and the protection Project’s Executive Sponsor of rights and interests with respect to both Russian and foreign investors, as Cooperates with the investor, executive authorities of the Republic of Karelia, well as transparent principles for working with governmental authorities, and and the Ministry of Economic Development. a system of support аnd guarantees for investors. The regional government Supports the investment project at all implementation stages. has put in place a corresponding regulatory framework designed to support Russian and foreign investors. Specifically, to date the following laws and regulations have been enacted or issued: Ministry of Economic Development • Republic of Karelia Law No. 1687-ЗРК of 5 March 2013 “On Government Support for Investment Activities in the Republic Controls investment project implementation. of Karelia”; • Republic of Karelia Government Decree No. 505р-П of 24 July 2013 “On Approving Priority Areas of the Economy of the Republic of Implementation of the investment project has been completed, Karelia for Providing Government Support for Investment Activities”; an on-site inaugural ceremony has been held • Republic of Karelia Government Resolution No. 218-П of 9 July 2013 “On Approving the Procedure for Assigning Municipal Entities in the Republic of Karelia to Investment Incentives Zones”; • Republic of Karelia Government Resolution No. 311-П of 14 October 2013 “On Approving the Procedure and Terms for Concluding Investment Agreements for Granting Tax Benefits to Investors”; • Republic of Karelia Government Resolution No. 346-П of 26 November 2013 “On Approving the Procedure for Performing the Competitive Selection of Investment Projects for the Purpose of Granting Subsidies to Investors from the Budget of the Republic * Until 2014, the functions of a specialised authorised organisation had been performed of Karelia for Partial Reimbursement of Interest Expenses on Loans by OAO Corporation for the Development of the Republic of Karelia. Starting from 2015, Obtained for Financing Investment Projects”. these functions will be transferred to a company to be selected via an open tender.

30 Guide to Investment PwC PwC Republic of Karelia 31 Investment climate Investment climate

Regional investment With the aim of improving the investment climate and optimising Administrative support for investment activities standard governmental support for investment activities, the Republic of Karelia is implementing a standard for ensuring a positive investment climate in the The investment process in the Republic of Karelia is currently region, which may be applied by the executive authorities of other Region administered and supported by the following organisations. Federation constituent regions. The standard calls for engaging in several key activities aimed at: Government authorities • improving the transparency of the republic’s investment policy; Organisation Functions • creating mechanisms for attracting investments and ensuring proper The Inter-Departmental Commission for the Coordination of activities by federal and regional executive investor relationship management (including working with investors Deployment and Development of Production authorities, and republic’s local municipal governments, for based on the one-stop-shop principle); Resources Forces in the Territory of the Republic of ensuring balanced regional development, efficiently using the • providing investors with accessible infrastructure and professional Karelia. This agency operates under the direction region’s natural and economic resources, and developing the labour resources; of the Head of the Republic of Karelia. region’s public-private partnership framework. • rendering comprehensive information support for investors. Lead coordinator of activities aimed at attracting investments. Responsible for structuring projects and drafting investment agreements on behalf of the regional government. With a view to ensuring efficient coordination of ministries’ and agencies’ activities, a task force for assisting in attracting investments to Republic of Karelia Ministry of Economic the Republic of Karelia has been set up. Personal responsibility Public-private Developing public-private partnerships (PPP) at the regional level Development for implementing investment projects in the republic has been represents one of the main mechanisms to be used in addressing the assigned to those individuals listed among regional officials partnerships in charge of supporting top-priority investment projects being need for improving a given region’s investment attractiveness. The implemented and/or targeted for implementation in the region; priority regional policy areas that can be covered through relevant PPP the list has been approved by the Head of the Republic of mechanisms include: transport, housing and public utilities, power Karelia. industry, communications, education, healthcare, culture, science, and sports, among others, etc.

To date, Karelia has gained strong practical experience in implementing investment projects through PPP mechanisms. Specialised organisations supporting the investment process Organisation Functions Established by Republic of Karelia Government Decree No. 146 р-П of 1 April 2011 for the purpose of creating a corresponding investment infrastructure, and developing and improving the public-private partnership framework in the Republic of Karelia PPP projects at the Applicable PPP legislation of the Republic of Karelia: The Corporation’s key areas of activities include: • Searching for and attracting investment resources for ensuring further implementation and development of the regional infrastructure and implementing top- planning stages • Republic of Karelia Law No. 1568-ЗРК of 5 December 2011 “On the Participation of the Republic of Karelia in Public-Private Partnership priority projects by applying PPP mechanisms; • Supporting investment projects approved by the Republic of Karelia on a Construction and reconstruction OAO Corporation for the Projects”; «one-stop-shop» basis; of water-supply treatment facilities Development of the Republic of in the Petrozavodsk Urban District • The Procedure for Developing and Concluding a Public-Private • Coordinating and accelerating investment project implementation; Karelia (Stage II) (implementation of Partnership Agreement, approved by Republic of Karelia Government • Monitoring investment projects involving the creation and development this project is supported by the Resolution No 26-П of 30 January 2013; of industrial parks and techno-parks in the Republic of Karelia; government • The Procedure for Selecting a Private Partner for Granting the Right • Representing the Republic of Karelia’s interests within the framework and on the terms of projects approved by the Republic of Karelia and funded with budget allocations to Conclude a Public-Private Partnership Agreement, approved by from the Investment Fund of the Government; Russian Federation) Republic of Karelia Government Resolution No 26-П of 30 January • Providing assistance in attracting new sources of finance; Integrated water treatment system 2013. • Developing a mechanism for cooperation between investors and the for the Republic of Karelia’s small Republic of Karelia’s government authorities and local population under towns (presentation of the project) the Corporation’s auspices. Construction of heat-and-power engineering facilities in the Republic The draft Federal Law “On the Basic Principles of Public-Private Partnerships in the Russian of Karelia’s Northern Ladoga region Federation”, the text of which is currently available to the general public, would authorise Russian for the period through 2026 constituent regions and municipalities to establish the procedure for conducting tenders based on the Reconstruction of engineering principles of openness and transparency, and as well would ensure a level playing field for bidders to Information support for investors facilities of the Besovets airport compete for the right to conclude a PPP agreement. Organisation Functions Given the unique nature of each public-private partnership project from the standpoint of system This website’s primary objective is to provide investors with information on allocation of risks and obligations between the parties and selection of the financial model, this The Republic of Karelia for Investors: investment activity opportunities in the Republic of Karelia (the regulatory Construction of a new deep-water proposed regulation would give Russia’s regions the flexibility to develop partnerships with businesses www.kareliainvest.ru commercial seaport in Belomorsk within the framework of specific projects. The bill also provides guarantees for the lawful rights and framework, key events, available investment projects, etc.). Design and construction of a interests of private partners. In 2013, an automated reference and information system was developed, building for the Republic of Karelia’s Once this draft law is enacted, the Republic of Karelia intends to take appropriate measures to bring featuring interactive three-dimensional monitoring of the Republic of Karelia’s its regional legislation in line with the federal law in this area. The Republic of Karelia Ministry of investment projects. Each database object has its own coordinates anchoring Bureau of Forensic Medical Geoportal for Investors: Examination, a state-financed Economic Development, in its role as coordinator of the regional authorities’ efforts to attract extra- (gridding). The database and related software component allow users to keep a geoportal.karelia.ru institution budgetary investments in regionally significant public infrastructure based on PPP principles, has register of investment projects and investment sites, as well as supplement the encouraged the regional executive authorities, municipalities and potential private partners to submit Construction of the Yalguba sports system with any relevant cartographic materials (infrastructure, power system, their proposals on participating in PPP projects in those areas that are aligned with the Strategy for the and tourist centre, and other projects social facilities). Republic of Karelia’s Social and Economic Development in the Period Through 2020.

32 Guide to Investment PwC PwC Republic of Karelia 33 Investment climate Investment climate

The Republic of The Karelia-100 Project was initiated by Russian Federation Presidential Decree N0. 517 of 24 May 2013 “On Celebrating the 100th Karelia's top-priority investment projects within the scope of the Karelia's 100th Anniversary of the Establishment of the Republic of Karelia”. This Government of the Republic of Karelia's Principal Investment Policy anniversary as a large-scale, landmark project has set the ambitious goals of by the year 2020 transforming the republic’s image, modernising its economy Priorities for 2011-2015 driver of the region's Amount of Scheduled and social sphere, and laying the groundwork for maximising the Project name. № Project initiator investments, project Project implementation stage Brief description further development realisation of the republic’s existing investment potential. RUB million timeline Forest products industry The table below presents the Republic of Karelia’s key development Polar Bear Project. As of 1 October 2014, RUB 0.96 billion had been invested since 45,000 issues to be addressed within the framework of the Karelia-1oo Project. Reconstruction and ОАО Segezha Pulp the start of the project. In October 2014, OOO LesInvest (a 1 (EUR 900 2010–2028 upgrading of ОАО Segezha and Paper Mill subsidiary of AFK Sistema) became a new owner of ОАО Segezha Action plan within the framework of Karelia-100 Project million) Industry Expected results Pulp and Paper Mill Pulp and Paper Mill. Project updating activities were started. implementation Implementation of the Up to two • Reconstruction of worn-out capacities and distribution grids; Development of all power- second stage of OOO Kalevala Wood years from 2 3,500 Design stage Electric power • Construction of new generation facilities (mini-hydro power consuming industries, creation the OSB Plant Construction Processing Mill the start of industry plants); of conditions for developing the investment project implementation • Increased capacity, elimination of electric power shortages. tourism industry. Implementation stage. The project has been included in the list of top-priority forest products industry investment projects. Removal of infrastructure Setting up operations for the Three industrial locations have been set up, and several pieces of limitations, momentum towards production of wood products, • Gasification of the republic’s populated localities; sawmill, wood-stoving and dubbing equipment, as well as a new Gas supply further development of all 3 hewed timber moulding and OOO NPO FinTech 1,216.9 2011-2020 • Conversion of key utility infrastructure facilities to gas fuel. boiler house, have been delivered and installed. Contracts for economic sectors glued articles by leasing of forest land for logging operations have been signed. of the republic. NPO FinTech As of 1 October 2014, RUB 0.2 billion had been invested in • Construction of the high-speed Onega toll motorway (the implementation of this project. Karelian section of the North-Western Development Corridor); Improved transport accessibility The second stage of the Design stage. A request for the project's inclusion in the list of • Reconstruction of the most worn-out regionally significant for both the local population and investment project for top-priority forest products industry investment projects has routes and road network facilities; ZAO Solomensky Transport businesses. 4 upgrading of the property 439.6 2015-2025 been agreed upon with the Russian Federal Forestry Agency • Replacement of wooden bridges; Lesozavod infrastructure Momentum towards further complex owned by ZAO and has been submitted for approval to the Russian Federation • Reconstruction of rail infrastructure facilities and the development of all economic Solomensky Lesozavod Ministry of Industry and Trade. Petrozavodsk railway station; sectors in the republic. Design stage. The company has drawn up a request for the • Reconstruction of the White Sea Canal; Organisation of logging and project's inclusion in the list of top-priority forest products wood processing operations • Reconstruction of the Kem Seaport. industry investment projects and submitted it for consideration 5 by ZAO Carlis-Prom under ZAO Carlis-Prom 695.1 2015-2024 Ensured availability of to the Republic of Karelia Ministry for Management of Natural a long-term information services for Karelia’s Resources and Environment. Currently, this request is being • Ensuring a complete coverage of the republic’s populated entire population. lease of forest land Communications considered by the Russian Federal Forestry Agency. localities and federal routes. Momentum towards further development of the region’s IT sector.

The impact of the Karelia-100 Project on the republic’s Mining The design stage has been completed. In 2013, a project for investment potential is expected to be as follows: commercial exploitation of the deposit and development of a concomitant infrastructure (Design and Estimate Documentation) was 1. Tourism industry: Elimination of existing infrastructure and Construction of a full-scale prepared and received a favourable opinion from the St Petersburg- gravel production facility in based FGU Glavgosexpertiza Rossii. The project has been evaluated transport limitations will create the essential prerequisites for actively 6 OOO Progress 9,000 2007-2032 the Medvezhyegorsk District by the Commission for Exploitation of Mineral Deposits and the Under the auspices the President developing the tourism industry, making it possible to achieve the target figure and Government of the Russian (Bratskoye Deposit) Subsurface Management Department in the Republic of Karelia. In Federation, a Governmental of 3.5 million tourists visiting Karelia by 2020. accordance with the terms and conditions of the use of subsurface Commission has been established to 2. Agribusiness: Elimination of existing infrastructure limitations resources, industrial mining of building stone is expected to be prepare for celebrations of the 100th will ensure the creation of favourable conditions for deploying production launched in 2017. anniversary of the establishment Upgrading of the production Implementation stage. The list of key projects includes development of of the Republic of Karelia. The operations involving advanced processing of agricultural raw materials and OAO Karelskiy 7 facilities of OAO Karelskiy 12,500 2010-2016 the steel pellet production process stage, product quality improvement Chairman of the Governmental Okatysh fish, and will drive increased output of agricultural products in general, which Okatysh and improvement of the company's energy efficiency. Commission is Nikolai P. Patrushev, in turn will allow for tapping both the domestic Russian market and markets in Implementation stage. The company is currently in the process Secretary of the Security Council of Construction of a gravel neighbouring regions (the St Petersburg metropolitan area, etc.). of executing land plot lease contracts. Documents certifying the the Russian Federation. Members production facility in of the Governmental Commission updated open-pit contours have been re-issued in accordance 3. Forest products, mining, and construction: The 8 Prionezhsky District OOO Carel Flot Invest 650 2012-2016 include the heads of federal with the established procedure. As per the licence terms: implementation of the Karelia-100 Project and the resulting invigoration of (Zapadno-Kakkorovskoye executive authorities and the heads • Launch of industrial mining – August 2013; Deposit) of a number of regions in Russia’s economic activity will prompt increased demand for construction materials • Attainment of projected capacity – March 2015. North-Western Federal District, as and wood processing products. Further development of the transport Implementation stage. The design stage has been completed. Construction of a full-scale well as representatives of the Federal infrastructure and improved freight traffic throughput capacity will also Production has started. In 2013, construction of a service road and Assembly of the Russian Federation 9 gravel production facility in OOO Granit 700 2006-2020 a dead-end railway track was launched. A stationary complex with (Russia’s parliament), the Security incentivise production in these industries. the Lakhdenpokhsky District a capacity for 1 million tonnes of gravel is planned to be built. Council of the Russian Federation, 4. Engineering: The implementation of large-scale projects will lay the and major business entities. Development of the Lobash groundwork for a revival of demand for engineering products. molybdenum deposit in the The Executive Secretary of the 5. Innovation: The Karelia-100 Project is an innovation-driven Belomorsky District (Stage 1). OOO Molibden- 912 (Stage 1 of Intention stage. Preliminary activities (licence, project, open pit Governmental Commission is programme, which will spur additional demand for innovative products. This, 10 Construction of integrated Karelia (OOO Kanon- 2014-2017 Alexander P. Khudilainen, Head of the project) position, etc.). mining-and-metallurgical works consulting) the Republic of Karelia. in turn, will lay the groundwork for implementing both existing and new for the extraction and production innovation-driven projects in Karelia. of molybdenum (Stage 2)

34 Guide to Investment PwC PwC Republic of Karelia 35 Investment climate Investment climate

Agribusiness Transport infrastructure Construction of a 400-head Implementation stage. Closing phase of implementation. Completion Design stage. This project has been included in the List of Top-Priority 12 commercial dairy farm with a OOO Mayak 110 2011-2014 of the construction requires additional credit resources in the amount Investment Projects in the North-Western Federal District. Pre- dairy block of RUB 25 million. implementation activities for the project involving the construction Construction of the of an intermediate railway station and intra-port rail infrastructure Karelskaya Poultry Farm for Implementation stage. The Government of the Republic of Karelia have been completed. Prospective cargo turnover volumes have been approved. Organisation of seaport design and construction tenders broiler chick poultry meat and OOO TEK Logistic – St Petersburg have signed a cooperation Construction of a new deep- OOO TEK Logistic – is currently under way. Depth measurements have been carried out 13 production, with introduction 16,970 2014-2018 agreement (dated 19 August 2014). Vnesheconombank (VEB) has 22 water commercial seaport in ZAO Belomorsky Port 15,363.8 2011-2016 St Petersburg in the new port waters over an area of approximately 400 hectares. of the company’s own been approached about providing the credit resources required to Belomorsk generating capacities (gas implement the project. Preparatory work related to a geological survey in the White Sea and in the territories adjacent to the new seaport has been completed. generators) Activities involving demarcation of seaport boundaries and official Implementation stage. The Government of the Republic of Karelia naming of the new seaport (terminal) are currently under way. An and OAO Kondopozhsky Kombinat Khleboproduktov have signed a OAO Kondopozhsky expert assessment of the logistics in the White Sea port has been Restoration and upgrading of cooperation agreement for implementation of the Restoration and 14 Kombinat 1,140 2014-2018 conducted. Investor search efforts are currently under way. the Sunskaya Poultry Farm Upgrading of the Sunskaya Poultry Farm project (dated 19 August 2014). Khleboproduktov Construction of the Kem VEB has been approached by the investor about providing the credit 23 OOO Kem-invest 5,413.8 2013-2019 Design and environmental survey activities are currently under way. Commercial Port resources required for implementing the project. On 10 July 2014, a new competitive tender with qualified Upgrading and OAO Kondopozhsky participation was announced by the Administration of Civil reconstruction of OAO 15 Kombinat 1,334 2014-2016 Intention stage. VEB has been approached about financing. Reconstruction of The Republic Airports (Aerodromes), a Federal State Unitary Enterprise, with Kondopozhsky Kombinat Khleboproduktov engineering facilities for of Karelia State regard to federally owned airport system facilities for the right Khleboproduktov 24 1,092.3 2011-2015 the Besovets airport system Committee for to conclude a government contract for the performance of Setting-up of an agribusiness (Petrozavodsk) Transport construction and installation activities for the Reconstruction holding company in OOO of Engineering Facilities of Besovets Airport System project 16 Sortavala (with centralised Selkhozpredpriyatiye 898 2014-2022 Pre-project activities. Registration of title to land plots. (Petrozavodsk, Republic of Karelia). control and a focus on Sortavala Design and environmental survey activities. An agreement was agriculture/ecotourism) signed in June 2013 between the Government of the Republic Construction of the Onega Setting-up a fish farm and of Karelia and OAO North-Western Development Corridor for Implementation stage. Based on the results of an auction, Motorway complete with incubatory/nursery pond implementation of a transportation/logistics project. OOO Karelproducts has acquired ownership of a land plot in the roadside service facilities OAO North-Western 17 for young trout in the OOO Karelproducts 80 2014-2017 Design and environmental survey activities are currently under village of Padun; design and environmental survey activities are 25 from the Russian-Finnish Development 245,000 6-10 years Medvezhyegorsk Municipal way for the Onega Motorway: topographical and geodesic currently under way. border to Petrozavodsk and Corridor District activities have been completed, updating of previous geological Karelia’s border with the survey results have been started, a preliminary drawing of the Leningrad Region route has been prepared, a feasibility study is being updated, and allocation of land plots is being prepared. Engineering and metallurgy, production of finished metal goods Setting-up an integrated Intention stage. An investment request and project-related materials power-generation and have been submitted to VEB. Negotiations are under way for 18 metallurgical plant on the OK RUSAL 6,800 2011-2014 acquisition of the Ondskaya Hydro-Electric Power Station and opening industrial site of the Nadvoitsky of a credit line by VEB for procurement of a foil-rolling mill. Aluminium Plant (NAZ) Setting-up a plant to Intention stage. The investor is currently assessing the project’s manufacture aluminium alloy feasibility, taking into account the potential for obtaining 19 Elso Group 335.6 2014-2016 radiators on a site in the government support. VEB has been approached about providing the town of Nadvoitsy credit resources required to implement the project.

36 Guide to Investment PwC PwC Republic of Karelia 37 Investment climate Investment climate

Karelia’s top-priority investment projects within the scope Karelia’s top-priority investment projects within the scope of the Government of the Republic of Karelia’s Principal Investment Policy Priorities of the Government of the Republic of Karelia’s Principal Investment Policy Priorities for 2011-2015 for 2011-2015 Amount of Scheduled Amount of Scheduled Project name. Project name. № Project initiator investments, project Project implementation stage № Project initiator investments, project Project implementation stage Brief description Brief description RUB million timeline RUB million timeline Energy Tourism Implementation stage. Implementation stage. Lyaskelya mini hydro power plant (commissioned on 5 September 2011) Yamka Business Centre (commissioned in 2013). The first half of The Petrovskaya Sloboda Basic parameters: 2014 saw continued construction of the Aleksandrovsky Residential district in Petrozavodsk – • Installed capacity – 4.8 mW; Compound, comprised of a single three-building housing complex integrated redevelopment OOO Okhta Group • Annual electric power output – 27 million kWh; 27 660 2010-2015 with 280 apartment units and total living space of 17,341.8 m2. It is of a former industrial area Onega • Total amount of investment – RUB 730.2 million. scheduled to be commissioned in June 2015. on the grounds of the Onega Ryumyakoski mini hydro power plant (commissioned on 9 July 2013) Construction of external networks (gas and water pipelines, and Tractor Plant Basic parameters: sewage and storm-water drainage systems) is currently under way in • Installed capacity – 630 kW; the district. • Annual electric power output – 2,562 million kWh; • Total amount of investment – RUB 201.8 million. Kalliokoski mini hydro power plant (implementation deadline – 2014) Basic parameters: • Installed capacity – 975 kW; • Annual electric power output – 3,520 million kWh; • Total amount of investment – RUB 384.3 million. Khaapakoski mini hydro power plant (implementation deadline – 2019) Basic parameters: • Intended installed capacity – 700 kW; • Total amount of investment – RUB 199 million. Pre-project preparation activities have been completed: an engineering survey of the hydraulic engineering installations (HEI) has been completed; documents of title to HEI have been issued; an engineering certificate has been issued; and probable electric grid connection points have been determined. Vyartsilya mini hydro power plant (implementation deadline – 2019) • The amount of investment has not been estimated at this point. Pre-project preparation activities have been completed: an engineering survey of the HEI has been completed; documents of title Reconstruction and to HEI have been issued; an engineering certificate has been issued; construction of mini hydro and probable electric grid connection points have been determined. 26 ZAO Nord Hydro 7,803.3 2014-2019 power plants in the Republic Reboly mini hydro power plant (implementation deadline – 2016) of Karelia Basic parameters: • Intended installed capacity – 500 kW; • Total amount of investment – RUB 220 million. Examination of the current condition of the HEI has been completed. A partnership agreement for the project has been signed by Jormakka OY, a leading Finnish partner, and ZAO Nord Hydro. An approved certificate has been obtained for the selection and examination of a land plot for ZAO Nord Hydro with a view to conducting design and environmental survey activities, construction and operation of hydraulic engineering structures, and an electric power transmission line for the Reboly mini hydro power plant. Beloporozhskaya-1 mini hydro power plant (implementation deadline – 2017) Basic parameters: • Intended installed capacity – 24.9 mW; • Total amount of investment – over RUB 3.0 billion. Initial planning permission documentation has been issued. A range of engineering survey activities for the deployment of the power plant's HEI and water reservoir have been completed. Beloporozhskaya-2 mini hydro power plant (implementation deadline – 2018) Basic parameters: • Intended installed capacity – 24.9 mW; • Total amount of investment – over RUB 3.0 billion. Initial planning permission documentation has been issued. A range of engineering survey activities for deployment of the power plant's HEI and water reservoir have been completed. Initial planning permission documentation has been drafted. A range of engineering survey activities for the deployment of the power plant's HEI and water reservoir have been completed.

38 Guide to Investment PwC PwC Republic of Karelia 39 Contact details Republic of Karelia PwC Russia (Moscow)

Head of the Republic of Karelia: White Square Office Centre Alexander Petrovich Khudilainen 10 Butyrsky Val, Moscow 125047 Telephone: +7 (495) 967-6000 Office of the Head of the Republic of Karelia Fax: +7 (495) 967-6001 19 Prospekt Lenina, Petrozavodsk 185028 www.pwc.ru Telephone numbers: Reception: (814-2) 79-93-09 For organisations: (814-2) 79-93-69 For individuals: (814-2) 79-93-75 Fax: (814-2) 79-93-91, 79-93-92 Email: [email protected]

Deputy Head of the Republic of Karelia; Republic of Karelia Minister of Economic Development: Valentin Yakovlevich Chmil

2 Ulitsa Andropova, Petrozavodsk 185028 Telephone: (814-2) 792-300 Fax: (814-2) 781-039 Email: [email protected]

Republic of Karelia Deputy Minister of Economic Development (in charge of investment policy issues): Sergey Vyacheslavovich Alimpiyev

Telephone: (814-2) 792-307 Email: [email protected]

Directorate for Investments and Government Support for Entrepreneurship; Head of the Investment Policy Division: Evgeny Vladimirovich Kharlamov

Telephone: (814-2) 792-361 Email: [email protected]

Investors Hotline on The Republic of Karelia for Investors website: www.kareliainvest.ru/ru/7079/

Representative Office of the Republic of Karelia in Moscow 9 Armyansky Pereulok, Office 555, Moscow 101934 , Telephone: +7 (495) 628-3447 Fax: +7 (495) 628-5930 Email: msk.karelia@yandex.ru

40 Guide to Investment PwC PwC Republic of Karelia www.pwc.ru