ADVANTAGE NORTHWEST RUSSIA The New Growth Centre of Europe? Grigory Dudarev, Sergey Boltramovich, Pavel Filippov and Hannu Hernesniemi Sitra • Helsinki • 2004 Sitra Reports series 33 ISBN 951-563-445-8 ISSN 1457-571X (Sitra) ISBN 951-563-450-4 (URL:http://www.sitra.fi) ISSN 1457-5728 (URL:http://www.sitra.fi) SITRA - The Finnish National Fund for Research and Development ETLA’s publication series B, no. 206 ISSN 0356-7443 (ETLA) ETLA - The Research Institute of the Finnish Economy Printed in Edita Prima Ltd, Helsinki 2004 Preface The shot fired in 1917 from the battleship Aurora in St. Petersburg, where the Russian revolution began, changed the world. It was followed by 85 years of Russia shutting itself out from the rest of the world. It is going to take decades before all the achievements facilitated by the enormous societal experiment are adapted into the present capitalistic world order. Russia is, however, already reclaiming its position in the in- ternational division of labour. Finland’s fate, standard of living and its business success are closely linked to its eastern neighbour. Finland has also been, and still is, an im- portant neighbour to Russia. These were the premises from which we began planning this project in December 2000, when Dmitri Mezentsev, Vice Chairman of the Centre for Strategic Research’s Board, visited Hel- sinki. I am grateful to Dr. Mezentsev, without whose initiative this im- portant research could not have gotten started and whose efforts were crucial to the success of the project. The end-result comprises a valuable analysis of Europe’s new growth centre, Northwest Russia, the region’s competitiveness and research-based proposals for its enhancement. Our Russian and Finnish researchers investigated this vast region dur- ing the research project. They visited the mines and smelters of Kola, Karelia’s paper machine and tractor factory, the sawmills and pulp facto- ries in Archangel, the huge steel mill in Vologda, various firms in oil rich Komi, progressive Novgorod, the overlooked Pskov, and Kaliningrad located within the EU. The region is geographically larger than Germany, France and Great Britain put together. Its administrative centre is St. Pe- tersburg, which, combined with the surrounding Leningrad region, com- prise Russia’s western window to the world. The economy of Northwest Russia has started to boom. The econ- omy’s most important industries include energy-related industries, min- ing, basic metals and the forest industry. The food industry is also grow- ing rapidly and is experiencing brisk investment activity. Thanks to these industries and along with the rising standard of living, the region’s trans- port industry and the construction sector are also expanding. It became clear during the research period that Northwest Russia’s administrative centre, St. Petersburg, is also the engine driving techno- logical progress in Russia. It used to be the hub for telecommunications development. Popov invented the radio there at the same time as Italy’s Marconi. Bonch-Bruevich invented the electron tube in 1915, and colour televisions were developed already in the 1930s. St. Petersburg is also the centre for Russia’s energy and space technologies and for many other industries. Currently, the metropolis’s scientific-technical potential is ex- tremely under utilized, but the rapid growth of programming businesses provides an indication of things to come in the future. In the program- ming area, Russia is growing to become the next India or Israel. The programming industry is a good example of new entrepreneurship. Northwest Russia now needs new entrepreneurs. During Soviet times, large firms accounted for almost all of industrial activity and private entre- preneurship was not allowed before perestroika. For these reasons, Russia almost fully lacks small and medium-sized industrial enterprises. This study reveals the opportunities opening up to this community of entrepre- neurs. Large firms are concentrating on their core areas of expertise and want to outsource some of their activities. Western firms locating to Rus- sia also need local subcontractors. Informed government and regional in- dustrial policy decisions as well as foreign venture capital will be needed in the future to encourage business activity amongst small and medium-sized firms. A historical opportunity for globalisation is also being offered to EU firms by starting operations in Russia. This book and the series of books preceding it focus on Europe and Finland’s neighbouring Northwest Russia. In this respect, I would like to emphasise that Finnish firms are in an exceptional position. Our compa- nies have the opportunity to build over-the-border subcontracting chains and, by combining Finnish and Russian factors of production, to be- come some of the world’s most competitive producers. Northwest Rus- sia also provides promising investment opportunities for Finland’s small and medium-sized enterprises. These firms now have an historical op- portunity to internationalise their operations by investing in Northwest Russia, side by side with large Finnish companies, and build their own as well as Russia’s future. Due to its geographical proximity to Europe and industrial heritage, this Russian region will become the most rapidly integrating region with the world economy. The results of the study and industrial policy proposals that emerge are extremely valuable for facilitating the development and integration process of Northwest Russia. In the next stage cluster and indus- try strategy studies should be extended to encompass Russia in its entirety. Helsinki, January 2004 Kari Tolvanen Vice President Sitra Authors’ Preface This study concludes the series of publications devoted to analysing the industrial competitiveness of Northwest Russia. This three-year long project was accomplished by the research-based consulting company Solid Invest (St. Petersburg, Russia), the Research Institute of the Fin- nish Economy (ETLA), and the Centre for Strategic Research (Moscow, Russia). The project and this final report was financially supported by the Finnish National Fund for Research and Development (Sitra). The pre- ceding industry studies were supported by twenty leading Finnish firms interested in Russia. Previous publications contained a preliminary analysis of the competitiveness of industry in Northwest Russia. They also singled out and analysed in great detail the following sectors of the economy with the highest poten- tial for competitiveness: the forest, energy, metallurgy and metalworking clusters, as well as the cluster of information technologies and telecom- munications. The present work summarizes the results of this research in order to reveal the key aspects and tendencies affecting developments in Northwest Russia’s industrial competitiveness in the medium to long term. Special attention has been paid to the need for forming a consis- tent industrial policy aimed at increasing investment and to an analysis of new opportunities for the Northwest Russian economy. These opportu- nities are opening up as a consequence of lively international coopera- tion, in particular industrial cooperation with the countries of the Baltic Sea region and Northern Europe. The Chapters 1, 3, 5, 6 and 7 were prepared by Sergey Boltramovich with assistance of Pavel Filippov and edited by Grigory Dudarev. The Chapters 4, 8, 9 were written by Grigory Dudarev. Hannu Hernesniemi contributed to the study by providing valuable assistance, supervision and editing of the text. Cases in the Chapter 4 were prepared by Sergey Boltramovich, Pavel Filippov and Grigory Dudarev. The authors wish to express their gratitude to all those who took part at various stages of this study, and who have assisted in bringing this book to fruition and making it available to the reader. We would like to thank Sitra and Finnish firms for their longsighted investment in this research on the Northwest Russian economy. Busy businessmen from various industries often found the time to meet with us to discuss our research results in Helsinki and to participate in our seminars held in St. Petersburg and Moscow. We would also like to ex- press our appreciation to the Russian ministry officials and representatives of Russian businesses who participated in these seminars, where the most important questions regarding the development of various indus- tries were discussed. Many Russian firms also opened their doors to our team of researchers conducting case studies. Our special thanks go out to Professor Sergey Sutyrin of St. Peters- burg State University, whose comments helped us in writing the sections on international collaboration, Vladislav Yurkovsky, who bore the bur- den of formatting the text and the graphics, and experts on specific in- dustries - Dmitry Efremov and Dmitry Belov (the forest cluster), Alexey Osipov and Anton Savchenko (the energy cluster), Vladimir Gorelov (the metal cluster), and Andrey Averin (the cluster of information tech- nologies and telecommunications). The authors are grateful to the translators of the study, Sergey Afonin, Mary C. Gannon and Astamur Panov, as well as to Anthony de Carvalho and John Rogers for language checking. The final design and layout of the text was done by Tuula Ratapalo. Our Project Assistants, Veronica Voinovian and Anna Ignatieva, displayed organizational skills that were indispensable in this project. The authors sincerely hope that the ideas and approaches embedded in this study will attract the attention of readers