DEVELOPMENT STRATEGY

UDC 338.124.4+338.26(470.12) © L.G. Iogman On the influence of financial and economic crisis in 2008 – 2009 on the region’s economy and prospects of its development in 2010 – 2011

Leonid G. IOGMAN Ph.D. in Economics, the Head of the Economy Department, the Deputy of the region Governor [email protected]

An innovative way of development, cur- but also a time when the new are determined. rently defined as a basic scenario for the de- Year 2008 will definitely go down in eco- velopment of the Russian Federation, creates nomic history due to the aroused financial crisis conditions for the formation of a regional in- and lots of attendant negative consequences. novation system, strengthening scientific and The emergence of the crisis is associated with technical potential of the region, integrating the following factors: science and education in the region through the – general cyclicity of economic develop- establishment of scientific, technical, scientific ment; and educational structures for solving the re- – “overheating” of the credit market and gion’s socio-economic development problems. mortgage crisis as its consequence; Using the potential of the Russian Academy and: of Sciences to identify the promising areas of – high prices of raw materials (including economic modernization in the Vologda region, oil); as well as a number of projects throughout the – “overheating” of the stock market; region will create a point of growth based on - using new unaudited financial techniques new technological structures, considerably in- and instruments – credit default swaps and creasing knowledge-intensive regional product. other derivatives. Ultimately, the cooperation of science and The current crisis is clearly beyond the government is investment in human capital and normal cyclical crisis. There are three of its hence in the future the Vologda region. This important features. resource must be replenished, strengthened First. Having begun in the context of glo- and developed. balization, the crisis is unprecedented in scope, Cooperation of science and government covering almost all the dynamically developing gets particular relevance right now, in times countries and regions. And it has a stronger of crisis. impact on those who were most successful in Of course, nobody likes crises. However, the the past decade. crisis is not just some sort of economic disaster, In contrast, stagnant countries and regions which we should try to wait till it is over without were affected by it in a less degree. The above losses. The crisis is a time when not only the old is characteristic of domestic economic situa- organizations, ties, game rules are destroyed, tion in individual countries, including ;

* The article is based on the author’s report presented at the Russian and French seminar “The Influence of finan- cial and economic crisis in 2008 – 2009 on the region’s economy and prospects of its development in 2010 – 2011”.

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the most serious problems occur where there be gradual. In 2010 the Russian economy will was an economic boom, while the depressed grow by 2.5-5% in the optimistic scenario, he regions almost do not feel the changes. This said, inflation will be around 9%, and the fall greatly complicates the process of overcoming in GDP in 2009 will amount to 8.7%. the crisis: it is unclear who will become the The Vologda region, which is successfully “locomotive” of growth restoration. integrated into a single global system, could not Second. The current crisis is structural in get away from the phenomena that violate the nature, that is, it involves a major upgrade the usual course of many people’s lives and reduce structure of world economy and its technologi- the rate of economic development of the region cal base. It’s hard to say what structural changes as a whole. will occur, but the result will be a redistribution Up to October 1, 2008 the Vologda region was of forces in the sectoral and regional aspects. developing confidently and stably. Third. The crisis is innovative in its nature. For industrial production by 1 resident the In recent years much has been said about the region was 2 times the average Russian level. importance of innovation, the transition of We were the first in the Northwestern Federal the economy on an innovative path of de- District and among the four Russian leaders. velopment; that is exactly what happened in After October 1, the situation began to the financial and economic sphere. Financial change profoundly. The Vologda region was innovation emerged and rapidly spread here - among the regions most affected by the finan- new financial market instruments, which, as it cial and economic crisis. seemed, will be able to establish conditions for And the active phase of growth gave way to infinite growth. But as it turns out now, many recession. leaders of the financial world had a very vague Export prices have fallen: idea about them that led to a twofold effect. – for ferrous metals – 2.1 times (from Obviously the final evaluation of the effec- 1057.0 doll./ton. in August 2008 to 503.7 doll./ tiveness of anti-crisis measures is still to come. ton. in January 2009); The leading countries of the world continue to – for mineral fertilizers – 3.1 times adjust their anti-crisis programs. Nevertheless, (from 1029.6 doll./ton in September 2008 to there are several consistent trends. 332.1 doll./ton. in January 2009); Firstly, is the growing state intervention in – for timber – 2.4 times (from 243.5 doll./ the economy. cub. m in December 2008 to 101.6 doll./cub. m Secondly, is the marked social dimension in January 2009). of state support. Demand “compression” has caused a sharp, Thirdly, is strong support for investment stepwise decline in the economic sectors – and infrastructure projects, strengthening the metallurgy, chemistry, forestry complex. competitive positions of the national economy Only for 2 months of 2008 (October – in the post-crisis period. November), we have lost more than 53% of These three directions are prior for Russia. metallurgical industry, chemical industry “sub- The first persons of the country say about sided” almost by 47%, decline in mechanical the criteria for the gradual normalization of engineering – almost by a third, in the timber the situation. Prime Minister Vladimir Putin industry – by 22%. It was more than the whole said that “the active phase of the crisis was of 1994 and more than in 1998 – 1999. overcome, and, starting with the second half As a result the regional budget decreased of the year, economic growth has resumed”. twice. President Dmitry Medvedev is more cau- Certainly, the economic problems caused tious: “We are well aware that the 2010 does structural changes in the labor market. Since not promise instant joy”, – he said and warned November 2008 the number of unemployed that a withdrawal from the financial crisis will and reducing the number of vacancies began

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to increase in the region. As of May 18, 2009 Many of the former unemployed having (the “peak” of unemployment), the number of got an annual unemployment benefit (in the unemployed increased by 3.9 times (from 7.4 amount of 58.8 thousand roubles), developed to 29.2 thousand people). business plans and won a grant of 300 thousand The Vologda region has built up its crisis roubles as individual entrepreneurs. management plan in the light of Russian and As a result, to a greater extent in 2009, international trends. we have stabilized the situation on the labor Forging an economic strategy, one must market. always bear in mind the possibility of adverse Maximum number of the unemployed was developments. We talked several times about recorded on May 18, 2009 – 29.2 thousand the danger of short-term fluctuations in world people. Since that date, the unemployment markets, so we consciously followed sufficiently rate started to fall. As a result, on December accurate, balanced fiscal policy. 31, 2009 the lowest number of unemployed We talked about the cyclic development citizens for the last 9 months – 24.2 thousand of economic sectors and the trends of growth people – was marked. The unemployment rate slowing in major tax forming indicators, in on an annualized basis was retained within particular, of reducing enterprises’ profits. 3.7% (target – 3.9%). In addition, in the regional budget, as well In 2009, more than 3 thousand workers as in federal, financial reserve was annually being at risk of dismissal were sent to training formed, which now helps the region to work in and retraining on demanded specialties. The difficult conditions of the global financial crisis. number of employed in temporary jobs and The events of last year showed that our pes- employed on public works amounted to 54.3 simism was justified. thousand people. Assistance to 1.63 thousand Nevertheless, focusing on maintaining unemployed citizens to develop small busi- social stability, we have retained all previously nesses was rendered. existing benefits and social guarantees. The The knowledge and ability to apply the full whole complex of measures of social support, range of instruments of government support ranging from targeted social assistance to the have allowed us to respond quickly to global monthly cash payments is calculated in the challenges in the real sector of the economy. amount of 7.2 billion roubles. To maintain economic vitality, we put all To fulfill the social obligations in the face of possible economic mechanisms, ranging from declining revenues austerity policy was enabled. commodity interventions to provide support to Shaping the 2009 budget, we have “pressed” enterprises in a critical situation (where it was the expenditure by 8.4 billion roubles. The necessary to correct errors inefficient manage- optimization of the costs of implementing ment). long-term and departmental target programs, Support mechanisms for enterprises of real for the maintenance of state institutions, bod- sector of economy: ies of executive power in terms of reductions 1. Trade intervention. in labor costs, operating costs, costs of capital 2. Ensuring the formation of state order. nature was made. 3. Forward purchases of goods and services Our prompt action and implementation from companies in the region. of targeted employment promotion programs In the absence of sales and revenue at JSC helped to preserve the human resources of “Ammofos” forward purchases of mineral fer- organizations, to increase competitiveness in tilizers for spring sowing in 2009 were carried. the labor market of workers who were at risk For this purpose the budget found supple- of dismissal, including the promotion of en- mentary funds in the amount of 164.5 million trepreneurial activity. roubles.

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4. Provision of direct financial assistance – tax incentives for investors are saved; (subsidizing part of the costs of acquiring tech- – low regional supplements (only 20%) to nology, equipment, repair, construction, etc.). the rates of payments for forest resources are 5. Provision of regional state guarantees kept; on loans. – legal persons are given the opportunity to Regional government guarantees on loans restructure the debt of the regional taxes levied of JSC “Corporation Vologdalesprom” are sur- on them, penalties and fines, formed on 1 April rendered to start the production of chipboard in 2009. the settlement of Vokhtoga, “LDK № 2” Ltd. 8. Upport for businesses in a critical situ- of holding company “Vologda lumbermen” ation. First of all, these are Ltd. “Monzensky ( District) to pay customs duties for MLC”, JSC “Elektrotehmash”. technological equipment. As of January 1, 2010 9. Socio-cultural objects owned by JSC regional government guarantees are provided “Severstal” are transferred to the gratuitous to 20 organizations totaling 3.5 billion roubles. use of the Cherepovetz municipality. For this 6. Promotion the marketing of products. purpose Cherepovetz’ budget got a grant in the To support the engineering workers in the amount of 123.2 million roubles. framework of preserving and further enhancing 10. Moreover, the crisis has prompted us the portfolio: to action aimed at supporting small business- – appeals are sent to the leading automotive es. Small business as an institutional sector of plants in Russia, enterprises of the Republic of the economy fulfills two important functions: Belarus, and this year to Kazakhstan; a social one being the source of employment – agreement on cooperation between the growth, and an economic one as it creates a regional government and KAMAZ on the competitive environment. expansion range of buses manufactured by JSC “Vologda Machine-Building Plant” is – In addition to optimizing the tax burden concluded; for small and medium businesses rates of rent – “Olymp” buses (JSC “Vologda Machine- for the use of regional assets are 30% reduced; Building Plant”) and trolleybuses “Avangard” the priority forms of business support are im- (JSC “Trans-Alfa Electro”) are included in plemented: subsidies to own business (grant the list of purchases of vehicles and municipal support), for reimbursement of expenses to pay vehicles (using a federal grant) for state and interest on loans. municipal needs. In 2009, JSC “Trans-Alfa During the work of the expert council on Electro” won a tender to supply 109 trolleybuses the development of small and medium-sized in 12 cities of Russia, in 2010, in particular, they businesses 597 grant applications are reviewed, concluded contracts with “Tushino engineering 158 of them are recommended to the grant (the plant” to supply 45 trolleybuses in the amount of total amount of 46.3 million roubles). 385 million roubles. As part of the direction to compensate for 7. Optimization of the tax burden: the interest rate on loans of 247 applications – rate for a simplified tax system for taxpay- submitted for small and medium enterprises ers engaged in socially important sectors (food, 173 projects are approved totaling 34.4 million light industry, folk handicrafts, public utilities, roubles. tour operator activity in the domestic tourism) A system of microfinance is developed. is minimized (reduced to 5%); – The mechanism of the Guarantee Fund – tax burden on tax payers of a single tax is launched. on imputed income is optimized. In 2009, the Today we can say with confidence that the size of the correction coefficient is reduced measures of financial and material support, in 7 municipalities (in Vashkinskiy, Vologda, reducing the tax burden, as well as eliminat- Kyrillov, Nikolsk, Syamzha, districts ing redundant administrative regulation have and in Cherepovetz); actually worked.

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Overall, our anti-crisis policy was adequate continue investment projects’ realization and arising challenges. We did not allow to collapse should also develop infrastructure for the new in the real sector, “restrained” food market, economy’s subjects. reduce the tension on the labor market, keep Even under hard financial conditions it is political and social stability. necessary to continue strategic projects’ re- Through a combination of measures of state alization planned for the regional economic support of the real sector of the economy, the development for years ahead. work of the enterprises, as well as changing the It was possible to retain the investment situation on the market by the end of 2009 we activity in the area. managed to reduce the backlog committed in In many branches even during the crisis the the beginning of the year. investment activity was not interrupted; the new Index of industrial production in 2009 com- capacities were placed in operation, the equip- pared with 2008, amounted to 87.6% (1 quarter ment enhancement was carried out. of 2009 – 72.4%). At JSC “Ammophos”, which is the largest The level of production in steel industry manufacturer of the phosphoric fertilizers, reached 88% by 2008, in wood processing – the complex on vitriolic production (the last 92.2%.There are industries where there is a of the four on this product’s manufacturing) positive trend. In particular, the chemical indus- has been launched. After reaching its designed try showed a growth of 6.5% in the textile and capacity (2.7 million tons a year), the enterprise clothing industry production increased by 8%. will produce 30% of the Russian sulfuric acid But it is too early to know rest, we mustn’t release (9.1 million tons), that determines its relax. indisputable leadership among the Russian There are still enough uncertainties in the manufacturers. global economy. At JSC “ plywood manufac- Export prices for ferrous metals, mineral turing plant “Innovator” large-format plywood fertilizers have relatively stabled, but growth is production is carried out. not observed. At JSC Cherepovetz Metallurgical Plant At the same time, the situation with the “Severstal” the blast furnace № 1 has been restoration of domestic demand is not encour- started-up. aging. The financial system is still not strong In Vologda Ltd. “Nestle Russia” started enough, credit crunch is additional proof. constructing the factory on producing momen- We estimate that in 2010 industrial produc- tary cooked cereals within brand “Bystrov”. tion in the region will grow by 2.5%. However, The Company “Ice berry” is realizing the perhaps we won’t come out on the level of 2008. investment project on ice-cream production. “During the crisis, Russia has fully felt, The production expansion is also carried what turns a lack of economy diversification, out at the enterprises of agriculture, forestry, weak domestic financial system, infrastructure commerce, catering and services. constraints, low productivity, waste of resourc- In 2009 within the framework of the invest- es, ineffective corporate governance”, – said ment projects’ realization about 3.2 thousand V.V. Putin. new workplaces were created. The spectrum of The crisis’ development showed that the the newly-created workplaces is rather wide; hard time is not a shock crisis’ phase, it is not it’s metallurgy, woodworking, mechanical engi- a piece of recession, but the transition to a neering, textile manufacture, food-processing growth phase. industry, trade and entertainments sphere (2 In spite of the sharp reduction of the oppor- persons at Ltd. “Immid” and 700 persons at tunities and the sources of financing we should the Company “Ice berry”).

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Realizing, that the prospect of the invest- some part of the grounds (400 hectares) became ment partnership exists only in a highly organ- the industrial grounds, the road to the indus- ized territory, we systematically carry out the trial park was constructed and the in-territory work on the infrastructure gaining information. roads are under construction; the waterpipe of Not only engineering, transport, and infor- drinkable water, the linear part of the technical mation infrastructures, but also public health waterpipe, the household water drain and the services, education, culture, social policy, and gas pipeline were constructed. administrative infrastructure are included here. The construction of the railway branch line The construction of the road infrastruc- with the attraction of the credit resources of ture’s objects continues (in 2009 25 km of the Russian Bank of Development is carried motorways and 3 bridges were placed in opera- out. The start-up of the railway is planned to tion, 37 km of motorways and 2 bridges were be carried out in 2010. repaired.). The works on reconstruction and For the new consumers’ steady work in the major overhaul of the -Baltic hydraulic town of Sheksna it is planned to construct gas engineering constructions are being carried out. piston heat and power plant with the electric Power engineering projects (the construction of capacity of 40 МWt and thermal capacity of the fourth largest power generating unit at the 21 Hcal. Cherepovetz state district power station, the As a result, the hi-tech companies become combined-cycle plant in the regional center, the park’s residents. In May of the current year and gas-turbine heat-and-power plant in Veliky putting into operation the factory on the roll- Ustyug Region) are realized. The advanced tel- formed welded shape production by the Close ecommunication technologies and services are Corporation “Severstal Pipe-Profile Plant – actively put into practice in the area (the multi- Sheksna” is planned. service network with IP-telephony application, The similar design decision is planned to be service of the wideband access to “Internet”, realized within the framework of the industrial the radio access systems). Municipal economy park “Sokol” creation in the town of Sokol on objects (water pipes, boilers were also placed in the basis of both grocery and technological operation (from the end of 2008 8 gas boilers diversity. It is priority for the decision of the were placed in operation). enhancement matters of the mono-profile cit- Budgetary constraints in 2009 did not pre- ies’ economy. vent the completion of schools’, kindergartens’, The uniqueness of the new industrial park’s medical institutions’ and sporting facilities’ territorial arrangement is that in Sokol three construction; and co-financing of the con- important transport arteries converge: the structions of the educational and rescue center Northern Railway, the water-way (river Suk- “Vytegra” of the Russian Emergency Ministry. hona), the federal highway Moscow – Archan- The creation of the industrial parks and gelsk. The river transport of the river Sukhona economic clusters is a perspective form of in- has the outlet to the sea through the lock system teraction among business and authorities aimed of in the Volga-Baltic and Severodvinsk systems at the increasing investment attractiveness of leading to the ports of the five seas. Air lines’ the area. availability can be measured by a half-hour For this reason one of the priority regional distance. There are railway terminals and gas investment projects is the development of the mains. industrial park “Sheksna”. The infrastructural The industrial park’s platform makes about satiation of the territory here is carried out at 200 ha. The distance from the platform to the full speed. ways makes about 110 m; engineering networks Geological and hydrological engineering and communications are situated within the researches of the territory were carried out, limits of 1.1 km.

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The first resident of the park will be a fac- In addition, they will contribute to the tory for the production of oriented strand saturating of domestic market with import-sub- board (OSB). The proposals for placement of stituting paper and wood-based panel products a modular housing factory, production of soft and to their exporting to Europe, and as for the roofing materials, insulation and furniture are trade balance of the Russian Federation they under study now. will also replace export of unprocessed timber An industrial park along with the cluster by highly competitive and highly efficient prod- approach (in the town of Sokol there are two in- ucts of deep processing. terrelated powerful clusters being formed – the In 2010, we’ll continue implementation of forest cluster and low-rise industrial wooden measures to support and develop small busi- housing cluster) are an effective mechanisms nesses. to increase investment activity and economic The emphasis of government support for development of the town – an increase in em- small business is shifted to providing subsidies ployment, wages, tax revenue in local budgets, to offset of the interest rate on credit. If in rise of resistance and competitiveness of indus- 2009 the maximum amount of subsidy was 400 trial production. thousand, but this year its size increases to 800 In this regard, future development of the thousand roubles. Under such circumstances, region focuses on the projects of large modern the borrower can get almost 12 million roubles. pulp and paper and other wood processing And besides, if last year we staked on pre- industries. serving jobs and creating new ones in small On the industrial site of JSC “Sokol Pulp business, this year the priority is to support and Paper Mill” a large country project “Vo- business in the innovation sector, in the manu- logda paper manufactory” is being prepared for facturing sector and in the services sector. implementing. Over the past 25 years there was Our focus for the near term will remain on no such project in Russia. It provides for issue of improving energy efficiency of the regional import-substituting high-quality coated print- economy. Namely, reducing the unit cost of ing papers (lightly coated and coated lined). production and use of energy resources due to At JSC “Sokol Woodworking Mill” (“Sokol- rationalization of their consumption, use of sky DOK”) there have launched the moderniza- tion projects connected with increasing capacity energy-efficient technologies and equipment, for the housing production (houses made of reducing the loss of production of fuel and laminated veneer lumber – up to 85,000 sq. m energy complex. per year; modular homes – up to 75,000 sq. m Behavioral patterns “do it as everybody does per year). it” that is virtually “do nothing to save power”, The modernization project at JSC “Sukhon- are prevalent so much because they deliver from sky PPM” (reconstruction of the existing paper both information retrieval and making one’s production and recovery of cellulose cooking) own decisions. has started. The volume of production – 150 In this regard, in the matters of energy sav- thousand tons of container board annually, 120 ing and increase in energy efficiency we need to tons of pulp for cooking annually. organize a strong relationship with the business And I can say with certainty that without community as well as to set the human factor in these projects the region will remain depending motion, providing information and educational on the results of the metallurgical and chemical support for our ongoing activities at all levels. industries. We have taken the first steps in this direction. It was their realization that will give a stimu- We have established Coordinating Coun- lus to the development of mechanical wood cil and the six working groups on the energy processing, as well as provide a multiplier effect saving projects, designated by the Ministry of on the development of related industries. Economic Development of the RF:

24 2 (10) 2010 Economical and social changes: facts, trends, forecast DEVELOPMENT STRATEGY L.G. Iogman

1. “Count, save and pay” – implies a mas- One of the projects implemented in our sive installation of meters and control electricity, region can become a United Nations Develop- which will enable to use energy economically ment Program and the Global Environment and pay less. Facility (UNDP/GEF) to improve the energy 2. “New World” – provides for the re- efficiency of buildings in the North-West Russia. placement of incandescent light bulbs with Based on the preliminary agreement, there more energy-efficient lighting devices and has determined an experimental ground of the development of national production in the project – low-rise buildings in the village this area. Nifantovo, Sheksna district in area of 50 hec- 3. “Energy efficient quarter” – the mod- tares with the use of new construction energy ernization of entire neighborhoods and towns efficient technologies. and replication of their experience throughout Co-financing of UNDP/GEF project in the the country in future period. period from 2011 to 2015 from the region within 4. “Energy-efficient social sector” – project developing long-term target program “Energy aims at creating, i.e. the use of energy efficient saving in the Vologda region” is planned in the technologies in public institutions, primarily in amount of 120 million roubles (including op- clinics, schools and hospitals. portunities for profitable part of the regional 5. “Low energy complex” – includes the budget for the financial year). production and introduction of energy efficient Funds from the regional budget will be equipment for the local power sector (this is directed at infrastructure development in the the replacement of inefficient old technologies design and construction of energy-efficient with new heating small objects, using the gas district in the settlement of Nifantovo. turbines). In general, except for the negative effects any 6. “Innovative Energy Sector” – the im- crisis had some positive moments. The so-called plementation of breakthrough projects related “natural selection” takes place on the economic to superconductivity, as well as to the use of market. Only the most viable companies with biofuels. strong policy management are afloat. Uncom- And we understand that only a consist- petitive companies leave the market. In addition, ent and purposeful work can lead to concrete a general economic recovery takes place, and results: our domestic producers move to the forefront. • more efficient use of energy resources; In conclusion, I’d like to note that the crisis • development of energy saving in the mu- sweeps the worst participants out of the market nicipal sector; as well as it allows the average participants to • reducing the negative impact of energy improve themselves and the best ones to take on the environment; higher position and the latter is much more • creating conditions for attracting in- important. The crisis is almost inevitably fol- vestment in order to introduce energy-saving lowed by growth: we all become more cautious, technologies in the region. smarter and more economical.

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