Summary

The Russian Investment Forum 2018 Summary

Forum programme public discussions summary*

The Russian economy has stabilized, it has become less dependent on external shocks and raw material prices, Prime Minister of the Russian Federation Dmitry Medvedev stated at the Russian Investment Forum in Sochi (RIF-2018). The financial system is stable, the GDP has shown positive dynamics, inflation rate is low and does not exceed standard scope, the pricing policy is transparent and predictable, the budget is balanced, and we even started accumulation of funds in the sovereign welfare fund. Now our primary goal is to enable development of the economy. This is where state centre and all Federal regions should act together. Discussions at the Forum have covered three major components of this effort: stimulating business development, improving the quality of life and management enhancement.


Industrial development

The administration of most regions regards investments in industry as the main source of economic growth.

  • According to the Strategy Partners Group the construction of a machine engineering plant is capable of adding 10 to 15% to the GDP of a region in just a year or two.

However, the Forum participants noted that investors’ requirements are growing. It is necessary to develop comprehensive strategies for the development of regions, and to articulate transparent terms for companies that build their business there.

The Forum participants agreed that one of the major pre-requisites for successful development of a region is searching and defining it's competitive advantages, its specialization.


ISSUES

The inconsistency in granting state support leads to unnecessary competition between industries and regions.

Regional protectionism also creates problems: often the regional authorities limit state procurement and investment agreements demanding full production cycle for the region.


SOLUTIONS

Spacial Development Strategy 2025 will assist regions in identifying their competitive advantages. The document should be finalized later this year, Dmitry Medvedev stated. The Strategy will define the economic specialization of each region of the Russian Federation, prioritize their development, offer reference points for administrations and businesses in making investment decisions, and solve the problem of excessive competition.

However, the Forum participants noted that formalized specialization of the regions requires separate discussion. On one hand, the endorsement of historically established industries is important and needed, on the other – strict regulation can also lead to the restricted development and competition.

Clustering is a promising mechanism, for industry and innovation alike.

  • Ministry of Industry and Trade sets 2.6 billion roubles until 2020 for cluster creation and about 9 billion roubles for the development of sites and cost recovery.

According to the Ministry of Economic Development clusters hold a significant number of viable innovative businesses, which allows support from developmental institutions.

  • Dmitry Medvedev reported on the approval of the Projects Financing Factory. Initially six projects with 180 billion investment roubles were approved.

  • The program of the Ministry of Economic Development for boosting labour productivity has been launched in 6 regions, 84 enterprises were pre-selected, and 14 companies are already working within the program. A Federal Competence Centre has been established, and IT platform has been launched providing each enterprise with a chance to comprehensively analyse its progress. Pilot production can receive a loan from the Industrial Development Fund at 1% interest rate.

  • Vnesheconombank sees the state objective in creating a market for private equity and venture funds for innovative projects.

  • Representatives of the Ministry of Economic Development reported that they reached an agreement with the Central Bank to amend the legislation so the later would allow pension funds to invest in innovative projects.

The Forum participants believe in inter-industrial, inter-institutional clusters with a complete production cycle.

  • In the latter half of 2018 the Ministry of Industry and Trade intends to propose a unified algorithm for cluster establishment as well as to create a common organizational and management structure. These measures should help avoid the situation when each agency creates and supports its own clusters exclusively.

In addition, it is proposed to expand the toolkit for innovative clusters support.

  • The Ministry of Economic Development plans to encourage development of scientific and technological centres around major research universities and organizations.

  • The Ministry of Industry and Trade considers the option of extending its support to private techno parks.

  • The State Duma drafts the project titled Growth Drives where it plans to identify 15-20 upcoming trends and investigate support mechanisms for them.

The cluster mechanism can give impetus to the development of agriculture. The program of the linen complex renovation has been mentioned as an example: engineering of production chain from cultivating stock to highly processed goods should make the industry profitable. This will contribute to the economic growth of the Nonblack Soil regions.

Expansion of interregional and interstate cooperation is thought to be yet another way to combat protectionism.

  • Unified Customs Code was launched in EEU. According to the Eurasian Economic Commission more than 3000 industrial enterprises have already declared their willingness to cooperate with the countries of the Union. Subcontracting Exchange has been also established.

Small and medium size businesses can play a significant role in the regional development. According to the Ministry of Economic Development the sector grows by about 3% per year with micro businesses contributing a major portion of it. Expansion and classification of support measures for SMEs is on the way.

  • SME-bank proposes replicating investment hoist, which combines the efforts of the REC, RDIF and PDF to support the production and export of goods, to the regions. Funding for the project has already reached 21 billion roubles in 2017.

  • The Ministry of Economic Development has formed a three-tier hierarchy of projects; priority projects for the development of small and medium-sized businesses have already been approved.

  • SME Corporation plans to allocate 2.5 billion roubles for start-ups support in 2018.

  • The Ministry of Economic Development intends to present a new service for entrepreneurs – a phone AI assistant – by the summer.

Market growth

The Forum participants gave special consideration to the measures that aim to drive up the demand for domestic products. First and foremost it should be goods quality improvement, facilitating access to foreign markets and promotion of Russian brands. Here the main role is assigned to federal agencies and developmental institutions.

  • Rosstandard has drafted a proposal to establish an interagency working group as part of the state commission to combat counterfeit, which will formulate an anti-infringement policy.

  • Roskachestvo with the support of the Ministry of Industry and Trade and with the participation of Rosstandart launches an information resource on available quality assurance business practices.

  • In 2017 REC registered a voluntary certification system Made in Russia and launched the electronic catalogue MadeinRussia.com where foreign partners can find contacts of any manufacturer, contact them directly or through unified REC system.

  • Roskachestvo provides REC with the information about manufacturers honoured with Russian quality seal so that the REC would promote them further in various markets.

  • Also, the Forum participants have talked about the need to refine the legislation: setting up Russian production process standards, improving subsidy assistance of export certification, etc.

  • Vnesheconombank proposes to establish a fund for projects ”acceleration” to foreign markets: to assist companies in search for partners.

  • Business spoke about the need to coordinate and promote Russian goods and services abroad in order to avoid competition between them in specific countries.

  • Legal support in brand security and intellectual rights protection is in high demand.


The development of e-commerce can significantly expand the market for Russian small and medium-sized businesses.

  • Pochta Rossii, Magnit and the VTB Group agreed to create an e-commerce ecosystem, which would consolidate sellers, buyers and service companies to market and deliver goods both in Russia and abroad. It is planned that the system will embrace over 80% of the country's population.

Conventions and trade shows are regarded as yet another tool for boosting investment appeal of the regions.

  • This tool allows regions to demonstrate their competitive advantages to investors and partners, and to offer unique ideas. The crucial component is sufficient project detailing level, accessibility of these projects for international investors.

  • Roscongress and newly created National Congress Bureau are of the highest value in the development of this domain. Specifically, the regions require a model of event or business tourism.

  • Congressional operations legislation is called for.

Tourism, including business tourism, can significantly contribute to the economy of the regions. The 2018 FIFA World Cup will help to unlock the potential: Rostourism expects about 1.5 million tourists from abroad.

  • Regions and business need to learn how to jointly create a tourist product for a variety of target audiences and promote it accordingly.

  • Business can also participate in the financing of personnel training for hospitality industry.

  • Representatives of the tourism industry themselves talk about the need to develop the transport infrastructure, incentives to create new tourist products, and about public private partnerships in the construction of facilities.

Developing human capital

Human capital is the major competitive strength, and cities are its centre.

  • According to the Centre for Strategic Research Foundation urbanization is one of the main drives of the country's economic development, and big cities are capable of yielding 5-7% growth annually.

The regions face the challenge to create an appealing environment for living.

  • Smart city as a comfortable and modern environment for living has become a key trend.

  • The development of human capital is also directly linked to the accessibility of housing and social infrastructure, such as health care and educational institutions, etc.


ISSUES

Major issues are lack of investments in the programs of regional and municipal development, out-dated infrastructure, low quality of public administration, shortage of qualified personnel, and low level of household income. All of the above bars shaping of demand for social innovations.

  • Wear of common utility infrastructure in some areas reaches 90%; many communities still lack access to broadband Internet, etc.


SOLUTIONS

The transition from building square meters to the synthesis of a comfortable urban environment and housing. Real estate programs and projects development, networking and best practices exchange systems.

  • Real estate development programs at the government level.

  • The new strategy 2020 for the development of the housing sector prepared by the Ministry of Construction takes a modern approach to the urban environment organization. One of the tools the Ministry of Construction of the Russian Federation utilises is tapping modern generic solutions for housing from the tenders with due consideration for energy efficiency and digital technologies.

  • The State has allocated over 18 billion roubles during the past 3 years through the Monocities Development Fund. More than 244 000 new jobs were created, 170 monicities completed all stages of the 5 Steps to Municipal Improvement program aimed to set up a comfortable urban environment, and state clinics got renovated in most monocities through the Monocities Integrated Development project.

  • The Agency for Strategic Initiatives (ASI) provides support to municipalities in implementing urban environment improvement projects.

Setting up an on-going interaction system between the government, business and society.

  • Educational programmes distribution to all municipalities in which public officials will learn how to seek investments and interact with public organizations.

  • Local development institutions establishment with assistance from the ASI and the Social Projects Support Fund. Those institutions would accumulate initiatives from the bottom up.

  • Community funds development that would accumulate resources of business, government and Diasporas for social investments and charity.

  • Several innovative educational centres for youth have been created within the 5 Steps to Municipal Improvement program. Authors of the programme propose those education centres become an integral part of it.

Development of charity, volunteering, social entrepreneurship, drawing elderly in the business environment, etc.

  • Social innovation centres have been established in 22 regions with the participation of the Ministry of Economic Development of the Russian Federation. Nine more centres will be set up in 2018.

  • Social Entrepreneurship Act has been prepared by the Ministry of Labour of the Russian Federation and should be submitted to the State Duma during the spring session. The Forum participants suggested adding provisions to stimulate family businesses, or amending SME Act along the same lines.

  • According to the Forum participants it is also necessary to investigate measures of social entrepreneurship support, to create special banking products for them, to engage business leaders in social projects endorsement. Development and promotion of mobile educational services for social entrepreneurs and small business owners is also needed.

  • It is essential to revise the attitude of the authorities towards philanthropists, so that they could see each other as partners and get involved in solving systemic problems together. A transparent regulatory framework would ensure the joint participation of business, private organizations, the state and volunteers in social projects.

Attracting investments to the social matters through active use of public private partnerships.

  • City-forming enterprises could take on the financing of the road reconstruction and housing construction programs.

  • According to the Ministry of Health regions are implementing 118 public private partnership projects, and have raised 65.5 billion of investment roubles.

Management development

Introduction of project management has been recognized as one of the most demanded moves, and this process has already been initiated in the regions.

According to the Ministry of Finance the regions have largely eliminated the risk of a debt crisis over the past two years, and debt reduction process has begun. Regional authorities are now more interested in developing their own revenue base.

The most enabling environment for the economic development is the stability of laws, the reduction of administrative pressure on business. Control and oversight reform should release entrepreneurs from excessive administrative pressure: the main indicator of the effective control should be violations prevention.

  • If the legislation is the prerogative of the federal authorities, then law enforcement belongs to the regions. Dmitry Medvedev noted that the regional leadership should coordinate the control and oversight reform.

ISSUES

According to both the federal centre and the regional governments one of the major issues is the contradiction between the powers and financial capacities of the regions of the Russian Federation. Mandated expenditures are in 1.5 excess over the available income. The current management system cannot resolve this situation and moreover reproduces it.

  • According to the Audit Chamber the number of deficient regions came up from 25 as of December 1, 2017 to 47 as of January 1, 2018 as a result of poor planning of regional budgets.

The shortage of innovative leaders and managers at the regional level leads to inconsistencies in infrastructure and social development programs, and hampers investment opportunities for the regions. The RIF participants summarized that Russian public service system is archaic, and does not fit project management approach.

There also are digitalization issues. The state fails to be the leader in this process, although it is a key innovation factor for Russia. One of the reasons for it is the intertwining powers and responsibilities of various state authorities with the continuing tendency to solve all the major issues in the federal centre. At the same time the current set up of the municipal bodies is not effective enough to accept more authority.


SOLUTIONS

The RIF participants believe that the principles of project management should be consolidated through law. The project management approach should become more integrated, and the state should promote the spread of best practices in this area.

The representatives of the regions suggest to tackle budget problems through implementing a simulation approach, alignment of all government tiers of authority, and the implementation of a transparent incentive scheme for the increased taxation. In their opinion tax federalism should be observed, including ending regional and local tax breaks from the federal centre.

The federal centre calls on the regions to increase their financial independence and to better control the initiative costs.

Leadership and management training plays an important role.

  • Governors and city mayors confirmed the high efficiency of training programs. The quality of projects – investment, developmental, and social – improves after leadership and management teams training, and the volume of investments grows with it.

  • The Forum participants noted the need for continuous professional development, as well as enrolment of municipal employees in educational programs. Compulsory education should be the subject to the allocation of any grants and subventions from the federal budget, and forums are the necessary platform for the best practices exchange.

Infrastructure development

Forum participants acknowledged that infrastructure quality is not just a crucial component of the Russian economic development but is the matter of state existence itself.

  • According to the Ministry of Transport one rouble invested in transport brings 5-6 roubles to the economy.

ISSUES

The main issue with the infrastructure development is the lack of funds, for both business and regions.

  • The transport industry needs at least 10-15 trillion roubles within the next 5 to 6 years as estimated by the Ministry of Transport. 1.8 trillion roubles has already been allocated in 2017 which comprises 2% of the GDP and over 11% of total investments in the economy.

Transport infrastructure is not the only one that regions lack. The business expansion is hindered by the underdeveloped banking system in rural areas, people do not have access to basic banking services, businesses are having difficulties collecting revenues, and tax proceeds are lowering.


SOLUTIONS

The Forum participants suggested that the infrastructure should be established for specific investors or projects.

  • The goal is the emergence of multiple economic centres of different scale, action points for business including medium and small businesses.

Funding can be increased through expansion of public and private partnerships, involvement of private pension funds, insurance companies, the development of concession mechanisms and infrastructure mortgages. The Infrastructure Development Fund may become the core element for such mortgages.

  • According to VTB such fund should be able to do both: co-finance projects and raise funds through issuing state obligation bonds. Such format would invite 8-10 roubles of investment per 1 rouble of state money.

Personal investments may also become the source of funds.

  • Dmitry Medvedev informed that he instructed the Ministry of Finance to explore the option of increasing the volume of federal loan bonds issue for physical entities from 30 billion roubles in 2017 to 100 billion roubles in 2018. The Prime Minister proposed to extend this practice through various regions of Russia, as it already exists in ten regions and even in one municipality.

Digitalization

The organizers and forum participants put an increased focus on the issues of digitalization, its implementation in all realms of the economy and state administration.

Dmitry Medvedev urged to digitize the interaction between business and the state. This would provide an opportunity to reduce the administrative burden on business, and to upgrade management at all the state levels.

  • The implementation of a cash registering digital system has already allowed for better tax administration and avoiding duplication, moving from reporting to direct access to source documents and information.

  • The Public Government within the next five years plans to provide business with a universal integrated digital window to interact with compliance monitoring authorities of all levels.

  • Pension Fund of Russia strongly supports computerization of its work. Among the main initiatives are the digitization of pension files and introduction of artificial intelligence pension calculation, so that requests are processed not by a machine rather than a fund officer.

  • Tatarstan is among the leaders of digitization. According to the regional authorities, 79% of the local population use electronic services at least once a year. With an average Russian indicator of 51.3% there are regions where is does not exceed 30%. The Forum participants emphasized that it is necessary to involve representatives of the regions in the discussion of the development of the digital economy issues to a regular basis.

Business is even less active in implementation of digital technologies. Major companies are the leaders here: Sberbank, Rosatom, and Rosneft. Still, gradually interest in digitization is growing.

The ability to work with big data creates new marketing opportunities.

  • Open assess to data sets accumulated in the ministries can provide substantial support to business; it would allow to study the dynamics of the market, consumer preferences, and identify open niches. The government is already working on it.

  • Small business representatives suggested to create an integrated export data centre on the basis of the Russian Export Centre.

Digital technologies create new opportunities for investments, especially for small and medium-sized enterprises.

  • According to the Ministry of Economic Development there are already several dozen crowd funding platforms in Russia that allow one to quickly find start-up investors. Better regulation of this realm would make the tool more attractive and safe for participants.

  • According to the discussion participants it is necessary to stimulate competition among digital market players, which would allow to significantly lower prices and avoid monopolism.

The Government plans to have digitalization regulatory base ready within the next two years.

The RIF participants agreed that it should be drafted together with the business community. The authorities should reduce bureaucratic costs and create convenient digital platforms, take into account various digital status of regions, and encourage IT industry development.

  • Before this summer the government plans to draft a so-called change management concept that would help upgrade the current legislation for an effective transition to digital economy.

  • The Ministry of Economic Development also proposed to draft and deliver a framework document for regulating digital economy at the level of the Eurasian Economic Union, as is the case in Europe.

The impact of the digitization of the economy on the labour market was also brought up. Experts stressed the growing
need for specialists with additional IT and Big Data skills and noted that
fears of manual labour being forced out of the economy and of mass layoffs are not justified.

* As covered by the General Media Partner TASS