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Foreign Investments
By January 1, 1999 the aggregate cumulative foreign capital in the republic’s economy
with taking into consideration of repaid credits from foreign organizations made up to 48,4
million US dollars.
If to look at the structure of foreign investments in the context of branches of industry one
may notice that the largest investments are allotted to the industrial sector (94% of all dollar
investments). Inside the industrial sector the overwhelming part of investments are assigned to the
forestry, wood-processing and pulp and paper industries (76,3%), which indirectly proves a good
outlook of investing in this branch of the industry, including from the side of foreign investors.
Nowadays, 134 enterprises with foreign investments operate in the republic where 4,5
thousand peoples work. From the viewpoint of the procedure of establishment and activity they
practically do not distinguish from purely Russian enterprises. therefore, there are reasons for
assumptions that a foreign investor sets up a foreign investment-based enterprise in the republic to
only obtain privileged, in comparison with Russian enterprises, conditions to conduct business.
When comparing the work of Russian and foreign investment-based enterprises, one may note
more stable and productive work of foreign investment-based enterprises. Their production rates
are higher than Russian average indexes, the technical equipment level of the production is also
higher. Of the total amount of investments into Karelia’s industry over the last three years, the
share of foreign investment-based enterprises adds up to 23,3%, and their proportion of the
production output in the Republic of Karelia amounts to 4,2%. So, in the recent years foreign
investment-based enterprises have become a considerable factor in the economy of the republic,
which to some extent keeps back the production drop.
Over the last years, the Republic of Karelia did not succeed to change the suspicious
attitude of foreign investors to the sphere of investment.
The lack of extensive attraction of foreign investments is, in the first place, a Russian-wide
problem. Political and financial instability, imperfect legislation and its frequent modification,
low personal security and high taxation make investment unattractive and hazardous. Meanwhile,
conditions for investing of foreign capital vary across Russia. There are objective conditions for
investment attractiveness of some regions of Russia. Ratings show that from the point of these
conditions Karelia does not belong to extra-attractive regions of Russia. Karelia does not have
capacious consumer and financial markets conditioned by high population number and density,
well-developed industrial sector and highly-development management like such regions of Russia
as Moscow, St. Petersburg, Nizhnii Novgorod region, Sverdlovsk region, Samara region and
Saratov region. The Republic of Karelia does not have such fuel and energy resources like
Tumen’ and Tom’ regions, Sakhalin, Republic of Tatarstan, Bashkortostan and the Republic of
Komi. Due to these and other objective reasons the republic can not pretend to get the role of one
of Financial and industrial centres in Russia. More than that, such centre as St. Petersburg will
always "pull over" investment and financial flows in the North-west of Russia. The capacity of
consumer and financial markets in the North-West of Russia (Archangel region, Republic of
Komi) is relatively low. Poorly developed transport infrastructure impedes effective use of transit
opportunities of the republic, between the Western Europe and the North of the European part of
Russia. Karelia, in regard to conditions of investment attractiveness, takes a place somewhere in
the middle of the Russia’s regions list.
There are also subjective reasons for investment unattractiveness of the republic of
Karelia, despite its cross-border locations. One of them is the absence of effectively working
investment legislation. Formally, the republic of Karelia has republican acts "State Guarantees
on Foreign Investments in the Republic of Karelia" #60-ZRK and "Investment Activity in the
Republic of Karelia" #289-ZRK. But these laws are not in force because of some subjective
reasons. In addition to this, refusal of the former Government from active investment policy and
support of projects pushed away some investors and created an image of an unfavorable region.
The republic lacks a reliable banking system which would be acceptable for servicing foreign
investments. Not enough attention is paid to forming information support to foreign investors.
Today, the republic lacks summarized and readable information about its investment potential.
At the level of enterprises, there are also serious obstacles for foreign investments. What
creates difficulties are debts of Karelian enterprises to different budgets and absence of
accessible mechanisms for their "freezing" or liquidation in case of drawing foreign investments.
Quite a low management level disables enterprises to seriously present to investors their
projects, which are formed in comprehensive feasibility reports or business plans because foreign
investors got used to work according to international standards in this sphere (standards of the
UNIDO). Non-regulated issues in the property sphere on enterprise’s property, land, etc. also
negatively influence investor’s wish to invest into the economy of the republic. Access to
resources and, above all, forest resources, if an investor is eager to operate in wood-processing
sector, and access to information needed for preliminary decision-making on investment
opportunities have much importance. So far, such opportunities are not created in the republic.
Foreign investments, along with domestic investments, including enterprise’s own
resources, are seen by the Government as one of the significant sources for restructuring the
republic’s economy.
The Government proceeds from the assumption that the problem of foreign investment
attraction depends, in the first place, on the Russian-wide conditions: general political and macro-
economic situation, on the federal legislation and taxation rates.
Attraction of foreign investments should not be considered as a self-driven process, in
particular under conditions of growing competition of Russian regions for foreign investments.
Plus to this, the issue of drawing foreign investments can not be detached from creating overall
conditions for investing, in the first place, for a domestic investor because the main guiding line
for foreign investors will be the reviving of the domestic investing process. And in this regard,
steps taken to removal of subjective factors bothering domestic investments will positively
influence the general investment climate in the Republic of Karelia, and on foreign investments.
Therefore, creating regional conditions to increase the investment attractiveness of
the Republic of Karelia will appear a key goal of the Government in the planning period.
On the one hand, implementation of such general economic tasks as development of the
transport, customs, banking and other technical infrastructure will contribute to reaching the goal.
On the other hand, quite specific tasks directly related to investments are put forward:
1) setting up a system of governmental support to individual projects connected with the coming
of large foreign investors to the Karelian market so that to help them adapt, to free from
extraordinary "care" by different control and supervision agencies and clear bureaucratic
obstacles in development of specific manufactures.
One of such pilot projects may become the idea of constructing a saw-mill producing high-
quality saw-timber on the base of an agreement concluded between the Republic’s Government
and "Stura-Enso" Finnish-Swedish company in July 1999;
2) making relevant amendments and alterations to the republican legislation, with keeping in
mind working out quite a clear and accurate system of providing preferences and guarantees to
foreign investors. Translation of legislative acts and norms into the English language;
3) provision of investors with information. It is expected to accumulate in a form convenient for
investors databanks on the investment potential of the republic, ideas and feasibility studies on
specific investment projects, incomplete construction objects, republic’s property, general
information on resources, etc.;
4) promotion of the idea of creating Kostomuksha free economic zone at federal level. The
proposed concept of creating a free economic zone will help make up the absence of the
Russian Federation legislation in this sphere. The Government hopes this project will meet
understanding and support from the Government of the Russian Federation.
The Government of Karelia will also encourage the study of opportunities for creating
local free economic zones in other cross-border areas of the republic and, in the first place, in
Sortavala town;
5) promotion to the establishing in the republic a reliable commercial bank, probably, with the
participation of foreign capital, able to deliver services in accordance with international
standards;
6) development of an action programme to create republic’s international image of a region with
favorable investment climate, including implementation of a number of advertising,
presentation and organizational actions;
7) organization of a Karelian-wide study aimed at exposure of factors decreasing investment
attractiveness rates of the republic (investment potential and investment risks) in rating of
Russia’s regions to be held by experts’ groups from leading economic editions of Russia.
8) Buildup of steady ties with different international financing institutions and potential strategic
investors of the republic;
9) Contribution to promotion of ready-made projects of Karelian enterprises to international
markets of investment resources.
The major mechanism for implementation of the goals and objectives, according to
Government’s estimation, will be the Republic of Karelia’s Inter-Sectoral Investment Committee
established by Resolution #188 of the Chair of the Government of the Republic of Karelia of
April 12, 1999. In addition to this, it is planned to develop a special programme for attracting both
domestic and foreign investments to the economy of the republic.
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