Irkutsk Economy (Financial Times Survey)

FT.com Survey - RUSSIA: Regions- IRKUTSK REGION
Financial Times; April 9, 2001

Irkutsk Region:
Industrial Output in the area is recovering, but has some way to go
by Stefan Wagstyl

From the air, the snow-covered forests of the Irkutsk region in Siberia appear as great wastes of whiteness dotted with dark islands of human settlement.

Among these islands, the oldest and largest is the regional capital of Irkutsk, with a population of 600,000 and a history dating back to the 18th century when it was the last outpost of urban civilisation for explorers heading into the wilderness. Many other human settlements are small - a few houses strung along a muddy road.

The region owes much to the Trans-Siberian railway, which brings in food and other necessities and takes out the region's principal exports, including timber, chemicals and metals. Equally important is the Angara, the only river flowing out of Lake Baikal, which has since the 1950s powered one of the world's largest hydroelectric power schemes. Electricity, as much as forests and minerals, is the foundation of the modern economy of Irkutsk.

Built in the heyday of Soviet central planning, the region's aluminium smelters, chemicals works, metal mines, timber mills and military factories suffered with the collapse of Communism. This was compounded by the impact of the 1998 financial crisis. But in the past two years, like much of the rest of Russia, the Irkutsk region has made a rapid recovery. After a 9 per cent increase last year, industrial production is 11 per cent above 1997 levels.

But output is still some 40 per cent below Soviet-era levels. Irkutskenergo, the regional power company, last year generated 55bn kilowatt hours of electricity, compared with 72bn in 1990. "In the past three years we have led the region out of crisis," says Nikolai Melnik, the region's deputy governor.

The recovery has come just in time for Mr Melnik and his boss, the regional governor, Boris Govorin, who faces re-election in June. Wages are high by Russian standards, averaging 4,000 roubles per month (about Dollars 130), but food prices are also high because much has to be imported from European Russia and beyond. The despair that has engulfed many Russians is also present in Irkutsk among its alcoholics, drug addicts, Aids victims and broken families. Mr Melnik says much remains to be done to improve living conditions. "I'm an engineer and I don't believe in miracles. Economic recovery is very difficult. We have to work at it non-stop."

The recovery is uneven. The big winner of the past decade has been the aluminium industry, which accounts for about a fifth of the local economy but two-thirds of its export earnings. The industry has seen a fierce and sometimes murderous battle for control, which has led to the emergence of two big groups - Russian Aluminium (Rusal), the world's second largest producer, and Siberian Urals Aluminium (Sual). Rusal controls the region's biggest smelter at Bratsk, in the north, and Sual, the Irkutsk smelter.

The aluminium companies are aggressively expanding their local and national influence, most controversially with a bid for management control of Irkutskenergo, which had yet to resolved at the time of writing.

Evgeny Ivanov, Rusal's deputy chief executive, denies there will be any conflict of interest in an aluminium company controlling its power supplier. Rusal's investment would support regional economic development. Regional authorities should now focus on securing corporate investment instead of playing their traditional game over winning public funds from Moscow. "It's better to fight for a share of profits for investment," Mr Ivanov says.

Other Irkutsk region industries suffered badly in the fall of Communism but are now recovering sharply. Output has risen 25 per cent in two years in forest products, 34 per cent in engineering and 38 per cent in chemicals. Value-added industries are also increasing. In forest products, for example, where output fell from 40m cubic metres in Soviet times to a low of 7m, the figure rose last year to 18m, of which only 3m left the region unprocessed. Mr Melnik says: "The next step is to raise the level of processing (from sawn timber and cellulose) to finished products such as plywood, paper and cardboard."

The regional authorities also have great hopes for developing new projects. The biggest of these is the Kovykta gas deposit, in which BP Amoco, the international group, has a leading interest via a 30.8 per cent stake in Rusia, the development group. BP estimates that the investments could total Dollars 10bn, including Dollars 4bn for the field and Dollars 6bn for a 3,000-3,500 kilometre pipeline to China and South Korea, the main potential customers. However, final decisions on the project are still some time away.

Second only to Kovykta is the Sukhoi Log gold prospect, where geologists proved reserves of 1,100 tonnes over 25 years ago but which is still awaiting development. The Irkutsk region, like much of the rest of Siberia, produces significant amounts of alluvial gold, panned from rivers. But mines are few and far between. The regional authorities have been arguing with the federal government about which companies might be invited to tender for the Dollars 1bn-plus project. Irkutsk wants to encourage international groups such as Placer Dome and Barrick Resources of Canada to participate. Moscow has favoured limiting bidding to Russian companies. The dispute highlights the key role of politics in decisions about such big investments where the pay-back period can be longer than 10 years.

Vladimir Yorsk, deputy chief executive of Sibexpo Centre, an Irkutsk investment promotion company, says: "Political stability is critical to long-term projects such as Sukhoi Log."

As well as natural resources, the region seeks economic expansion in manufacturing and in tourism. Irkutsk city is home to one of Russia's biggest military aircraft plants. Producing the Sukhoi jet, which has a world-class reputation for manouverability, it has fared better than most defence-related plants, not least thanks to exports to India and other countries.

Other manufacturing sites have fared less well, such as the Radion radio factory, also in Irkutsk, where production collapsed in the face of imports from east Asian consumer electronics companies.

Konstantin Shavrin, president of the east Siberian chamber of commerce and industry in Irkutsk, says smaller companies are also contributing to the economy, notably in services, such as restaurants and shops, and in construction.

But, like the regional authorities, he believes the future lies in the big investment schemes. He wants to see the implementation of better transport links to east Asia, the Kovykta gas project and one or two big tourist schemes such as a ski resort on the shores of Lake Baikal. "If such projects are developed, I'll vote for Putin for the rest of my life."

by Stefan Wagstyl
Financial Times; Apr 9, 2001