Investment activity in Russian regions under sanctions and restrictions

Starovoitov Vladimir Gavrilovich ORCID: 0000-0002-7595-6379 Doctor of Economics Chief Researcher, Institute of Economic Policy and Problems of Economic Security, Financial University under the Government of the Russian Federation 125167, Russia, Moscow, Leningradsky Ave. 49/2 vladstar1953@yahoo.com Other publications by this author     Krupnov Yurii Aleksandrovich ORCID: 0000-0002-9524-3747 Doctor of Economics Leading Researcher, Institute of Economic Policy and Economic Security, Financial University under the Government of the Russian Federation (Financial University) 125167, Russia, Moscow, 49/2 Leningradsky Ave. yukrupnov@mail.ru

Lapenkova Natalia Vladimirovna ORCID: 0000-0003-1644-4338 Junior Researcher, Institute of Economic Policy and Economic Security, Financial University under the Government of the Russian Federation (Financial University) 125167, Russia, Moscow, Leningradsky Ave. 49/2 ms.nvla@mail.ru

Introduction

According to the global sanctions tracking database Castellum.ai , after February 24, 2022, 15,159 new sanctions restrictions were imposed on the Russian Federation (data as of September 18, 2023).

In March 2022, the leading international rating agencies Standard&Poors, Fitch, Moody's downgraded Russia's credit rating from "stable outlook" to "default is inevitable". This rating largely determines the economic and investment prospects of the country.

The imposition of sanctions and the downgrade of the credit rating led to a loss of interest of private investors in the Russian market ^[1].

To date, in accordance with Article 65 of the Constitution of the Russian Federation, 89 subjects of the Russian Federation are part of Russia. These subjects of the Russian Federation consist of more than 20 thousand municipalities.

Currently, in connection with the implementation of Decrees of the President of the Russian Federation (Decree of the President of the Russian Federation dated May 7, 2018 No. 204 "On National Goals and Strategic Objectives of the Development of the Russian Federation for the period up to 2024"; Decree of the President of the Russian Federation dated July 21, 2020 No. 474 "On National Development Goals of the Russian Federation for the period until 2030"), special attention is paid to the issues of preserving the population and improving the quality of life of people, therefore, researchers in the field of economic security are paying more and more attention to the regional and municipal levels.

It is at this level that the interaction of regional (state) and municipal management is carried out, while there is a rational distribution of functions and powers and optimization of management. The difference between municipal economic security and other levels of economic security is contained in its objective function – the protection of the socio-economic interests of the population, since the subjects of municipal administration solve issues related to ensuring the life of the local community.

Economic security at the level of local self-government is closest to the local community and a specific person, only at this level can economic security as a whole be assessed (Leukhina V.I. Economic security of municipalities: the essence, factors and methodology for assessing the state of economic security // Humanitarian Scientific Research. 2021. No. 1 [Electronic resource]. URL: https://human.snauka.ru/2021/01/38792 (accessed: 02.08.2022).

In accordance with the National Security Strategy, the achievement of the goals of ensuring economic security at all levels, including municipal, is carried out largely due to the increase and acceleration of the inflow of investments into fixed assets, stimulating the use of internal and external sources of investment ^[2] (Decree of the President of the Russian Federation No. 400 dated 02.07.2021 "On the National Security Strategy of the Russian Federation Federation" Article 63, Article 67 (4)).

Unfortunately, in recent years, due to the sanctions restrictions imposed by many foreign countries on Russia, the inflow of foreign direct investment into Russian regions and municipalities has significantly decreased ^{[3, 4]}.

The article discusses the issues of activating the process of attracting investments to Russian regions and municipalities and strengthening their economic security.

The analysis of existing problems is carried out, practical examples of attracting foreign and domestic investments are given, recommendations are made to regional and municipal authorities to improve the investment climate, identify sources of investment, and build partnerships with potential investors in modern conditions. This determines the relevance of this article.

It should be noted that since the beginning of the 90s of the last century, a significant amount of research has been carried out in the country to ensure economic security at the federal, regional, municipal and sectoral levels.

The issues of regional and municipal socio-economic development and ensuring economic security are quite widely covered in the publications of V.N. Leksin ^[5], J.A. Mingaleva ^[6], E.S.Mityakov ^{[7, 8]}, S.N. Mityakov ^[9], S.N. Silvestrov ^[10] and others. 

The specifics of the impact of investment activity on the economic security of the Russian Federation, its regions and municipalities under sanctions restrictions are considered in the works of O.A. Bulavko ^[11], I.P. Glazyrina ^[12], O.A. Gorbunova ^[13], S.V. Kazantsev ^{[14, 15]}, M.N. Kozin ^{[16, 17]}, T.V. Pluzhnikova ^[18], L.V. Strelkova ^[19].

About investments as a factor of ensuring economic security

In the modern economic policy of Russia, the most urgent problems are related to stimulating economic growth and ensuring economic security, as well as creating conditions for the development of the social sphere. Investments as an economic category play an important role in the national economy. In fact, they are the basis for the development and modernization of production. The state of affairs in the economy can be judged very confidently by the nature of the processes taking place in the investment sphere. It is an indicator indicating the general state of affairs within the country, the size of the gross domestic product, the attractiveness of mutually beneficial cooperation with other states. With investments, new technologies and modern management methods are being introduced, equipment is being updated, attractive jobs are being created, the tax base and revenue parts of budgets are increasing.

The determining role of investments in economic growth is recognized by most scientists of various economic schools ^[20].

The importance of investments in the Russian economy is indicated in the fundamental documents of strategic planning.

Thus, the National Security Strategy of the Russian Federation in paragraph 63 states the need to implement large-scale investment and innovation programs and projects that should contribute to the consolidation of scientific, technical, production and resource potential of Russia, saturation of the domestic market with Russian-made goods and the emergence of new advanced scientific competencies create the basis for long-term economic development of the Russian Federation and further strengthening national security/

In the Strategy of Economic Security of the Russian Federation for the period up to 2030, paragraph 12 refers to the main challenges and threats to economic security - insufficient investment in the real sector of the economy due to the unfavorable investment climate, high business costs, excessive administrative barriers, ineffective protection of property rights.

Paragraph 16 (2) sets out the task of improving the investment climate, increasing the attractiveness of the Russian jurisdiction for entrepreneurial activity.

In paragraph 27, one of the main indicators of the state of economic security is the Indicator - the share of investments in fixed assets in gross domestic product.

The relationship between the main macroeconomic indicators of the volume of investments in fixed assets, GDP and the Industrial Production Index (hereinafter IPI) is clearly visible in Figure 1, which shows the dynamics of the main macroeconomic indicators in the Russian Federation for the period 2010-2022 (in comparable prices as a percentage of the previous year).

Figure 1 - Dynamics of the main macroeconomic indicators (in comparable prices as a percentage of the previous year)

Source: [Finance of Russia. 2022: Stat.sat./ Rosstat. - M., 2022. - 392 p. [Electronic resource] URL: https://rosstat.gov.ru/storage/mediabank/Finans_2022.pdf (date of application: 22.09.2023); Socio-economic situation of Russia: January 2023 // Federal State Statistics Service (Rosstat), Moscow. 2023 [Electronic resource] URL: https://rosstat.gov.ru/storage/mediabank/osn-01-2023.pdf (accessed: 09/22/2023)]

The graph shows that a reduction in fixed capital investments (2010-2015, 2018-2022) leads to a drop in GDP and PPI, respectively, an increase in fixed capital investments (2015-2018) leads to an increase in GDP and PPI.

The importance of investments in the activities of local self-government bodies is indicated by the fact that the volume of investments in fixed assets (with the exception of budgetary funds) per 1 resident (rubles) is one of the main indicators for assessing the effectiveness of local self-government bodies (Decree of the Government of the Russian Federation No. 1317 of 17.12.2012 (ed. of 30.06.2021) "On measures on the implementation of the Decree of the President of the Russian Federation dated April 28, 2008 No. 607 "On evaluating the effectiveness of local self-government bodies of municipal, urban districts and municipal districts" and subparagraph "and" of paragraph 2 of the Decree of the President of the Russian Federation dated May 7, 2012 No. 601 "On the main directions of improving the system of public administration").

Regional and municipal investment standards are being implemented in Russian regions and municipalities. Their task is to support the investor at all stages of investment activity.

Thus, at the level of local self-government, the introduction of the municipal investment standard provides comprehensive support to potential investors in the issues of prompt selection of land plots and their transfer to the required category, registration of an enterprise, obtaining a construction permit and territorial planning, cadastral registration of land plots and real estate objects, connection to energy, heat, gas andwater supply and sanitation, construction of investment sites, technology parks, etc.

Practical experience in attracting foreign and domestic investments in municipal education

As an example, let's consider the experience of one of the municipalities of the Vladimir region - the Kirzhachsky district Municipality, which has been actively engaged in attracting investments to its territory for more than 20 years. This municipality is located in the western part of the Vladimir region, the population is 38,470 people (2021), the area of the district is 1,135 sq. km.

In 2000, it became one of the leaders in Russia in developing and implementing a Strategic plan for its socio-economic development. Scientific support for the development of the first Strategic Plan for the socio-economic Development of the Kirzhachsky district was carried out by a group of scientists of the Russian Academy of Public Administration under the President of the Russian Federation.

In the Strategic Plan, a significant place was given to the issues of analysis, evaluation and proposals for the use of the resources available to the municipality for potential investors. Recommendations have been developed to improve the investment climate in the municipality, to improve and use territorial marketing technologies.

It should be noted that the municipality is currently implementing the third Strategic Development Plan.

Largely due to the implementation of the Strategic Development Plans of the Kirzhachsky district, as well as the purposeful work to attract investment, several major investment projects have been implemented in the municipality.

1. The famous Austrian company Wienerberger, the world leader in the production of ceramic bricks and ceramic tiles, has built the largest brick factory in Europe.

The enterprise was built next to a "unique" deposit of brick and tile raw materials with a volume of 350 million cubic meters.

2. The largest financial and industrial group in Turkey, Koc Holding, has implemented a large-scale investment project - the construction of a factory for the production of household appliances "BEKO" and a logistics center of the all-Russian level.

3. The well-known Swedish concern "TERRACO" has built a factory that produces high-quality building finishing materials.

4. The DOKE Group of Companies has built a plant for the production of flexible bitumen shingles and roofing roll materials equipped with Machine Solution Providers Inc (USA) and Boato International (Italy).

5. Moscow JSC Scientific and Production Association "Science" has carried out the construction of a new production and testing complex for the manufacture of unique units of life support systems for aviation and space technology.

6. The State Corporation "Russian Technologies" has built Parachute Plant No. 1 and launched the production of parachute systems for various purposes.

7. Rusklimat Trade and Production Holding has created the largest Industrial Technopark of engineering, climate systems and electronics in Russia, IXEL, which brings together the main manufacturers of climate, heat and ventilation equipment (9 residents in total). The Federal Distribution Center (logistics center) of class "A" has been put into operation.

 The Federal Distribution Center "Rusklimat" provides residents of the industrial technopark "IKSEl" with a full cycle of transport and logistics services and allows them to free up their production areas by placing products in their own warehouses; the center also contributes to the accelerated entry of residents' products into the market, providing residents with industrial products and technologies.

The relationship between the dynamics of the volume of shipped goods of own production of economic facilities located on the territory of the municipality "Kirzhachsky district" and the dynamics of investments in fixed assets are shown in Figure 2.

Figure 2 - Dynamics of the main macroeconomic indicators of the municipality "Kirzhachsky district" in 2005-2022.

Source: [Official Internet portal of the Administration of the Kirzhachsky district of the Vladimir region [Electronic resource] URL: http://www.kirzhach.su/econom /?base=32 (accessed 29.09.2023)]  

Figure 2 shows that the increase in investments in the implementation of investment projects for the construction and launch of large Winerberger and Beko plants in 2003-2007 led to a significant increase in production volumes in the municipality (by 3 times). We observe the same phenomena in 2014-2016 when launching and increasing production volumes at the DOCKE plant, as well as in 2019-2021 in connection with the expansion of production of the Industrial Technopark of engineering, climate systems and electronics "IXEL".

In general, over the period 2000-2022, foreign and domestic investments worth more than 24 billion rubles were attracted to the municipality, which allowed for a 30-fold increase in annual industrial production. The taxable base of the municipality has significantly increased, revenues to the local budget have increased. For many years, the percentage of own income in the consolidated budget of the Kirzhachsky district has been one of the highest in the region (from 50 to 80%), that is, it is characterized by a high level of "budget self-sufficiency".  

With the arrival of investments, more than 3,500 modern, attractive jobs have been created at newly built enterprises. There is practically no unemployment in the municipality (see Table 1 (as of 01.04.2023)), currently the owners of new enterprises, in addition to residents of the Kirzhachsky district, employ employees from other municipalities of the region (delivery is carried out by official transport).

Table 1 – Unemployment rate in the municipality of Kirzhachsky district in 2014-2022

Source: [Official Internet portal of the Administration of the Kirzhachsky district of the Vladimir region [Electronic resource] URL: http://www.kirzhach.su/econom /?base=32 (accessed 29.09.2023)]

Investment activity in conditions of sanctions restrictions

As practice shows, with the introduction of sanctions restrictions against the Russian Federation, the volume of investments at the federal, regional and municipal levels is decreasing (see Figure 1). In 2022, due to the adoption of sanctions by the West, in addition to a sharp decrease in the inflow of investments into the country, the process of curtailing the activities of many Western companies on the territory of the Russian Federation began ^{[21, 22]}.

At the same time, a number of large investors, comparing their losses from the imposed sanctions, as well as current and future benefits from doing business, make decisions about continuing their work in Russia ^[23].

This situation is typical for the municipality of Kirzhachsky district. Next, we will consider in more detail the reasons for such trends in the municipality.

 The Austrian company Wienerberger has built its plant next to a "unique" deposit of brick and tile raw materials. According to the calculations of the company's specialists, with a huge annual output of 340 million pieces of ceramic bricks, the reserves of raw materials will be enough for 200 years of uninterrupted operation of this plant. Therefore, the company is not only not leaving Russia, but is currently expanding its production facilities.

Thus, municipalities should know their natural resources well, actively offer them for use to a potential investor, ensuring long-term business for the manufacturer on the territory of the municipality.

Since the launch of the company, the Turkish company BEKO has been constantly investing in the development of its own production, improving the logistics of its business. So, a large logistics center has recently been built next to the plant, where products manufactured at eight plants of this company located in Turkey, Europe and Russia arrive, and are already delivered to the consumer from this center. In recent years, despite the sanctions restrictions, the company has been steadily operating in a three-shift mode and has been one of the best taxpayers in the Vladimir region for many years (TOP 30 largest taxpayer companies in the Vladimir region // Regional socio-political newspaper "Vladimirskie Vedomosti" [Electronic resource] URL: https://vedom.ru/news/2021/03/27/46359-top-10-krupnejshih-kompanij-nalogoplatelschikov-vladimirskoj-oblasti (accessed: 08/22/2023)). In 2022, the Turkish company Archelik, which owns the BEKO brand, bought from the American company Whirlpool Corporation the Indesit and Hotpoint home appliance factories located in Lipetsk and significantly expanded its share in the home appliance market in Russia.

This allows us to conclude that it is advisable to attract investors from countries that have long-standing, stable, mutually beneficial economic ties with the Russian Federation and are ready to work in Russia despite sanctions.

It should be noted that, since 2014, there has been a significant increase in investment projects based on the use of domestic capital in the municipality of Kirzhachsky district.

Such investment projects include the construction of a flexible tile factory by DOCKE, as well as the opening of an Industrial Technopark of engineering, climate systems and electronics "IXEL".

In addition, in recent years, a trend has emerged among domestic investors to move their production from large cities to municipalities in which favorable conditions have been created for accepting investments and doing business. These processes are typical for our two capitals of Moscow, St. Petersburg, as well as regions with the largest cities (millionaires) - Nizhny Novgorod, Novosibirsk, Perm, Krasnodar, Voronezh, etc. For the municipality of Kirzhachsky district, this phenomenon manifested itself at the launch of production at the above–mentioned JSC NPO Nauka and Parachute Plant No. 1 of the Rostechnologies Group after their relocation from Moscow.

As a rule, such a move is associated with high costs of enterprises for the lease and purchase of land plots, an increased salary level for their employees in large cities, etc.

In 2013-2016, on the basis of the property complex of the former Avtosvet plant, the IKSEl Technopark was formed and launched, whose residents are the leaders of the Russian climate market. Among them: Industrial group Royal Thermo; Production association VentEngMach; LLC "Thermocomponent"; LLC "Shaft Technology"; Production branch of "Izhevsk Plant of thermal equipment", etc. - there are 9 companies in total.       

In December 2022, the Chairman of the Government of the Russian Federation Mikhail Mishustin signed a decree on the creation of a special economic zone (SEZ) "Vladimir" of an industrial-production type. It will include territories in the Kirzhachsky and Alexandrovsky districts of the Vladimir region with a total area of 143.47 hectares. The fundamental structure of the Special Economic Zone being created is the Technopark "IXEL".

13 companies are ready to become residents of the SEZ "Vladimir". Investors plan to open production facilities in the field of construction, household and climate technology, industrial enterprises. At the same time, the announced investment projects are aimed at import substitution and the development of a universal component base for enterprises of the Vladimir region. At the first stage, the volume of investments will amount to 18.8 billion rubles, and by 2031 they will exceed 30.87 billion rubles. The SEZ will create about 6 thousand new jobs in the region.

The emergence of a special economic zone in the Vladimir region is new opportunities for the entire region: the development of its industrial potential and various business areas, improving infrastructure and the quality of people's lives. These are new jobs and an increase in tax revenues to budgets of all levels. And for enterprises that will receive the status of residents of the SEZ will give the opportunity to receive special preferences – measures of state support and tax benefits. SEZ "Vladimir" is an important step in the economic development of the municipality of Kirzhachsky district and the Vladimir region.

Conclusions and recommendations

Currently, in connection with the implementation of the Decrees of the President of the Russian Federation defining the national development goals of the country, special attention is paid to the issues of preserving the population and improving the quality of life of people, therefore, researchers in the field of economic security are paying more and more attention to the regional and municipal levels.

The research results show a close relationship between the volume of investments in fixed assets and the index of industrial production, i.e. the indicator on which economic growth and economic security of an economic entity, municipality, region, country directly depend.

In order to enhance the attraction of investments in the conditions of sanctions restrictions, regional and municipal authorities are recommended to ensure:

- Development and implementation of Strategic Development Plans for municipalities and regions, as well as the introduction and implementation of regional and municipal investment standards;

- formation of an attractive regulatory framework for investors in the regions and municipalities, taking into account the sanctions regime;

? identification and use of "unique" resources necessary for conducting and developing a long-term highly profitable business;

? Design and engineering arrangement of investment sites;

? creation of conditions for the reception of modern production facilities on the territory of municipalities and regions during the relocation of industrial enterprises from large cities;

Preferred choice of investors among representatives of countries with long-term, stable mutually beneficial economic ties with the Russian Federation ("friendly" countries), as well as representatives of domestic businesses moving their capital from foreign offshore zones to the Russian Federation;

- formation of special economic zones in regions and municipalities with favorable conditions for conducting and developing business.

Thus, under the conditions of sanctions restrictions, Russian municipalities and regions should actively deal with issues of increasing their investment attractiveness, arrangement of investment sites, territories of advanced development, Technoparks, Technopolises, industrial and investment clusters, SEZs, etc.

As a rule, such Russian municipalities and regions successfully address issues of ensuring their economic security and socio-economic development.

You can simply select and copy link from below text field.