Yekaterinburg, the capital of the Ural federal district, recently played host to the Construction Equipment and Service 2002 international exhibition.

The exhibition, organized by the National Agency for Industrial Marketing with support from the Russian government, the Chamber of Trade and Industry, the Sverdlovsk Oblast and the Ural Federal District authorities, drew representatives of the Russian and foreign machine-building industries, as well as product sellers and consumers, to find solutions to their sector's challenges.

Although the Russian economy continues to grow and production is increasing, industries – such as electricity, machine-building and construction materials – that focus on domestic rather than export markets have seen their demand and output fall. Industrial production in general grew 4.9 percent overall in the first 8 months of 2002, compared to the same period in 2001.

But electricity production dropped 1.5 percent, and machine production increased only 2.8 percent.

In machine-building, metallurgical machine-building saw the most serious decline, operating at 68 percent of last year's level.

The machine-tool industry is operating at 85 percent and the tractor and agricultural equipment sector at 86 percent of last year's level. Both a drop in investment activity and the end of state leasing programs for farming equipment have contributed to an uninterrupted 15-month decline.

It was not always this way. The ruble's devaluation in Aug. 1998 led to a jump in growth among machine-building companies, as the demand for Russian-made goods increased.

But this growth peaked in early 2001 and then began to fall, continuing a slow but steady decline of 0.3-0.5 percent per month. Demand from agricultural and metals processing companies also dropped, and pressure from imports, especially of secondhand equipment, increased.

The Yekaterinburg International Machine-Building exhibition and the International Machine-Builders' Forum in late September addressed some of these pressing issues. More than 6,000 visitors browsed 100 examples of construction and repair equipment and over 200 company stands. Russian companies such as United Machine-Building Plants, the IKO Group, Uralvagonzavod, Cheboksary Aggregates Plant, Promtraktor and Pokrovskiye Filters joined Western companies including Komatsu, Dressta, Case, Lebherr, AtlasKopko, and Chevron Lubricants.

Bringing the two sides together allowed the foreign companies to demonstrate interest in cooperating with Russian companies. Russian companies are coming under increasing pressure to match imported technology, while Western companies' solid financial backing allows them to offer more competitive prices.

"At the moment, competition in the machine-building sector is on the increase in all markets, including Russia," said Jerzy Dziura, the director of Dressta's Russian office. "This is why it's so important to become part of these global trends of international division of labor and production cooperation. This will guarantee more effective production and investment, and higher production quality that satisfies a client's demands."

Consumer-producer relations, and the introduction of quality guarantees and service not common in Russia, was another popular topic. Western firms say they are hampered in developing their services by large distances, a lack of reliable local partners, and their reluctance to extend their own networks and open service centers.

Russian companies, meanwhile, are more interested in selling technology than in long-term service.

"We must join forces and break out of the stereotypes on how this business is run," said Alexander Denisov, the president of the National Agency for Industrial Marketing.

"The producer's aim should not simply be to sell the technology, but to provide the consumer with a whole range of maintenance and repair services, adapt to the market's demands, and abide by its laws."

This opinion was shared by Valery Stolbov, the director of the IKO Group, Russia's biggest construction technology repair and maintenance company. "The problem that Russian companies and some Western companies have is not that their prices are too high, but that they have no clear principles for guarantee and post-guarantee servicing," Stolbov said.

"It often turns out to be more advantageous to buy Western technology, especially secondhand, because the manufacturer will provide qualified help and servicing throughout a product's service life. Our companies, on the other hand, are very unwilling to provide such services, and are in no hurry to cooperate with service and maintenance companies."

All forum presentations came back to a common theme: the sector urgently needs state support, now that state loan and leasing programs have ended. Many consumers have stopped investing in machine-building products and production is dropping. However, a number of financial institutions have shown willingness to invest in modernization, especially in small and medium-sized businesses.

"Leasing is not just an effective means of financing the real sector of the economy," said Vadim Konstantinov, Delta Leasing's Ural region director and a forum participant. "It is also one of the ways to form the financial base for modernizing production. Many financial institutions are interested in working with suppliers of foreign and locally made road-building equipment, cranes and lifting equipment on the Russian market. Our company has already invested about $200 million in this area."

Without state help, market conflict is intensifying. Russian consumers want high-quality equipment at reasonable prices with a full range of service options, and they are looking increasingly to the Western market to find it – even second-hand.

Without leasing programs and support, Russian producers are concentrating instead on short-term strategies of the "make it, sell it and collect the money" type, rather than developing servicing. Related industries such as the construction sector and maintenance and repair companies also suffer along with production.

At the same time, equipment in use is getting older and is not being replaced at the rate it should be.