Alexander Khloponin, one of Russia’s youngest governors, is always at ease when addressing a foreign audience – a feature that highlights his birth in Sri Lanka where his parents worked for the Soviet Committee for External Economic Affairs in the 1960s.

Khloponin has had a meteoritic rise both in his business career and politics, taking only 12 years after graduation from the Moscow Financial Institute in 1989 to accomplish what most government figures usually spend a whole lifetime to achieve. After a stint at the USSR Vneshekonombank, Khloponin moved to a private bank, International Financial Corporation in 1992, where he had a fast-track career that led to the post of board chairman in 1994.

He later left for Norilsk Nickel in 1996, which was then humbled by crisis, and moved it back into solvency – winning an honor award for "an immense contribution to the nation’s production of non-ferrous and precious metals."

Using Norilsk Nickel – the main revenue earner in Taimyr, an autonomous district in Krasnoyarsk Krai – as a launch pad into federal politics, Khloponin became the district governor in 2001, and in 2002, the governor of Krasnoyarsk Krai itself.

Governor Khloponin – who was recently in Moscow to present the Krasnoyarsk Regional Development Corporation to the Moscow investment community – talked to TRJ at the sidelines of the event about his region and measures taken so far to improve its attractiveness as a default destination for capital-intensive investments.

TRJ: As the governor of Krasnoyarsk Krai, Russia’s largest region, what unique feature and competitive advantages does this region have – and what are its main disadvantages?

A.K.:

Most people do not really grab the real vastness of Krasnoyarsk Krai. So, I would start by saying that our region is not only the largest Russian region, but also a territory that is four times the size of France and about 40 times the size of Holland.

Of course, Krasnoyarsk Krai certainly has a lot of competitive advantages. It has a huge reserve of mineral resources – non-ferrous and precious metals, oil, coal and several others – that are extractable on an industrial basis. For instance, the region is one of the world’s top producers of nickel. Another competitive advantage is the availablility of low-cost energy needed to run the industrial production of most of these natural resources.

A major disadvantage stems from the region’s specific economic structure, which always makes me see the region as a mini-model of the Russian Federation. Just as the national economy is largely dependent on global oil prices, so also does Krasnoyarsk Krai depend largely on mineral resources, especially on non-ferrous metals, which account for more than 70 percent of its annual budget. This nearly complete dependence on a single economic sector for sustenance does subject the region to unpredictable vagaries of price volatility on the global market for these metals.

Another of the region’s relative competitive disadvantages, in my opinion, stems from its unique geographic location, as it is located approximately 4,000 kilometers from the Asian and European markets. This means in practice that the region has to produce goods whose transportation costs cannot exceed 15-20 percent, leaving the region with only two options – either to specialize in export of raw materials or concentrate on production of high-tech goods and services.

TRJ: In most of your public speeches, you have called for a new regional policy termed Regions of Growth, that will reflect and use each region’s specificity to stimulate growth in place of the current one. What is wrong with the current one and what novelties do you have in mind?

A.K.:

The issue of regional policy is very important to me. Just a few days ago, President Vladimir Putin and his economic and finance ministers, respectively, German Gref and Alexei Kudrin, were in Krasnoyarsk Krai, where the issue of new regional policy was also discussed.

The need for a change stems from the fact that the Russian federal budget, and the economy as a whole, is largely built on an outdated principle – of balancing poor regions’ budgets at the expense of the so-called donor regions. This is done by the federal government by taking a certain amount of revenues from donor regions to subsidize the budgets of the so-called donation regions. This is a very significant problem in Krasnoyarsk Krai because it is the only donor region in all of Siberia.

But the reality of today’s economy shows that the current budgetary policy is outdated, and therefore, can no longer help in solving most of the problems faced by the regions. This is why we need a new regional policy based on growth regions – that is, regions that are capable of generating enough financial and other resources – to fund their core functions. Krasnoyarsk Krai belongs to the group.

About 10 billion rubles have been disbursed within the federal government’s special investment programs for investment into Krasnoyarsk Krai for the past five years. However, a closer look would show that this money was spent on building about 500 uncompleted high school buildings, 1,500 computers and a 1.5 kilometer runway at one of the region’s airports.

These are not the type of investments and projects that are needed in the region. We need huge, capital-intensive investments measured in billions of dollars to develop the region’s energy, mineral resources and electricity that will allow the region to pursue ambitious economic programs aimed at doubling GDP, creating job opportunities and improving social infrastructure. These are some of the postulates of the new regional policy.

I personally plan to head a federal government group that will research the topic comprehensively for us to derive maximum benefits from its implementation.

TRJ: How can you characterize the investment climate and the participation of foreign investors in your region’s economy today?

A.K.:

Krasnoyarsk Krai is an isolated or independent entity within the Russian Federation. As such, the investment climate in the region bears all the general hallmarks of the current investment climate throughout the country. This is because the task of creating a framework and other infrastructure for boosting investment in any country is the prerogative of the central government and is mostly achieved by ensuring two vital conditions – political stability and economic predictability. These are two of several vital factors that determine whether or not investment would flow into or out of a particular country or region.

This is also another factor – related to the Yukos case. Here, investors have question marks over such issues as how safe is their committed capital and how long are investors’ rights going to be tampered with or totally disregarded in the country. There are other factors connected with certain problems both at the federal and regional levels that currently impact negatively on the course of investment and capital flow into Russia.

Concerning Krasnoyarsk Krai, however, I would like to say that we have put a lot of investment-boosting programs, including adopting business-friendly and capital-stimulating legislation, in place in the region. These include setting preferential treatments for investors, protecting their rights, assets and other properties. And, the Krasnoyarsk Regional Development Corporation, which is the subject of my presentation, will surely help to boost the attractiveness of the region to both local and foreign investors.

TRJ: With these arrangements in place, can you say that you are satisfied with the current level of investments in your region?

A.K.:

Objectively speaking, I cannot say at this moment that I am satisfied with the level of investment in the region.

Basically, what is going on today is that some local corporations such as Norilsk Nickel, RusAl and others, are merely re-investing parts of their capital back into their facilities to boost production. Though such actions by and large do qualify for investment inflow into the region, they, honestly speaking, do not really constitute an investment inflow into the region. This is because such sums of investment are not large enough to generate an economic breakthrough in the region.

The situation with foreign investors is even worse, and their meager, mainly portfolio, forms of capital invested so far in the region is disappointing. In the real sense, they are not actually investing in the region, but mainly diversifying their assets, which are not more than 10 percent of their gross assets held outside Russia. This is because 10 percent of assets are not seen as constituting huge risks to their operations.

A possible explanation for the lukewarm reaction stems from the fact that most real investors contemplating on investing into Russia are still on the watch for certain signs such as the fate of economic reforms, liberalization of the economy and key events capable of influencing investors’ plans to invest in a specific country. Another issue, as I have mentioned, concerns the Yukos affair, and specifically, parts that relate to the protection of investors’ rights and properties.

However, with [President Vladimir Putin’s] re-election and installation of the new cabinet, I, personally, do not have any doubts on the course of reforms and liberalization of the economy in the country.

TRJ: Could you give the gross total investment for 2003, the sources of most investments and the largest foreign investor in your region?

A.K.:

Usually, I do not like dividing capital by countries of origin, because to me, capital has no nationality. As a governor, I am interested in any capital and investor willing and ready to invest in projects in the region. To us, there is no difference where such capital is coming from – from the United States, the European Union or the Arab states.

We only have one criterion for discriminating against capital – and that is if it is of suspicious or clearly criminal origin. Here again, this is not a problem for regional governors to solve as we have federal organs and other state agencies that can help to sieve dirty money from going into investment projects in Russia and its regions.

By our latest account, the gross sum of investments into the region increased by about 17 percent in 2003. In absolute figures, this translated to about $1 billion. As I have already noted, I cannot say this sum represented a windfall in foreign investments because it is a very small amount – and certainly not enough – for a region the size of Krasnoyarsk Krai.

However, I must note that, individually, certain companies have invested heavily – both in cash and production facilities – into the region. One of these is Coca-Cola, which has invested several millions of dollars to build production and other facilities in the region.

TRJ: As a former CEO of Norilsk Nickel, there was probably some legislation that you found difficult, and probably could not understand how such laws could have been enacted in the first place. And now as a governor, do you see things a bit differently - from the other side of the barricade, as the Russian saying goes?

A.K.:

The only difference is that you now come to see how the bureaucratic apparatus really functions in practice. In essence, a government needs only to do its core functions – culture, health, education and a few others. Instead, bureaucrats dabble into all spheres, including those that do not fall directly into government’s prerogatives. They devise all means to remain needed in the administrative setup, and because of this, the level of bureaucratization of the economy, and the society at large, has surpassed all imaginable proportions.

But the administrative reform now going at the federal level will also be executed in Krasnoyarsk Krai. The main emphasis will be placed on streamlining the workforce, while dumping all non-core government functions in favor of a few, vitally needed services.