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Reference ID Created Released Classification Origin
06MOSCOW4353 2006-04-24 13:10 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Moscow

DE RUEHMO #4353/01 1141310
R 241310Z APR 06

E.O. 12958: N/A 
1. (SBU) SUMMARY. Economic progress is visible in the 
resource-rich Komi Republic, we found on a recent trip to 
that remote region.  Its economy is doing well, in part 
because of global price gains in oil, gas, and metal, but 
also because of its growing paper and furniture industries 
and budding retail sector.  Although the regional government 
seems to be working hard to promote small and medium-sized 
enterprises, corruption is a strong countervailing force. 
Prospects are uncertain for significantly reducing 
corruption, although the federal government has stepped in to 
address that issue.  Despite such problems, we found that 
locals tend to be upbeat about the future.  END SUMMARY. 
2. (SBU) On a recent trip to Syktyvkar, capital of the Komi 
Republic, we found a prospering city in a resource-rich 
region.  Originally a crossroads of trade and the location of 
dozens of Soviet gulag camps, the republic, in European 
Russia's northeast, has an ethnically and religiously diverse 
population of just over one million people.  European virgin 
forests cover over 60 percent of the republic's territory and 
represent the first natural UNESCO World Heritage site in 
Russia.  Komi's economy is based mainly on energy extraction, 
mining, and forestry, which together make up more than 70 
percent of the republic's output.  Komi is home to Europe's 
largest paper mill and cardboard factory; other plants 
produce pre-cut boards and furniture parts.  To modernize and 
diversify its economy, Komi is seeking to develop its retail 
and tourism sectors ) ecological and extreme sport tourism 
is becoming popular in its national parks, drawing a small 
but growing number of foreign tourists.  Western-style 
shopping centers are appearing in Syktyvkar and Komi's other 
major cities. (NOTE: For more information on the 
geographical, sociological, political, and economic make-up 
of the Komi Republic, see www.rkomi.ru and www.komistat.ru. 
Komi's Financial Situation Positive ... For Now 
--------------------------------------------- -- 
3. (SBU) Recently appointed Regional Head Vladimir Torlopov 
has touted his 2006 budget as "socially oriented," but 
members of Komi's Public Chamber and independent media told 
us the budget underfunds healthcare -- one of President 
Putin's national projects -- and programs to fight poverty 
and unemployment.  In Komi, 16.6 percent of the population is 
below the official poverty line (somewhat better than the 
18.9 percent for Russia as a whole), and unemployment is 2.9 
percent (versus 3.4 percent for Russia).  The republic's 
municipalities are almost completely financially and 
politically dependent on subsidies from the republican 
authorities, our interlocutors said.  Outside of the 
subsidies, supplemental funds to support the municipalities 
are distributed competitively based on detailed business 
plans.  Because developing such plans requires specialists 
and money, however, only a few of the wealthier 
municipalities have the resources to compete for these funds. 
 Accordingly, the municipalities that usually receive such 
funds will continue to do so, increasing the divide between 
the municipal haves and have-nots. 
4. (SBU) Although it is a net contributor to the federal 
government, Komi is on course to run an anticipated regional 
budget deficit in 2006 of 1.5 billion rubles (USD 53.6 
million).  The republic's overall debts are nearly as large 
as its annual budget, and further increases in debt without 
serious sources of new income could lead to financial 
problems.  Despite the spending pressures, high dependency on 
the primary sector, and resulting vulnerability to commodity 
price fluctuations, Fitch Ratings changed Komi's outlook from 
stable to positive in 2005 and affirmed its international 
long-term and short-term foreign currency ratings at B  and 
B, respectively.  Likewise, Moody's Investors Service raised 
Komi's domestic and international borrowing ratings from B1 
to Ba3, with a stable prognosis. 
5. (SBU) After a seven-fold rise from 1998 to 2004, 
investment dropped in 2004-2005 to approximately 20 billion 
rubles (USD 714 million).  The largest investment inflows 
took place from 2001 to 2004, up to 90 percent of which came 
from Austria in connection with the investment programs of 
Mondi Business Paper, which dominates harvesting and 
processing in the forestry sector.  Aside from Mondi the bulk 
of investment in Komi's industry comes from Severstal, which 
is modernizing Vorkuta's coal mines, and SUAL, which 
continues to invest in the development of local bauxite mines 
and processing.  The other major corporate investor, LUKoil, 
is moving much of its refining activity from the city of 
MOSCOW 00004353  002 OF 003 
Ukhta to the neighboring Nenets Autonomous Okrug, because it 
is more profitable to process oil there. 
SME Sector Growing But Bureaucracy Is a Problem 
- -- 
6. (SBU) Regional Head Torlopov has spoken out frequently in 
support of developing SMEs to diversify the republic's 
economy.  Most SMEs in Komi are retail shops, creating jobs 
and improving the selection of Western-style goods and 
services.  Almost 90 percent of small businesses are located 
in Komi's major cities, and fifty-three percent of them are 
in Syktyvkar alone.  From 2000 to 2005 the number of small 
businesses increased by one-and-a-half times: from 2700 to 
4500.  On average, a small business employs 13 people.  The 
median salary for one worker is 8,400 rubles per month (USD 
300), which is one-third less than in large and medium-sized 
businesses.  Small businesses wield considerable influence on 
the republic's socio-economic development, generating almost 
80 percent of the turnover of retail trade, 25 percent of 
consumer services, and almost 50 percent of construction 
work.  In 2005 revenues from small businesses increased 38 
percent over 2004, and investment in small business increased 
1.8 times.  More than half of the investment (55 percent) was 
in Syktyvkar, and 48 percent of that was in construction. 
7. (SBU) The republic administration has sought to help SMEs. 
 It worked with the Komi Chamber of Commerce, for instance, 
to turn an abandoned factory into a business incubator for 38 
up-and-coming businesses at a time.  Beneficiaries receive 
reduced rent, training, and commercial information.  SMEs 
also pay regional taxes at more favorable rates than larger 
companies.  However, SME entrepreneurs complain about the 
administrative hurdles they must overcome to be able to 
start, conduct, or grow their business.  Chamber of Commerce 
officials told us, for example, that the Syktyvkar government 
mandated that all businesses replace the aging concrete 
sidewalks in front of their buildings with brick.  The brick 
had to be purchased from a certain supplier so it would be 
uniform, and there was a citywide deadline established for 
all walks to be finished.  The sidewalks would remain the 
property of the city after the upgrade, but the building 
owners had to pay all of the costs associated with the 
installation and upkeep.  Businessmen were further outraged 
when they found out that over eighty separate administrative 
approvals (both at the city and regional levels) were 
required to make the change.  Our interlocutors said that 
pursuing these approvals took the average businessman an 
entire workweek. 
And Corruption Remains a Problem 
8. (SBU) Such excessive bureaucratic hurdles are often rife 
with corruption opportunities.  There are no regional or city 
programs to combat corruption, although in March a 
parliamentary roundtable recommended creation of a regional 
Anti-Corruption Commission.  In 2005, about 4,500 officially 
recorded economic crimes -- worth about 165 million rubles 
(USD 5.9 million) -- were committed in Komi.  According to 
komistat.ru, the number of economic crimes in the republic 
grew 16 percent in 2005 and is up 30 percent since 2000. 
Komi entrepreneurs told us that almost all SMEs enjoy the 
protection ("krysha" or "roof") of bureaucrats and law 
enforcement agencies, and that this is essential to 
commercial success.  Local authorities have been reluctant to 
attack the problem because they would essentially be giving 
up a key source of income. 
9. (SBU) Additionally, entrepreneurs say they are expected to 
sign "contracts" with government entities to cover the 
"costs" of fire, health, sanitary, and security inspections. 
Normally, these inspections would happen once every two 
years, with the costs covered by the budget.  In Komi, 
however, businesses pay for these "contracts" when they first 
register and then are told to expect "inspections" every 
month or so, paying a "fee" each time.  As long as the 
contract is current, the business will likely pass the 
inspection, but the business's profit margins are squeezed 
because they are paying both legitimate taxes and these 
"contract fees." 
10. (SBU) Arson appears to be a favored mode of intimidation 
or retribution in the republic.  Ukhta authorities are 
prosecuting a case against an organized crime group that 
extorted a significant sum from businessmen to support 
imprisoned colleagues.  The criminals not only threatened the 
businessmen but even burned one of their cars to intimidate 
them.  Stores have been set on fire in Usinsk, apparently 
because their owners refused or were late in paying 
MOSCOW 00004353  003 OF 003 
extortionists.  In the most extreme case of arson, in July 
2005, a fire in a shopping center killed 25 people in Ukhta 
because no one could escape through the metal grills on the 
Federal Government Gets Involved 
11. (SBU) Federal authorities appear to be growing tired of 
waiting for local officials to adopt decisive anti-corruption 
measures and remove barriers for SME development.  After 
Russia's General Procurator issued an August 2005 order 
requiring regional procurators to provide more oversight in 
implementing laws defending SME rights, the Komi procurator 
created a working group to execute that order.  Reporting on 
the group's first month of operation, a procuracy official 
said that investigators found evidence that criminal groups, 
government officials, and policemen were extracting bribes 
from businesses.  Procurators have filed several criminal 
cases as a result.  For example, an official in Ukhta faces 
charges for soliciting a USD 25,000 bribe from an 
entrepreneur seeking to rent municipal property, and a Komi 
Interior Ministry investigator and a former tax police 
official face charges for seeking bribes in return for 
stopping an investigation against several businessmen.  In 
April, the Komi Prosecutor's Office opened a criminal case 
against a deputy industry and energy minister for taking a 
USD 1.8 million bribe from a company director and town 
council deputy in Troitsko-Pechorsk in exchange for 
assistance in the wood-processing business.  Charges without 
convictions tend to be commonplace in Komi, however, and this 
new initiative appears to be no exception.  Indeed, Syktyvkar 
Deputy Mayor Vladimir Pystin was charged with embezzling over 
three million rubles (USD 107,000) in computer equipment 
meant for regional schools, but managed to evade conviction 
by returning the embezzled money to the regional government. 
12. (SBU) Given its solid industrial base and relatively 
well-developed infrastructure, the Komi Republic seems to 
have good economic prospects.  Syktyvkar has a strong 
entrepreneurial feel to it, with housing and commercial 
construction booming and foreign-made cars crowding the 
streets.  Customer service approaches Western standards in 
the main hotel and restaurants.  With an imp
roved tourism 
infrastructure and better marketing, Syktyvkar and the 
republic in general could capitalize on their many cultural 
and natural attractions.  Lack of economic diversification, 
budget woes, and corruption remain nagging problems that even 
federal intervention will be hard-pressed to eliminate. 
Nonetheless, our visit suggested that the typical Komi 
citizen's attitude is upbeat and positive about the future. 


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