07MOSCOW1326, RUSSIA: SPECIAL ECONOMIC ZONES START TO STAND UP

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Reference ID Created Released Classification Origin
07MOSCOW1326 2007-03-27 10:35 2011-08-30 01:44 CONFIDENTIAL Embassy Moscow

VZCZCXRO6280
PP RUEHDBU
DE RUEHMO #1326/01 0861035
ZNY CCCCC ZZH
P 271035Z MAR 07
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 8636
INFO RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 001326 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EUR/RUS - MWARLICK, AHOLMAN, SGUHA AND EB/TPP/BTA 
STATE PASS USTR FOR SDONNELLY, LERRION, LMOLNAR 
NSC FOR TMCKIBBEN 
USDOC FOR 4231/IEP/EUR/JBROUGHER 
USDOC FOR 4231/IEP/EUR/MEDWARDS 
 
E.O. 12958: DECL: 03/30/2016 
TAGS: EINV ETRD ECON RS
SUBJECT: RUSSIA: SPECIAL ECONOMIC ZONES START TO STAND UP 
 
REF: A. MOSCOW 52 
     B. MOSCOW 13002 
     C. MOSCOW 1148 
 
Classified By: ECON M/C Pamela Quanrud for reasons 1.5 (b) and (d). 
 
.1. (C) Summary: As part of ongoing efforts to diversify the 
Russian economy away from oil and gas, Russia is hoping to 
attract investment to the high-tech sector, a potential area 
of natural advantage, in part through the establishment of 
Special Economic Zones (SEZs).  Formally established in 2005, 
development plans and budgets are now in place for the 
high-tech and manufacturing zones, incipient infrastructure 
is under construction, and initial residents are setting up 
shop.  The Ministry of Economic Development and Trade, and 
Minister Gref in particular, hope these SEZs will attract 
top-flight companies, but opinions among local 
representatives of U.S. high tech firms varies.  Some would 
rather see uniform improvements to the investment climate 
over advantageous conditions at a handful of individual 
sites.  Others, however, cite the opportunity to curry 
political favor, and potential new business with the GOR, as 
sufficient reasons to throw their hat into the SEZ ring.  End 
summary. 
 
Investing in Economic Diversification 
------------------------------------- 
 
2. (SBU) The recent up-tick in investment in the consumer 
goods and services and financial sectors is a first faint 
sign of economic diversification here (Ref A), a trend that 
senior GOR leadership is working to expand through greater 
investment in the high tech, manufacturing and other 
non-energy sectors.  In a November 2006 placement in the 
Washington Post, Minister of Economic Development and Trade 
(MEDT) German Gref laid out what he called "a systemic 
approach" to stimulating both domestic and foreign investment 
-- one of the first such entreaties by a Russian Minister 
since oil crested the $50 mark.  Elements of Gref's plan 
include the development of technoparks, venture capital funds 
for innovation start-ups, business incubators, tax incentives 
for software exporters and firms that invest in R&D 
activities, public-private partnerships to develop major 
infrastructure projects, a new state Development Bank (Ref B) 
and establishment of Special Economic Zones (SEZs). 
 
SEZs: High Hopes 
---------------- 
 
3. (SBU) Since Putin signed SEZ legislation in mid-2005, an 
SEZ Management Agency, RosSEZ, has been established as an 
independent body under the MEDT and six sites were selected 
in late 2005 for technological/innovation and 
industrial/production zones.  In January 2007, the GOR 
selected an additional seven tourism and recreational zones, 
and is now considering the creation of port zones.  MEDT 
hopes the SEZs will create 75,000 jobs and generate $4.38 
billion in revenue by 2011. 
 
What's Being Offered? 
--------------------- 
 
4. (U) The GOR hopes to attract investors to the zones with 
an array of incentives.  For the technological/innovation and 
industrial/production SEZs, the federal, regional and local 
governments will jointly fund infrastructure development 
(roads, railroads, communications, power, water, sewerage, 
schools, health and child care, and recreation areas as well 
as business and technology transfer centers, and 
administrative buildings) to the tune of RUR 78.8 billion 
(about $2.84 billion) through 2010.  Over a twenty year 
period, RosSEZ is slated to provide on-site "One Window" 
service for companies for all necessary permits and 
registrations as well as tax and customs assistance. 
Companies in the zones will enjoy a five-year reduction of 
social security and profit taxes, five-year exemption from 
land, property and transport taxes, tax write-offs for R&D, 
accelerated depreciation of fixed assets, exemption from 
customs duties and VAT for imported products, and exemption 
from import duties and taxes for SEZ-produced exports. 
 
5. (SBU) In order to qualify for these benefits, firms must 
register in the local jurisdiction (i.e., cannot be a 
subsidiary of a company registered elsewhere in Russia) and 
submit an application form and business plan to a RosSEZ 
 
MOSCOW 00001326  002 OF 003 
 
 
committee for adjudication within 53 days.  For the time 
being, Minister Gref personally approves all RosSEZ committee 
decisions.  Residents of the industrial/production zones must 
agree to invest at least 10 million euro over twenty years to 
build and later upgrade production and other facilities, with 
first year investment totaling at least 1 million euro. 
Companies are also expected to finance any employee housing 
it may choose to build on specially designated SEZ territory. 
 
6. (SBU) Technological/innovation SEZs are located in the 
towns of Dubna (120 km north of Moscow), Zelenograd (22 km &#x0
00A;west of Moscow), St. Petersburg and Tomsk.  Each zone is 
designated to specialize in specific technologies (Dubna in 
IT and nuclear technologies; Zelenograd in microelectronics 
and nano technology; St. Petersburg in hi-tech; and Tomsk in 
new materials).  Industrial/production SEZs are located in 
Lipetsk and Elabuga (Tatarstan), and are also specialized 
(the former in household electronics and the latter in 
automotive and petrochemical production). 
 
7. (SBU) In each of the zones we have visited (Dubna, 
Zelenograd, Lipetsk and Elabuga), initial work is underway on 
roads, sewage, power, phone and data lines.  All six zones 
have a handful (no more than 6 in any one zone) of approved 
residents, mostly Russian, some of which have begun building 
plants or operating in pre-existing buildings.  In the case 
of the technological/innovation zones, the locations were 
chosen to take advantage of nearby universities and 
scientific institutes, such as the Joint Institute for 
Nuclear Research near Dubna (Ref C) and the Moscow Institute 
of Electronic Technology in Zelenograd.  The zones plan to 
interact closely with the universities and institutes through 
student internships with SEZ residents, recruitment of local 
graduates, university tailoring of curriculum to meet 
resident needs, and shared use of laboratories and other 
facilities.  The two industrial/production zones were 
selected for their existing infrastructure advantages, as 
well as proximity to adequate work force. 
 
Build it, but Will They Come? 
----------------------------- 
 
8. (C) The Moscow offices of several U.S. high tech firms 
already active in Russia (Oracle, Sun Microsystems, Motorola, 
Intel and Microsoft) expressed doubts that SEZs would fit 
into their investment strategies.  They voiced concerns about 
the ability of the various levels of government to execute 
ambitious plans, including provision of truly adequate 
infrastructure and "One Window" services, and about whether 
the SEZ regime would survive a change in government.  Some 
commented that the timing for completion of the SEZs (2009) 
was too late for their business needs.  Many advocated 
improvements to the overall business climate in Russia rather 
than the creation of isolated havens in select locations, 
pointing out that companies want the freedom to choose their 
location and don't necessarily want the government as their 
landlord.  Microsoft's Mikhail Yakushev (please protect), a 
former deputy minister of IT, more cynically opined that the 
SEZs would simply allow bureaucrats to line their pockets. 
S-Terra, a Russian IT firm in Zelenograd, thought the 
financial benefits were "not worth the effort" of filling out 
the paperwork to become an SEZ resident. 
 
9. (C) We are, however, aware of at least two U.S. companies 
planning to apply for resident status.  Boeing has already 
told Gref they will open a technical center in Dubna (note: 
our perception is that Boeing is largely motivated by 
positive relations with Gref and an ongoing desire to 
demonstrate their long-term commitment to Russia.  End note.) 
 The firm will not move any engineers from its Moscow Design 
Center, but hopes to attract engineers from Tomsk and other 
university cities with the promise of good jobs and 
company-subsidized mortgages.  Cisco is considering opening a 
technical assistance center, a warehouse and a small R&D shop 
in the Zelenograd SEZ.  Cisco does considerable business with 
MEDT and said they hope to seal new contracts for provision 
of services to RosSEZ and zone residents. 
 
10. (SBU) Some SEZs, in particular Lipetsk, have launched 
road shows to Europe and Asia, while others told us they will 
wait until key infrastructure is ready in 2008 to begin 
recruiting in earnest.  Each zone anticipates a majority of 
Russian residents, but are all keen to attract a healthy 
representation of foreign, including U.S., firms. 
 
 
MOSCOW 00001326  003 OF 003 
 
 
11. (C) Comment:  Many in the current administration, 
particularly Minister Gref, are clearly committed to the 
successful establishment of SEZs as part of their strategy to 
further economic diversification.  Funding has been 
identified, RosSEZ and local administrations seem motivated, 
organized and informed, and initial construction work has 
begun in all zones.  In the background is the failure of 
previous GOR SEZ regimes, which ended up fostering shell 
company tax havens, a painful lesson the government says it 
learned from.  The question is whether business will feel 
sufficiently confident in the long-term and competent 
administration of the zones, and whether they are lured 
sufficiently by SEZ benefits to move their operations to 
specific geographic areas.  Our soundings indicate that some 
will chose to do so, but many would simply prefer more 
generalized (and ambitious) "fixes" to the overall investment 
climate and many, we would note, established their positions 
here long before talks of innovation SEZs became fashionable. 
BURNS

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