Association for Public Policy Analysis & Management

Russia is an oil-cursed country whose economic health has been dependent on hydrocarbon prices. To hedge against such risks, in 2005, the federal government launched special economic zones (SEZs) to modernize and diversify its economy by attracting foreign direct investment in a number of sectors. The benefit of SEZs including tax allowances and exemptions lowered the risk of investment in Russia. One of most successful has been the automotive sector that experienced exponential growth. In 2010, Russia became the 15th largest car producer and in 2012, Russia became the largest car market in Europe. Foreign car manufacturers were lured by a large market but also by one-sixth production costs of Europe. Several automotive clusters emerged. Some emerged at past domestic car manufacturing areas like Samara region to take advantage of the skilled labor force, suppliers and logistics. Some emerged at new strategic locations like St. Petersburg, close to sea ports for timely arrival of parts from Europe and in close proximity to the target consumers in metropolitan regions.

Of particular interest is the unheralded Kaluga region, 200 kilometers from Moscow with no natural resource endowments, which has become an unlikely success story. Its innovation and industrial cluster have attracted over $7 billion in investments between 2006 and the first half of 2013 – they have climbed from 48th place in foreign investment per capita in 2005 to the top few. Kaluga has become an industrial powerhouse with largest industrial production per capita and investments per capita. Of particular interest is Kaluga’s automotive industry. The paradox is that Kaluga is not a sea port like St. Petersburg nor does it have a critical mass like Samara. The large part of its success is attributed to Governor Anatoly Artamonov and the local institutions that have together created an investment-friendly “Singapore” within an investment-risky country.

Governor Artamonov established 6 guiding principles to minimize the risks for foreign investors and maximize the ease of doing business in Kaluga: 1). No isolating of investors 2). No long processes 3). No bureaucracy 4). No restraints 5). No infrastructural risks 6). No hidden costs 7). No middle brokers. In practice, Artamonov established Kaluga Region Development Corporation, which oversees industrial parks under the Ministry for Economic Development and the Regional Development Agency, which oversees investment projects under the Ministry for Economic Development that have together minimized corruption and enabled the needs of investors to be met.

This paper will examine in-depth the Governor Artamonov’s policymaking. While the federal government may have the funding, it may be best up to the local governments and its governors to modernize their economies through federally-mandated SEZs. The real value is in understanding if the case of Kaluga is applicable elsewhere too. My general conclusions are that if foreign investors can find agencies or individuals that they can trust, they are ready for Greenfield investments. In fact, dependent on the degree of trust, they are willing to forego geographically strategic locations like St. Petersburg or skill-endowed locations like Samara.