Modernization of the economy of Karelia

The crisis that gripped the socio-economic sphere in many countries, including the Russian Federation, has forced Russian regions to look for appropriate ways to counter their effects. In addition, the regions have to find not only the methods of survival, but also the ways of further development. Despite the situation caused by the crisis, by 2010 the Republic of Karelia has overcome the difficulties of socioeconomic nature. Thanks to the measures taken by the government of the Republic to ensure sustainable development of economy of Karelia it was able to prevent a sharp decrease of production in industry. Mass reduction of the production staff and loss of wages were prevented, most of enterprises which have appeared on the verge of closure and bankruptcy were kept. Social protection of the population has been kept, the stability of the fiscal system was ensured, and state support for backbone enterprises of the republic was provided. [2] As a result of the authorities’ emergency response a trend of reduction in the backlog growth of industrial production in comparison with 2008 has appeared.

At the same time, the crisis showed that the period of high commodity prices, rapid growth of companies’ capitalization and the availability of credit resources came to an end. It became clear that the economy of the Republic of Karelia has reached that level when for its further rise it is not enough to have only activities for the restructuring of production, monopolists’ price controls, tighten control over the collection of taxes, legal support of investments, lobbying Karelian enterprises, privatization of property, etc. It is necessary to walk on a fundamentally new way of development. In this situation, upgrading, declared as a national idea by the President of the country, becomes very necessary thing [3].

In the Republic of Karelia the implementation of certain provisions of the development program is initiated taking into account the specific and regional characteristics. The state anti-crisis program of action of the Government of the Republic of Karelia in 2010 [4] is adopted and implemented which contains a large section of “Modernization measures”. The Republic understands modernization as the process of implementation of measures, leading the economy into line with the latest modern requirements and standards. In other words this is a process, which is the fastest and possibly the full (taking into account the specific realities of the regional historical traditions and cultural and ethnic characteristics) promotion to target the basic model of modern social and economic relations. For the Republic of Karelia it is also the key to successful technology development and the way of the Republic on a new technological level in the strategic perspective. The main purpose of modernizing the economy of the Republic of Karelia is the creation of socio-effective model of the economy, which will ensure the progressive development of our republic.

For this purpose the Government of the Republic of Karelia supports modernization in industry sectors of the Republican economy and creating new industries through innovative resource-saving and highly efficient technologies that enhance the quality and competitiveness, reduce production costs. It assists in the creation of integrated business structures on the organization of high production in the form of innovative activity, stimulating the development of strategic plans and business plans for short and medium term taking into account the development priorities of the Republic.

Priority areas for economic and social policies are defined in the Strategy for socio-economic development of the Republic of Karelia up to 2020, in the Concept of socio-economic development of the Republic of Karelia for the period until 2012 and the Program for economic and social development of the Republic of Karelia up to 2010.

Building a system of interaction between society, government and business the Government will have to find ways to the positive development of the republic. Priorities declared for the republic previously remain unchanged: these are the improving the quality of life of the republic’s population, stable economic growth, building capacity for future development.

The Government of the Republic is focusing the objectively limited capacity of on the priority development of industrial and financial, scientific, educational, information, transport and social infrastructure ensuring the fullest possible use of both the resource and territorial advantages of the republic and the creative potential of the population.

The Republic has planned and implements the following modernization measures:

• -    diversification of economy and export, domestic demand support, creation of new modern production (including the attraction of investments, the implementation of projects aimed at in-depth processing of raw materials, the use of information and communication technologies);

• -    promotion of innovative ways of development;

• -    development of high-tech and infrastructure sectors of the economy (including the development of communications, transport system, improving the energy complex including through energy efficiency);

• -    improving the efficiency of public sector and the use of public assets (reforming the budgetary network, improving the efficiency of government procurement and budget expenditures, improving bonded loan system of the Republic of Karelia, development of the state property insurance).

These measures are scattered among different programs and activities that are implemented in the republic.

The Government of the Republic of Karelia is consistently implementing its Guidelines for investment policy for 2007 – 2010, thus expanding the investment potential of the region and developing energy and transport infrastructure, housing and social sphere. In the Republic the interaction of executive authorities of the republic with investors is ordered. Documents defining the procedure for passage of concord, registration and licensing procedures when considering projects are drawn up; a procedure for monitoring of investment projects on the territory of the Republic of Karelia is established. The Republican list of investment projects is being recorded.

Government of the Republic of Karelia signed a cooperation agreement with state-governmental corporation “Bank for development and foreign economic affairs (Vnesheconombank)”, which provides for joint development of schemes of financing investment-scale projects, the implementation of which is planned in the territory of the republic. To offset the loss of cash flows caused by the crisis, and ensure the inflow of investment in the economy of the republic there is working to restore the full system of long-term loan with the optimization of interest rates and collateral threshold for investment credits. It is assumed that a close mutual cooperation with investors will increase the total investment in fixed capital of the Republic of Karelia in 2010 to 18.2 billion rubles.

As a result of the undertaken measures, it is planned to raise more than 3.4 billion rubles of federal investment through federal investment programs, federal subsidies and the Investment fund of the Russian Federation. Under the reached agreements with the State Corporation “Rosatom” the Government of the Republic of Karelia will assist Closed Joint Stock Company “Petrozavodskmash” to implement an innovative portfolio for the nuclear industry, mass production of modern logging equipment in Co. Ltd “Onega Tractor Plant”. To enhance the interaction between the Government of the Republic and the leading enterprises of the republic an agreement on cooperation in overcoming the effects of the financial crisis and social partnership is signed. Measures for the state promotion of investment are taken. The Republic has 16 agreements for the regime-favored investment. Project investment amounts to 7.2 billion rubles.

The Government of the Republic of Karelia has conducted extensive work with federal agencies of the Executive authority on postponing the introduction in 2010 of increased rates of customs duties on round raw timber, especially from hardwood. The decision to maintain rates of export customs duties on raw materials in 2010 at the level of 2008 is made. This measure is very important and timely for the loggers of the republic. In this case the Government of the Republic of Karelia implements a consistent policy aimed at gradual reducing the volume of exports of unprocessed timber and modernization of production for its processing in the territory of the republic.

A deliberate and systematic work in providing state support to investors in implementing investment projects through the introduction of modern financial instruments is being done. The Government of the Republic represents guarantees and issues guarantees on loans borrowed for investment projects to small and medium enterprises. It also provides grants for reimbursement of expenses to pay interest on loans borrowed for investment projects. To solve the problem of increasing the availability of small businesses to credit resources established the Guarantee fund of the Republic of Karelia is established. To participate in the fund program to provide guarantees for the obligations of small and medium enterprises six banks were selected, 21 surety contracts totaling 18.7 million rubles were signed.

Much attention is paid to the promotion of innovation, creation of innovative thinking in students, academic and industrial spheres. The country has already created “IT-park” Petrozavodsk of the State University, Karelian center for technology and innovation transfer at the Karelian research centre of the Russian academy of sciences, Business incubator of the Republic of Karelia, several innovation-active enterprises are functioning.

Integration of science, industry and business based on market mechanisms of commercialization of intellectual property objects and transfer of advanced high technology developments and technology will be implemented through the site of innovation market, “research landing forces” to the enterprises, providing businesses with information through the organs of executive power in the republic.

In order to transition to innovation economy the Government of the Republic of Karelia plans to implement the following activities aimed at modernizing the economy and the development of innovative structure elements:

• •    development of guidelines for the investment and innovation policy up to 2020;

• •    government support for reconstruction and technological modernization of existing enterprises;

• •    creation of favorable conditions for the new industries based on modern resourcesaving and high-performance technologies, providing improvement of quality and competitiveness of products;

• •    assistance in the preparation of professional personnel for innovation areas, including those from the developers of new competitive products and technologies;

• •    assistance in the promotion of production of innovative enterprises in other regions of the country;

• •    development of a mechanism for attracting domestic and foreign investors (including venture firms) in innovation projects;

• •    organization of joint scientific-practical and information-cognitive actions (conferences, seminars, round tables, business games) for employees of state and municipal agencies, developers of new products and technologies;

• •    development of long-term regional program for the development of innovative activity in the Republic of Karelia;

• •    development and participation in the work on priority areas for further development announced by the President of the country [1] (energy efficiency, new fuels, nuclear energy, information and space technology, health care

and medicine production). For a number of them the republic has significant developments and achievements.

The republic has already developed and implemented the Regional Program on energy conservation for the period until 2012. The basis of the program is a system of energy saving measures that allow covering all the main spheres of the republic, as well as ensuring an integrated approach to improving energy efficiency in the economy and social sphere. A working group to develop a long-term development of the complex power grid of the Republic of Karelia for the period 2010 – 2015 years is created. The program will address issues about the reconstruction of distribution networks and substations in order to tackle these challenges. The implementation of energy saving projects and activities on energy-intensive industries of mining and processing, metallurgical and engineering industries is taking place.

The implementation of the anti-crisis program in 2009 showed that the increase in the effectiveness of public sector and the use of state property is required. This, in turn, means that it is due to implement the reform of fiscal expansion, improve efficiency of public procurement and budget expenditures, improving bonded loan system of the Republic of Karelia, development of insurance of public assets.

In 2010, while adapting the budget of the Republic of Karelia to the reduction of budget revenues the structure of budget expenditures has also changed. The main priorities of budget spending for 2010 the following are determined: the unconditional fulfillment of social obligations to citizens by the state, timely payment to workers of budgetary sphere, preparations for the 65-year anniversary of Victory in Great Patriotic War and the 90-year anniversary of education of the Republic of Karelia, payment for utility services provided by budgetary institutions, budgetary transfers to local budgets, implementation of measures which aim at stabilizing the situation on the labor market.

The projected reduction in revenues in 2010 would require the concentration of financial resources to the most important events and sites, optimization of costs for the operation of public authorities and budgetary institutions, taking into account industry characteristics, improvement of funds efficiency to support the real sector of economy, refusal from the non-priority costs.

The active participation of the Government of the Republic of Karelia in the leading enterprises’ activities caused a trend of economic recovery and the modernization process seeks to preserve all the positive trends and provide whatever state support, with the participation of financial institutions. To this end, the Government of the Republic of Karelia will enhance work with enterprises of key industries to increase the rates of production of major products, optimizing costs, preserving social stability in the workforce. About three hundred key enterprises for the national economy are included in the federal list of system companies. The Government of the Republic of Karelia, together with the owners of companies is monitoring the situation in these enterprises and rapidly eliminating the problems.

The republic also has a list of 1,148 enterprises of republican values, which are supported by the Government of the Republic of Karelia in obtaining assistance from the federal budget. One of such measures is the ability to obtain government contracts that allows the company to have secured funding and retain its activity. The republic will also take all possible measures to reduce the tax burden on the real economy sector. The total amount of tax relief for the real economy in 2010 will amount to 600 million rubles. In order to create the necessary conditions for the emergence of new participants in the commodity and service markets of the republic a program to promote competition in the Republic of Karelia will be finalized and approved.

An important role in attracting financial resources in the republic’s economy is given to the banking sector of the republic. Currently, in the territory of the Republic of Karelia a program to support small and medium-sized businesses, implemented by JSC “Russian Bank for Development” jointly with the Ministry of Economic Development of the Russian Federation is executed. This program provides loans to organizations of infrastructure, supporting small and medium businesses. In 2010, the expansion of the number of program participants and increase the number of partner banks is planned.

Activation of the investment process in the republic also helps to attract resources of insurance companies through the establishment of the developed insurance system in the republic. In 2010, the Working Group will continue to work on the interaction of executive authorities of the Republic of Karelia and the insurance companies in the field of insurance, the Commission on the development of the financial services market in the Republic of Karelia.

Working in partnership with business owners, the government pays attention to and provides state support to all companies with development plans for the medium term, with the necessary expertise for the management of household assets, which are aware of the business’ social responsibility.

With the support of the Government of RK in 2010 an investment project of the company Co. Ltd “AKS-Holding” “Construction of pig-breeding complex for 12 thousand heads per year” will be implemented which will produce 1.1 thousand tons of pork. In 2010 it is planned to begin construction of dairy farm for 800 heads with milking and dairy unit in Co. Ltd “Agrofir-ma “Tuksa” in the Olonetsky district. To support the agricultural sector 214 million rubles will be invested. They will focus on preservation and development of dairy farming, poultry farming and animal breeding in the Republic.

To stabilize the situation in the forest complex of Karelia, creation of prerequisites for sustainable operation and further development the Government of the Republic provides measures of state support to enterprises that have real plans for post-crisis development with the necessary expertise to manage forest industry assets and pursuing a conscious social responsibility in forest settlements.

The Government of the Republic of Karelia consistently solves the problem of increasing the volume of deep processing of timber in the republic, providing state support for investors and enterprises implementing investment projects in timber processing. At the present time the following major investment projects have already been implemented or are in the process of implementing: projects on reconstruction JSC “Kondopoga” and Co. Ltd “Medvezhegorsky logging enterprise”, development projects JSC “Karelia DSP” and Closed Joint Stock Company “Solomensky timber mill”, the project of construction of timber enterprise Co. Ltd “Setles” in Impilakhti settlement.

Simultaneously, the state orders for the products of deep processing of wood are formed and measures to ensure these industries with raw materials through the transfer of forest areas for rent are taken. Together with the Federal Forestry Agency system of public funding for forest roads construction in the republic is organized. Currently in cooperation with the tenants of forest plots (JSC “Seg-ezhsky PPM”, JSC “Karellesprom”) the work on preparing the required documentation is being done.

Despite the difficult financial state of the enterprises the work on measures to attract investment in the forest sector, modernization and technical re-equipment of the enterprises, including the integration of projects of the Republic of Karelia in the list of priority investment projects in forest development is continued. Two investment projects – “The Polar Bear” of Segezhsky PPM and “The organization of logging and forest processing under long-term leases of forest of Ltd. “Kostomukshskaya construction company” – are included by the Ministry of industry and trade of the Russian Federation in the list of investment projects in forest development. The funding is received and the progress of these projects is monitored. The work with Co. Ltd “DOC “Kalevala”, Co. Ltd “Swedwood Karelia” and other companies planning to realize their projects, which may be considered a priority in forest development and incorporated in the state list of priority projects is being done.

In the mining complex of the republic in 2010, three new modern enterprises for production of crushed stone will be put into operation, a stationary crushing and sorting complex of Co. Ltd “KarelTransNerud” in Pitkaranta region is built and the construction of the 2nd stage crushing and sorting plant and the wharf of Co. Ltd “Granite Mountain” is continued.

Further development of the republic depends on the level of development of small and medium enterprises in rural and urban settlements. The development of this sector can contribute to enhancing the economic growth in the region. Therefore, the Government of the Republic is pursuing a policy of creating the most favorable conditions for conducting business through the implementation of the activities of the republican program “Development of small and medium enterprises in the Republic of Karelia for the period until 2014”. This program generally provides a quantitative increase of small and medium enterprises in the settlements.

Questions of support for small and mediumsized businesses become of particular importance in the Republic, since this very sector of the economy can quickly adapt to changing market conditions, is socially oriented, creates new jobs and is able to reduce the impact of various negative phenomena. In 2010, the cost of rents for small businesses has been reduced in the republic, interest subsidies on loans for investment have been introduced, and business incubator will receive 2.9 million rubles to support its activities.

Actions taken by both the Government of the Russian Federation and the Government of the Republic of Karelia allowed to smooth negative trends in the Republic’s economy related with the influence of the effects of the global financial crisis. By the end of 2009 through the joint efforts there has been a positive trend for a number of indicators. Incipient economic recovery is accompanied by a slowdown in inflation and higher prices for exported goods, the recovery of investment and consumer demand is expected. The increase in production and an increase in load of idle production capacity, in turn, have increased the level of employment in the Republic and reduced tension in the social sphere. But these positive trends are still fragile. An increase in production at some enterprises and decline at others is observed, delays in wages can take place.

The dependence of the republic’s economy from the conjuncture of world prices for exported products, the restriction of domestic demand, the problems of long-term lending also significantly reduce the stability of the republic's economy. However, in the real existing conditions in 2010 the implementation of anti-crisis measures for keeping the economic recovery will continue. Particular attention will be paid to unemployment, social support, industry towns’ problems solving.

The recovery of investment of previously suspended projects, the participation of the Republic in the implementation of federal target programs and the federal targeted investment program are expected. Increased investment and external demand will contribute to the restoration of industrial output. Compared with last year it is expected to increase the volume of mining, logging, wood products and pulp and paper production.

Easing of inflation will maintain the level of real disposable monetary incomes and stabilize the situation in the consumer market. Due to the restoration of production, a reduction in unemployment to 3.3% is expected. In view of the adverse factors in 2010 the gross regional product at constant prices will remain at the level of 2009.

The Government of the Republic considers 2010 as the year of arrangement of conditions for economic modernization and development of human capital [5]. To solve the problems of economic modernization raised by the country’s president the changes in the strategy for socio-economic development of the Republic of Karelia until 2020 are made. A new mediumterm program of socio-economic development of the Republic of Karelia, programs in the field of tourism, timber industry, education and health care development are developed.

Effective implementation of anti-crisis and modernization measures, the implementation of sectoral programs and innovative projects will monitor the situation and positively manage the socio-economic development of the republic.