Kaluga’s success continues to feed its foreign investment boom

25 Mar '09
Oleg Kouzbit, Online News Managing Editor

The Kaluga Region, a small Russian territory 125 miles south of Moscow, is not only defying the economic crisis, but experiencing an investment boom. The funding is coming mostly from international investors—last year foreign investors injected $1.5bn into the regional economy. The keys to its success are lining up a well-connected bank with deep pockets and then reeling in multi-sector players. Flush with success, it is now setting its eyes on the global automotive business.

Small is beautiful… and profitable

Over the past two years Kaluga Region, whose entire population is less than the city of Nizhny Novgorod, has been experiencing an investment boom. RF Minister of Foreign Affairs Sergei Lavrov, presenting the region to international diplomats, said earlier this month the region had inked more than 30 contracts with international companies over the time. Last year’s foreign investment hit $1.5bn.

The region is one of Russia’s leaders in economic growth. In 2008 it showed an impressive 35-percent industrial growth vs. a meager 3.5% Russian average.

Kaluga Region is also a sizable scientific hub.
Russia’s nanotechnology development program in effect through 2015 stipulates the establishment of a regional nanoindustrial center in Kaluga.

Fueling the investment boom is a shrewd investment policy that local authorities stick to. Unlike many other regions, Kaluga opts not to change the rules in the middle of the game.

Vorsino, $500m in four years

Kaluga’s premiere success story is Vorsino industrial park. Established in April 2005, Vorsino has become a Mecca for foreign investors. In just three years, international companies have pumped more than $500m into the park.

Currently Vorsino has 14 investment agreements worth a total of $1.3bn that are now being implemented. Since it opened, almost 10,000 new jobs have been created in the park.

VEB bets on an auto cluster

The region has also made sure to secure solid funding from one of Russia’s most powerful banks, Vnesheconombank (VEB). The bank is directly involved in the region’s largest project, setting-up production sites in the Rosva and Kaluga-Yug industrial parks and the Grabtsevo technopark. These projects are worth $203m, of which VEB is kicking in $144m. And putting its reputation on the line, the Kaluga Region is the guarantor of the loan.

The first beneficiaries of the project were Volkswagen and Volvo whose factories have already been put into operation there. Both CEOs claim they are delighted to be there.

Now VEB is considering terms of its last $73.5m tranche. The bank and the regional government are close to convincing Peugeot-Citroen Mitsubishi to finally building its facility in the region, according to sources.

Here is a review of recent investment activity by well-known global players:

General Electric

Despite its sagging fortunes and its under $10 stock price in the US, General Electric (GE), a multi-national firm know for everything from home appliances to advanced jet engines, has announced plans to build a $25m factory to produce spare parts for electric turbines and a repair facility to maintain them.

The facility is to be built at the Rosva industrial park in Kaluga’s suburbs and scheduled to be put into operation in the first quarter of 2011.

Magna

Canadian auto component manufacturer Magna has unveiled its firm plans regarding a $26m auto component plant in the Grabtsevo technopark which VEB is helping set up. The facility is to be commissioned by the end of 2010, Magna managers say. The new plant will supply auto components to the nearby Volkswagen plant.

Magna also claims the new factory is expected to create 150 new jobs.

John Deere

Earlier this month word came from regional officials that US farm machinery manufacturer John Deere was ready to invest $80m in Vorsino to produce agricultural machinery.

By the end of next year the Americans plan to build warehouses for machine parts, a training center, a show-room, as well as production facilities on a 40 ha.complex. Deere says that 100 new jobs will be created.

L'Oreal

France’s L'Oreal, a global marquee name in the highly competitive cosmetics business, is also joining the parade to Kaluga. Its decision to build here proves that the region is not just a focus for heavy industry, but has sector-wide appeal. In March, the company said it would invest $30m in a new facility, creating 200 new jobs. New production is scheduled to be launched in 2011.

According to Kaluga regional officials, the projected capacity of L’Oreal’s plant is 300 million units of predominantly hair care products.

Nestle

Switzerland’s Nestle has also announced its plan to spend $28m for a second facility in Kaluga Region—this one to produce pet food.

The new plant is expected to be put it into operation in the third quarter. Nestlé’s first pet food factory, in Vorsino, was launched in 2007; it produces the well-known Friskies and Darling brands.

Patience, teamwork, success

Kaluga and its strategic banking partner are getting it right, despite the global economic downturn. Flush with success, now they are focusing their attention on global automotive giants. It is fair to expect that if the region and VEB successfully fulfill their plans and foreign investors do not backpedal on theirs, Kaluga could become one of Russia’s most powerful automotive clusters, rivaling Samara and Tatarstan.
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