The Russian economy needs a bigger share of deep processing

9 november 2018

"The national projects that have already been approved are super global documents that comprise numerous programs and sub-projects but there is also a whole class of initiatives that have been left outside the perimeter of the national projects. Even though, these initiatives should be somewhere alongside them because they are related to economic growth, development of the non-mineral resources sector and ultimately improving the quality of life and life expectancy in the country. We expect the road map produced with our joint efforts to address the problems not addressed in the existing state programs," said First Deputy Head of the Analytical Center Gleb Pokatovich opening a meeting of the subgroup for cluster policy and territorial and industry specific projects "Companies and projects specializing in deeper processing of natural resources".

Deep processing has tremendous development potential. Its share in terms of the number of companies in the processing industry is 30.4% and in the entire Russian economy it's just 3.4%. The registered jobs count to 39.9% of the jobs in the processing industry and 10% in all jobs in the country. Deep processing produces 50.7% of the added value produced by the whole processing sector and 10.5% of the added value produced by the entire economy.

"The main problem of the sector is that we export raw natural resources of the first and second processing stage (natural gas, oil, fish, lumber, gold, rare earth and precious metals), and then import the finished products," explained Anastasia Alekhnovich, Head of the Expert Center of the Presidential Representative for the Protection of the Rights of Entrepreneurs. "In fact, we only retain the minimal amount of added value in the country and the minimal number of jobs."

Market players agree with this expert opinion. According to the general advisor of Krasnoselsk Uvelirprom (Jewelry Company) Flune Gumerov, last year the company extracted 319 tons of gold while domestic jewelers processed no more than 50 tons in finished jewelry products. Partially, this situation stems from the country's legislation that makes it easier for businesses to sell raw materials rather than finished goods.

"Jewelry is targeted by anti money laundering laws. People that buy jewelry must show their passport and jewelers must write down their passport information. If they pay with a bank card, this requirement applies for purchases of upwards of 100 thousand rubles, and when paying in cash - upwards of 15 thousand rubles. We once had some Chinese tourists in our store and when we asked 18 people to give us their passport data they just left. Everybody understands this requirement is an overkill, even people that don't know very much about our industry. We are all for more monitoring but it must focus on procurement of raw materials and payment of all taxes, and instead we are now looking at a very real prospect of the cancellation of all the existing special tax regimes aimed at supporting small and medium sized businesses," Mr. Gumerov commented.

Krasnoselsk Uvelirprom is a member of the Kostroma Region Jewelry cluster. The region manufactures almost a third of all gold and a fourth of all silver jewelry made in Russia, processing over 33% of all precious metals of the total amount of gold and silver processed in Russia. Members of the cluster are of the opinion that Russia has great potential in the global jewelry market but in order for the Russian manufactures of the finished goods to become global market leaders in terms of exports, the Federal taxation and customs laws need some serious amendments.

Another very important project of the future road map, the amber cluster in the Kaliningrad Region, has run into similar problems. There are 601 amber processing companies operating in the region, and 156 of them specializing in the manufacture of jewelry, while 121 process precious stones. At the moment, the Kaliningrad Region only processes 7% of the amber found there. The goal of the new amber cluster is to increase the share of domestic processing of the amber found in the Kaliningrad Region by creating a cooperative chain of companies from the extraction of the raw materials (amber) to the development of the design and manufacture of jewelry as well as creating a global chain of retail outlets.  Development of industry clusters on the basis of existing groups of companies specializing in a specific industry is going to be easier and more effective than building new capacity from scratch, the specialists believe.

"The decree of the Russian president clearly states that one of the goals is to increase investments in fixed assets and increase their share in the total domestic product to 25% while increasing the contribution of small businesses to the GDP to 40%. These are the kinds of targets that can't be achieved by selling cheap products so we need to develop sectors that produce high added value. In accordance with the Growth Strategy, deeper processing of natural resources in the traditional sectors can generate an additional 0.3% of GDP growth per year," Ms. Alekhnovich summed up.