Investments in Chechnya: more money, but the results are not obvious

Victoria Pavlova

Recently, the Ministry of Economic and Trade of the Chechen Republic presented to Deputy Prime Minister Alexander Novak a model of economic development until 2030, which provides for 5 complex investment projects. This is the reconstruction of the Grozny airport named after A.A. Kadyrova, tourist SEZ Veduchi, industrial SEZ Grozny, a cluster of building materials and an agro-industrial cluster. The only thing that Chechen officials promise at the exit is the creation of 5,838 jobs.

The economic "miracle" of Chechnya

For a start, we must admit: judging by the numbers, Chechnya is developing. In October 2021, SberCIB recognized the economy of Chechnya as the fastest growing in the last 2 years. Viktor Solntsev, Associate Professor of the Department of Corporate Governance of the Graduate School of Corporate Governance, RANEPA, confirms this fact with figures:

- In general, Chechnya is the most dynamically developing republic in terms of macroeconomic indicators, its growth rate is more than 15% in annual terms. Chechnya started from a low base (that is, the republic’s economy was, to put it mildly, very small), but now it is reaching sizes that, in principle, can be regarded as attractive for investment. For example, the gross regional product (GRP) is more than 200 billion. The republic has the right to attract 100 billion rubles simply because they will be invested within several years, and the economy will be able to develop and include these objects. But on one condition - that these projects must be cost-effective, effective, and that all the money is directed in a targeted way on the project's tasks.

As Natalya Zubarevich, a professor at Moscow State University, Doctor of Economics, notes, Chechnya is radically different from other regions of Russia by the growth of investments, which even the coronac crisis did not prevent:

- Yes, the volume of investments there is growing. Moreover, if we take investments from 2020 to 2019, then they fell throughout the country, but not in Chechnya. The same volume. Because the federal center helped. And if we take the cumulative volume of investments from 2019 to 2013 as a cumulative total, then investments in Chechnya have grown by a third. And across the country they have decreased.

“In 2019, the volume of investments in the Chechen economy amounted to 82.6 billion rubles, which is a good average level”, - adds Mikhail Chernyshov, Ph.D.

Money in Chechnya is buried in the ground

But the volume of investments is one thing, and the source of these investments, their effectiveness, is quite another. There are already many questions here. The Ministry of Economic, Territorial Development and Trade of the Czech Republic published a certificate of investment activity in the region as of July 1, 2021. Fixed capital investments increased in the 1st quarter. 2021 up 55% over the same period last year. This is very good, but the list of the largest completed investment projects includes the branch of the Pension Fund of the Russian Federation, the construction of the fence of the SEZ "Grozny" with the preparation and survey of the territory, 4 apartment buildings and only one industrial facility - the solar power plant LLC "Hevel RG" in the Naursky district, which gave only 10 jobs. Among the largest unfinished investment projects are the Akhmat Tower multifunctional complex, the Grozny Mall shopping and entertainment center, a residential neighborhood in the Leninsky district of Grozny, the Minutka multifunctional complex, the Grozny International University, the creation of the Kazbek construction technology park and the expansion of the existing cement plant in the village ... Chiri-Yurt. As you can see, the industry that creates added value is not a priority in Chechnya.

Natalya Zubarevich concludes that the success of the region, and indeed of the entire North Caucasus Federal District in the investment field, is primarily associated with the generous injections of state money:

- If we take all investments in the Russian Federation as 100%, then the Chechen Republic accounted for 0.4% in 2020. But - we are mainly talking about budget investments, business does not invest there. If we take all the republics of the North Caucasus, then their share in all investments in the country is less than 3%. But in budget investments - 10%. Why not invest when you are given a lot of money all the time in the form of transfers from the federal budget?

The flow of money to the Chechen Republic does not really dry out. According to the federal treasury, the revenues of the republican budget for 8 months of 2021 amounted to 97.13 billion rubles, of which only 13.68 billion rubles fell on own tax and non-tax revenues, and 81.95 billion rubles were budget transfers. And this is not a unique situation: in January-August 2020, budget transfers gave 73.81 billion rubles out of 85.46 billion rubles of all revenues.

This approach, according to Natalia Zubarevich, negatively affects the efficiency of investments:

- The effectiveness of these investments raises very big questions. If they give you money, you can invest whatever you want, you can dig a bunch of foundation pits and put a bunch of foundations. What will be the economic effect of all this is a very big question. If the federal budget gives a lot of money - well, that's investment. And this is not about the economy, this is about the disbursement of funds.

Mikhail Chernyshov, however, notes that, according to the studies of the Russian Academy of Sciences, in terms of investment efficiency, there are regions in Russia that are even worse:

- We conducted research on the effectiveness of investments in regions and macroregions of the Russian Federation. I will make a reservation that Rosstat data so far allow us to make calculations only for 2018 and earlier, but the trends of recent years are more or less constant. The Chechen Republic is not a leader in terms of investment efficiency (in the Okrug it is slightly worse than in the Stavropol Territory), but it is not an outsider either. Her group includes the Perm Territory, the city of Sevastopol, the Penza, Saratov and Kostroma regions. The country has Crimea, Kalmykia, Ivanovskaya oblast, where the efficiency indicators are twice as bad. There are subjects that look much better: St. Petersburg, Moscow, Kaliningrad, Moscow, Tula regions, some oil and gas regions. In terms of the capital-labor ratio (per 1 employed in the economy), Chechnya looks a little lower than the average for the Russian Federation (in the Chechen Republic - 1.1 million rubles, in the Russian Federation - 2.9 million rubles), but in the North Caucasus Federal District there are few large enterprises and lags behind the average Russian level, therefore Chechnya is in the middle of the rating for the North Caucasus Federal District in this parameter.

Such positions can hardly be justified. “Not the worst” with such cash injections is a dubious indicator.

Gold jobs

Maybe future investments of 100 billion rubles, promising the creation of 5835 jobs, will help correct the situation and create conditions for future successful independent development? Still, for each workplace there are 17 million rubles - a rather large amount. But experts have big doubts. Viktor Solntsev points out the problems with the return on investment:

- Job creation in itself requires at least three annual salaries, this is tolerable. But when the amount exceeds tens of millions, it is already unbearable. Projects never pay off if 17 million are spent on one job. And only 5800 jobs are, of course, to put it mildly, very few. They will not affect the broad masses of the population with very low incomes relative to the entire country. The region can receive losses from the operation of expensive facilities, and if there is no payback, but there is no development either. We'll have to ask for even more money to maintain these facilities, as happened with the Olympic facilities.

Natalia Zubarevich also sees no economic sense in such a ratio of investments and jobs:

- Workplaces in the amount of 5800 jobs, 17 million rubles each - this is economic madness. In general, according to their official statistics, which are most likely overstated, almost 1 million 479 thousand people live in the republic at the beginning of 2020. Almost 1.5 million people. Minus the children, the elderly, about 750 thousand people are the able-bodied population. And here there are 5800 jobs. Where is 750 and where is 5 thousand?

Mikhail Chernyshov sees the main problem in setting goals and choosing priorities:

- A high-performance workplace requires a large capital investment. Therefore, when tourism and agriculture are prioritized for the North Caucasus, serious economists only laugh bitterly. The republics of the North Caucasus Federal District have too few suitable lands for modern agriculture. In order to live off tourism, you need a lot of tourists and a small population. Both of these industries have their own perspectives, but they will not fill the budget and most of the population will not be fed. We need other, more realistic priorities.

The expert gives a clear example of the "efficiency" of investments with state support in the Caucasian way:

- For example, a few years ago a Caspian sheet glass plant was built in Dagestan. They built a similar plant in Ryazan for credit funds twice as expensive as the Americans at their own expense. More than 10 billion rubles were allocated by VEB under the guarantees of the Ministry of Finance of Russia. Immediately after the start of work, the debts of the plant exceeded its assets. In 2016, the plant became the property of VEB, then in 2019 it went through bankruptcy, and at the beginning of this year JSC Salavatsteklo was bought out for 3.16 billion rubles. Investment indicators are good, but efficiency is low. Taking into account inflation, the losses to the state on the project amounted to more than 80%.

The editors of Novyye Izvestia sent an official request to the Chechen Ministry of Economic and Trade and Trade with questions about how the department assesses the efficiency of investments, what are the sources of funding for the program until 2030, what opportunities they see for increasing the efficiency of invested funds. However, at the time of publication of the material, no response was received.

The last hope is that the new unified development institution Kavkaz.RF, which has become a result of joining the North Caucasus Resorts JSC, the North Caucasus Development Corporation JSC and the Elbrus Resort JSC, will be able to drag private investors into the region. But, judging by the comments of experts, only local business has some chances for development: the corporation acquired an exclusively pro-Chechen bias, and even then with its own peculiarities.

- Business will not go there. There will be only Chechen business, because it is taxed and transfers money to the republic. But this is precisely either to the Akhmat Kadyrov Foundation, or somewhere else - this is where the Chechen business transfers money. But I have not heard that he actively invested in business projects. I have not seen anything perceptible in the news stream about the success of investment projects in Chechnya, - explains Natalya Zubarevich.

But at the same time, despite the poor economic prospects of ski resorts (according to Mikhail Chernyshov, according to the initial project of JSC "Resorts of the North Caucasus", in order to be profitable, it was necessary to serve about 20 million tourists a year, although in Russia about 200 thousand people) support from Kavkaz.RF receives the Veduchi resort, so beloved by Kadyrov, which can accommodate only a couple of hundred people.

You can't stop paying...

Or maybe it is worth depriving Chechnya of funding for federal programs altogether, leaving only the necessary support for the social sphere?

Mikhail Chernyshov believes that it is private entrepreneurship from the bottom that can raise the economy of the region, since the most valuable resource of the Caucasus is the people living there. But the problem is that entrepreneurial activity is limited by an unfavorable business climate:

- The way out, in my opinion, is to let the business work normally, grow without the threat of “weaning”, cheap loans, and have free access to the markets. The state needs to pay more attention to the administrative environment than to “get into business”. Residents of the regions of the North Caucasus are not particularly interested in the billions of oil and gas going to support their poverty. Teachers, doctors and even civil servants in the Caucasian regions receive several times less than in many other regions. Fortunately, in the republics many rural residents have not yet forgotten how to work and drink little alcohol. Social ties are strong, relatives help each other. There is a positive demographic trend. There are many children and youth. People are the main resource of the Caucasus. They want to earn money, they are not afraid to take responsibility, to create their own business. The Caucasus has not lost its passion and has enormous entrepreneurial potential. Not megaprojects from above will turn the North Caucasus from subsidized regions into donors, but the entrepreneurial success of tens of thousands of "business projects" from below.

But in reality, independent development of the Caucasus from the bottom is hardly possible. According to Natalya Zubarevich, nothing will change in the foreseeable future, hundreds of billions of rubles will continue to be poured into the region and spent not on providing tax benefits and subsidies to a wide range of entrepreneurs, not on protecting their interests, but on individual large projects that will not have a significant impact for the welfare of one and a half million people.

- This includes solving political problems in this way. This can continue for a long time, as long as the federal budget has money and as long as the areopagus of power is preserved in our system, which it has been retaining for the third decade.

Public investment can be a powerful tool. Turkey, for example, in this way in the format of public-private partnership has raised the tourism industry to an unattainable height. But when the entire state system opposes the support of entrepreneurship as such, focusing on selected projects, then investments turn into a feeding trough for those who are either very close to power, or represent this very power.