Arkhangelsk Region Overview
by Igor Yegorov, BISNIS Representative in Northwest Russia
March 2003
(See related article – History of Archangel-Maine Rule of Law Project)
Summary
Arkhangelsk Region belongs to the Northwest Russia Federal District and is located in the northern part of the district. Important regional features include harsh climate conditions, vast territories and low density of infrastructure. The region is not only a supplier of sawn timber, cellulose, plywood, fish and oil, but it is also home to several shipbuilding and machine-building enterprises, a military naval base (where the Kursk submarine was based), and a space-aviation launching site. The most important industries in the region are wood processing, pulp & paper, fishing and fish processing, mining, as well as transportation and oil extraction. Extraction of diamonds and exploration of new oil and gas fields are also emerging as important sectors of the region’s economy.
In spite of its cold climate and remoteness from consumer markets and industrial clusters, Arkhangelsk Region can be attractive to U.S. investors interested in its natural resources. U.S. companies working in wood processing, fish processing/trading and transportation/logistics, as well manufacturers of equipment for these industries may be interested in looking at Arkhangelsk Region as a potential market for their products/services. This report is based on information received from government officials and private businesses by a BISNIS representative during an outreach to Arkhangelsk Region.
The report contains the following information:
- Basic regional information about Arkhangelsk Region
- Infrastructure
- Key Industry Sectors
- Foreign Trade and Investment in Arkhangelsk Region
- Business Travel Conditions
- Contact Information
Basic Regional Information
1. Arkhangelsk Region, including Nenets autonomous district, is the largest in Northwest Russia, covering 589,900 sq. km (230,000 sq. miles). Arkhangelsk region also includes several islands, such as Novaya Zemlya Archipelago (New Land), Franz Josef Land, Solovetskiye Islands, Vaygach, Kolguyev and many other islands. The region’s size is approximately equal to the size of Texas. Average temperature in July is 14-16 Celsius (approximately 60 Fahrenheit). It can be very cold in the wintertime, which lasts up to 250 days a year. A large portion of the territories is located beyond the Polar Circle. Arkhangelsk Region borders the Karelia Republic in the west, the Vologda and Kirov regions in the south, the Komi Republic in the southeast, and the Tyumen Region in the east. Waters of three seas wash the region: the White Sea, the Barents Sea and the Kara Sea. The main rivers are Severnaya Dvina, Vaga, Pinega, Onega and Mezen’. Overall, there are 70,000 small and large rivers in the region. The largest part of the territory is covered by forests (39%) and reindeer pastures (24.2%). The rest is distributed between islands (19%), swamp areas (12.5%), rivers and lakes (4%) and agricultural land (1.3%).
2. The total population of the region as of January 2001 was 1.44 million—less than 2 people per one square mile. Over one million live in cities and towns. The mean age of population is 37 years old. Difficult climate conditions and long distances predetermined distribution of the population mainly along both natural and created transportation routes (rivers and railways) and on the seashore. Arkhangelsk Region is divided into 20 municipal districts. The main city, Arkhangelsk (370,000 inhabitants), has a history dating back almost 400 years. Smaller towns in the region include Severodvinsk, Novodvinsk, Kotlas, Koryazhma, Mirniy and Onega. Novodvinsk and Severodvinsk are located near Arkhangelsk and together form an industrial-transport cluster. There are 38 urban-type villages and over 4,000 villages in the region.
3. Arkhangelsk Region has historically been a cornerstone of the Russian state system. Slavs from Novgorod started to settle down along rivers and the seashore in the tenth century. Over centuries the vast territory was colonized (including parts of territories which currently belong to Murmansk, Vologda and Komi regions). Arkhangelsk has always been an important center of the Russian spiritual life. A great number of ancient monasteries can be found even in the most remote places of the region. Of course, the most famous one is Solovetsky monastery, located on Solovetskiye Islands. Sadly, the monastery became one of the cruelest concentration camps during Soviet years known as the GULAG. Today, the monastery has been restored and attracts thousands of pilgrims and tourists from all over Russia and from abroad. In the period from the year 1581 until early 1700, Arkhangelsk was the only Russian port able to carryout international trade. Extensive trade relations with Great Britain, Holland, Germany and many other countries characterized life of this northern city for many centuries. After the foundation of St. Petersburg in 1703, which overtook the role of the major foreign trading outlet, Arkhangelsk has become less important for the Russian external links. Nevertheless, being located far inside Russia, it has remained an important port. For example, Arkhangelsk was intensively used during the Second World War to deliver cargo from the Western Allies to the Soviet Army. A long history of trading relations has prompted development of shipbuilding industry in the region. Shipbuilding is still a very important industrial sector, especially in the city of Severodvinsk.
4. Traditionally, fishing and forestry are the most important industries in the region. Current total forest reserves are estimated at approximately two billion cub meters (20 billion cub feet). Fir tree accounts for 55% of the wood stock, pine 26% and birch 16%. There are 78 oil and gas deposits, mainly in Nenets’ autonomous district and on the sea shelf (Timan-Pechora oil & gas province). Estimated oil reserves are over 1.2 billion tons and estimated gas reserves are 620 billion cub meters. An important project is the development of the Lomonosov diamond deposit, which has already been started. Diamond reserves are estimated at 832 million carats. Arkhangelsk region also has coal deposits (3.7 billion tons), building materials (limestone, dolomites, cement), copper ores, zinc, lead and some other.
Infrastructure
5. Waterways
The best form of transportation of cargo to and from Arkhangelsk Region is by sea. Sea transport plays the major role in international trade of Arkhangelsk Region, as well as in supplying some settlements along the seashore and on the islands. The main ports are located in Arkhangelsk—Narjan-Mar, Onega and Mezen’. Cargo shipments from Arkhangelsk can be transported to central parts of Russia. The seaport in Arkhangelsk has 124 berths (docking points) and is able to handle all types of cargo including timber, cellulose, containers, oil, metal, etc. Vessels with 9.2 meters collapse (depth below water) and 175-200 meters length can be accepted. The port has the only container terminal in Russia’s European North (Russia’s regions west of the Urals), where 5,762 TEUs can be stored simultaneously, including up to 200 refrigerator containers, and up to 2,200 containers for hazardous cargoes. The annual throughput capacity of the container terminal is 75,000 TEUs.
6. According to Mr. Nekrasov, General Director of Belomortrans and the largest international forwarder and customs broker of the region, the Arkhangelsk seaport handles approximately 15,000 containers annually. The port’s capacity is utilized by 20-25% and volume of imports through Arkhangelsk can be increased substantially. It takes one day longer to ship from Rotterdam to Arkhangelsk than to St. Petersburg, but because no waiting is necessary for customs clearance, cargo arrives to Moscow and other Russian regions faster. Opportunities for shipment to Russia through Arkhangelsk can be used until the port of St. Petersburg develops its capacity and increases the speed of cargo processing substantially. The main shipping company in Arkhangelsk is the Northern Shipping Company. This company is able to ship general, timber, bulk cargo and containers worldwide. It also carries out delivery of cargo to locations without docking points. Northern Shipping Company provides dredging services, icebreaker escort, as well as diving, rescue, and underwater technical works. The company has icebreakers to provide year-round navigation in the ports of Arkhangelsk and St. Petersburg.
7. Rail and Road
The density of rail network per square mile in the region is low—approximately three miles of railroad per 1,000 sq. miles of territory. There are almost no major roads or railroads leading from the region to the west. Because the transportation system is meridian (i.e. it is oriented in the north-south direction), the transportation of cargo from the east to the west is a long process. The main railway goes from Arkhangelsk through Vologda and Yaroslavl to Moscow. There is a rail link between Arkhangelsk and Murmansk. No fast and short rail, river or road link exists between Arkhangelsk Region with eastern parts of Russia. The only railroad from east to west runs in the south of the region, from Komi Republic through Kotlas in Arkhangelsk Region to Pudozh in Karelia Republic. Railroads carry the largest tonnage of cargo, followed by sea transport and waterway transport.
8. The density of major roads in the region is some ten miles per 1,000 sq. miles. The road network is underdeveloped, with the main motorway connecting Arkhangelsk with Central Russia going through Velsk to Vologda, Yaroslavl and Moscow. The main road connection with St. Petersburg goes through the city of Vologda. A few small roads connect towns and cities of the region and with neighboring regions. There is a lack of good roads in the region, and many roads are seasonal, i.e. impassable during certain periods. Lack of good roads impedes development of the economy (forestry for example).
9. Air Connections.
The main civil airport is located in the city of Arkhangelsk. International flights are available to Finland (Rovaniemi) and Sweden (Oulu). There are regular flights to Moscow, St. Petersburg and some other Russian cities, carried out by AVL (Arkhangelsk Airlines), Aeroflot, and Pulkovo Airlines. There are also small airports in many regional cities as well as several military airports. The flight time from St. Petersburg to Arkhangelsk is 80 minutes. The flight time from Arkhangelsk to Moscow is slightly longer. The best way to travel to Arkhangelsk is by air.
10. Telecommunications.
The largest Russian cellular operators—Megaphon and MTS—are available in Arkhangelsk (GSM standard). Phone connection to the city of Arkhangelsk and especially to smaller cities and towns of the region can be quite bad and low quality. It is sometimes difficult to get through. Internet services are offered by a number of companies in Arkhangelsk, and e-mail is a normal way of communication. According to the International Relations and Tourism Development Committee of the regional administration, there is an opportunity to do teleconferences at the Administration’s facilities.
Key Industry Sectors
11. Arkhangelsk is a northern region and harsh climate conditions influence all aspects of life, including business and economy. Despite a number of difficulties, the need to exploit natural resources and get access to the sea has motivated the colonization efforts for many centuries. The economy of Arkhangelsk Region has traditionally been based on the exploitation of forests (mainly logging at the first stages, then moving to processing of wood), fishing, and transportation. High costs of building infrastructure has limited its development to a few key projects, such as the main railway, the main motor road, a few ports, power stations, etc. Outside of cities and towns, infrastructure is almost non-existent. Economic activity is concentrated in a few key sectors, and, partially as a result of Soviet time monopolization and gigantism, the largest share of output is produced by several large industrial enterprises.
12. In all northern countries, including the United States, economic and social development of northern territories is supported through a wide array of governmental measures. This was also the case in the Soviet Union, where northern areas received additional funding from the country’s budget, and construction of key enterprises was a nation-wide effort. However, these support measures almost ceased to exist with the collapse of the Soviet Union. This left many of Russia’s northern regions, Arkhangelsk being no exception, with a heavy burden of large ineffective enterprises, military naval bases, outdated infrastructure and suffering people. Arkhangelsk Region has gone through these difficulties and is now on the path to economic stability, but its economic growth will probably be limited by an outdated infrastructure, which requires huge investments to continue proper functioning.
13. Logging, wood processing, and pulp and paper.
The region produces 30% of Russia’s exported sawn material and 25% of paper and cellulose exports. Forestry, wood processing and pulp & paper are very important sectors of the economy—contributing over 40% to the regional production volume. Woodcutting in 2002 totaled 8 million cub meters (80 million cub feet), but 23 million cub meters can potentially be cut. According to regional administration, there are over 200 wood cutting enterprises in the region and some 30 wood processing companies. According to expert estimates, regional enterprises produce 1.5-2 million cub meters of sawn timber, plywood, glued blanks, fireproof plywood slabs and other wood products, approximately half of volume being exported. There are also furniture manufactures. One of the most successful is Aquatechnika, whose furniture exports to the U.S. exceeded $4 million last year. An impediment to increased production is poor road infrastructure, especially bad access to forests. Modernization and productivity enhancement on existing sawmills are the priorities for development of logging and wood processing sectors. Active processing and trading companies include Arkhangelsk Plywood Plant, Dvinosplav JSC, Primorsky Sawmill, Onega Sawmills, Solombala Sawing and Woodworking Combine, Timber Mill N3 and Timbex.
14. The three pulp & paper manufacturing facilities in the region are Kotlas (part of St. Petersburg-based Ilim Pulp Enterprise), Arkhangelsk (part of Titan holding), and Solombala mills. In 2002, their output totaled 728,000 tons of pulp, 320,000 tons of paper and 674,000 tons of cardboard. The mills have their own logging capabilities and cut a significant share of needed timber themselves. For example, Kotlas pulp & paper mill has 16 logging companies, which recently started to use two Timberjack logging machines (total investment of $2 million). Products include sulfate pulp, cardboard, coniferous sulfite bleached cellulose, offset printing and bag paper, Kraft liner, foliage sulfate bleached cellulose etc. Arkhangelsk pulp & paper mill is part of Titan Holding with nearly 25,000 employees. Titan produces 35% of Russia’s cardboard. Its logging companies cut two million cub meters of timber every year (25% of logging in the region). For that purpose Titan bought 13 Caterpillar complexes and intends to purchase or lease an additional 10. Titan is currently in the engineering stage of a project to build a pulp literature processing plant in the city of Podolsk for $120 million.
15. Oil & Gas
Due to large unexploited reserves, oil companies consider Arkhangelsk Region a very promising place for development of new projects. Russian and international oil companies are pursuing opportunities in the development of the Timan-Pechora oil field—the most active being Lukoil, Rosshelf, Conoco Statoil, Norsk Hydro and Tatneft. Since oil companies will be targeting international markets, transportation of oil from new deposits to the consumer will be an important issue. Pipeline capacity is limited and railroad is not the best option because oil cannot be transported during the winter months without heating due to low temperatures. The capacity of railroad network is not sufficient and rail transportation is not cost effective in times of low oil prices. Oil companies will have to either build an oil terminal and a new pipeline, or find alternative methods of bringing oil to the market. There are huge gas reserves in the region and on the sea shelf. Stockman gas field is among Gasprom’s best prospects for future growth. Besides gas exploration and extraction, the gas pipeline through Vologda Region to Arkhangelsk is currently under construction. A methanol plant for processing of gas is also being built near Arkhangelsk.
16. U.S. oil company, Conoco, was the first foreign firm to invest in the region’s oil sector ten years ago. Polar Lights’ (Conoco’s JV with Arkhangelskgeoldobycha) investment in oil extraction in the Nenets Autonomous District exceeded $400 million. Today, Polar Lights is producing about 1.7 million tons (14 million barrels) of oil per year, which is transported through the Russian pipeline system and sold both abroad and domestically. The venture is also developing three satellite fields, previously discovered by Arkhangelskgeologia and is planning to drill several new wells to develop these additional fields. The Polar Lights’ license area is located in the Nenets Autonomous District in the Timan-Pechora region, about 125 kilometers south of the Barents Sea, above the Arctic Circle and west of the Ural Mountains.
17. Transportation of oil from Arkhangelsk by sea is handled by ROSNEFT-Arkhangelsknefteprodukt. The company has several petroleum storage stations along the railways and the export terminal in the port. The terminal has two 150 meter-long piers capable of mooring oil tankers with draft up to 9.2 meters and 25,000 tons of deadweight capacity. In 2002, the terminal processed two million tons of oil products, 95% of which were exported. In 2003-2004, the company plans to carry out an expansion program aiming at increasing the annual throughput capacity to four million tons of oil. Another major Russian oil company Lukoil invests in the region through its subsidiary Arkhangelskgeoldobycha. It holds 22 licenses for oil prospecting, exploration, and production and 12 licenses for hard minerals prospecting and production, including prospecting and production of diamonds. Arkhangelskgeoldobycha plans to increase oil production up to three million tons by 2005.
18. Fishing and Fish Processing
Fishing is one of the traditional industries of the region. Local fishing companies catch over 180,000 tons of fish every year. Output of processed and canned fish is over 120,000 tons. One of the most successful companies is Grumant Fleet. Several year ago the company attracted its first long-term loan from a Norwegian bank under the guarantee of the regional administration and built three new fishing trawlers, $7.5 million each. The trawlers of the new model proved to be very efficient and the company plans to build a few more modern fishing vessels. Grumant Fleet is part of a holding, which includes ship-building, fish processing (Belomorye company), and trading companies with the total number of employees exceeding 600 people. Belomorye company has acquired large facilities in Arkhangelsk and installed several refrigerators and a fish processing line. It currently produces a wide array of fish products and exports high-quality fish fillets. The company plans to expand its storage, processing and packaging capabilities, develop new product lines, and move into new markets. There is an opportunity for U.S. companies to collaborate with fish plant Belomorye and fishing company Grumant Fleet on these projects.
19. Machine-Building
The two large enterprises in the nuclear submarine shipbuilding are Zvezdoychka and Sevmash, located in Severodvinsk. During Soviet times, these companies built nuclear military submarines but now their product line has expanded to include various types of civil ships—mainly fishing trawlers and ice-resistant platforms for oil exploration and extraction on the sea shelf. The companies are also active in several nuclear safety, conversion, and nuclear submarines utilization programs. Sevmash has received an order from Rosneft and Gasprom to build an offshore ice-resistant platform for oil filed “Prirazlomnaya” in the Pechora Sea. The total cost of the project is $1 billion. Sevmash is also a contractor of several oil companies to manufacture sea shelf platforms for oil and gas development in Sakhalin. Zvezdoychka has a contract from the Finnish shipbuilding company, Azipod, to supply screw propellers for civil ships. The company is also Norway’s contractor to build bearing structures for tidal electrical power stations. Zvezdyochka has experience in designing and manufacturing of floating bridge piers, pontoons, pontoon bridges of different length, ships, fishing trawlers, jack-up drilling rigs for exploration and exploitation of oil and gas offshore wells in Russian Arctic. However, attraction of investment is difficult due to the fact that the enterprise is still government property and is engaged in Russian military programs.
20. Diamond extraction
The single development-ready diamond deposit in Europe named after Russian scientist Lomonosov is located in Arkhangelsk Region. Gems and diamonds make up 60% of the raw material content. Russian diamond company ALROSA plans to begin extraction of diamonds in 2004. A combine for processing of 5.6 million tons of ore should be completed by 2006. According to the press-service of the Arkhangelsk administration and to ALROSA’s own comments, the total investment in the exploration project exceeds $350 million over a period of several years. In 2004 alone, the company plans to invest approximately $100-110 million in the development of deposit. The governor of the region Mr. Yefremov believes that diamond exploration will bring additional orders to local construction companies and help raise employment.
21. Banking and Finance
The banking industry in Arkhangelsk is represented by a relatively large number of Moscow and St. Petersburg banks, as well as local banks. The most active banks are Sberbank (St. Petersburg), Baltuneximbank (St. Petersburg), Industry-Construction Bank (St. Petersburg), MDM Bank (Moscow), Moscow Industrial Bank (Moscow), Lesobank (Arkhangelsk), Pervy Sudokhodny Bank (Arkhangelsk) and several other. International payments can be made easily and without delays through almost any regional branch. However, it is not easy to receive trade and investment financing, for several reasons: banks usually require collateral exceeding the amount of a loan by a ratio of two; crediting limits are small because of insufficient own capital; loans are only up to one year. Due to these obstacles all large companies in the region attract financing from Moscow or St. Petersburg banks. However, for small and medium companies access to credit resources is very difficult. There are seven leasing companies in the region, for example Arktika (Arkhangelsk) and Baltleasing (St. Petersburg). Their main activity is leasing of vehicles and various equipment. Indeed, development of leasing is also constrained by the tough conditions imposed by banks.
22. Consumer Market
With the total population of some 1.4 million people, the region is not an attractive or large consumer market. According to statistics produced by the regional branch of the State Statistical Committee (Goskomstat), the average salary in Arkhangelsk Region in 2002 was 5,000 rubles per month (approximately $160), increasing by 33% year-on-year in nominal terms and by 14% in real terms. In December of 2002 the average salary in the region was 6,500 rubles ($200). Since official statistics in Russia usually underestimate personal incomes, it can be presumed that actual salaries are even a bit higher than that. Prices in Arkhangelsk are comparable to prices in other Northwest Russia regions. Due to pick-up in the region’s core industries in recent years and improvement of financing of federal programs, the personal incomes in the region have stabilized on a mean Russian level. However, for U.S. exporters the main opportunities lie not on the consumer market front, but in working with industrial buyers of equipment and technology.
Foreign Trade and Investment
23. The region’s economy is export-oriented. The export products are oil (27% of the total exports in 2001), pulp (26%), wood products (18%), paper and cardboard (17%) and vessels (9%). Imports include various equipment for key industries (32% of the total imports in 2001), ships (38%) and chemical products (6%). It is important to note that ships produced in Arkhangelsk are usually exported to Norway for fitting and equipping and then re-imported back. Arkhangelsk Region’s main trading partners on the export side are Poland, Italy, Germany, Netherlands, and Ireland. Exports to the United Stated in 2001 were a mere $7 million. The region imports various products from Great Britain, Finland, Sweden, Germany and Austria. Imports from the United States in 2001 totaled $6 million.
24. The single largest foreign investment in the region is in the Polar Lights (Conoco’s JV) $400 million oil extraction project. Some other foreign companies in the region are involved in logging and wood processing, transportation, trade, fishing and consumer goods manufacturing, including Russian-German company Holz Dammers (wood processing), Russian-Danish JV Shalakusha Wood Processing Industry, Danish company DLH Nordisk and Russian-Norwegian Solombala Shipyard. Norwegian companies Statoil and Norsk Hydro have placed substantial orders with Zvyozdochka and Sevmash for manufacturing of oil sea shelf platforms and metal structures.
Development Priorities and Investment Climate
25. Economic priorities of the region stem from the necessity to maintain and develop its industrial potential and infrastructure and respond to new challenges, for example, environmental problems. Development of region’s basic industries such as wood processing, fishing and fish processing remain a priority for the local administration and companies. Shipbuilding and conversion of military enterprises are as well high on the reform agenda. Energy efficiency is also a concern in the region, where heating period is 256 days a year. The region is dependent on mazut (black oil) for heating and electricity supply. The problem is that, apart from being expensive, this type of fuel has to be shipped from Central Russia, which further raises the costs. Electrical power facilities are worn out and, if plans for construction of a nuclear power station don’t materialize, than the region may experience a shortage of power supply in several years. This is why energy efficiency, alternative sources of energy and efficient ways of power supply of remote settlements are a priority.
26. Arkhangelsk Region does not offer any special treatment or investment incentives to foreign investors. Federal legislation is currently not in favor of competing regional investment regimes and limits possibilities for granting tax concessions to regional portion of the property and profit taxes. Arkhangelsk Region has adopted all the necessary legislation to make these concessions work. However, tax breaks are not the primary concern of investors, who mainly seek stable, predictable conditions and equal treatment. Usually, the regional administration appoints a supervisor to large private investment projects. Investors are also invited to make presentations of their projects to the administration and discuss any positive or negative effects on the social stability and incomes. Administration is especially willing to support projects, which bring employment and social benefits to the region.
Business Travel Conditions
27. Almost all large regional companies have headquarters in the city of Arkhangelsk. The best way to travel to Arkhangelsk is by air, whereas other cities in the region are far more difficult to reach. The best hotel in the city is Pur-Navolok, which has recently opened its second building, fitted according to international standards. There are a lot of restaurants and cafes in the city. Transportation is easy as taxies are cheap and can be ordered by phone. Credit cards are accepted in the Pur-Navolok hotel and in the best restaurants, but business travelers are advised to confirm each time they intend to use a credit card. Cash can also be withdrawn through automated telling machines or in branches of local banks. The airport is within 20 minutes driving distance from the city. It is easy to catch a taxi by the airport building.
Contact Information
Office of the Head of Arkhangelsk Region Administration
Mr. Anatoliy A. Yefremov
Head of the Administration
Troitsky av., 49, Arkhangelsk, 163061, Russia
Phone: 7 (8182) 437912
Fax: 7(8182) 432112
www.dvinaland.ru
Department of Economic Development
Dr. Vladimir A. Kolomentsev
Deputy Head, Director of Economic Department
49 Troitsky pr., Arkhangelsk 163061, Russia
Phone: +7 (8182) 646672
Fax: +7 (8182) 646278
Email: kolomentsev@dvinaland.ru
Foreign Relations Department
Ms. Svetlana Gorlanova
Deputy Head, Director of Foreign Relations and Tourism Development Department
49 Troitsky pr., Arkhangelsk 163061, Russia
Phone: +7 (8182) 646521
Fax: +7 (8182) 211203
Email: intercom@dvinaland.ru
Arkhangelsk Investment Company
Mr. Eugene A. Mikhaylovsky
General Director
12 Voskresenskaya str., Arkhangelsk 163000, Russia
Phone: +7 (8182) 652127
FAX: +7 (8182) 652127
Email: progect@atnet.ru
29. U.S. Government Contact
For more information you may also contact:
Igor Yegorov, BISNIS representative for North-West Russia
http://www.BISNIS.doc.gov
E-Mail: Igor.Yegorov@mail.doc.gov
Tel.: (7-812) 326-2585
Fax: (7-812) 326-2561
25 Nevsky Prospect, St. Petersburg, 191186 Russia
This report is provided courtesy of the Business Information Service for the Newly Independent States (BISNIS)