Economic cooperation in the Barents Region

barents-economy-2013.jpgRune Rautio, Akvaplan-niva AS ; Alexei Bambulyak, Akvaplan-niva AS
Martti Hahl, Barents Center Finland Oy

 August 2013, Akvaplan-niva AS Report: 6265

The Norwegian Ministry of Trade and Industry initiated an overall mapping of the development of Norwegian, Finnish, Swedish and Russian economic cooperation in the Barents Region through the recent 10 years. 

In the study the focus is on activities and results of east-west cross-border business cooperation between Norway, Finland, Sweden and Russia within the Barents Region covering the period from 2003 to 2013.  

The overall conclusion is that the future of the Barents business cooperation depends much on the development of the regional economies and regulatory frameworks, continuous public support for elaboration and maintenance of business frameworks and infrastructure as well as steady, active political dialogue on both national and regional levels. 

You can download the publication from here.


Summary

Sustainable development in the Barents region was stated in the 1993 Kirkenes Declaration as the objective of the work of the Barents Euro-Arctic Council, and economic development and business cooperation have since then always been in focus at the forums of Barents cooperation. Today, the Barents Euro-Arctic Region includes the counties Finnmark, Troms and Nordland in Norway; Norrbotten and Västerbotten in Sweden; Lapland, Northern Ostrobothnia and Kainuu in Finland; Murmansk and Arkhangelsk regions, Republics of Karelia and Komi, and Nenets Autonomous District in Russia.

During 20-years of the Barents cooperation, there were expectations and several initiatives and efforts in establishing a Barents business platform. Most of the expectations were related to large industrial projects, like huge Shtokman gas or smaller Prirazlomnoye oil fields. Increased economic activity in the Russian North and public support funds of Nordic countries and EU was expected to lead to significantly increased economic cooperation and business establishments, particularly in the Russian part of the Barents Region.

However, we could see that business cooperation, through established and actively present Norwegian, Finnish and Swedish businesses in the Russian part of the Barents Region, has been decreasing by number of enterprises during the recent, especially comparing with the increasing people-to-people cooperation with border crossing in the region. On the other hand, several of the 78 enterprises we have registered as active today are significantly larger than before.

Most of the larger Norwegian, Finnish and Swedish enterprises in the region in terms of investments, turnover and number of employees have established themselves with little or no use of the structures of the Barents Cooperation or the public instruments for grant funding covering the region. These are mostly coming from regions outside the Barents Cooperation, and many of them are active in other parts of Russia as well. For them, the Barents Region is like any other market.

The lack of larger enterprises from the northern parts of Norway, Finland and Sweden is partially to find in the business structures on these regions, which mainly consists of smaller SMEs developed for the local and regional domestic market and therefore are lacking adequate resources for internationalization.

Projects and public funding

The Norwegian public funding instruments of the Ministry of Foreign Affairs, the Barents Secretariat, Innovation Norway, Kolarctic and counties have spent about 24 million EUR (184 million NOK) financing 476 business development projects, including 171 commercial ones, in the Russian Barents regions during the recent ten years. We have seen certain peaks in projects aimed at business development in different sectors through those years, and joint peaks in fishery & aquaculture, petroleum and transport & logistic projects in 2009.

Finnmark County with 46% of the projects and Murmansk region as target for 54% of all Norwegian projects is reasonable in lead of the Norwegian-Russian Barents economic development cooperation, while Karelia, Komi and Nenets areas together got less than 10% of business project financed by Norwegian public instruments. Almost one third of the projects had all the Russian Barents regions as unspecified impact area.

Finnish public funding through Kolarctic and Karelia ENPI that have Murmansk, Arkhangelsk, Nenets and Karelia as target regions amounted to about 200 million EUR during 2004-2012 (including Interreg in 2004-2007). The Finnish Ministry of Foreign Affairs had neighbouring areas in focus, spending about 20 million EUR to projects in St Petersburg, Leningrad, Karelia, and Murmansk regions annually. Nordic Project Fund focused on Moscow and St Petersburg, while only 15% of financed enterprises were located in the Russian Barents regions.

47% of Finnish enterprises with Nopef (Nordic Project Fund, Norden) funding succeeded in establishing business in Russia, while the success rate for Swedish and Norwegian companies was about 20% only. In average, one Nordic enterprise received about 45 thousand EUR support from public funds to establish business in the Russian parts of the Barents Region.

For enterprises that want to invest in Russia, and need more comprehensive financing, there are other options in the Nordic finance market, as Nordic Investment Bank (NIB) and CapMan.

Comparing with Finland and Sweden, Norway has spent comprehensive amounts of money and efforts to establish business cooperation with the Russian Barents regions, spending in average 2.4 million EUR per year to support and promote Norwegian companies and cross-border business cooperation. Sweden and Finland, comparing to Norway, are lacking such national funds addressing Barents business cooperation issues, but having access to EUs project financing schemes.

Establishing business in a foreign country

Establishing business, especially in a foreign country, is not an easy task. However, lack of direct financial or in-kind support from home countries cannot be considered as a reason for relatively small presence and/or low success rate in business development of Nordic countries in the Russian Barents regions. Business in Russia represents several additional challenges for foreign businesses, as it has a different climate.

The Russian parts of the Barents region are export oriented in their foreign trade. Raw materials, as oil, timber, minerals and metals produced in the region are delivered to the Western markets via the Barents Sea, and through the Russian-Finnish border. In return, the regions import equipment and consumer goods. In 2012, the Russian export was worth 6.6 billion EUR, while the import was worth 1.1 billion EUR.

Export to Norway, Finland and Sweden amounted to 330 million EUR - or 5% of the total export from the Russian parts of the Barents Region in 2012. The import was worth 440 million EUR - or 41% share of the regional Russian imports. Murmansk region even imports fish from Norway worth four times the export value.

We should note that Murmansk and Karelia are Russian border regions, and most of goods that are exported from or imported to Russia through the Barents Sea go through customs clearance in the Murmansk port.

Capital investments in the Barents Region

Capital investments in the Russian parts of the Barents Region varied from 0.5 to 5 billion EUR per region per year and were very much related to implementation of big industrial projects. Foreign capital investments were also on different levels, from 15 million EUR in Murmansk region in 2012 to 450 million EUR in Nenets Autonomous District in 2009.

Finnish and Swedish companies actively invested in timber and wood processing industry in Karelia, Arkhangelsk and Komi; in 2012 Finland shared 22% of foreign capital investments in Karelia. In 2011 Finland and Sweden had 18% share of foreign capital investments in Komi.

Among leading foreign investment countries in the Russian parts of the Barents Region during recent years we could see Austria, Great Britain and Germany. Again, peaks in investments were related to implementation of large industrial projects, like development of oil fields or reconstruction of pulp-and-paper plants. Those projects did not use Barents business development support instruments. Most of Norwegian companies present in the Russian parts of the Barents Region are not competing on the local or national market, but benefit from local expertise or lower labour costs, operating with niche products or serving trade operations. Those companies have not identified barriers forming a "red line", no barriers of structural or legal character, but rather given a general opinion that the system lacked predictability related to security of investments, changing and time consuming formal procedures with permissions and taxes, customs and visa systems, infrastructure, and hidden local business management mechanisms.

Today, there are relatively few commercial investment projects in the Russian parts of the Barents Region, especially comparing to St Petersburg and Moscow. Finnish businesses are well presented in St Petersburg and Leningrad region, while Norwegian companies generally chose Murmansk and Arkhangelsk regions to enter the Russian market.

Central Russian markets comparing to the remote Barents regions have both possibilities and challenges of difference scale. 20 years of the Barents Cooperation created a favourable environment, capacity and personal networks in the regions, where the distance to decision makers is also shorter, especially when we speak about SMEs.

The expensive resources used for economic development and cooperation in the Barents Region certainly contributed in establishing good environment for Norwegian, Finnish and Swedish business activities in the Russian parts of the region. Frameworks for development of Russian business in the opposite directions lack similar strength – so far. Russia's membership in WTO is to create a more predictable and stable environment for foreign businesses and more transparent procedures, alternatively we may experience more controversial cases, and driving forces for these processes will be outside the Barents Region.

The future of business cooperation in the Barents Region is closely linked to the general economic development – and the political development in Russia and its Northwest regions. Much will be depending on the presence of "economic engines" – large industrial projects, as the Shtokman or Murmansk Transport Hub on the Russian side. The seaway eastwards and the Northern Sea Route development also give interesting opportunities for business cooperation in and through the Barents Region.

Russian foreign investments in the Barents Region are presently not significant as investment opportunities further south are generally considered as more attractive. Their future could partially relay on better marketing of the regions for foreign investments and subsequent services to follow up investors. Russian SMEs also lack favourable financing services to support cross-border business. Improvement of Barents business cooperation can be done on different levels and with several steps. 

 Recommendations

Improvement of Barents business cooperation can be done on different levels and with several steps. To sum up, the recommendations to the member countries of the Barents Cooperation, for further improvement of framework and conditions for successful cross-border business cooperation and investments in the Russian parts of the Barents Region, are as follows:

  1. To establish dialogue with the authorities in the Russian regions to create a public service, a "one window", to guide and assist Western companies safely through the different and complex formal process of e.g. establishing enterprises and to do proper reporting in accordance with Russian legislation and regulations;
  2. To work together with Russian side to promote business opportunities in the Russian Barents regions; work to improve the regions profile as investment area in Norway, Finland, Sweden and other countries; work to create predictable business environment and secure investment climate, and to improve e.g. Murmansk region's position of the World Bank's ranking "Ease of Doing Business"; 
  3. To strengthen efforts to promote the Norwegian, Finnish and Swedish parts of the Barents Region as business- and investment areas with opportunities for Russian enterprises; 
  4. Consider expansion and rise of capital base Innovation Norway and Nopef; 
  5. Public support to more Russian SMB-investments in the Norwegian, Finnish and Swedish parts of the Barents Region will require development of favourable financing instruments designed for this purpose; 
  6. To maintain and intensify bilateral business cooperation and business frameworks on the regional level, and to involve relevant decision makers on federal level in the processes; 
  7. To develop transport infrastructure and communication in the Region. Flight connections in transverse directions are needed to reduce travel time in a region with very long distances; 
  8. The Finnish and Norwegian side should invest in better and – for Finland - more border crossing points in order to facilitate the communication for tourism and business. The Finnish side should work in concert with Sweden and Norway for establishing a border crossing point along with Finnish Russian border with veterinary inspection facilities allowing the import of food products to and from Russia.

 
The future of the Barents business cooperation will depend much on the development of the regional economies and regulatory frameworks, continuous public support for elaboration and maintenance of business frameworks and infrastructure as well as steady, active political dialogue on both national and regional levels.