Alexander Khloponin is no economic visionary. His economic values are based on open markets, free movement of capital, public-private partnership – in short, what might be termed the neo-liberal economic agenda. These economic values brought him success as governor of Krasnoyarsk Krai. Now, as President Medvedev’s representative to the North Caucasus Federal District, Khloponin proposes to use many of the same economic policies to bring prosperity to Russia’s most destitute region. However, these policies will hardly suffice to attract significant investment to a region which remains the base of an armed insurgency.

BACKGROUND: On July 2 the Russian daily Vedomosti carried details of Alexander Khloponin’s forthcoming economic blueprint for rejuvenating the regional economy in the North Caucasus Federal District (SKFO). Khloponin was appointed as President Dmitri Medvedev’s presidential envoy to this new region in January and was also awarded the responsibilities of a deputy prime minister in the Russian government. With this dual mandate, Khloponin has spent the past seven months touring the seven republics included in the SKFO, meeting with political leaders, businessmen, students and regular citizens with a view to formulating a fresh economic strategy for the region.

As reported by Vedomosti, Khloponin has identified a series of ‘threats’ that are endangering the security of the region. These include clan politics, corruption, ethnic separatism and religious extremism. A further threat identified by the envoy-minister is the dependency of so many of the regions’ inhabitants on state welfare. Vedomosti reports that Khloponin’s economic strategy relates to the timeframe 2010-2025.

The period 2010-2012 will be devoted to the initiation of so-called ‘priority projects’, in other words key infrastructural developments. Khloponin foresees the investment climate in the SKFO improving during this period. The second stage of the plan, 2012-2025, envisages a period of ‘active growth’, assuming that the various ‘priority projects’ will be up and running, creating employment and thereby stimulating growth in the regional economy.

Among the marquee ‘priority projects’ envisaged by Khloponin are: the construction of an oil refinery in Chechnya; the construction of new port terminals in Makhachkala and Derbent; and the construction of skiing and health resorts in locales throughout the region. The Khloponin plan might usefully be broken down into four distinct categories – tourism, transport, energy, banking – each of which is intended to function as a pillar for the future economic development of the SKFO.

In terms of tourism, the plan outlines a scheme for the foundation of health sanatoria in Stavropol Krai, Karachaevo-Cherkessia, Kabardino-Balkaria and Chechnya. Ski resorts will be built in locations in Chechnya, Dagestan, Kabardino-Balkaria, Karachaevo-Cherkessia and North Ossetia. While Khloponin has praised the region’s existing transport infrastructure, he intends to improve its road and rail systems with a view to improving trans-regional economic links, as well as links with the countries of the Southern Caucasus.

Energy is the third key component of Khloponin’s strategy. The plan emphasizes Dagestan’s potential as an energy hub for the entire region and beyond. Khloponin recommends improving the region’s existing energy infrastructure. He also insists that the various governments in the SKFO service their debts in relation to energy consumption (in this context he specifically mentions Chechnya). Khloponin’s plan also envisages the establishment of a new banking system for the SKFO. The state-owned Vnesheconombank (VEB) is to open a subsidiary in the region. This subsidiary will be capitalized by VEB as well as other (as yet unidentified) banks and the Russian exchequer. The SKFO branch of VEB will help to finance priority projects throughout the Northern Caucasus.

IMPLICATIONS: Of course, the priority projects Khloponin has in mind will not be funded solely by the Russian exchequer. Khloponin’s plan anticipates these projects being financed by public-private joint venture initiatives. But what investor(s) might reasonably be expected to involve themselves in a region that is evidently in the grip of wide-scale social unrest? For now, there is a clear consensus among Russian businesspeople that any investment in the Northern Caucasus is risk-averse. Sensing this reluctance to invest, Khloponin has apparently conducted a risk assessment of his own and has concluded that potential investors will need certain guarantees before they will make concrete investments in the region.

The envoy-minister apparently believes that the establishment of a strong banking sector in the SKFO is paramount to stimulating confidence among potential investors. A special fund will be established to help guarantee such investments; this fund will be managed by Vnesheconombank. As a means of increasing investors’ confidence in the fledgling banking sector, a supervisory board will be established to oversee the activities of Vnesheconombank. This board will be chaired by Khloponin personally. This body will also include inter alia businesspeople and regional politicians. Whether all this will be enough to persuade outside parties to invest in the SKFO remains uncertain.

Vladimir Putin, Russia’s prime minister, has recently acknowledged that banks in general are reticent about involving themselves in the region. Speaking at a conference in southern Russia in early June, Putin stated his government’s willingness to guarantee up to 70 percent of individual loans for priority projects in the SKFO. This suggests that Putin is rather less optimistic than Khloponin about the possibility of attracting serious private investment to the region.

According to Vedomosti, however, Khloponin’s plan makes provision for one very serious inducement to potential investors – the establishment of a so-called ‘Zone for Territorial Development’ (ZTR) in the Northern Caucasus. This zone, it would seem, is predicated on the concept of a Special Economic Zone (SEZ). Vedomosti reports that unlike a conventional SEZ, the ZTR envisaged under Khloponin’s plan will be multi-vectored, applying to several industries at once (presumably the four pillars identified earlier). Vedomosti also reports that the planned ZTR will have certain features analogous to those associated with the new Skolkovo high-tech research hub, the so-called ‘Russian Silicon Valley’, which is situated just outside Moscow.

While the authors do not elaborate as to what exactly these similarities might be, it is worth noting that President Medvedev has proposed certain financial incentives – tax breaks, exemption from VAT – for parties involved with the Skolkovo project.

CONCLUSIONS: Khloponin’s economic plan is thoughtful and ambitious but it nevertheless presupposes that outside parties will be willing to invest in a location that remains host to a region-wide armed rebellion. Nor will these investors be attracted by the reputation that many indigenous, pro-Russian functionaries have earned for extracting tribute from local businesspeople. Khloponin will doubtless point to Russia’s recent counterinsurgency successes in the region as proof that the insurgency is a spent force.

In addition, he will be hoping that the establishment of a regional branch of Vnesheconombank – a sort of financial bridgehead – in tandem with his own personal-political gravitas, will persuade reluctant parties that investing in the Northern Caucasus is a risk worth taking. Interestingly, the exact cost of this new plan to the Russian exchequer has not yet been ascertained.

Vedomosti’s source stated that he did not know how much money would be needed to implement Khloponin’s agenda. In light of Putin’s recent statement that the Russian government has spent some 800 billion rubles (almost US$ 26 billion) in the Northern Caucasus since 2000, it can be safely said that investment alone cannot solve all of the region’s difficulties. Khloponin, however, like the rest of Russia’s political elite, believes that free enterprise, free markets and public-private partnership and other related economic phenomena will eventually make threats like ethic separatism and religious extremism socially redundant.

AUTHOR’S BIO: Kevin Daniel Leahy holds a postgraduate degree from University College Cork, Ireland.