HOST: This week Vnesheconombank’s Supervisory Board has approved a new strategy and several projects. One of them is the Kazbek Technopark where construction materials are planned to be manufactured. The transaction provides for Vnesheconombank to enter into the capital of the North Caucasus Development Corporation as the facility will be located in Chechnya.

We’ll discuss these plans with VEB’s representative, Director General of the North Caucasus Development Corporation Anton Pak. Good afternoon, Anton. We’d like to talk with you about your plans as a whole and about what you are going to do in the North Caucasus and how you are going to develop the region rather than about your concrete plans.

Anton PAK: Director General of the North Caucasus Development Corporation (OJSC): Good afternoon, in fact, we have pretty extensive plans in the North Caucasus; we’ve already been operating for a year. The Corporation was established in December of 2010 and in February we opened our office in Essentuki where we have been based to the present time. During the year, we managed to form the first pool of investment projects and we have already invested our own funds in some of them and we are planning to invest funds in some others in the near future. These projects are in utterly different areas. We have projects in the tourist sector as well as industrial projects such as the Kazbek project that we’ve already mentioned or the National Aerosol Cluster Project in the city of Nevinnomyssk. We have also the so called business infrastructure projects, for example, an Expo-Center in Caucasian Mineralnye Vody. And naturally, we have projects in one of the most important North Caucasian sectors, namely, agro-industrial complex.

HOST: So, there are three top-priority, promising sectors in the North Caucasus: tourism, some industrial facilities and agro-industrial complex?

Anton PAK: I think it’s most logical to develop them. Of course we can develop other sectors too. It’s a matter of determining priorities for the region taking into account its competitive edge as we should develop sectors that have competitive advantages.

HOST: Do you mean these three sectors?

Anton PAK: Yes, I do. We view them as our most important sectors.

HOST: And how did you identify priorities inside these sectors? Could you tell us now about specific projects?

Anton PAK: The first project we have started to fund in the tourist sector is the Arkhyz All-Season Ski Resort in Karachaevo-Cherkessia. It’s the first one of 5 and now I think of 7 North Caucasian resort projects. We have been working in partnership with this corporation here. On March 18, the first ski-lift was launched in Karachaevo-Cherkessia. And now we are building the first stage of hotels and I hope that by a new season somewhere in September-October this year tourists will be able not only to go skiing but also stay at hotels.

HOST: How would describe the situation in the industrial sector?

Anton PAK: We started to fund a very interesting project in Nevinnomyssk. The Russian largest aerosol manufacturer is located there, here I mean Arnest Company. It accounts for 70% of Russia’s and even in my opinion CIS’ market. We have set up an enterprise jointly with them. It is to deal with localizing production of component parts for their core business. These are component parts for manufacturing aerosol containers.

HOST: What about projects in agro-industrial complex?

Anton PAK: We are working on three very interesting and large projects in agro-industrial complex. Due to their technological complexity which requires a lot attention we haven’t started to fund these projects yet but we have plans to launch the first project in one-two month’s time in Karachaevo-Cherkessia jointly with Razgulyai company. This is a large-scale agro-industrial park. At the first stage the existing sugar factory is to be reconstructed and a vegetable storage facility is to be built. An agro-park is to be created on the basis of this vegetable storage facility. I’d like explain an idea behind an agro-park and why it differs from an ordinary storage facility. The fact is that it’s no secret that there are very favorable natural conditions in the Caucasus and when fruits and vegetables are in season you can buy them at low prices but unfortunately, in order to attract fruit and vegetable processors to the region we should be able not only to buy them for a period of 4-5 months but also to store them. So, we developed this project to attract medium-sized companies to this agro-park for them to be able to come and deploy their production facilities to process agricultural produce which is grown there.

HOST: How much money is needed to finance projects in the North Caucasus?

Anton Pak: The projects that we have started to fund are worth about 3 billion rubles; here I mean the Corporation’s participation in those 5 projects. We won’t spend all the money this year because projects are funded on a step-by-step basis and as a result the Corporation will invest in these projects about 3 billion rubles for a period of 1-2 years.

HOST: What’s next?

Anton PAK: The total value of these projects if I’m not mistaken is about 14 billion rubles, all the rest money will be invested by commercial banks responsible for funding these projects or private investors who participate in the charter capital together with us.

HOST: Do you participate in the charter capital as shareholders?

Anton PAK: Yes, we participate as shareholders but we are also supposed to have an operational partner who will manage this business and invest money together with us.

HOST: How do you work as shareholders in the North Caucasus?

Anton PAK: In general, the territory is not principally different from Russia’s all other regions. People are very energetic, enterprising; they generate a lot of various ideas, so our work is going pretty well.

HOST: But there must be some problems after all. It’s common knowledge that somehow the North Caucasus is a peculiar region. Could you specify any problems?

Anton PAK: Seriously speaking, our main problem is related to low-skilled managerial personnel. We have to admit that the level of corporate governance in many companies we are starting or trying to work with in the North Caucasus is not very high. So, the main problem that makes us prepare projects for a long time is the low quality of managerial personnel.

HOST: And what about pluses? Can you highlight any positive sides of working in the North Caucasus?

Anton PAK: The main positive side I’ve already mentioned is that people there are very energetic and enterprising; there are almost no lazy people there. It’s another matter that sometimes we have to channel this creative energy into the right direction but as a whole our work is going very well.

HOST: The manager’s responsibility is to guide. To my best knowledge there are advantages of working in the North Caucasus in the form of various federal privileges – federal programs, subsidies and etc. Do the take advantage of these privileges in the North Caucasus? And do you take advantage of these programs?

Anton PAK: You know that the Corporation’s second most important function after the investment one is to provide consulting and information support because there are very many state support measures designed to encourage federal business, foreign investors and local business to invest in new projects.

HOST: What are these measures?

Anton PAK: A set of state support measures is very large. In general, there is a program of government guarantees. Under this program the federal budget is to provide a guarantee for a commercial bank’s credit extended for implementing a project in the North Caucasus. 70% of this credit can be covered by a guarantee granted by the Russian Government. This program is pretty large. About 100 billon rubles have been approved for 2011 or 2012. I think that the first projects will receive guarantee support as early as within 2-3 months.

HOST: Therefore, can we say that money is coming to the region because of this program?

Anton PAK: Yes, there is no doubt about it. And this is not the only program. There is a program of subsidizing interest rates.

HOST: How does this program work?

Anton PAK: It works not for all projects, for the most part; it works for projects in agro-industrial complex. Factually, it makes it possible to compensate for a part of interest rate that the borrower has to pay to a bank through using federal or regional budget funds. Naturally, projects seeking this compensation have to meet a whole number of criteria but it is an absolutely realistic list of projects because almost all interesting projects can receive this sort of support.

HOST: Do you work with major corporations? Do federal corporations come to this region?

Anton PAK: This is one of the most important objectives our Corporation in our opinion should address. And we are trying to engage federal business because local businessmen’s  financial resources are not always sufficient for implementing large-scale projects in the North Caucasus. For example, the agro-industrial project I mentioned earlier is being implemented in Karachaevo-Cherkessia jointly with Russia’s largest agricultural holding, namely, Razgulyai company. Vnesheconombank is its minority shareholder and to a large extent their decision to come to the Caucasus and participate in implementing this project was brought about by our Corporation’s efforts. So, we hope that in the near future the number of such investors will increase greatly and we’ll be able to change the region’s negative image.

HOST: Could you open a veil of secrecy and tell us about future projects? What else does the Corporation plan to do in the North Caucasus? In what sectors do you plan to operate?

Anton PAK: We plan to operate in those sectors where we have already started to fund projects. We have a very interesting project that we are going to implement in Dagestan. This is a project on the construction of a ceramic tiles production plant. The project is to be funded by a local investor and a federal bank. I hope that we’ll be able to launch this project in 2-3 month’s time. There are also large-scale industrial projects, for example, a copper ore deposit in Kyzyl-Dere in Dagestan. Naturally, a project of such a caliber requires a very serious preparation and engineering research. That is why sometimes it takes months or even years to prepare and develop a project. But we have been involved in this project for a year already and I think that this year we’ll try to start taking some practical steps.

HOST: Anton, just a few days ago I talked with your colleague Petr Fradkov. We discussed his Agency and talked about sources of financing. As far as I understand in case of the North Caucasus Development Corporation VEB is the only source of its capital. Do you plan to diversify sources of capital?

Anton PAK: Yes, we are supposed to do it and it is a key element of our Corporation’s development strategy. At present, the only source of our capital is Vnesheconombank. But in about a year from now I think next spring we plan to engage other investors into our Corporation’s capital. In order to do it we must show tangible results of our activity rather than limiting ourselves to declaring some goals and tasks. In our case these are successfully implemented projects. Hopefully, in a year’s time we’ll manage to form a portfolio of such projects and we’ll be able to inform Russian federal and foreign investors about concrete results of our activity with certain profitability indicators and persuade them to invest in the North Caucasus on the basis of our successful performance.

HOST: Anton, I wish you every success, thank you very much for your answers.

Anton PAK: Thank you!

HOST: I’d like to remind you that our guest today was Director General of the North Caucasus Development Corporation Anton Pak.