Strategic Doctrine

for the Kemerovo Oblast

“Social and economic development strategy

for Kemerovo Oblast till2025” was approved

at the meeting of Kemerovo Oblast Administration Board

on January 18, 2008

Saint-Petersburg –Kemerovo

2008

Table of Contents

General Information About the Region

1. Social and Economic Development Strategy

for Kemerovo Oblast- Executive Summary

External Trends

Main Challenges (Risks)

Development Scenarios

Development Purposes and Priority Areas

I. Ensuring Stable Growth in the Major Economy Sector

II. Diversification of Economy – Increasing the Depth of Raw Material Processing

III. Emergence of New Types of Business Activity

2. Support and Development of Local Initiatives

3. Implementation Mechanism of the Social and Economic Development Strategy for Kemerovo Oblast till 2025

Improvement of the State Administration System, the Budget System, and the Budgetary Process

Regional Development Management for Kemerovo Oblast

Social and Economic Development Strategy for Kemerovo Oblast till2025 in the field of Regional Development Management

Implementation Phases of the Social and Economic Development Strategy for Kemerovo Oblast till 2025

4....... Expected Results of Implementation of the Social and Economic Development Strategy for Kemerovo Oblast till 2025

General Information About the Region

Kemerovo Oblastlies in the South-East of Western Siberia. It covers95.7 thousandsquarekilometerswhichis equal to 4%of the territory of Western Siberia and 0.56%of the territory of the Russian Federation.

The civil boundaries ofKemerovo Oblastare land boundaries. Itborders upon Tomsk Oblast in the North, and upon Krasnoyarsk Krai and the Republic of Khakassiain the East. The southernboundary withthe Republic of Altaiand the AltaiTerritory goes along the main mountain ranges ofGornaya Shoria and SalairRange, and the western boundary with Novosibirsk oblast passes through a flat terrain. TheOblastislocatedabout5thousandkilometersaway from Far East harbours by rail, and about 5.5 to 6.5 thousandkilometersaway from the harbours of the Baltic Sea and the harbour of Murmansk.

Thepopulationamountedto 2,826.3 thousandpeopleasofJanuary01, 2007,whichwas equal to 14.4%ofthepopulationoftheSiberianFederalDistrictand2%ofthepopulationof the Russian Federation.

Thegross regional product made337,409.1 millionrublesin2006 (or1.3%oftheGDPofRussia), which was equal to 119.1 thousand rubles per capita.

According to expert analysis of investment potential, Kemerovo Oblast is aregion of medium potential andmoderate risk. In view of the volume of fixed capital expenditures, the Oblast became No.1 among regions of the SiberianFederalDistrict, and No.11 in Russia in 2006.

The volume of foreign investments into the economy of the Oblast made 396.8 million US Dollars in 2006.

1. Social and Economic Development Strategy for Kemerovo Oblast - Executive Summary

Kemerovo Oblastis one of the most developed regions of Siberia, with a strongly markedraw-material orientation. Industry is the leading sector of economy of the Oblast, with a 47.5% share of the gross regional product in 2006 considered jointly with power generation, which is much higher than the average index for the SiberianFederalDistrict and for the Russian Federation. Kemerovo Oblast specializes in primary production and processing in the aspect of national and international division of labour.

The branches of industry prevailing in the sectoral structure of regional economy aretraditionalindustriesmostly deployed by the middle of the 20th century,such as ferrous industry, coal industry, and chemistry.

The region provides 56% of all the coal mined inRussia, including 76% of coking coal. Kemerovo Oblast produces 14% of steel, 14%of rolled ferrous metal, 53%of ferrosilicon, 80%of trunk rail tracks, and 100%of tram-rails in view of total production in theRussian Federation

The situation of the last 7 – 10 years wasfavourable for development of the region due to the rise of prices for natural resources in the world and to the general economic revival inRussia. In regard to the economy of Kemerovo Oblast, it found expression in increased prices for the production of regional enterprises and higher demand for it on the national as well as on the international markets.

Such orientation of the Oblast should be expected to survive in the long view. This can be concluded on the basis of the structure and the volume of investments into the region. In 2006, 70% of all fixed capital expenditures were represented by investments in mining operations (48%) and in processing factories (22%), and the total volume of fixed capital expenditures grew 5.2-fold during 2000 - 2006.

Favourable conditions have formed in the region in terms of implementation of major investment programmes:

  1. Incoalindustryalone, thevolume of long-term fixed capital expenditures under declared projects exceed 109.2 billion rubles[1] in the long-term. Theseincludeprojectsofconstructionof24newminesand 9 openpitmines (commissioning of new capacities for extraction of 13.8 milliontonscoalby2015 and24.1 milliontonsby 2020), 7 concentrating mills; creation of capacities for processing of 17.7 million tons ofcoking coal per year and 18.9 million tons ofpower station coal by 2020, which will jointly require investments exceeding 62.5 billion rubles.
  2. In the course of three years, 11.2 billion rubles were invested in development of railway transport,pursuant to “Development and Improvement Programme forTrunk and Industrial Railway Transport in Kuzbass till2005”.In2005, anewprogrammewasapprovedfor2006–2008 amounting to17.7 billionrubles,implementation of which is covered by an agreement concluded between Russian Railways Open Joint-Stock Company (OAO RZD), the West-Siberian branch of RZD, the Administration of Kemerovo Oblast, and 30 majorconsignors[2]. Moreover, major investment projects of OAO RZD for 2007 – 2010 (except for programmes of development of high speed and extra high speed operation) include a traffic centre between Kuzbass and Azov – Black Sea region with a volume of investments worth 36.6 billion rubles, a traffic centre between Kuzbass and the Far East worth 27.1 billion rubles, and between Kuzbass and the North-West region, worth 29 billion rubles.

External Trends

Asmentionedbefore, Kemerovo Oblastbelongs to export-oriented regions of theRussian Federation, with primary production and processing as its major economy sector.Therefore, social and economic development of the Oblast is to a certain extent determined by external factors characterizing general dynamics of the social and economic situation in the country,as well as by the state of commodity markets of the major economy sector for the region which go far beyond the boundaries of the Oblast: macroeconomic parameters of Russian economy, peculiarities of governmental monetary policy, state of international commodity markets, etc.

Long-lastingeconomicadvance and financial stability in the Russian Federation allow for:

  1. Counting upon growth of thedomestic market of the Russian Federation (oil and gas, power supply, metal, coal, chemicals, etc.).
  2. Expecting an upswing of investments in our country, implementation of major industrial projects, and inflow of direct foreign investments.
  3. Expecting growing infrastructural restrictions of development, and first of all restricted development of transport infrastructure and deficiency of power supply
  4. Counting upon national budget growth (in 2006, cumulative expenses per capita incurred by budgets on all levels exceeded 58 thousand rubles, and they will achieve the amount of 85 thousand rubles by 2009), and capability of implementation of major investment projects on account of public and private investments (according to the Federal State Statistics Service, 4,730 billion rubles of fixed capital expenditures were used in 2006, which makes 116.7% compared to 2005).

Worldwide Supercycle in Raw Materials

Increased consumption of raw materials byinternational economies and the Russian economy creates an extremely favourable market situation for the Russian Federation and for Kemerovo Oblastas one of its primary suppliers. Among important consequences of deployment of a “supercycle in raw materials”, emergence of natural gas deficiency in the state should be named. Currently, gas is the main fuel for Russian power economy. Experts forecast gas deficiency of 30 to 120 billion cubic meters on the domestic market by 2010. In this respect, a “coal and atomic” development scenario for the Russian power economy has already been approved on the state level, implying increased consumption of coal fuel, also due to its increased production in Kuzbass.

Corporate development of fields which major sectors of Kemerovo Oblasteconomy are related to, is currently determined by three main trends:

  1. Asset consolidation andgrowingscope of corporations (mainly in the oil and gas complex, metallurgy, coal industry, and chemistry).
  2. Gradual transformation of major Russia chemical and metallurgic companies into multi-national companies, implied by increased presence of foreign transnational corporations in the Russian Federation.
  3. Business process restructuring, spin-off of non-core assets, development of such sectors of economy as service and engineering support of core operations in primary production and processing of raw materials, implementation of new management systems and transition to international management practices, including quality management and management of production processes.

One of the most significant factors determining the development of Kemerovo Oblast is high reliance of regional economy upon governmental regulating of natural monopolies. The following governmental resolutions might have the highest influence upon Kemerovo Oblast in the long term:

  1. Liberalization of power supply and gas markets, and reduced governmental participation in price administration on these markets. Currently, governmental resolutions are made regarding gradualliberalization ofpower supplymarket (by 2011, sale of gas must take place at free prices).
  2. Railway transporttariff policy. As estimated by the experts of Mining Operators of Russia, a Non-Commercial Partnership, the average share of transport expenses exceeds 27%of consumer price, which makes it marginal to deliver coal beyond the distance of 1,200 kilometers. It is exactly therailway transporttariff policy that defines distribution of export cargo between harbours and railway border terminals, distribution of forwarding between various transportation carriers, as well as distribution of markets between manufacturers.
  3. Implementation of investment programmes supported by the state in infrastructural fields, on the power supply market and the transport market.

Main Challenges (Risks)

Risks of high priority for Kemerovo Oblast in the long term are outlined below:

  1. Risk of dependency of regional economy and public sector upon the situation on international coal and metal markets.

Raw-material and primary processing orientation creates strong dependency of the social and economic situation in the Oblast upon the state of commodity and primary markets which is cyclic, that is, advancing prices for major economy sector products can give way to stagnation or even recession at any time.

As the major sector plays an important role for the social and economic situation in the oblast, industrial and financial decline in this sector will first of all have a negative impact upon:

- thestateofthe budget system in the Oblast (the share of tax payments to budgets of all levels made by mining organizations is 30%);

- the regional labour market (the share of industrial employees makes about 30%; such fields as trade, catering, education, health care, social services, and transport which provide about 40% of employment jointly, are also sensitive to the state of the major sector);

- stability of the settlement system (the oblast is rich in settlements with mono-industry specialization, which include miner towns and villagesfirst of all).

  1. The risk of resource base degradation

This risk has both direct consequences such as decreased cost of mining licenses, and indirect consequences such as reduction of general investment appeal of the oblast as well as the appeal of new sitedevelopment for extracting companies:

a)therisk of Kemerovo Oblast resource base degradation.

By the beginning of 2000s, it became typical for Russia in general and for Kemerovo Oblast in particular that ore and coal reserves extracted and written off balance were not covered by reserve increment, which resulted in reduced raw materials potential of metallurgy and coal industry in the region.

b)theriskof quality degradation of available natural resources.

Many current enterprises have been carrying out intense industrial production of coal and iron ore in Kemerovo Oblastfor over half a century,so deposits with the best mode of occurrence have already been depleted or are close to depletion, while remaining sites are not always characterized by favourable operating conditions.

  1. Environmental risks

Output growth resultinginhigheranthropogenic stress impliesthefollowingrisks:

- deterioration of public health,

-reducedcapitalizationofmajorenterprisesprovidinganegativeimpactupontheenvironment,andadministrative restrictions in regard to their industrial activities,

- reduction of general investment appeal of the region,

- higher on-budget public health and environmental expenditures.

  1. Theriskof technological inferiorityof the region.

Low level of innovative andtechnological development of the region aggravates risks related to concentration on manufacturing of low added value products and, consequently, possible forcing of the products of Kemerovo Oblast enterprises out of product markets, which may lead to loss of competitive ability by the economy of the region.

  1. Theriskofinsufficientinfrastructuralsupport.

Infrastructural restrictions are crucial for Kemerovo Oblast (transport and power supplyfirst of all) due to high resource and capital intensity of the major sector of economy and heavy costs required for infrastructure development and operation. Lack of sites with developed infrastructure for deployment of new industrial parks may become another possible development restriction in Kemerovo Oblast in the long term.

  1. Theriskoflabour market imbalance.

Labour market and vocational training system disproportions will turn into significant risks in the long term in view of social and economic development of the oblast. Particularly such risks as:

- non-competitiveness of traditional industry (extractive industry, primary processing enterprises) on the current labour market;

- the risk of outstripping manpower cost growth rate related to labour efficiency growth;

- the risk of severe job cuts in the major sector of economy due to competitive expansion as well as to large scale technological upgrade and corporate restructuring;

- the risk of loss of vocational training system efficiency in the region (graduates and their families and not the labour market are customers of educational services).

  1. Theriskof instable settlement system, reduced demographic potential, and inefficient spatial development.

The main risks emerging in the field of demography, the settlement system, and the spatial development, include:

- gradual population reductionand ageing;

- instableeconomyofsettlements with mono-industry specialization;

- reduction of the importance of the region in spatial organization of the country;

- lowlevelof urban environment development.

  1. Administrative, political, and legislative risks.

Kemerovo Oblast being a raw-material region with export-oriented economy is more dependent upon governmental regulation and investment policies of major public corporations than many other regions.

Development Scenarios

Inertial development scenario for Kemerovo Oblast – growth due to enhanced raw-material orientation of the region

Accrued investments in the economy of the region, announced projects ready for implementation, and expansion of major markets of industrial specialization products allow for counting on a growth scenario due to enhanced raw-materials orientation of Kemerovo Oblast (accretion of primary production and processing).

In case of inertial development of Kemerovo Oblast, risks may generalize as follows:

2008–2010: risks are mainly related to consolidation (re-distribution) of assets in coal industry, metallurgy, and chemistry, and to reforms on power supply and transport markets, which will influence investment decisions in the main sector of economy significantly. The fact that decline of the macroeconomic situation in the country as well as adverse effects of entrance of the Russian Federation into the WTO in the shape of liberalization of coal railway transportation may take place exactly during this period, should also be taken into account.

2015–2020: crucial decline of the resource base of economy, including peak level of negative environmentaleffect, first of all by the extractive industry, and growing infrastructural restrictions (the ability to process the growing cargo traffic and supply it with power).

After 2020, the main critical factors for Kemerovo Oblast will be related to economic growth of Asian competitors. This period can become the period of final depletion of “Soviet legacy” resources (production assets, proved effective mineral reserves, typical housing development of the second half of the 20th century, retirement of employees who started their labour activity in that period, etc.) for the Oblast. By that time, new technological, HR, and infrastructural capacities must be ensured.

Target-oriented (active) development scenario for Kemerovo Oblast – ensuring competitive ability of the region based upon growth of technology and human potential

Technology and human potential growth scenario can be implemented by means of diversification of regional economy, enhancement or the major sector core both in view of raw materials processing depth (moving along the chain of added value production to finishing conversion) and in view of inclusion of new types (fields, sectors) of production activities into it, thus ensuring higherstandards of living, better resistance of the economy in regard to cyclical changes in the market environment, and allowing for restraining mining operations from the ecological point of view. If stakes are placed on the target-oriented scenario, not only natural resources, most of which are non-renewable for Kemerovo Oblast, can be involved as development sources. All raw-material regions of developed economies, including coal-mining regions, have followed or are following this line.

Thisscenario can be accomplished through implementation of a complex of strategic priorities., In view of large scale of Kemerovo Oblast major sector and the momentum already achieved, effects from implementation of strategic priorities will develop in the long term.

Development Purposes and Priority Areas

The strategic goal of public policy of Kemerovo Oblast social and economic development in the long-term is increase of competitive ability of the region and subsequent growth in prosperity of the population of the region.

The strategic goal implies:

I. Ensuring stable growth of the major sector of economy in the region (enhancement and support of existing positions and competitive advantages);

II. Diversification of regional economy (implementation of existing capacities not yet used);

III. Creation of an innovational capacity for growth of new production sectors competitive in the long term (“venture investments”).

Implementation of a complex of strategic projects and programmes is required in order to achieve the strategic goal.

I. Ensuring Stable Growth in the Major Economy Sector:

1)Supply of the major economy sector with resources:

a)stimulationofgeological exploration;