Vladimir Ilyukhin: "We need to make it out of the debt trap"

Vladimir Ilyukhin, Governor of the Kamchatka Region presents his vision on how to create some reliable foundations or the so-called “runways” for the new development projects within the area


– Mr.  Ilyukhin, it seems that Kamchatka Peninsula has attracted the Federal Center’s attention. The Russian government has provided support to four investment projects in the Kamchatka Region (let me stress out that no funds have been allocated for the projects in the Primorsky Territory yet). Besides, the governmental decision to establish a territory of priority development in the Kamchatka Region was one of the first. How did you manage to achieve such impressive results? Do you feel optimistic and enthusiastic about the future?

– We are glad that we have moved forward here, though we always remain a certain amount of moderate skepticism. As you know, I previously expressed certain doubts with respect to potential residents in a territory of priority development, concerning their level of engagement or financial involvement. A territory of priority development is not the miraculous "bread of heaven" or manna, there should be an emphasis on ability to implicit mutual obligations and financial liabilities. Despite the fact that I had previously worried about businessmen’s unavailability to manage complex development projects in our challenging surroundings, my fears were allayed by the fact that instead of 13 applications which were originally submitted by prospective residents, their number has grown and we are now reviewing 18 applications. The total amount of capital to be invested in the territory development now exceeds 22 billion roubles. More than two thirds of the Kamchatka potential residents are local businesses which are set to be granted some preferences for their projects. Of course, some problems that may further arise should be handled promptly on an as-needed basis, for example, the ones related to federal property, to airport infrastructure, etc. The most important task is to create greater integration of the networks between the federal government which is the single owner of the economic territory and some core service providers such as airports, ports, etc. Besides, there are some federal targeted programs which have already been implemented in the region and the money, which are required for the development of the territory of priority development, are partly allocated from these already existing projects. Of course, we hope that "Kamchatka" territory of priority development will positively contribute to the development of the region in general. We are planning to create about 2 thousand new jobs, build new manufacturing sites and also increase the regional budget revenue. I would like to draw your attention to a beautiful logical structure of "Kamchatka" territory of priority development, which is aimed at connecting its sea gates and airport infrastructure with incredible natural wonders for tourists to visit. We consider various alternatives in order to boost tourist flows to the best places for little money (otherwise, who would like to travel there?). At present, every time when Kamchatka welcomes huge cruise ships, coming to its port and carrying thousands of passengers, only few of the passengers are able to visit the Valley of Geysers because of its remote location. The valley is difficult to reach, with helicopters providing the only feasible means of transport, although it is a very expensive kind of transport. That’s why we decided to develop general aviation infrastructure within the territory of priority development and build several runways for small aircraft. Some land has already been allocated for that construction project and there are some businessmen who are interested in buying and servicing small planes, building cafes, hotels and other types of tourist infrastructure. With everything in place, we just need to develop this rich potential.

– Budgeting has long been a sensitive issue for many regions. How is the deeply subsidized Kamchatka region feeling the ill effects of falling oil prices and weakening ruble? Do you see any growth points?

– Just a few days ago we held a regular meeting to review the results of the previous year. We all agreed that the current economic situation in the region was difficult, but stable. And it doesn’t mean that Kamchatka’s economy has not yet sunk into painful recessions – the crisis consequences are becoming increasingly tough and affecting the entire region. The point is that we have successfully implemented our anti-crisis plan and thus have managed to provide the efficient and effective use of the resources for which they are responsible within the framework of socially oriented budget in order to comply with all our social obligations. In terms of overall impact, despite the fact, that construction sector has decreased its volumes, being affected by general economic downturn in the country, such fundamental industries for Kamchatka region as mining, fishing and agriculture have increased their volumes. In the year 2015, as well as 7 years in a row, we became leaders in Russia in terms of investments in the fishery industry and the volume of aquatic bio-resources caught. Kamchatka’s share in the country’s fish production is one of the largest, for instance, last year the region’s total catch reached about one million tonnes. I am sure the region will pass through a turbulent period smoothly and without any disturbance. Of course, in the cold light of day, we can clearly see that although the salaries in the region have increased, the real income has actually decreased against the backdrop of rising prices. In the real view, there are clear signs of social tension and anxiety. Nevertheless, we are successfully reducing unemployment and are implementing different social programs. It gives hope of the region’s economy faster recovery compared to some other Russian territories.

– What can you tell us about the regional treasury funds distribution policy? In 2013, three quarters of Kamchatka’s budget were financed by the federal government and only a quarter was subsidized from the local budget. Do you have any plans or ideas on how Kamchatka’s budget can increase its revenue?

– I am not able to provide you with any specific numbers right now, but I can сonfim that we're really trying to increase the local government share in total revenues, though it’s not so easy. As the other 8 regions within the Far Eastern Federal District of the Russian Federation, we have signed an agreement with the Ministry of Finance of the Russian Federation on subsidized public financing. The region's total income gain is too little now, so we are not able to run functionally independent economy. Just a couple of years ago, we were aimed at generating great revenues from huge projects, but unfortunately the crisis made these goals much harder to achieve. To cope with the impact of the crisis, we have to make structural adjustments in our investment strategy. We have managed to develop new strategies to attract and increase the volume of private investments that gives hope of growth for the future. You know, the idea that if Moscow gives money, the region can do nothing or “sit twiddling its thumbs” might seem logical only to an uninformed person. In fact, such pull of public loans leads us into a debt trap and we need to get out of this trap as soon as possible.

The most important path to recovery is to develop our ore-and-mining complex. We expect that our mining complex will become a real driving force, which will accelerate regional economy. We have launched our mining complex development programs to increase its production efficiency. Our first gold mining license had been issued in the early 1990s, but for a long time the region’s gold deposits were not explored. They were sold, resold and simply changed hands. In 2011 we started industrial production at the gold and silver deposit of Asachinsky, and last year – at the Ametistovyi gold and silver deposit in the northern part of the Kamchatka peninsula. We extracted half a ton of gold at the Ametistovyi deposit within the period of 5 months, so in 2015 all gold mining companies of Kamchatka extracted almost 4.2 tons of gold. As soon as Ametistovyi deposit has reached its full capacity, its annual gold production will increase up to 4 tons. That will allow increasing gold extraction in the region by almost twice. In addition, another promising mining and processing plant at the Ozernovskoye deposit with a planned annual output of up to 10 tonnes of gold is currently under construction. This investment project has received federal funding and credit assistance for its infrastructure development.

According to our estimates, in 2020, when our mining sector starts running at full capacity, the part of profits which is expected to return to the treasury by means of taxes will climb up to 14 billion rubles. Since then, we will be able to substantially cut government support or, as they say, “get off the federal funding needle”.

– As far as I know, some Indian investors have expressed interest in the region’s coal industry. At what stage of negotiations are you now? Are there any results or arrangements?

– Kamchatka has a unique reserve of underground resources including a significant brown coal deposit, but I am not sure if we are going to explore this deposit in the nearest future. The problem is that it takes about a hundred kilometres to get from this brown coal deposit to the nearest motorway, which connects the city Petropavlovsk and the village Milkovo. Besides, the deposit is located on the Okhotsk Sea coast, but there are no port facilities nearby. The main constraint on the development of mining there is the lack of transportation infrastructure, though on the basis of heating value the coal at this deposit is close to soft coals. Indian partners are interested in the coal production project, but first they need to determine whether or not the project can prove to be profitable. Insufficient infrastructure is the main constraints for mineral extraction in the region in general. That’s why we were not able to start exploration and production until relatively recently, despite the fact that we had received our first gold mining license 20 years ago. Before exploring our goldfields, we had to make at least the basic infrastructure improvements through a complex of works to provide different locations of the region with energy, transportation system, etc. So, to start developing our coal deposits, we first need to build and maintain adequate infrastructure supplies.

– Does Kamchatka have adequate energy generating capacity to meet all demands for both existing and future projects?

– It is a good question. For three years I've been trying to promote the idea to construct a hydropower plant (HPP) on the Zhupanova river, in the southern part of Kamchatka. It would be a radical solution of electrification problems in the southern and central parts of Kamchatka peninsula, including such cities as Petropavlovsk-Kamchatsky, Elizovo and Vilyuchinsk. According to our estimates, the total construction cost of HPP cascade on the river Zhupanova can reach approximately 52 billion rubles (if we take into account prices of the year 2014). We did not get the approval of the Ministry of Energy of the Russian Federation, so I later discussed the plan with President Vladimir Putin and he gave the Ministry the task to examine the idea more thoroughly. Meanwhile, the experts are still opposed to the idea as they don’t see the point in a power plant building primarily because of the fact that it is expensive and the region has sufficient energy supplies at present. But we need to think today about the future as the future starts today, not tomorrow!

– Does it mean that the region may not have enough generating capacity available to meet all the demands of the economy in the future? Does the region have enough capacity to power its economy now?

– Formally, taking into account our power balance, we even have potential to save some amount of energy. Peaks or spikes in customer power demand can be easily handled with the help of a geothermal power station of Mutnovskaya and a hydroelectric power station in the cascade of Tolmachevsky. But the primary fuel-energy resources are our heating and power plants. We have switched to gas two combined heating and power plants (CHPP). The problem is that both plants are rather old, forty and fifty years old, respectively. They will endure for the next 5-10 years and what will happen then? I mean, gas supply is limited and will not renew, so what might happen when it expires? Shall we switch to naphtha residue (mazut)? Mazut is a heavy, low quality fuel oil, used by generating plants and similar applications and since last year it has been used by almost all refineries in Russia. Its price is going to increase dramatically very soon. We use it as a backup fuel for peaking power plants in case there are any supply problems. We have signed a contract with Gazprom Geologorazvedka to take part in exploring the Arctic shelf. The previous attempt three years ago failed because of the clear reason - the phase before production begins usually takes a long time and costs a lot of money. At present we receive gas from the Sobolev Gas Pipeline which belongs to Gazprom. The Russian government imposed gas prices for our region, so it was ultimately a political decision. Of course, it is not profitable for Gazprom. But the biggest problem is to know when the regulated price for gas to Kamchatka will be raised and what alternative decisions can be used to keep the power balance in the region. That’s why I think that the best solution here is to build a new hydroelectric power station.

Of course, we use modern energy efficient technologies based on renewable energy sources, such as wind power generation (e.g. a modern wind-diesel complex on Bering Island; a wind power plant in the village of Ust-Kamchatsky; we are planning to install windmills in 9 more locations of the Kamchatka region with the help of several Japanese power companies). The use of wind-diesel systems leads to a reduction in electricity tariffs as wind power replaces about a half of costly diesel fuel consumption on Bering Island. This technology will significantly reduce the island's dependence on imported energy diesel fuel, but can be used only in isolated grids, it will not be able to act as the main electrical power source for the whole region.

There are lots of problems in our energy sector which are still unresolved. The industry is almost monopolized by branches and structural subdivisions of the JSC RusHydro Holding which imposes one of the highest tariffs in the country. We are not able to influence or change the situation, though all our economic activities require energy resources which have become prerequisites of our developing economy. To some extent, financial assistance paid by federal authorities helps us reduce energy prices. New hydropower development can help us solve this problem and unleash our potential. We are going to submit our proposals to the Presidential administration one more time in May 2016, so again I will try and insist on the idea of building a new hydroelectric station.

– Kamchatka is one of the most difficult regions to access in Russia. How are you going to solve transportation problems?

– We are geographically known as a peninsula, but in reality Kamchatka is experiencing isolation problems like a real island. There are no roads and railroads connecting Kamchatka peninsula with the "Big Land". An ordinary man can only get there by plane and we hope that aviation can help us meet our development goal. We have nearly completed reconstruction of the airfield complex with dual military and civilian use at the main airport in the region. In cooperation with Rosaviatsia, we are now developing our airport infrastructure in the northern part of the region, including the construction and reconstruction of airports and air terminals, subsidized by the federal targeted program. We are working actively and hope to complete the large-scale reconstruction in 7-10 years, so that we will have airports with paved runways in all the regional centers of Kamchatka. This complex project becomes a crucial part of the region’s development. Currently, the air company Aeroflot provides its customers with an access to the Kamchatka territory. Most visitors arrive at Petropavlovsk-Kamchatsky airport by the Aeroflot flight from Moscow and St. Petersburg. We are grateful to the Aeroflot air company as it connects Kamchatka with other parts of Russia, but during the high summer holiday season their ticket prices become unaffordable. Aeroflot applies the so-called “flat rates” to lower their cost base, but these rates still account for a relatively low share of total volume of its airfares. We are interested in allowing any other air carriers access to our market. The air company Transaero, which also used to fly to Kamchatka, doesn't exist anymore. We have signed an air service agreement with the airline “Russia” and this air carrier will launch its regular service to our region at the beginning of the new tourist season. They have already started selling tickets. I think it will help us a lot.

– Are they going to stat direct scheduled or charter flights?

– Definitely not the charter ones, we didn’t even discuss this option, only the regular flights. We have agreed that there will be five scheduled return flights from Moscow to Kamchatka per week. We are discussing the possibility to increase the number of regular return flights to St. Petersburg and also in a southern direction - to Krasnodar and Sochi. In this case, our citizens will be able to fly to these destinations directly, rather than via connected flights through Khabarovsk or Novosibirsk.

S7 Airlines provides the availability of passenger air transportation from our region to Siberia, Aurora Airlines connects us with Vladivostok and Khabarovsk. In summer there are few charter flights to Japan and Korea, but that is not enough for us. We are negotiating with Chinese air carriers the terms and conditions for operating at our market. We would like to arrange flights to Beijing and Harbin, so our southern neighbors are expressing their interest in our region and they are ready to begin scheduled flights as soon as possible. No doubt, it's not worth getting to these locations via three connected flights as it is now via Aurora Airlines, but the air company needs to upload their base airports in Khabarovsk and Vladivostok. Alternatively, we could collect passengers from Chukotka and Magadan to carry out direct flights to Korea and China from our base airport. To achieve this, we need to find an air company which is able to provide this kind of service. As soon as we complete the reconstruction of the Kamchatka main airport and its new runway starts running in June 2016, we can make more substantive progress in negotiations for partnership with any air companies.

– Is there any guarantee that the airport reconstruction will be completed on time and there won’t be any delays?

– Let me specify that the progress of the reconstruction is on the control of the Russian Presidential Administration, so there will not be any disruption or delay. I'm glad that our general contractor, the Federal State Unitary Enterprise “Spetsstroy Russia” has overcome its crisis, because Spetsstroy has got a division which specializes on building airports. When the division had completed their building works at Vladivostok airport by the Economic Forum, they initiated reconstruction of our airfield complex.

All the required concrete pavement works have already been completed and the next step is to build the infrastructure complex: to build patrol roads and fences as required by airport security guidelines in order to protect the entire perimeter of the airport; to build the airport’s control tower and also to install the airport navigation equipment. This April we plan to arrange a series of post-maintenance flights to check the new runway. In addition, we have to build a new passenger terminal building with the help of our local aviation enterprise. The plan of our terminal building was designed in Krasnoyarsk and now we have to get the required expert approval to start the construction works. The new terminal building will be located next to the existing one.

I need to note that we were choosing the final variant of the terminal building very carefully: we were studying the common practice of building air terminal complexes to service the flights and we were not satisfied with the options that were previously used by our colleagues. Our airport is not going to be divided into landside and airside administrative areas; it is economically unprofitable with our small amount of work.

– What do you mean by “small amount of work”?

– It depends on what you compare it to. The airport complex infrastructure including the terminal building will cost us approximately 2 billion 300 million rubles. The average planned construction period is 48 months, but our builders believe that it will be possible to complete all construction work within two years. We all want to stay focused on the tasks we are committed to completing as soon as possible. It’s a very well-considered project with compactly arranged facilities and effective space allocation. The terminal building is expected to have a capacity of 400 passengers per hour. Besides, it is a beautifully designed building. Next to the terminal there will be a nice hotel. The airport will serve for both domestic and international travel and its capacity will enable it to service relatively high passenger traffic flow.

– Will the money for the project be allocated from the local budget?

– No, that would be an excessive burden for our budget. We are currently looking for investors and reviewing loan terms provided by different banks and companies, applying the so-called “trust-but-verify” approach. We should verify that all the submitted information is accurate and trustworthy. We would like to identify and avoid the potential situation when our project is stalled due to financial problems of our developers. To minimize any risks and safeguard us against possible financial problems, our local aviation enterprise plans to start building the airport at their own expense. We are ready to offer our investors the following option: first, we sign an agreement and then they make advance payment (e.g. a bare majority, which is 51% of the shares to be issued or even more). Since then, we record the liability that stays on the books until the construction is completed. Our local aviation enterprise does all the required construction works by their own means. As soon as all the works are over, our investors get a controlling block of shares and start operating the new infrastructure. So, this is the point and in case we are not be able to agree with any potential investors, this construction project will be further supplied from our own resources and loan funds, so we will be regularly making the related loan payments at a quiet pace.

– Back down to earth, what can you tell us about the resettlement program for people living in dilapidated housing? Taking into account extreme weather conditions of your region, it might be more important to ensure accessible housing for people rather than to build an airport for adventure travel or overseas journeys.

– The situation is quite optimistic here. We are within the top twenty or thirty regions for new buildings delivered in Russia, so it’s the clear sign that we are doing our best to handle the project effectively. Recently, a group of experts from the Ministry of Construction, Housing and Utilities of the Russian Federation visited the construction facilities in Kamchatka. They gave a high appraisal of our program for the resettlement of dilapidated housing and construction of earthquake-resistant buildings. The experts were satisfied with the results of their revision, though we're lagging behind somewhat, e.g. our contractors in Ust-Kamchatsky and Kozyrevsk have delayed in completing two houses on time.

– When are you planning to resettle all the people living in dilapidated housing?

– Unfortunately, that is not possible. At present, we are developing five targeted housing programs in Kamchatka, aimed at citizens’ relocation from unfit housing facilities. But only in Petropavlovsk-Kamchatsky and Yelizovo, there are 3.5 thousand buildings which need to improve their earthquake protection. What shall we do with such a huge amount of buildings which can also be considered as unfit housing facilities, though the criteria are different? Bearing in mind that all housing units in our region have nearly become obsolete and distressed, it’s much easier to knock down all the old buildings and put up the new ones. But do you know any region of Russia, where it might be possible? That’s why we are setting realistic yet challenging goals. Every work requires a systematic approach, so we have set start and completion dates for each step of our housing project. We tackle one step at a time. Thus, we can get a good feel for the timeline and it keeps us on track. At the moment we are focused on achieving the so-called “intermediate result” in the year 2017. Then, some new proposals to improve the living conditions will crop up at federal level. I’m sure that everyone will share our inspiration to contribute to the improvement of people’s living conditions.

We've built a new residential area, demolished 50 earthquake-prone houses and we are currently resettling their inhabitants in new apartments. Although, it’s clear that so much of the city still needs rebuilding, simply because Petropavlovsk-Kamchatsky is 300 years old. It is the second oldest city in the Russian Far East after Okhotsk. The first stone house was built here only 50 years ago. Most of the buildings in the city were put up according to simplified method of construction which was very common at the era of the Soviet Union, so now they do not meet modern levels of building regulation. We can’t demolish them, as we don’t have enough money to renew them or put up the new ones instead. Nevertheless, we have exceeded the initial housing plan by 28% that is quite sound and I think that we will gradually solve all our problems over time.

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