Kremlin Remains Clueless About How to Mitigate Dangers for Foreign Investors In the North Caucasus

On September 16, the French state bank Caisse des Depots et Consignations and Russian state company Resorts of the North Caucasus signed an agreement on setting up a joint venture. The French bank promised to raise 10 billion Euros ($14.2 billion) within a year for the grand project of building five world class ski resorts in the North Caucasus, if the Russian side provided state guarantees for return on investment and tax breaks. Fifty-one percent of the joint company’s shares belong to the Russian side and 49 percent to the French side (www.vedomosti.ru, September 16).

A North Caucasus investment conference took place in the Black Sea resort of Sochi from September 16-18 which heightened hopes for greater investment in this volatile region. An investment of $14.2 billion would be almost all the money the Russian government requires to build ski resorts in Dagestan, North Ossetia, Kabardino-Balkaria, Karachaevo-Cherkessia and Adygea. Earlier, Moscow suggested it would allot $2 billion for the project. In the summer of 2010, Moscow’s envoy to the region, Aleksandr Khloponin, unveiled his plans for the development of ski tourism in the North Caucasus as the way to solve a range of social problems that supposedly create the conditions for the violent insurgency in the region. Skeptics have pointed out financial flaws in the project, such as overly optimistic expectations for how many skiers would visit the regions and the security conditions in the North Caucasus, which preclude the development of large-scale tourism. In fact, Moscow officially banned tourists from visiting Kabardino-Balkaria following the murder of several tourists from Moscow in the republic in February 2011.

Meanwhile, the newspaper Kommersant has shed more light on the nature of the agreement that neither the Russian nor the French side wished to comment on in great detail. Caisse des Depots et Consignations requested that only French developers participate in the project. The French developers would become the owners of the real estate they build, while the Russian Resorts of the North Caucasus company would own the infrastructure. The budget for the project to develop tourism in the North Caucasus could increase from an estimated $15 billion to $27 billion, as the government wants to upgrade the resort area in the southern part of Stavropol region and to develop the Caspian beaches in Dagestan. The Russian billionaire of Dagestani origin, Suleiman Kerimov, is expected to partner with the Russian state company to build hotels on the Caspian Sea shore (www.kommersant.ru, September 16).

An Anglo-German consortium, Astor Capital and Drees and Sommer, also expressed interest in developing resorts in the North Caucasus. But the nature of the agreements signed in Sochi remains vague (www.kavkaz-uzel.ru, September 18). Korea Western Power, which is a subsidiary of the Korea Electric Power Corporation (KEPCO), would invest $1 billion to build five hydroelectric plants in the North Caucasus, if the government provided guarantees as similar to those given to the French state bank. However, there are no Russian state guarantees yet. In addition, due to rigid and outdated Russian customs regulations, the foreign construction companies may find it difficult to import the equipment necessary for the work (www.vedomosti.ru, September 16).

There are also questions about the plausibility of such a large investment by Caisse des Depots et Consignations. Kommersant reported that in 2010, the bank managed a portfolio worth only 20.2 billion Euros. So investing in the North Caucasus would require half of the company’s capital to go into an enterprise that is risky for both financial and political reasons. If Caisse des Depots et Consignations expects to attract the capital of other financial institutions, then it will probably take some time and may not even be feasible.

Meanwhile, the Russian government announced another increase in funding for the North Caucasus through 2025. In July 2011, the Russian ministry for regional development announced plans for investing up to $125 billion into the region, including $84 billion in government funds. On September 20, Kommersant reported that this number has now grown to $177 billion, as the state monopolies, including Gazprom, Rosneft and others, offered to participate. It must be noted, however, that the budget for North Caucasus development was requested by the ministry for regional development, but the Russian ministries of finance and economic development have strong reservations about it. The ministry for economic development stated that Russia has no planning instruments of such a scope that would allow it to have long-range investment plans until 2025 (www.kommersant.ru, September 20).

The argument between the Russian ministry for regional development and the finance ministry indicates a political struggle is taking place inside the government. While Russian politicians seem to be under pressure to promise more because of the upcoming parliamentary and presidential elections, public servants are trying to be more realistic. Even if the Russian government had the funds to invest in grand projects in the North Caucasus, it would risk a Russian nationalist backlash. Building world-class ski resorts in the North Caucasus while many ethnic Russian regions live in poverty would evoke anger and frustration among ethnic Russians.
There are more subtle problems that will also be hard to ignore.  If the French companies were to construct five big resorts in the North Caucasus, it would necessitate opening the region up to foreigner visitors. So far Moscow has been intent on keeping foreign visitors away from this region, and changing that would require a major policy overhaul that the current Russian leadership does not seem prepared for.

On September 14, the Kavkazsky Uzel (Caucasian Knot) website reported that the conflict in the North Caucasus had claimed 1,007 victims since the beginning of 2011 – 593 killed and 414 injured (www.kavkaz-uzel.ru, September 14). The North Caucasus still appears a hazardous place for tourism, even though some areas are safer than others. If Moscow is serious about developing the North Caucasus, drastic policy changes in the region are unavoidable.