Kabardino Development Project

Strategy for the development of the Kabardino-Balkarian Republic up to 2030

This report was developed by Pro-Invest Spetsproekt LLC on the basis of information provided by the Government of the Kabardino-Balkarian Republic, and no part of it can be reproduced or transferred to the coma in any form and by any means, whether electronic or mechanical, including photocopying and recording on magnetic media, if there is no written permission of the Government of the Kabardino-Balkarian Republic.

Introduction

2

In the middle 2006 The Government of the Republic decided to develop a development strategy for 2030 years

Over the past year, some progress has been made in the Republic. Its economy has come out of a phase of stagnation. In particular, the pace of industrial production has significantly increased

These changes indicate the possibility of improving the economic situation in the Republic through active actions of the regional authorities. Achievements must be consolidated and strengthened

This requires identifying the most promising areas

to concentrate the efforts of the state and society on them and to proceed to a systematic change in the nature of the modern economy, which is characterized by extremely low efficiency

The development and implementation of the Strategy serves this purpose

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Development Strategy of Kabardino-Balkarian Republic

Objectives of developing the Strategy. Main restrictions

3

Objectives of Strategy Development

Consolidate the efforts of government, society and business to ensure high and sustainable

Economic growth rate of the Republic

Identify priorities for concentrating power and effective use

Limited resources

In the long run, raise competitiveness to an acceptable level

the Republic and the demand for its economy in the Russian and world markets

To ensure a decent standard and quality of life for the population

Main restrictions

Low investment attractiveness of the region

The current structure of the economy does not take into account the natural and climatic features of the region, does not use its advantages and therefore is low efficiency

The population of the Republic, its business structures, social groups are anxiously expecting high results from the new socio-economic policy, which urgently requires the authorities to take non-trivial and decisive actions for the future development of the Republic.

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Development Strategy of Kabardino-Balkarian Republic

Summary

4

The CBD economy is currently one of the least competitive in Russia. The reasons for this, which lie in the depths of the past decades, were aggravated by the transition of the country to the market. Accumulated problems are systemic and require an integrated, targeted solution

Analysis of industry trends in the world, their compliance with the current structure of the economy of the Republic, the natural and climatic and resource characteristics of the region, as well as the study of the prerequisites for accelerated and sustainable socio-economic development - all this leads to the conclusion that the promising areas of activity in the territory of the CBD can include the production of products of deep processing of agricultural raw materials (with a focus on the export of premium products), sports and health tourism and high-tech production of building materials

The development of the Strategy considered three alternatives to the development of the CBD economy: "Inertial development", "CBD - the center of recreation and tourism", "CBD - the center of health and effective environmental management". The most attractive alternative is "CBD - a center for health and effective environmental management"

The choice of this alternative and the implementation of the relevant strategy will allow 2030 the GRP Year 6,9 Once (before 255 billion Roughly reducing unemployment with 26% to 15%, increase the regional budget with its own revenues 35% to 75% Increase the average salary in 7,3 once, with 3,8 to 28,5 thousand rubles in modern prices

The priorities of the Government of the CBD outlined in the Strategy provide for its active participation in supporting and developing entrepreneurial initiative, protecting property rights in all other areas of economic activity in the republic:

Financial support: temporary tax preferences, co-financing of projects

at the federal level, promotion of products at the federal and international level, assistance in establishing business contacts with administrations and business in other regions of Russia and foreign countries

Support: Defending

Enterprises

Interests

One of the important conditions for the implementation of the Strategy is the formation of a new image of the CBD as a successfully developing, reliable and safe region for living and recreation in Russia.

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Development Strategy of Kabardino-Balkarian Republic

Contents

5

1. The relevance of the development strategy of the Kabardino-Balkarian Republic

2. Prospective sectors of the economy

3. Strategic choice of alternatives for the development of the CBD economy up to 2030

4. Prospects for the implementation of the Strategy

5. Annexes

1. Industry analysis: selection of priority industries

2. Strategic choice of alternatives for the development of the CBD economy

3. Current socio-economic situation of the CBD

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Development Strategy of Kabardino-Balkarian Republic

The relevance of the development strategy of the Kabardino-Balkarian Republic

6

> Integrated

Low CBD competitiveness: CBD ranks 81 among 88 regions of the Russian Federation. Economic problems of the Republic are also characteristic for other subjects of the SFD

Testimony

Economics

evaluation

Her

About

The low competitiveness of the economy is due, in particular, to the extremely low efficiency of the use of resources available in the Republic. As a result, the main sectors of the economy, which give 50% Budgets bring less to the budget 20% Tax Revenues

The development strategy of the CBD is designed to focus the efforts of the authorities on the development of those high value-added sectors, to provide employees with high wages and income to the budget system of the Republic of an adequate amount of taxes

Capable of releasing

Products with

economy,

Who

The Republic has a number of competitive advantages, on the basis of which it can

A modern, highly efficient economy

The competitive advantages of the Republic can be realized only if

carefully thought out, active and purposeful actions of the authorities

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Development Strategy of Kabardino-Balkarian Republic

At present, the economy of the Republic is not competitive. While maintaining its current structure, the prerequisites for overcoming the competitiveness crisis are weaker than that of most other subjects of the Russian Federation.

7

Competitiveness of CBD

Consolidated rating M 81**

The current competitiveness (***) reflects the competitiveness of the region according to the actual development results

The Growth Competitiveness***)

Reflects the ability to grow in the medium term, on the basis of the region's prerequisites

Assessment of the current situation of the region in Russia on the main indicators of socio-economic development

M 73

Estimation by investors and economically active population of the actual preference of the region for investment and residence

Amount of investments per capita, million rubles

M 35

Migration growth rate, %

The region’s relative ability to compete in the foreign market

Gross national income per person employed in the economy

Proportion of products produced in the region exported

M 79

Quality of infrastructure (transport infrastructure, electricity, telecommunications infrastructure, educational infrastructure, health care, living conditions of the population)

Quality of human resources (demography and migration of the population, quality of labor resources)

M 68

M 46

Business environment

(business environment, competitiveness of the leading sectors of the economy of the region, the level of development of the credit system, the level of costs for doing business, the efficiency of government)

M 84

Evaluation of the effectiveness of the authorities to improve the competitiveness of the region in recent years

M 84

(Projection for 2006 g. M75****)

*The calculation of competitiveness ratings was carried out according to the Pro-Invest methodology, developed on the basis of M. Porter (USA) and experience in assessing the competitiveness of the US and UK regions **We are here and then the place of CBD among 89 the Russian Regions 2004 St Petersburg. *** The concepts of modern competitiveness and growth competitiveness were first used in the works of M. Porter **** Projected values based on data from 9 months 2006 St Petersburg.

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Development Strategy of Kabardino-Balkarian Republic

The problems accumulated in the economy of the Republic are systemic and are associated primarily with inefficient use of resources, with underestimation of the competitive advantages of the region.

8

Sectoral structure of the economy CBD*, 2005

50197

310 600

22%

1%

2%

9%

1%

19%

Agriculture

29%

Food industry

Mechanical Engineering Tourism

8%

5% 1%

Other basic industries

15%

Supporting Industries

25%

Other industries

17%

45%

2 482

1%

7%

4%

3%

14%

39%

32%

Turnover**, mln. rub.

Number of employed

Tax revenues, million rubles.

* In addition to turnover for medium and large enterprises, turnover of small business is taken into account

** For agriculture, the indicator "Gross production" is used instead of the indicator "Oborot" as the most accurately reflecting the level of production

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Employment structure in the sector "Other industries", ths. persons 138

Employed in health, education and other social services

Employed by individual work

80

58

2005

Basic sectors of the economy > Agriculture and food industry > Mechanical engineering > Metallurgy > Light industry > Building materials industry > Tourism > Oil production and refining > Pharmaceuticals and biotechnology > Science

Small Business

Supporting industries > Construction > Electricity and utilities > Transport and communications > Trade

Development Strategy of Kabardino-Balkarian Republic

It is necessary to increase the efficiency of the economy structure - that is, to provide employment of the population mainly in sectors with high levels of productivity and added value.

9

Changing the structure of the economy

On the chart, the structure of the CBD economy by employment and wages in industries. 2006

Increased productivity

) g 6 0 0 2

.

rubles

.

S and T

,

a l l i a n t o a r a Z

7,5

6,0

5,9

6,1

4,8

4,8

4,7

4,6

4,5

4,5

4,4

4,4

4,3

3,7 3,4

3,4

1,8

Science Tourism

Trade and marketing

Mechanical Engineering

Construction

Transport and communications

Small Business

Electric Power

Pharmaceutics

Other sectors of economy

Utilities

Agriculture

Number of employees, % (2006)

Construction materials

Metallurgy

Food industry

Light industry

Oil production and refining

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Development Strategy of Kabardino-Balkarian Republic

The development strategy of the CBD provides for the concentration of efforts and resources on priority sectors of the economy that ensure a high level of added and paid labor, as well as sustainable and adequate entry into the budget system of the Republic.

10

Consistency and main results of the stages of work on the Strategy

“We need to learn to concentrate resources on key development issues” Vladimir Putin

When developing a strategy, it is necessary to identify the most promising areas of economic development of the Republic, concentrate the efforts of the state and society on them and begin a systematic change in the nature of the modern economy, which is extremely inefficient.

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Identification of priority sectors of the CBD economy

1.1. Identification of the priority sectors selection space: Identification of the list of sectors significant for the modern economy of the CBD and its expansion capable of developing in the CBD by fast-growing sectors of the world economy, characterized by a high level of added value and products in demand in foreign markets

1.2. Selection of priority sectors for development in the CBD

Selection criteria: 1. Prerequisites for development

the CBD

2. High level of added

Cost of products

3. Demand for products in

Foreign Markets

4. High synergy with respect to other industries 5. Importance of the industry in the future

the CBD Economy

Analysis of possible alternatives to the development of the CBD economy and the choice of the preferred alternative 2.1. Identification of development alternatives

Analysis of development alternatives that differ in goals, objectives and opportunities for implementation

2.2. Strategic choice of alternative to the CBD economy development

Selection criteria: 1. Budget security 2. The population is 3. Population income 4. Recoupment of state

Investments

5. Sustainability in the long term

Perspective

3. Formalization of the strategy. Formation of a package of promising investment projects. Determination of goals and objectives of the executive authorities for the implementation of the Strategy.

Development Strategy of Kabardino-Balkarian Republic

The Republic has a number of competitive advantages, on the basis of which a modern, highly efficient economy can be formed*

11

Proportion of population younger than working age, %

17

20

22

Potentially high availability of labor resources at the expense of the younger generation

Almost 100 percent gasification of settlements, extensive road network of good quality

Gas supply in the region, %, 2003 93

85

70

Russian Federation

SFD

CBD

Russian Federation

SFD

CBD

Strong recreational potential and positive experience of its large-scale use in the past

Favorable climatic conditions for the creation of modern agricultural production with deep processing of its products, in demand in the Russian and foreign markets

Availability of significant reserves of minerals, products of deep processing of which are in demand in the regional and Russian markets

* For an analysis of the current socio-economic situation of the Republic, see annex.

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Development Strategy of Kabardino-Balkarian Republic

Contents

12

1. The relevance of the development strategy of the Kabardino-Balkarian Republic

2. Prospective sectors of the economy

3. Strategic choice of alternatives for the development of the CBD economy up to 2030

4. Prospects for the implementation of the Strategy

5. Annexes

1. Industry analysis: selection of priority industries

2. Strategic choice of alternatives for the development of the CBD economy

3. Current socio-economic situation of the CBD

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Development Strategy of Kabardino-Balkarian Republic

Prospective sectors of the CBD economy

13

The choice of priority sectors for development in the CBD economy provides for careful consideration of the characteristics of the region, long-term trends in the evolution of similar industries in the world economy, sales opportunities for relevant products in the domestic and foreign markets.

When determining the optimal sectoral structure of the CBD economy, prospects were taken into account

development of not only historically developed areas of activity on its territory, but also the most actively growing sectors of the world economy, whose products are in demand in global markets. The analysis showed that from this point of view only the production of therapeutic and preventive drugs and other health products has the necessary prerequisites for development in the Republic.

In determining the priority sectors, the presence of the Republic is crucial.

necessary conditions for their successful development and the availability of real opportunities for the authorities to optimize these conditions

Industry analysis, taking into account possible risks, led to the conclusion that the most

promising for the formation of a competitive economy of the CBD tourism with the development of related activities; deep processing of agricultural raw materials; high-tech production of building materials

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Development Strategy of Kabardino-Balkarian Republic

Optimization of the sectoral structure of the economy provides not only for the accelerated development of existing industries, but also the formation of new industries for the Republic, whose products are in demand on the world market.

14

Sectoral structure of the CBD economy in 2005 (by turnover), %

Industries poorly represented in the current CBD economy but actively developing in the global economy

17%

29%

5%

5%

6%

6%

3%

10%

3%

1%1%1%

8%

5%

Agriculture

Food industry

Mechanical Engineering

Metallurgy

Light industry

Construction materials

Tourism

Small Business

Electric Power

Construction

Trade and marketing

Transport and communications

Utilities

Other sectors of economy

Information technology

Educational services

Pharmaceuticals and Biotechnology

The list of sectors of the economy to be analyzed in order to determine the priority for the Republic:

1. 2. 3. 4.

Agriculture Food industry Mechanical engineering Metallurgy

5. 6. 7. 8.

Light industry Building materials Tourism Oil production and processing

Small Business

9. 10. Pharmaceuticals and Biotechnology 11. Educational services

Source: CBD Statistical Service; European business facts and figures; US manufacturing statistics

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Development Strategy of Kabardino-Balkarian Republic

The choice of priority sectors of the economy involves careful consideration of the characteristics of the region, long-term trends in economic development in the world, trends in demand for goods and services in the national and global markets.

15

5

Availability of export potential

4

The importance of the industry now and in the future

1

Availability of necessary and sufficient conditions for the development of the industry on the territory of CBD

The potential of industry development in the Republic

2

Industry’s ability to synergize with other sectors of the economy

3

Opportunities for production of high value-added products

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Development Strategy of Kabardino-Balkarian Republic

Priority for the CBD economy can be considered those industries for the development of which there are necessary and sufficient market conditions, which, in turn, can be optimized by regional authorities.

16

Availability of necessary conditions in the CBD for the development of certain industries and the ability of the authorities to optimize these conditions

Rating of industries by availability of necessary and sufficient conditions (units)

Area of further industry analysis

Tourism

Manufacture of health products

Tourism

Food industry

Medicines for health

Light industry

Food industry

Pharmaceuticals and Biotechnology

Mechanical Engineering

Pharmaceuticals and Biotechnology

C/H

Information services

Metallurgy

Educational services

Oil production and processing

Construction materials

0,2

0,4

0,6

0,8

1,0

1,2

1,4

1,6

1,8

2,0

2,2

Availability of the necessary conditions for the development of the industry in the CBD, ed.

Source: Analytics of LLC "Strategy"

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C/H

Construction materials

Light industry

Metallurgy

Oil production and processing

Mechanical Engineering

Educational services

Transport equipment

Information services

1

1

1

1

Industries that do not have the prerequisites for development in CBD. They are not considered further

Development Strategy of Kabardino-Balkarian Republic

on the

I and I and I and I and a and a and a and a and a

i t t o n o m o V

.

d e .

L with U

,

and l with a r t o e and t and with a r

3,0

2,5

2,0

1,5

1,0

0,5

4

4

4

3

3

3

3

2

2

Industry analysis showed that the activities of the most promising sectors for the development of the CBD economy are based on the use of the competitive advantages of the region.

17

The matrix of industry risks and its prospects for development in the CBD

Industries with high potential, but also with high risks

Tourism

Agriculture

Industries that need to be prioritized

Food industry and deep processing of agricultural raw materials

Pharmaceuticals and Biotechnology

Construction materials

Light industry

Stabilizing industries

Metallurgy

Oil production and processing

* and l c a r t o

i and t and t and a r t t o n e n e e r e p

11

10

9

8

7

6

5

4

5,0

5,5

6,0

6,5

7,0

7,5

8,0

8,5

9,0

9,5

10,0

10,5

11,0

Industry Risk Resilience Index**

* Subject to the development of industries according to an optimistic scenario, in conventional units (See slide 63) ** In units (see slide 64)

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Development Strategy of Kabardino-Balkarian Republic

The content of activities, nomenclature and quality of products of future sectors of the economy will be radically different from the ones that have developed to date.

18

Existing economic sectors

Future economic sectors

Agriculture

Food industry

Pharmaceutics

Light industry

Tourism

Production of market-demanded crop and livestock products, their deep processing and receipt of products with high added value, belonging to the premium class and in demand in the domestic and foreign markets (vegetables, fruits, chilled sheep and cattle meat, high-quality feed, biofuels, etc.)

Production of therapeutic and preventive drugs and health-promoting products for consumption in the region and beyond. Production of all kinds of goods for tourists and vacationers

Sports and health tourism, offering a wide range of services for the prevention and treatment of various diseases. Hotels, sanatoriums and other tourist facilities of modern format

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Development Strategy of Kabardino-Balkarian Republic

Small business is one of the most important sectors of the economy with significant growth potential in the CBD

19

Small business can effectively contribute to addressing the employment problem in the CBD, especially in remote areas

Development trajectory: increasing the share of small businesses in GDP and total employment

Russia 2005

Russia 2003

CBD 2005

Russia 2004

Hungary

Poland

Croatia, Sweden

Germany

Great Britain France USA

Israel

Philippines

Italy

Mexico

Australia

Japan

China

Russia 2010 the Ministry of Transport of the Russian Federation*

Pakistan

I and I and R.

x and n d e r s

I'm going to go to D.

%

,

P V V

70

60

50

40

30

20

10

0

0

10

20

30

40

50

60

70

80

Proportion of small and medium-sized enterprises in total employment, %

Stage of growth

Stage of maturity

In developing countries and countries of the former Soviet bloc

Small Business Segment Growth

In Eastern Europe after market reforms

the average annual growth rate of the sector was up to 50%

In developed countries, small business is stable

high share, being the basis of the economy

The share of employees in the sector ranges from 50 to 80%, and the contribution

sector in GDP - 40-60%

* Target declared by the Minister of Economic Development and Trade Gref

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Development Strategy of Kabardino-Balkarian Republic

Contents

20

1. The relevance of the development strategy of the Kabardino-Balkarian Republic

2. Prospective sectors of the economy

3. Strategic choice of alternatives for the development of the CBD economy up to 2030

4. Prospects for the implementation of the Strategy

5. Annexes

1. Promising projects for implementation in the CBD

2. Industry analysis: selection of priority industries

3. Strategic choice of alternatives for the development of the CBD economy

4. Current socio-economic situation of the CBD

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Development Strategy of Kabardino-Balkarian Republic

Strategic choice of alternatives for the development of the CBD economy until 2030

21

Existing alternatives to CBD development differ from each other primarily in the role that

The government is able to play in the development of the economy of the Republic, as well as how the future society of Kabardino-Balkaria sees its future

The alternative "inertial development" involves following the current development trends

economy, preserving its industry structure

Alternative "Center of tourism and recreation" provides for the accelerated development of tourism

a Recreational Complex with Exit 23 Years on 6,4 Millions of tourist visits. If this alternative is implemented, the development of agriculture and the food industry is focused primarily on ensuring domestic consumption, including the provision of food to the growing tourism sector

The alternative "CBD - the center of health and effective environmental management" provides

comprehensive development of the region, effective use of all its competitive advantages. In the case of this alternative, the development of tourism is guided by the average price segment, the positioning of the Republic as a region, which assumes wide opportunities for active recreation and health promotion. There is an exit through 23 the Year 3371 Thousands of tourist visits per year. Large-scale production of various therapeutic and preventive drugs based on local raw materials of plant, animal and mineral origin. Advanced development in the Republic of deep processing of agricultural raw materials, large-scale export of products with high added value outside the region

Analysis of these alternatives has shown that inertial development is not in the interests of economic development.

active population, business and society as a whole. Focusing only on the tourism sector of the economy carries great risks and will not solve, in particular, the problem of high-paying employment of the population.

The most attractive alternative is “CBD is a center for health and effective environmental management”.

Qualitative and quantitative analysis gave the best results

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Development Strategy of Kabardino-Balkarian Republic

The existing alternatives to the development of the CBD differ from each other in the role that the authorities are able to play in the development of the economy of the Republic, as well as in the way the future society of Kabardino-Balkaria sees its future.

22

Alternative to inertial development

Alternative "Center of Tourism and Recreation"

Alternative "CBD - the center of health and effective use of nature"

Tourism

Deep processing of agricultural raw materials

Manufacture of health products, pharmaceutical products

High-tech production of construction materials

Other sectors of economy

*

**

* APC is focused on domestic consumption ** AIC is focused on the production of premium and "export-oriented" products

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Primary priority

Priority

Inertial development

Development Strategy of Kabardino-Balkarian Republic

The alternative "Inertial development" involves following the current trends in the development of the economy, preserving its sectoral structure.

23

Implementing this alternative means maintaining current trends and industry

the CBD Economy Structure

The tourism industry is developing mainly through private initiatives. There is no planned development of recreational zones in Nalchik and Prielbrusye that meet international standards

Food industry and agriculture work mainly on domestic,

Regional Market

The government only indirectly participates in the implementation of production development projects

Building Materials

The development (decline) of other sectors of the economy continues in line with the established

Trends

The government's efforts to improve the economy and economic relations have neither

neither sectoral nor social priorities

The volume and structure of public investment in the CBD economy are changing

Trends

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Development Strategy of Kabardino-Balkarian Republic

Alternative "Center of Tourism and Recreation"

24

The implementation of this alternative means:

- Forced development of tourist and recreational complex with exit

During 23 Years on 6,4 million tourist visits to Kabardino-Balkaria, which implies:

Significant modernization of the transport infrastructure of the region

- Forced construction of new and reconstruction of existing hotels,

sanatoriums, tourist bases in Prielbrus, on the "northern slope" and in Nalchik

Creation of modern ski slopes in Prielbrusye and on the northern

Slope

Advanced development in the CBD SPA-resort

. . . active development of services infrastructure in recreational areas; and

Entertainment

The focus of agriculture and food industry in the first

to meet the demands of the regional market, including the provision of food for the growing tourism sector

Development of production of building materials (in the format of small and medium-sized businesses) is subordinated to the needs of the tourism industry

Other industries are developing and under control

the Government of the CBD in the framework of the all-Russian industrial policy and the growth of the state order

The volume of investment from the federal budget in the economy of the CBD will be

2.5 billion dollars (mainly for developing tourism infrastructure), and up to 2.7 billion dollars from other sources.

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Development Strategy of Kabardino-Balkarian Republic

The alternative "CBD - the center of health and effective environmental management" provides for the integrated use of all competitive advantages of the Republic.

25

Integrated development of the region and its transformation into a "health region":

Development of tourism with a preferential orientation to the average price segment and

positioning of the Republic as a region adapted for active recreation, health prevention and rehabilitation for 3,3 million people per year by the beginning of the 2025-ies; gradual development of the ski complex in Prielbrusye, on the "northern slope" and in the vicinity of the city. Nalchik; construction of SPA-resort on the territory of Nalchik and Gila-Su

Large-scale production of various therapeutic and preventive drugs based on local raw materials of plant and animal origin using modern biotechnology in the pharmaceutical and food industry

Advance development of agro-industrial complex and large-scale export

Products with high added value outside the region:

Production of chilled cattle and lamb

Production of juices, soft drinks, vegetables, fruits and other products

crop production, including canned, meeting the modern requirements of consumers for quality and ecology

Production of fuel alcohol and compound feed based on modern protein additives (in

DDGS)

High-tech production of building materials is developing at

active support of the authorities (including in the format of small and medium-sized businesses) with a focus on regional, interregional and national markets

Other industries are developing and actively supported

the Government of the CBD in the framework of the all-Russian industrial policy and the growth of the state order

The volume of investments from the federal budget in the economy of the CBD will be 1,5

billion dollars (mainly in the development of tourist infrastructure), and from other sources up to 1,6 billion dollars.

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Development Strategy of Kabardino-Balkarian Republic

The definition of the preferred alternative should be based on the analysis of quantitative and qualitative criteria

26

Key stakeholders and their expectations

Government of the Russian Federation (Federal Government)

Minimization of federal budget expenditures

Support for the Subsidized Region

Improving the standard and quality of life of the population* - Ensuring high rates of sustainable living

Economic growth*

Capacity-building for future development* - Enhancing national security*

CBD Government (Regional Authority)

High standard of living of the population - High level of regional security

Budget own taxes

The region’s high attractiveness for

Investors and the economically active population

CBD Population

High level and quality of life - Opportunities for development and self-realization

CBD Business

A favorable climate for development and

Entrepreneurship Development

Quantitative criteria

1

Employment of the population

* Income of the population

Tax revenues (fullness)

budget)

Financial results (take into account the amount of

investments in alternative

Qualitative criteria

2

Sustainability of the economy in

Long term

> Compliance with the development goals of Russia,

the Russian Government*

Synergistic effect of development

CBD Economy for Other Regions of South Africa

* Methodological recommendations for the preparation of reports on the results and main activities of budget planning entities, Ministry of Finance of the Russian Federation, 2004 St Petersburg.

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Development Strategy of Kabardino-Balkarian Republic

The alternative “CBD is the center of health and effective environmental management” is the most attractive option for the development of the CBD economy.

27

Selection criteria

"Inertial Development"

"Center for Tourism and Recreation"

"CBD - Center for Health and Effective Environmental Use"

Development indicators of CBD 2005

e e n e e e e t e h and l o C

e e e n e e e e c e a K

Employment of the population, % of the economically active population (by 2030)

Per capita income, ths rubles / month (by 2030 year)

CBD Consolidated Budget Endowment (by 2030)

Sustainability of the economy in the long term

Compliance with the objectives of the Government of the Russian Federation

Synergistic effect of CBD development for other regions of the SFD

67%

13,1

46%

ü ü

74%

3,3

65%

83%

19,9

36%

ü ü üü

ü

84,7%

26,5

25%

ü ü ü ü ü

üü

PRO-INVEST SPECIAL PROJECT

Development Strategy of Kabardino-Balkarian Republic

Calculation of the main indicators of pessimistic, realistic and optimistic scenarios of economic development in the implementation of the alternative "CBD - the center of health and effective environmental management" *

28

Endowment** Budget (2030 g.), %

Unemployment rate (2030), %

35

27

25

18

15,3

3,3

Pessimistic Realistic Optimistic

Pessimistic Realistic Optimistic

GRP (2030 g.), billion rub.

Income of the population (2030), ths rubles/person.

240

256

351

25,3

26,5

34,2

GRP

Pessimistic Realistic Optimistic

Pessimistic Realistic Optimistic

* See chap. "Methodology, prerequisites and results of forecasting strategic alternatives for the development of the CBD economy"

**Hereafter, subsidisation refers to the difference between the expenditures and the CBD consolidated budget's own revenues attributable to the expenditures of the consolidated budget

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Development Strategy of Kabardino-Balkarian Republic

Contents

29

1. The relevance of the development strategy of the Kabardino-Balkarian Republic

2. Prospective sectors of the economy

3. Strategic choice of alternatives for the development of the CBD economy up to 2030

4. Prospects for the implementation of the Strategy

5. Annexes

1. Promising projects for implementation in the CBD

2. Industry analysis: selection of priority industries

3. Strategic choice of alternatives for the development of the CBD economy

4. Current socio-economic situation of the CBD

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Development Strategy of Kabardino-Balkarian Republic

Prospects for the implementation of the Strategy

30

During the upcoming 23 Over the years, the efforts of the authorities in the Republic will be aimed at creating a new, more efficient economy. Its development will be based on the unique features of Kabardino-Balkaria, as a result of which the average wage will grow in the future 7,3 times (s 3,8 to 28,5 The budget will be formed mainly from its own tax revenues (the provision of the regional budget with its own revenues will increase from the current year 35% to 75%)

In the Republic will be created in fact new industrial complexes for

production of healthy food products, therapeutic and preventive drugs, providing comprehensive tourist services for the treatment, promotion of health and recreation of the population of Russia and foreign guests of our country. High-tech production of construction materials with high added value, meeting modern environmental standards, will be launched in the Republic. In the Republic will be actively developed other sectors of the economy that provide employment of qualified personnel

The structure of the economy thus formed will ensure high and

The stable rate of its development (the average annual growth rate of GRP (2006-2030) will be 9%). The republic will become one of the most successful regions of the North Caucasus, characterized by high standards of quality of life (unemployment will decrease from 26% to 15,3%) and public safety.

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Development Strategy of Kabardino-Balkarian Republic

Vision - Center for Health and Environmental Management

31

(cid:127) The highest life expectancy among the regions of Russia (cid:127) Uncompromising compliance with high environmental standards (cid:127) Developed sports and recreation infrastructure combining:

Unique and extensive opportunities for sports holidays in ski centers

(cid:127) (cid:127) High level of treatment and prophylactic and balneological services (cid:127)

World-class comprehensive medical services

(cid:127) Production of high-quality and in-demand medicines

products and food additives, including from local raw materials

(cid:127) Manufacture of other goods for health, sports and recreation (cid:127) Production of environmentally friendly food products, including from

the use of modern technologies of processing and packaging, as well as biotechnology

(cid:127) Availability of scientific schools and educational institutions in the field of medicine,

Spa and Sports

(cid:127) Developed system of training for tourist and sanatorium-resort

Organizations

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Development Strategy of Kabardino-Balkarian Republic

The goals of the regional executive power in the implementation of the strategic alternative "CBD - the center of health and effective environmental management"

32

Long-term goals up to 2030

Ensure high incomes and ensure high incomes and quality of life of the population

Ensure high rates of sustainable development of the CBD economy

Ensure high rates of sustainable development of the CBD economy

Increase the financial independence of the region

Increase the financial independence of the region

Strategic goals up to 2015

To form an economy structure capable of effectively using the competitive advantages of the CBD

To form an economy structure capable of effectively using the competitive advantages of the CBD

Increase the share of own tax revenues in the income of the CBD budget

Priority goals in economic development

Financial objectives

Increase the production of export-oriented products of the agricultural sector (including premium agricultural products (including the premium segment) segment)

Accelerated development of tourism

Accelerated development of tourism

Increase production of high-tech high-tech building materials

Increase production and increase the depth of processing processing of natural raw materials (ore, oil, etc.) (ores, oil, etc.)

Ensure that tax revenue is commensurate with the scale and efficiency of economic activity

Increase the level of the minimum wage and ensure the growth of wages and ensure the growth of the average wage in the budget sphere in the budget sphere

Objectives for infrastructure development and enterprise support

To provide conditions for mass implementation of the entrepreneurial initiative

Increase inflows Increase inflows of domestic and foreign domestic and foreign private investment

To create infrastructure, to create an infrastructure that provides 2030 by 2030, providing more than 1 million tour arrivals more than 1 million tour arrivals

To increase the attractiveness of products manufactured in CBD products and services in the domestic (in and services in the domestic (including state order), and foreign (including state order), and foreign market

To ensure the growth of the economy with its own energy resources

To ensure the advanced development of small-scale entrepreneurship

Objectives to improve the efficiency of the executive branch

Aims of the social block

Provide the authorities with highly qualified personnel at all levels

To organize the work of the executive power "on goals and benchmarks" (conduction of goals and benchmarks) (implementation of administrative reform)

To ensure a high level of health care, to ensure a high level of health care, social protection, education, science and culture of social protection, education, science and culture

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Development Strategy of Kabardino-Balkarian Republic

Objectives that ensure the achievement of priority goals in economic development

33

Increase production Increase production of export-oriented products of agro-industrial complex of agricultural products (including the premium segment) (including the premium segment)

To promote the creation of a modern (certified) meat processing plant capable of providing sustainable supplies of chilled meat for sale in national and global trade networks

To promote the implementation of projects for the production and export of bioethanol, the production of modern feed

and feed additives (based on bioethanol production waste), production of biofuels and other rapeseed products

Implement land reform that streamlines and improves efficiency

Land Use and Crop Optimization

To ensure accelerated growth in livestock production, increase in sheep and cattle

Provide state support (financial and organizational) to promotion programs

domestic and foreign markets of high-quality food products

Ensure high environmental standards are met

Develop a master plan for the territorial placement of production of goods and services for

information support of potential investors and provision of land plots to them

Accelerated development of tourism

Accelerated development of tourism

Provide state funding for advanced development of tourism infrastructure

(transport, protection against mudslides/lavins, provision of water, gas, electricity, sewage, construction of tracks, lifts and other facilities)

Ensure personal and environmental safety of tourists

Develop a comprehensive program for the creation and development of small and medium-sized production facilities

related goods and ensure its implementation

To ensure the promotion of tourism services within the country and abroad

Increase production Increase production of high-tech high-tech building materials

Increase production and increase the depth of processing of natural raw materials (ore, natural raw materials (ore, oil, etc.) oil, etc.)

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To promote the construction of the Russian railway line to the city of Tyrnauz

Attract investors to create high-tech production of building materials

To promote the development of innovative entrepreneurship in the production of building materials

To clarify oil and gas reserves with public and private funds

Attract investors for the organization of mining and deep processing of minerals (oil, ore)

Development Strategy of Kabardino-Balkarian Republic

Tasks on infrastructure

34

Provide support Provide support for successful businesses and successful businesses and entrepreneurial initiative initiatives

Ensure the inflow of domestic and foreign investments, foreign investments, promote the implementation of investment projects of investment projects

Create infrastructure, infrastructure that provides 2030 1,2 million tour 2030 1,2 million tour arrivals

To ensure the promotion of CBD products and services in CBD products and services in Russia (including state orders) and Russia (including state orders) and abroad. To form an image and to form an image and a brand of the Republic

Ensure growth of the economy with the necessary energy resources

To provide for the cutting development of small-scale entrepreneurs.

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Provide targeted support for successful enterprises and entrepreneurial initiative (subsidies, compensation payments, state guarantees) > Promote products to the foreign market, expand and strengthen business ties > Provide PR support and public recognition of successful development of small and medium-sized businesses > Organize systematic training of qualified personnel

To form favorable investment legislation > To ensure guaranteed protection of investors' interests > To ensure active, personal participation of regional leaders in attracting key investors > To minimize bureaucratic barriers to the implementation of investment projects > To develop and implement a program for the development of telecommunications and communications in the CBD

To develop and implement a comprehensive program for the development of Prielbrus and the Northern slope of the city. Elbrus

- reconstruction of existing and construction of new cars and railways for the delivery of tourists - construction of avalanches and shelter structures - construction of ski slopes, lifts, balneological infrastructure

Develop and implement a comprehensive program for the development of the resort area of Nalchik (including

implementation of the "city" ski route project)

Create effective sales representative offices in major cities of Russia and abroad to develop and conduct (on a regular basis) advertising and PR companies to improve the image

Republic, brand formation and its promotion

To promote the production of light industry and state engineering enterprises

Orders

Promote the comprehensive and rational development of the hydropower potential of the CBD

Ensure equal, transparent and prompt access to enterprises and tourist facilities

Energy Capabilities

Implement a set of measures to create a favorable business climate

Build an effective small business support infrastructure

Develop and implement a small business support system through a franchising mechanism

Development Strategy of Kabardino-Balkarian Republic

Tasks on Finance and Executive Power

35

Finance

Ensure that tax revenues are commensurate with the scale and efficiency of economic activity

Increase the level of the minimum wage and ensure the growth of wages and ensure the growth of the average wage in the economy and wages in the economy and the budgetary sphere

Executive branch

Provide the authorities with highly qualified qualified personnel at all levels

Organize the work of the executive branch "on the executive branch" on goals and control goals and control indicators "(conducting indicators" (administrative reform) of administrative reform)

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Increase the efficiency of tax administration to form a new culture of legal business

To ensure a gradual increase in the level of the minimum wage, to consistently increase the share of “legal” wages

To create a system of motivation to certify employees to improve the efficiency of systems of training and training of young professionals

Develop a system of goals and benchmarks

To bring the organizational structure of government bodies in line with strategic goals and objectives

CBD

Development Strategy of Kabardino-Balkarian Republic

In the 70-ies economic science began to associate the success of development with the formation of the so-called clusters. State support for clustering has fundamentally changed the face of the national economy, for example, a country like Finland.

36

The state is responsible for the implementation of an active policy to support the creation and development of clusters:

In the socialist economy

the analogue of the cluster was the territorial-production complex, which, unlike the market prototype, was created directively, with all the inherent shortcomings of the command economy

The cluster is

a group of geographically adjacent and functionally interconnected companies characterized by common activities and complementing each other; successful firms that produce products and services; suppliers that exist in the region. All of them operate in a favorable business climate in a market economy cluster is formed under the influence of many factors of objective and subjective nature.

The role of regional authorities in the formation of a successful cluster is to timely "detect" opportunities for its formation and provide comprehensive support to initiatives for its development, to involve in this process the intellectual potential of the region, to stimulate its constituent enterprises to produce export-oriented and highly competitive products.

Provide support in the creation of supplier enterprises for manufacturers of final products and the development of "outsourcing"

Leading companies

Key companies exporting goods and services outside the region

Network of supplier companies

Companies that provide "leaders" with raw materials, raw materials, components and specialized services

Business climate

Resources/Economic basis of activities

Human resources

Technology

Access to capital Infrastructure

Source: M. Porter, The Clusters White Book, National Competitiveness Institute, Bauman Innovation

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Creating a favorable business climate implies:

. . . . all necessary conditions

for the creation and conduct of business in the region; - the possibility of registration of new companies in the shortest possible time and the low cost of the relevant services;

reasonable cost of rental housing; and

non-residential premises;

high level and quality of life; ? security guarantees for business and

Population;

Ensuring equal access to sources

energy;

high quality of labor resources; availability of scientific and production base; high quality of transport and

Telecommunications infrastructure

Development Strategy of Kabardino-Balkarian Republic

The implementation of the alternative "CBD - Health Center" will significantly accelerate the formation of three clusters in the Republic

37

Cluster "Health", which includes a wide range of companies for the production of goods and services related to the development of sports, mining, sports, environmental, contemplative tourism with a balneological component, as well as high-tech and preventive drugs and other products that improve the production of medical health, based on natural local raw materials (grass, mud, mineral water, etc.) The formation of the cluster will provide a comprehensive use of tourism and recreational potential of the Republic

Cluster "Agro-industrial complex", uniting production for deep processing of agricultural raw materials and providing high quality premium products with high added value, which is in growing demand in the domestic and foreign markets Formation of the cluster will allow to put agricultural production on a modern basis, integrate it with the processing of products, to give sustainability to the development of the industry, to ensure its high competitiveness, and workers employed in the industry - decent income

Cluster "Extraction and processing of natural raw materials", which includes enterprises for complex and deep processing of minerals The formation of the cluster will allow using the most advanced technologies that ensure the proper depth and complexity of the development of ore and non-ore deposits in the Republic in compliance with all environmental requirements, significantly increase the added value of products, increase its competitiveness

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Development Strategy of Kabardino-Balkarian Republic

The study of international experience allows us to identify the most important factors for the success of public policy aimed at the formation and intensive development of clusters.

38

Formalization of public policy towards clusters taking into account country (regional) and industry specifics - Identification of long-term goals for the functioning and evolution of clusters (inclusion of cluster development programs in the strategy)

Development of the country/region)

Development of communications between the main components of the cluster: companies, government bodies, scientific and technical

educational community, financial organizations, trade associations, etc.

Support from the state cluster initiatives (at least at the stage of formation of the cluster) - Active use of the state order as a tool to support clusters - Development of scientific and educational base, expansion of access to state research and development, stimulation of cooperation of educational

the Complex and Real Economy Sector

Development of innovative infrastructure (incubators, science parks, special economic zones) > Marketing policy and presentation of clusters in foreign markets > Ensuring access of cluster participants to information

Source: The Clusters White Book, National Competitiveness Institute, International Organization for Knowledge Economy and Enterprise Development

Critical factors of cluster formation and development success

Mutual cooperation and partnership Innovative technologies Quality of labor resources Physical infrastructure Presence of large companies Entrepreneurial initiative Availability of sources of financing Professional services Access to markets Business support Competition Accessibility of information Communications Leadership Information technologies External economic factors

a x e s y r o t a F

0

10

20

30

40

50

60

70

80

% of sources that mention the factor

Source: A Practical Guide to Cluster Development A Report to the Department of Trade and Industry and the English RDAs by Ecotec Research & Consulting

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Development Strategy of Kabardino-Balkarian Republic

All companies that form the cluster receive state support in one form or another

39

Companies-leaders The state can use various forms of support:

> Attracting Direct

Foreign investors, (Maquiladoras in Chihuahua, Malaysia IT Super Corridor)

Export support,

delegations-participants of international exhibitions, (India Software) - Public sponsorship of joint brands, market development campaigns, etc. (Marketing Canadian Wine)

> Provision of services

Export credit and finance (Spain fund for international disputes IP)

Modern clusters can be competitive only if the most modern technologies are used. Innovation is the key to success

Government Needs State Policy to Support the Formation and Development of Regional Clusters

Power

Companies

The environment of mutual action

Finance

Science

The state authorities contribute to the establishment of links between companies and institutions that form a cluster and are able to join it:

By creating a platform for dialogue

(Science Parks, Incubators; eg. Bangalore, India. Austin, Texas, Stanford Research Park)

* By encouraging and helping to establish contacts; (Vinnova, Sweden, UK Incubation Challenge Fund, Pro-Inno Germany)

(Barcelona)

Through training and provision

Information (Competence Systems, Sweden, Italy)

The role of the state: attracting large financial institutions to the region, reducing their risks, stimulating financial market development

Source: Adapted from Sjelvell et al. (2003); IKED (International Organization for Knowledge Economy and Enterprise Development)

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Development Strategy of Kabardino-Balkarian Republic

The strategy provides for the development of tourism in the CBD in sports and health and medical areas

40

Availability of CBD resources

Current trends

Tourism

Peace

Russia

Cruise tourism is a fast-growing type of tourism, but in absolute terms it occupies a small share of the entire market.

Types of tourism based on cultural, historical or natural features of the region

Tourism

Types of tourism based on visits to artificial structures or events

Rapidly growing and promising direction

Growing direction Non-growing/stagnant direction Declined direction

Beach tourism

Cruise (water, bus)

Sports and active tourism

Health and Wellness Tourism

Cultural and educational tourism

Ecological tourism

Extreme and adventure tourism

Amusement parks

Event tourism

Conference tourism

Shopping tourism

Gambling tourism

û ü ü ü û ü ü ü ü û û û

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Development Strategy of Kabardino-Balkarian Republic

Source: Expertise Ghh-consult, Analytics LLC "Strategy"

The strategy provides for the development of tourism in the CBD, taking into account the peculiarities of traditional and new resort areas in the North Caucasus.

41

Rostov region

Kalmykia

Astrakhan region.

Sea of Azov

Black Sea

Krasnodar

Arkhyz

Investment amount: 1,1 billion US dollars.

Capacity:

30 thousand people/day

Maykop

The creation of the Adler-Cherkessk-Nalchik highway will strengthen the consolidation of tourist areas in the North Caucasus and will cause a synergistic effect

Stavropol

KMV (Kislovodsk, Pyatigorsk, Essentuki)

Number of arrivals: 2,5 million to 2030

Cherkessk

Grozny

Nalchik

Vladikavkaz

Caspian Sea

Makhachkala

Sochi and Krasnaya Polyana Mining and Recreation Complex

Investment amount: 12 billion US dollars.

Number of arrivals: 6 million people

Dombay Ski Center

Investment: 1 billion dollars

Georgia

Greater Caucasus

The basin of Caucasian mineral waters

Rocky Ridge

Centers of subjects of Federation

Sources: Statements, No 218 November 2006g; Expert magazine, No38 16 Oct., 2006g; Region-Inform news agency 19 Dec. 2006 St Petersburg.

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Development Strategy of Kabardino-Balkarian Republic

Azerbaijan

On the territory of the CBD there are a number of promising tourist sites, the most large-scale of which are the Prielbrusye and the Nalchik balneological zone.

42

5

BAKSAN

FRESH

MAISKY

CZEGEM

NARTKAL

TALKER

1

TEREK

3

TURNIAUZ

Elbrus

2

6

7

4

8

9

1

2

3

4

5

6

7

8

9

Nalchik resort and recreational balneological zone

Mining and Recreation Complex Prielbrusje

Northern slopes of Elbrus - creation of a multidisciplinary ski resort using healing springs of Djila Su

The Bezengi Wall is five five thousandths of seven, located in the North Caucasus. Mountaineering routes of various difficulty categories are laid - up to 6A and 6B

Lake Tambukan - creation of a medical and health complex based on healing muds

Blue lakes - one of the deepest lakes in Russia

Chegem waterfalls,

Auschiger is a unique source of nitrogen-bromide thermal hot water

Upper Balkaria

*Analysis and estimated rates of tourism industry deployment are given in the industry analysis

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Development Strategy of Kabardino-Balkarian Republic

Description of prospective tourist and recreational zones of KBR*

43

The North Side. Elbrus.

The development of Elbrus region is associated with large-scale investments in the construction of an all-season highway (120 km.), power line (100 km.), gas pipeline (100 km.), sewage treatment system, mini airfield. Advantages:

The shortest distance to m. Kislovodsk, which will provide an influx of tourists from the region KMV - Undeveloped currently the northern slope of the city. Elbrus has great opportunities for the construction of lifts, and other

Ski Infrastructure

In terms of capacity, the northern slope is comparable to the already developed slopes in the Azau valley . Sources of thermal water of Dzhilysu, located in close proximity to the northern slopes, allow creating a comprehensive

ski and balneological zone.

The tourist capacity of Elbrus is calculated taking into account the development of the Baksan Valley, the gorges and slopes adjacent to it throughout the city. Turnause to Elbrus. On this site, along with the existing ropeways and bogie lifts, including 2-y and 3-th queue of the new gondola cable car (Old Outlook - World) and six-seater cable car (Mir - Gara-Bashi), it is possible to build new ski slopes with the necessary infrastructure.

Due to climate change in the Caucasus region, it is advisable to provide artificial snow removal from remote glacial zones

ski runs, which will extend the season by 2 months.

Maximum capacity of all slopes. Elbrus (including the Northern) and other gorges of the Baksan Valley: 35 000 people. - In an alternative to "CBD - health center" in a moderate scenario, the capacity of the Elbrus region will be 21 000 skiers.

Nalchik resort area (cid:127) There are currently 7,5 thousand beds. Considering that most of the resort area needs a root

reconstruction in accordance with modern requirements of comfort, the number of beds in 2030 Year adopted at the level 6 thousands (realistic scenario). In an optimistic scenario, the number of beds - 7,5 thousands.

(cid:127) It is necessary to organize balneological treatment in each health resort, but in the presence of a general resort treatment and diagnostic center.

In addition, it is necessary to create hotels and sanatoriums of modern formats focused on recreation and health promotion.

(cid:127) It is advisable to develop ski slopes in the South-West region of the city. Nalchik and in the ski slope of Sary-Tala in 18 km. from

Mr. Nalchik. In 1988-90 there was an attempt to develop the slope. In working condition were 3 bugels, and tourists were delivered from the tourist base of Dolinsk. The road and the power line are brought to the slope. The project requires further development.

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Development Strategy of Kabardino-Balkarian Republic

The development strategy of resorts in the CBD provides for a synergistic effect from interaction with the Cavminvods and the Red Glade, as well as a special positioning in specialization and price.

44

Synergy

● Integration (entry) into

the overall system of ski resorts. Rotation of tourist contingents (exchange of tourists)

The Creation of North Caucasus

tourist highways, exchange of tourists and tours

Characteristics of CBD

The presence of mountain-balneologists-

the Czech Complex

The competitiveness of

Price/quality ratio

Dombay, Arkhyz

Synergy

The Creation of North Caucasus

tourist highways, exchange of tourists and tours

Characteristics of CBD

> Orientation to

the average Russian consumer (as opposed to the more expensive Krasnaya Polyana)

The CBD has more

various ski slopes, allowing, in particular, to hold competitions in giant slalom

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Sochi, Krasnaya Polyana

Mineralnye Vody

Essentuki

Pyatigorsk

Kislovodsk

CBD

Synergy

Offer of skis,

Mountaineering, environmental and excursion tours to the CBD for holidaymakers in the KMV

.Inclusion of Nalchikskaya and others

balneological zones of the CBD as part of the tourist product of the KMV. Joint promotion of balneological treatment and prevention

Use of the transport hub. Mineral Waters for the transit of tourists to the CBD

The Creation of North Caucasus

tourist highways, exchange of tourists and tours

Characteristics of CBD

Promotion of own brand

"health center", development of own distribution of tours, development of own system of transport communications

Wide offer of various types of sports and health tourism, in contrast to the more "medical" and medical specialization of KMV

Development Strategy of Kabardino-Balkarian Republic

The strategy provides for state support for the development of the tourism industry, in particular, in the form of organizing a broad advertising campaign of opportunities open to domestic and foreign tourists.

45

Tourism

One of the most effective ways to promote is the organization of tourism offices

Budgets of tourism offices, millions of dollars

25

20

15

10

5

0

a B E

A C A A A A A A A A

a n o e e s r a B

the University of St Petersburg

n and l r e B

Ph D C

g r in b r e t e P

Funding by Authority

Private capital

Functions of tourism offices:

Interaction with travel agencies in key tourism markets and ensuring their interaction with tourism operators in the region

Promotion of the tourist product of the region in the audience

potential tourists and travel agencies

Source: Tourism Development Strategy, St. Petersburg, BCG, 2005

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Along with the program to improve the image of the Republic, an advertising campaign is needed to promote the tourism product of the CBD in other regions of the Russian Federation and foreign countries.

Development Strategy of Kabardino-Balkarian Republic

The strategy provides for the qualitative improvement of the agro-industrial complex of the CBD and the production of high-quality products in demand on the all-Russian and world markets.

46

APK

Increase in GRP

Production of mass products in highly competitive markets

Production of premium products with high added value

The main part of added value is created in the processing of agricultural raw materials

The scale of Kabardino-Balkaria does not allow it to become a significant player in the mass food market of Russia

Based on raw materials

Based on imported raw materials

The creation of a processing enterprise operating on imported raw materials and marketing products in other regions contradicts the global trend.

Premium segment and export-oriented product groups (shown in color)

Potential for Segment Increase

Level of competition

Availability of market entry conditions

Summary assessment of competitiveness

Market volume

*

Bread Bread Products Products Vegetables and Vegetables and melons

Main Main product groups

Fruits and berries Fruits and berries

Meat Meat Milk and Dairy Milk and Dairy Products Eggs

Sugar and confectionery Sugar and confectionery products

Fish and fish products Fish and fish products

Alcohol Alcohol

Liquor Distillery Products

Soft drinks Soft drinks

Source: Analytics of LLC "Strategy"

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Development Strategy of Kabardino-Balkarian Republic

The strategy provides for the growing participation of the CBD Government (following the example of foreign countries) in promoting republican products to foreign markets.

47

APK

The Canada Beef Export Federation –

1997 is an organization that promotes and organizes the supply of meat from Alberta to Mexico.

Example

Supply of beef Alberta, thousand tons

+29%

53 000

72 000

12 000

Functions:

> Establishing business relationships with customers > Creating an image

Goods

Quality control > Search for promising markets and segments

> Interaction with

1997

2002

2004

Power

Parma Ham Consortium is a long-term organization dedicated to the promotion of Italian consumer goods in the US and Europe

Functions:

Example

> Forming an image

Goods

Advertising campaigns for the promotion of goods

* Identification of counterfeit

Products

> Quality control

Products produced under this brand

Source: Marketing: Whose job? (Blue Planet Report), 2006

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The structure of costs for the promotion of exports of food industry products in the world, 2002, million dollars.

1 530

Industry

71%

State

29%

390

59%

41%

320

66%

34%

820

77%

23%

In the world

Europe

USA

Other

Food industry (private funds)

State

Development Strategy of Kabardino-Balkarian Republic

The strategy provides for the accelerated development of high-tech 48 production of facing materials, dry building mixtures, wall materials and cement

Construction materials

Market volume

Potential to expand the segment

Value added level

Availability of market entry conditions

Summary assessment of complicity

Possible Segments

Facing Materials Facing Materials

Dry construction mixes Dry construction mixes

Roofing materials Roofing materials

Wall Materials Wall Materials

Precast Concrete Precast Concrete

Cement Cement

Non-metallic raw materials Non-metallic raw materials

Any production of construction materials on the territory of the CBD must meet the most

High environmental requirements

The main requirements for the creation of new industries - the use of progressive

Technology and high competitiveness

Source: Analytics of LLC "Strategy"; interviews with experts

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Development Strategy of Kabardino-Balkarian Republic

The strategy provides for state support for entrepreneurial initiative primarily in strategically important areas of the region’s development.

49

Projects that have already expressed

Entrepreneur Interest*

Forms of support by the authorities for entrepreneurial initiative

Tribal and meat sheep and cattle

Construction of a certified meat processing plant

Production of modern feed, fuel alcohol and fuel additives

Production of rapeseed processing

Production of pharmaceuticals

Promising projects are also the development of tourist areas of the CBD, the development of parapharmaceutical production, the extraction of granite gravel, oil production and refining, cement production based on environmentally friendly technologies.

*See annex

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Temporary tax preferences

Co-financing of prospective

projects

Promotion of products of enterprises

in the Russian and international markets

● Advocating for enterprises’ interests

the region at the federal level

Ensuring the timely return of VAT to enterprises exporting products to foreign countries

> Facilitate business relationships with

companies and administrations of other regions and foreign countries

Development Strategy of Kabardino-Balkarian Republic

The strategy provides for the mandatory formation of a new image of the CBD as a successfully developing, reliable and safe region for living and recreation in Russia.

50

Improving the image of the CBD both in Russia and abroad depends on comprehensive and targeted actions of the authorities.

A survey conducted by the Public Opinion Foundation showed that almost half of Russians perceive the situation in the CBD as unstable*

"Can the situation in the CBD become as tense as in Chechnya?"

Difficult to answer

28%

44%

Yeah.

27%

none

* The survey was conducted in November 2005 years

We need to change the image

Source: Analytics of "Strategy" LLC; research of "Public Opinion" Foundation

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The main directions of formation of the image of the Republic

Reliable and economically stable region for strategic partners

Safe, environmentally friendly picturesque region for family and individual holidays

Republic, managed by a highly professional team of modern professionals

Enterprises of the region are reliable partners for conducting profitable business

Development Strategy of Kabardino-Balkarian Republic

The creation of a franchise-based system of small enterprises can significantly contribute to the development of small business in the Republic of Kazakhstan.

51

The sequence of the project to create a franchise network of small businesses in the CBD. The most promising areas include: mini-shops in the food industry, the construction materials industry, light industry and health products, the service sector

Selection of the most promising business ideas for the Republic

Launch of pilot project

Project preparation for scaling

Selection of entrepreneurs, territorial placement

Networking

Coordination: President and Government and CBD

Support from the Federal Government

Private investors

“Franchise networks, due to their structural features, present the state with significantly greater opportunities to purposefully influence the development of small business” G.B. Kochetkov, Head of the Center for Management Problems of the Institute of the USA and Canada RAS

Features of the franchise business allow to minimize the risks of a small enterprise

Staff training, consulting support

Well-functioning business model and operational processes

Complex technological equipment

Staff training, consulting support

Adequate market assessment and business planning

Providing sales through centralized promotion and marketing support

PRO-INVEST SPECIAL PROJECT

Significant reduction of small business risks

Additional benefits

Opportunities to attract cheaper funding

Improving the “survival” of small enterprises and their profitability

More effective performance of social functions (employment)

The past “school of entrepreneurship” will be able to further develop their own business

Development Strategy of Kabardino-Balkarian Republic

The scientific and educational complex will play a key role for the development of the future economy of Kabardino-Balkaria

52

Scientific and educational complex

is of strategic importance for the development of the CBD:

(cid:127) An industry of high social significance,

Impact on employment and income

(cid:127) Key value in elevation

competitiveness of the Republic (personnel and scientific potential)

(cid:127) The basis for the development of modern,

the Innovation Economy

(cid:127) Providing highly qualified

Accelerated Development of Priority Industries

Objectives for the development of the NOC:

Implementation of the national project "Education" (improving the quality of education, motivating teachers and students)

Strengthening the material and technical base of educational institutions, providing highly qualified personnel

Development of cooperation of CBD universities, student exchange programs, study abroad opportunities

Opening of branches of leading educational institutions in the Republic

Creation of infrastructure to support innovative business ("new economy") - business incubators, technoparks

Main directions of NOC development

(cid:127) Effective management of the industry based on a system of goals and benchmarks (cid:127) Development of a program for the development of the scientific and educational complex in accordance with a long-term strategy

Development of the Republic

(cid:127) Active modernization of the industry using federal and regional budgets,

Public-Private Partnerships

(cid:127) Measures to attract new and retain existing highly qualified

Staff

PRO-INVEST SPECIAL PROJECT

Development Strategy of Kabardino-Balkarian Republic

As a result of the implementation of the Strategy, the share of employed in high-wage sectors will be increased in the CBD economy

53

54

54

55

54

47

39,2

23

17,2

7,5

5,6

3,7

5,2

4,5

2,8

8,7

5,9

7 5,9

6,4

) . St Petersburg 0 3 0 2 - 6 0 0 2 (

.

rubles

.

S and T

,

a l l i a n t o a r a Z

Comparison of the structure of employed and wages

payments by economic sectors in 2006 and 2030

39

28

37

31,4

22

20

27

18

4,4

4,7

3,5 4,3

8,8

3,4

Pharmaceuticals Tourism Construction

Food Industry Science Building Materials

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Electric Power

Other sectors of economy

Trade and marketing

Utilities

Agriculture

Transport and communications

Mechanical Engineering

Metallurgy

Small Business

Light industry

Number of employees, % (2006 - 2030)

Development Strategy of Kabardino-Balkarian Republic

Under the most likely scenario, the CBD will reach the current level of GDP per capita of countries such as Argentina and Venezuela by 2030, and China will outpace the rate of growth.

54

GDP per capita and average GDP growth in the world

12%

10%

Kazakhstan

CBD 2030

China

8%

CBD 2005

Russian Federation

Belarus

India Ethiopia

Bulgaria

Philippines

Republic of Korea

Hong Kong, China

Slovak Republic

Hungary

Chile

Nicaragua

Brazil

Poland Mexico

Czech Republic

Venezuela

Malta

Kenya

Argentina

Israel

Portugal

Canada United Kingdom

Spain

USA

France

Japan

Germany

5 000

10 000

15 000

20 000

25 000

30 000

35 000

40 000

45 000

GDP per capita, dollars, 2004

6%

4%

2%

0%

0

4 0 0 2 - 0 0 0 2

a c e e e e e r c %

, St Petersburg 0 0 0 2 X A C

the P V V A T C O R M E T

Source: World Bank Development Indicators Database, Analytics of "Strategy"

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Development Strategy of Kabardino-Balkarian Republic

The strategy will significantly improve the efficiency of government decisions

55

Expected impact of implementation

Initiatives:

• Strategic Effect - Conformity

the Government Strategic Priorities Initiative

• Economic effect • Social effect • Emotional effect

Initiatives

Risks: • Budget • Legal • Organizational • Other (environmental, political,

The natural...)

Activities included in the plans of the Government and Municipalities

PRO-INVEST SPECIAL PROJECT

Development Strategy of Kabardino-Balkarian Republic

Contents

56

1. The relevance of the development strategy of the Kabardino-Balkarian Republic

2. Prospective sectors of the economy

3. Strategic choice of alternatives for the development of the CBD economy up to 2030

4. Prospects for the implementation of the Strategy

5. Annexes

1. Industry analysis: selection of priority industries

2. Strategic choice of alternatives for the development of the CBD economy

3. Current socio-economic situation of the CBD

PRO-INVEST SPECIAL PROJECT

Development Strategy of Kabardino-Balkarian Republic

Summary

57

In terms of growth and productivity, the most promising sectors in the global economy are pharmaceuticals, information technology and transport equipment manufacturing.

In terms of employment and value added, the most

promising in the world economy are medical, educational and information services

The possibility of developing new sectors of the economy of the Republic is determined by the presence of the necessary conditions and the ability of the authorities to optimize these conditions.

Among the "traditional" industries that exist in the Republic, the authorities deserve special attention those in which products are manufactured that are competitive in foreign markets and that can positively affect the development of other industries (producing a significant synergistic effect).

In this view, the most promising sectors of the economy are

tourism, food industry, oil production and refining, production of building materials. This Strategy provides for the priority development of tourism with related industries, agro-industrial complex and production of building materials until 2030.

Various scenarios for the development of promising industries, taking into account

Various measures of associated risks

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Development Strategy of Kabardino-Balkarian Republic

In terms of growth rates and productivity in the global economy, pharmaceuticals, information technology and the production of transport equipment are the most dynamically developing.

58

Labour productivity and industry growth in the EU 1993-2003

Labor productivity and industry growth rates in the United States 1998-2004

Productivity

Productivity

105

100

95

90

85

80

75

70

65

60

55

50

45

40

35

30

25

20

15

10

5

Pharmaceutics

The most attractive

Chemical industry

Information services

Medical services Extraction of non-energy minerals

Transport equipment

C/X Mechanical Engineering

Household instrumentation

Educational services

Woodworking prom.

Production of furniture, etc.

Attractive

The least attractive

300

280

260

240

220

200

180

160

140

120

100

80

60

40

20

Pharmaceutics

The most attractive

Information services

Non-energy mining

Transport equipment

Chemical industry

Woodworking industry

Attractive

Production of furniture, etc.

The least attractive

Medical services

Educational services

0 0,000

0,025

0,050

Growth rate

0,075

0 -0,025

0,100

0,000

0,025

0,050

0,075

0,100

Growth rate

The most promising industries for development are

Pharmaceutics

Information services

Transport equipment

Source: Eurostat, US Census Bureau

PRO-INVEST SPECIAL PROJECT

Development Strategy of Kabardino-Balkarian Republic

In terms of employment and value added, health, education and information services are the most promising for development

59

Number of employed and value added industries in the EU 1993-2003

Busy, thousands

Busy, thousands

Number of employed and value added industries in the United States 1998-2004

17000

16000

15000

14000

13000

12000

11000

10000

9000

8000

7000

6000

Medical services

The most attractive

Attractive

Information services

5000

Least Attractive

4000

3000

2000

1000

0 0,2

Transport equipment

Chemical industry

Woodworking industry Manufacture of furniture, etc.

Household instrumentation

Educational services

Pharmaceutics

C/X Mechanical Engineering

Extraction of non-energy. fossils

0,4

0,6

Share of value added in revenue

16000

15000

14000

13000

12000

11000

10000

9000

8000

7000

6000

5000

4000

3000

2000

1000

0

0

Medical services

The most attractive

Attractive

The least attractive

Information services

Chemical industry

Transport equipment

Pharmaceutics

Woodworking industry

Production of furniture, etc.

Educational services

Non-energy mining

Share of value added in revenue

The most attractive industries are

Medical services

Educational services

Information services

Source: Eurostat, US Census Bureau

PRO-INVEST SPECIAL PROJECT

Development Strategy of Kabardino-Balkarian Republic

Among the priorities should be the industries that have the best conditions for development in the CBD, high export potential and can have a significant synergistic effect.

60

Industries

Medical services

Food industry

Agriculture

Mechanical Engineering

Tourism

Pharmaceuticals and Biotechnology

Educational services

Information services

Construction materials

Metallurgy

Light industry

Oil production and processing

Criteria: > The availability of conditions for the development of the industry in the CBD > The ability of the authorities to influence the development of the industry > The positive impact of the industry on the development of other industries > The contribution of the industry to the economy to 2030 under the most favorable development scenario

Industry 1

Industry 2

Industry 3

PRO-INVEST SPECIAL PROJECT

Development Strategy of Kabardino-Balkarian Republic

Industries that can give the maximum synergistic effect include tourism, food industry, medical services

61

The possibility of export-oriented industries to become cluster-forming

Industry ranking (by synergistic effect)

Tourism

4

Tourism

Food industry

a c and c c c u d o r p

a t r o p c e

i t t o n o m o V

12

10

Agriculture

.

D E

Medical services

Food industry

.

L with U

,

R B K e l e e r p

Metallurgy

Pharmaceutics

Light industry

8

6

Oil production and processing 4

Construction materials 2

0

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

The region’s need for industry-specific products

Medical services

Metallurgy

Pharmaceutics

Agriculture

Light industry

Oil production and processing

Construction materials

1

3

3

2

2

2

2

2

Source: Analytics of LLC "Strategy"

PRO-INVEST SPECIAL PROJECT

Development Strategy of Kabardino-Balkarian Republic

The analysis shows that tourism and agriculture will make the greatest contribution to the economy of the CBD in 2030.

62

Comparison of the tax return and the number of employees to 2030 the Year*

Tax deductions, million rubles.

1 000

900

800

Tourism

Food industry

Construction materials

700

Medical services

600

Pharmaceutics

Industry contribution to the economy rating 2030

Tourism

Food industry

C/H

Construction materials

Medical services

Pharmaceutics

3

3

3

3

2

2

1

1

500

400

300

200

100

0

Oil production and processing

Light industry

Agriculture

Oil production and processing

0

5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85

Light industry

*Based on industry development forecast for 2030 year under optimistic scenario

Employment, thousand people.

Great contribution

Average contribution

Low contribution

Source: Analytics of LLC "Strategy"

PRO-INVEST SPECIAL PROJECT

Development Strategy of Kabardino-Balkarian Republic

Tourism and agriculture - the most promising industries for development in the CBD

63

Cluster-building potential of industries

Rating of industries according to the necessary conditions of development

Industry contribution to the economy rating 2030

Tourism Food industry

Medical services

Metallurgy

Pharmaceutics

Agriculture

Light industry Oil production and processing Building materials

2

2

2

2

2

1

4

3

3

Tourism Food industry

Medical services

Pharmaceutics

C/X Building materials

Light industry

Metallurgy Oil production and processing

2

2

4

4

4

3

3

3

3

Tourism Food industry

C/X Construction Materials Medical Services

Pharmaceuticals Oil production and processing

Metallurgy

Light industry

3

3

3

3

2

2

1

1

1

The resulting industry outlook rating

Tourism

Food industry

Medical services

C/H

Construction materials

Pharmaceutics

Light industry

Oil production and processing

Metallurgy

11

10

10

8

7

7

6

5

5

Source: Analytics of LLC "Strategy"

PRO-INVEST SPECIAL PROJECT

Development Strategy of Kabardino-Balkarian Republic

The development of each sector of the CBD economy is subject to certain risks

64

1.Fall of the world oil price

2.Removal of barriers to entry to the Russian market of Western players in connection with the entry into WTO, increase in imports

3.The growth of tension in the Caucasus (terrorism, political instability, etc.) and as a result - low tourist and investment attractiveness of the region

4.Unfavorable natural factors: natural disasters, epidemics, etc.

and n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n

I am in and p.

e e e e e e e e e r t C

A and R and M

e o c e e e e e e c

I'm in the X

M with R in T

3

1

9

9

1

9

1

9

3

6

1

1

3

3

3

1

i and r y l l t e M

3

3

3

1

Industry development risk exposure

Least risk exposure

Average risk exposure

The highest risk exposure

a c and t in e c a m r a F

3

3

6

6

and n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n n

I am a Mr L

and a b e e e e e e e e e e e

a c c c b a r e r e p

e and c n and c and d e M

and g y y y y

3

9

1

1

9

1

3

3

3

1

9

9

0,4 0,4

Industry Stability Index

Building materials Metallurgy Food industry Oil production and processing Light industry Pharmaceuticals Agriculture Medical services Tourism

0,3

0,3

0,3

0,2

0,2

0,2 0,2

Source: Analytics of LLC "Strategy"

PRO-INVEST SPECIAL PROJECT

Development Strategy of Kabardino-Balkarian Republic

Contents

65

1. The relevance of the development strategy of the Kabardino-Balkarian Republic

2. Prospective sectors of the economy

3. Strategic choice of alternatives for the development of the CBD economy up to 2030

4. Prospects for the implementation of the Strategy

5. Annexes

1. Industry analysis: selection of priority industries

2. Strategic choice of alternatives for the development of the CBD economy

3. Current socio-economic situation of the CBD

PRO-INVEST SPECIAL PROJECT

Development Strategy of Kabardino-Balkarian Republic

Modeling the results of the alternative "Inertial development"

66

Structure of the CBD economy in 2030 in the implementation of the alternative "Inertial development"

168 810

283 707

17 407

16,70%

3,00% 3,80% 5,00%

7,60%

4,50%

23,60%

2,90% 3,30%

7,50%

6,70%

13,10%

0,90%

0,50%

0,10%

0,30% 0,60%

1,10%

0,90%

0,00% 0,30%

38,30%

6,70% 3,90%

11,60%

2,30%

1,60%

2,00%

27,70%

1,10%

1,50% 0,20%

0,60% 0,30%

38,80%

2,60% 3,00%

9,80%

6,30% 3,30%

16,00%

3,60%

4,70% 5,60%

1,30%

1,40% 0,50%

0,40%

0,90%

0,80% 1,20%

Turnover*, million rubles

Busy, man.

Taxes, million rubles

Agriculture

Food industry

Mechanical Engineering

Metallurgy

Light industry

Construction materials

Small Business

Pharmaceutics

Tourism

Science

Oil production and refining

Electric Power

Construction

Trade and marketing

Transport and communications

Utilities

Other sectors of economy

* Here and beyond - turnover by medium and large enterprises (except for the small business sector)

Source: Analytics of LLC "Strategy"

PRO-INVEST SPECIAL PROJECT

Development Strategy of Kabardino-Balkarian Republic

Modeling the results of the alternative "Center of Tourism and Recreation"

67

The structure of the CBD economy in 2030 in the implementation of the alternative "Center for Tourism and Recreation"

506 440

348 158

1,20%

0,30%

16,70%

2,20% 4,20% 2,90% 2,60%

18,80%

39,10%

0,00%

0,10%

0,50%

3,10% 2,20% 4,40%

0,60% 1,10%

1,10%

0,70%

0,00%

0,50%

31,20%

14,00%

2,90%

13,50%

6,30%

0,30%

1,50%

1,40% 0,20%

1,60%

1,30%

1,00% 0,30%

22,60%

51 247

13,20%

1,30% 4,90%

10,90%

3,50% 3,00%

20,40%

32,60%

0,80%

0,50%

1,00% 0,70%

3,20% 2,60%

0,70%

0,40%

Turnover*, million rubles

Busy, man.

Taxes, million rubles

Agriculture

Food industry

Mechanical Engineering

Metallurgy

Light industry

Construction materials

Small Business

Pharmaceutics

Tourism

Science

Oil production and refining

Electric Power

Construction

Trade and marketing

Transport and communications

Utilities

Source: Analytics of LLC "Strategy"

Other sectors of economy

PRO-INVEST SPECIAL PROJECT

Development Strategy of Kabardino-Balkarian Republic

Modelling of the results of the implementation of the alternative "CBD - Center for Health and Environmental Management"

68

The structure of the CBD economy in 2030 in the implementation of the alternative "CBD - Health Center"

0,10%

1,10%

575 074

16,70%

2,00% 4,50% 2,90% 2,10%

34,20%

1,10%

1,40%

0,10%

1,00% 1,40%

1,40%

17,80%

3,30% 3,80% 6,10%

356 863

30,40%

15,50%

1,40%

16,90%

3,90%

1,00%

1,60%

20,70%

1,50%

1,00% 0,60%

1,80% 0,30%

60 702

11,10%

1,10% 4,30%

11,10%

3,50% 2,30%

35,70%

14,70%

2,90% 4,10%

2,30%

0,40%

1,90%

0,50%

1,40%

1,60%

0,90%

1,70%

0,00% 0,80%

Turnover*, million rubles

Busy, man.

Taxes, million rubles

Agriculture

Food industry

Mechanical Engineering

Metallurgy

Light industry

Construction materials

Small Business

Pharmaceutics

Tourism

Science

Oil production and refining

Electric Power

Construction

Trade and marketing

Transport and communications

Utilities

Other sectors of economy

PRO-INVEST SPECIAL PROJECT

Development Strategy of Kabardino-Balkarian Republic

Comparison of alternatives

69

168 810

506 440

575 074

3,00%

0,90%

0,30% 0,50%

16,70%

3,80% 5,00%

7,60%

4,50%

23,60%

2,90%

7,50%

6,70%

13,10%

0,10%

0,60% 3,30%

1,20%

0,00%

0,10%

16,70%

4,20% 2,90%

18,80%

39,10%

0,60%

3,10%

2,20%

4,40%

2,20%

2,60% 0,30%

1,40%

0,50% 1,10%

1,00% 1,40%

16,70%

2,00%1,10% 4,50% 2,90% 2,10%

34,20%

17,80%

3,30% 3,80%

0,10%

0,10%

1,40%

6,10%

Inertial development

Tourism and Recreation Center

CBD - Health Center

Agriculture

Food industry

Mechanical Engineering

Metallurgy

Light industry

Construction materials

Small Business

Pharmaceutics

Tourism

Science

Oil production and refining

Electric Power

Construction

Trade and marketing

Transport and communications

Utilities

Other sectors of economy

PRO-INVEST SPECIAL PROJECT

Development Strategy of Kabardino-Balkarian Republic

Comparison of employment alternatives

70

283 707

348 158

356 863

1,10%

0,20%

0,00% 0,60%

38,30%

1,10% 6,70% 3,90% 1,50%

11,60%

2,30% 1,60% 2,00%

27,70%

0,90%

0,30% 0,30%

1,10%

0,70%

0,00%

0,50%

31,20%

14,00%

2,90%

13,50%

6,30%

1,50%

1,40% 0,20%

1,60%

1,30%

1,00% 0,30%

22,60%

30,40%

1,50%1,10%

15,50%

1,40% 1,00%

16,90%

3,90% 1,00% 1,60%

0,60%

0,80% 0,30%

1,70%

0,00% 1,80%

20,70%

Inertial development

Tourism and Recreation Center

CBD - Health Center

Agriculture

Food industry

Mechanical Engineering

Metallurgy

Light industry

Construction materials

Small Business

Pharmaceutics

Tourism

Science

Oil production and refining

Electric Power

Construction

Trade and marketing

Transport and communications

Utilities

Other sectors of economy

PRO-INVEST SPECIAL PROJECT

Development Strategy of Kabardino-Balkarian Republic

Comparison of tax revenues by alternatives

71

17 407

38,80%

3,00%

9,80%

6,30% 3,30%

16,00%

3,60%

4,70% 5,60% 0,40%

2,60%

0,90%

1,40%

0,50%

1,30%

0,80% 1,20%

1,30%

0,80%

0,50%

51 247

13,20%

10,90%

3,50%

20,40%

32,60%

1,00%

3,20%

2,60%

0,40%

60 702

11,10%

1,10% 4,30%

11,10%

3,50% 2,30%

35,70%

1,40%

1,60%

0,90%

14,70%

2,90% 4,10%

2,30%

0,40%

1,90%

0,50%

4,90%

3,00% 0,30%

0,70% 0,70%

Inertial development

Tourism and Recreation Center

CBD - Health Center

Agriculture

Food industry

Mechanical Engineering

Metallurgy

Light industry

Construction materials

Small Business

Pharmaceutics

Tourism

Science

Oil production and refining

Electric Power

Construction

Trade and marketing

Transport and communications

Utilities

Other sectors of economy

PRO-INVEST SPECIAL PROJECT

Development Strategy of Kabardino-Balkarian Republic

The alternative “CBD is the center of health and effective environmental management” provides higher employment of the population and the level of monetary incomes of the population.

Employment of the population, thousand people.

Dynamics of average per capita income of the population, thousand rubles per month

348

357

284

14

10

6

3,33,3

72

26,426,4

19,919,9

13,113,1

"Inertial Development"

"Recreation and Tourism Center"

"Center for Health and Environmental Management"

PRO-INVEST SPECIAL PROJECT

2004 2006 2008 2010 2015 2018 2020 2024 2028 2030

The main assumptions of calculations

Wage share in income by sector of the economy 55% (35% for

small business)

Wages are rising with productivity growth in

the relevant industry

Employment is calculated by dividing the turnover of the industry by

Productivity

Development Strategy of Kabardino-Balkarian Republic

In addition, the alternative "CBD - Center for Health and Environmental Management" is more attractive from the point of view of ensuring the budget system with taxes.

The volume of the regional budget, billion rub.

Budget security with regional taxes, %

8,68,6

68,768,7

35 %35 %

73

75 %75 %

64%64%

54 %54 %

0 2004

2006

2008

2010

2012

2014

2016

2018

2020

2030

0 2006

2008

2010

2012

2014

2016

2018

2020

2030

"Inertial Development"

"Recreation and Tourism Center"

"Center of production of goods and services for health"

PRO-INVEST SPECIAL PROJECT

The main assumptions of the calculations > The regional budget of the CBD is growing due to the reduction of

per capita expenditure of the consolidated budget to 75% from the average Russian level

The forecast of each industry assumes the growth of the share of taxes in revenue to

Middle Russian

The forecast of each alternative assumes a decrease in the share of taxes coming to the regional budget due to an increase in the share of taxes coming to the federal budget

Development Strategy of Kabardino-Balkarian Republic

Contents

74

1. The relevance of the development strategy of the Kabardino-Balkarian Republic

2. Prospective sectors of the economy

3. Strategic choice of alternatives for the development of the CBD economy up to 2030

4. Prospects for the implementation of the Strategy

5. Annexes

1. Industry analysis: selection of priority industries

2. Strategic choice of alternatives for the development of the CBD economy

3. Current socio-economic situation of the CBD

PRO-INVEST SPECIAL PROJECT

Development Strategy of Kabardino-Balkarian Republic

Social and economic problems of the CBD are typical for the regions of the SFD

75

CBD is characterized by a high subsidy budget with an average growth in the South Federal District tax

Revenue

The unemployment rate in the CBD is one of the highest in Russia (26%), and the share of unemployed in the

The CBD economy accounts for 69% of the working-age population.

The Republic is characterized by territorial distribution and significant differences

areas from each other

The productivity of the Kabardino-Balkaria industries is lower than in Russia and significantly lower,

than in industrialized countries.

Average salary and GRP per capita share in CBD is lower than in other regions

Russia

The sectoral structure of the economy is inefficient, it retains the priorities of the past and does not

competitive advantage of the region

In the main sectors of the economy, there is excessive wear and tear of equipment,

lack of qualified personnel, low-cost products with low added value and oriented to intraregional consumption

According to forecasts of Rosstat and estimates of the government of the CBD, in the republic there is a slow decline in the population and a decrease in the share of the population in working age

PRO-INVEST SPECIAL PROJECT

Development Strategy of Kabardino-Balkarian Republic

About the current situation. CBD is characterized by high budget subsidy with an average increase in tax revenues in the South Federal District

76

Structure of revenue part of budgets of subjects of the Russian Federation, 2005

100%

Tax revenues

73%

Non-tax revenues

Gratis income

Other

9%

16%

2%

28%

2%

65%

54%

5%

39%

2%

5%

Subjects of RF

Subjects of SFD

CBD 2005

PRO-INVEST SPECIAL PROJECT

Development Strategy of Kabardino-Balkarian Republic

About the current situation. Unemployment in the CBD is one of the highest in Russia

77

Unemployment rate, % (2004)

Average by Federal District

Southern FO

CENTRAL

4,6%

NORTH-WEST

6,0%

URAL

PRIVOLZHSKY

7,5%

7,8%

Rostov Rgn

Krasnodar region

Volgograd Rgn

Stavropol Krai

Astrakhan Rgn

North Ossetia - Alanya

Karachay-Cherkess Republic

Adygea Republic

8,6%

8,8%

9,4%

9,6%

11,0%

11,7%

16,9%

17,6%

LONG EAST

8,8%

Kalmykia Republic

21,7%

SIBERIAN

10,0%

SOUTH

15,4%

Kabardino-Balkarian Republic

Dagestan Republic

Ingushetia Republic

Chechen Resp

25,7%

27,2%

46,3%

75,6%

PRO-INVEST SPECIAL PROJECT

Development Strategy of Kabardino-Balkarian Republic

The share of unemployed in the CBD economy is 69% of the working-age population

78

Age structure of the population of CBD, %, thousand people

25 (4%)

35 (6%)

100% Unemployed

Structure of the population in working age, %

Employed

= 100% 562 thousand people

Discontinued students

40,8 (7%)

Unemployed

99 (18%)

Others not in employment

106,1 (19%)

Younger than able-bodied

Older than able-bodied

899

204 (23%)

140 (16%)

897

195 (22%)

140 (16%)

In the employable

556 (62%)

562 (63%)

Students in Universities

361,1 (56%)

Employed

2003

2004

PRO-INVEST SPECIAL PROJECT

Development Strategy of Kabardino-Balkarian Republic

The proportion of unemployed and other unemployed is significantly lower in the cities of Nalchik and Prokhladny, compared with other regions of the Republic

79

Baksan +

Chegemsky

Zolsky

Urvansky +Lexensky

Prokhladnenskiy

Chereksky

Tersky

Maysky

Elbrussky

Nalchik

Unemployed relative to population, %, 2004

57%

52%

46%

53%

47%

40%

42%

45%

42%

43%

0% 10%

19%

5%

91%

2%

15%

17%

5%

91%

1%

17%

19%

7%

90%

0%

15%

18%

4%

90%

0%

15%

22%

4%

89%

0%

17%

22%

9%

87%

1%

17%

1%

12%

21%

24%

6%

87%

2%

85%

1%

14%

20%

5%

82%

3%

11%

18%

2%

77%

Mr. Cool

37%

1%

11%

23%

2%

75%

Other Unemployed

Percentage of retirees

Percentage of registered unemployed

Proportion of primary vocational education

Percentage of students in general education

PRO-INVEST SPECIAL PROJECT

Development Strategy of Kabardino-Balkarian Republic

Among the unemployed, the share of those with higher or secondary vocational education is lower, which emphasizes the relevance of the development of the educational complex of the Republic.

80

Structure of employed and unemployed by level of education*

You're a man.

With higher professional education

With incomplete higher professional education

With average professional

35

10,1%

3,3%

9,4

With primary vocational education

11%

With secondary (general) education

57,5%

100%

176

27%

1%

24%

10%

33%

With basic general education

8,7%

Unemployed

4%

Employed

Source: Rosstat 2004

PRO-INVEST SPECIAL PROJECT

Development Strategy of Kabardino-Balkarian Republic