Investors’ Guide to Yekaterinburg

Yekaterinburg is often called the 3rd capital of Russia along with Moscow and Saint Petersburg, and Russia’s Manchester. 

Among international investors the city is still an insider tip, as many companies looking to localize their production in Russia choose to stay around Moscow and St. Petersburg as close as some hundreds of kilometers to the already established sales offices, missing the advantages of an industrial center. In fact, it takes longer to get from Moscow to the Kaluga cluster struggling through traffic jams than to take a two-hour flight to Yekaterinburg with one of Aeroflot’s new aircraft. Nevertheless, the regular international business missions show the growing interest. Below is the region’s short overview.

The region’s major competitive advantages for localization: 

  • Quality of life 
  • A choice of industrial parks and production sites with all the necessary utility connections to buy or to lease
  • Attractive rental rates for production sites, offices and warehouses 
  • Availability of qualified workforce for manufacturing (engineers, blue-color workers, IT specialists, etc.). According to statistics and HR agencies the average salary in 2018 amounts to 34,140 rubles (455 euro) 
  • Main road and railroad connections with Moscow and Asia
  • Attractive logistics costs 
  • Availability of potential partners and suppliers (Siemens managed to increase the local sourcing for its trains to 84% in only two years)
  • Governmental support, special economic zones with tax preferences 
  • Two major Ural cities Yekaterinburg and Chelyabinsk – both industrial center – located only 200 km apart constitute with their satellite towns an agglomeration with 4 million people, the third largest in the country.

History and basic information 

Yekaterinburg was founded in 1723 on the will of the ambitious tsar Peter the Great (1682-1725) as the host town to the emerging iron works on the banks of Iset River east of the Ural Mountains rich in natural resources.
The name means literally City of Catherine, in honor of Empress Catherine, Peter’s wife, reflecting the same naming practice as Saint Petersburg founded only 20 years earlier in 1703.
The tsar entrusted two men with the construction and administration – the founding fathers Vasily Tatishchev and William de Gennin. The last was a German mining engineer born in Siegen (Georg Wilhelm Henning – according to records in church books). He constructed the factory-fortress in accordance with European principles of urban architecture with its strict structure of perpendicularly crossing streets. The iron works served as the centerpiece of the urban space. The large body of water in the city center is an artificially created pond which once was necessary to generate a waterfall feeding the mills of the metal production site, the one of the largest at that time in Russia and Europe. Iron, steel and copper produced in Yekaterinburg were also exported to other countries and used, for example, to build some of the world’s most famous landmarks: the Houses of Parliament in London, the Eiffel Tower in Paris and New York’s Statue of Liberty.
In 2018, Yekaterinburg counts 1.4 million people, and is in this regard the fourth largest city in Russia behind Moscow, St. Petersburg and Novosibirsk. The climate is not much different compared with Moscow, with a warm summer and the average temperature in January, the coldest month of the year, of minus 14.

Quality of life 

Sverdlovsk, the city’s name in the time period from 1924 to 1991, was hidden from the rest of the world for decades. It had the status of a “closed city” with limited access for foreign visitors imposed due to the location of major parts of the country’s military-industrial complex with its production, scientific and research facilities in the region. After 1991 the city’s development accelerated so fast, that some locals say, it was practically rebuilt.
Today, Yekaterinburg is a modern, open, comfortable and safe place with all the attributes of a capital – top universities, opera, philharmonic concert hall, theaters, museums, art exhibitions, nice hotels, a variety of cafes, bars and restaurants, golf club, ice arena, etc. Ekaterinburg Arena for 35,000 visitors hosted FIFA World Cup matches in summer 2018. Meanwhile 15 countries opened their diplomatic missions in the city, including Germany, France, Austria, China and USA – the third largest number in the country after Moscow and St Petersburg.
A new airport provides daily dozens flights to Moscow, and belongs according to Skytrax rating 2018 to the TOP-10 in the world in its category 5 to 10 million passengers per year in a row with: 1. Durban, 2. Cincinnati/Northern Kentucky, 3. Christchurch, 4. Gold Coast, 5. Bahrain, 6. Malta, 7. Adelaide, 8. Medina, 9. Keflavik, 10. Yekaterinburg.
The airport is connected with the city by a three lane highway, and in general the traffic is easier compared with Moscow.
In rating “Best Hotels in Europe 2018”, compiled by U.S. News & World Report, three hotels from Yekaterinburg – Hyatt Regency, Hilton DoubleTree and Ramada Hotel & Spa – made it into the top 10 percent and received a gold badge. ParkInn, Novotel, Angelo by Vienna House and others are nice as well.
Yekaterinburg takes the top position in the ranking of Russia’s Safest Cities  based a nationwide poll conducted by Zoom Market in 2018. Moscow came second, while Kazan and Novosibirsk took third and fourth place respectively. Sociologists asked participants to rate the safety of their home city on a scale of one to ten.
Since 2010 Yekaterinburg hosts annually INNOPROM, a major International Industrial Fair with visitors from over 100 countries.
In November 2018, Yekaterinburg was voted the number two for the right to host World Expo 2025, a truly global event with expected 15 million visitors. Even though the city did not become the host, it was a noticeable performance drawing attention from around the world.
The city’s development continues, i.e. with a remarkable new concert hall, a new ice arena and a high-speed railroad connection with Chelyabinsk.

Industry

Yekaterinburg is the administrative center of Sverdlovsk Region. The region’s industrial core competences are mining, metallurgy, pipe production, mechanical engineering and heavy machinery. The region accounts for 40% of the country’s total industrial output, holding a significant share in production of copper, titanium, steel pipes, ferrous alloys, locomotives and railroad freight cars. The profiles of leading local companies illustrate the structure.

Copper and titanium are Ural’s export hits produced by local giants Ural Mining Metallurgical Company, Russian Copper Company and VSMPO Avisma. The main shareholders Andrei Kozytsin and Igor Altushkin made it on the Forbes billionaire list. The companies are continuously investing in modernization of their production capacities and new assets.

Another successful regional product are steel pipes. According to Dmitry Pumpyansky, the main shareholder of Sinara Group listed in Forbes as well, the rapid development of the steel pipe industry in Russia and the region was driven in the last two decades by strong domestic market growth and high investments of over $12 billion – only comparable with China – transforming the outdated pipe mills and industrial complexes into global enterprises. New gas pipeline projects such as Nord Stream, Nord Stream 2, Turkish Stream or Power of Siberia played an important role.

A showcase illustrating the industry transformation is the pipe mill Vysota239 launched in Chelyabinsk in 2010, the probably most prominent example of ChelPipe’s greenfield projects with an investment of $880 million. The mill is equipped with state-of-the-art machines from the German SMS Group, linked to form an extremely modern process chain. Trond Gjedred, a quality supervisor from Nord Stream 2 AG working on the production site, says, it’s probably the most modern pipe mill in the world equipped with the latest technology. His colleague and Chief Project Officer Henning Kothe commented in June 2018: “We are highly satisfied with the performance of ChelPipe. The company fulfilled all its contractual obligations on time and in accordance with the highest quality standards”. CMMS Software Insight listed the mill for its design in a row with Volkswagen’s Transparent Factory and BMW’s Central Building in Leipzig.

TMK (part of Sinara Group) has meanwhile eight pipe mills in Russia and Kazakhstan, thirteen in North America (thereof twelve in the US), four in Europe and one in Oman. Jens Bohlmann, representative of German Eastern Business Association, describes in an article his impressions from the visit of a TMK’s pipe mill located not far from Yekaterinburg as following: “TMK is another example of what I have recently noticed in several other Russian enterprises: the companies are competitive, internationally positioned and excellently managed. The owners have turned an industrial complex from the Soviet era into a global enterprise. Including social responsibility, the company supports local infrastructure and public life as well as leisure facilities. Environmental standards are at an European level, and even sustainability, safety and worker codetermination are not unfamiliar terms here.” 

Ural Locomotives is a 50/50 joint venture between Sinara Group and Siemens AG established at the site of the former Ural Locomotives Plant. The new production facility was launched in 2013. The plant boasts aluminum welding, machining, painting systems and passenger train assembly fixtures supplied by world’s leading equipment makers. Over 150 Russian electronics, machine-building and metallurgical engineering companies now form a full competence cluster around the locomotive production site. In 2014, following the rapid rouble weakening, the company initiated a large-scale import-substituting project which allowed to increase the share of local sourcing to 84% in a short period of time.
In 2018, Russian Railways, Siemens and Sinara Group signed an agreement for the delivery of 11 high-speed trains Sapsan, in addition to 16 of this kind already operating between Moscow, St. Petersburg and Nizhniy Novgorod at a speed of 250 km/h. 

U.S. plane maker Boeing and Russia’s VSMPO-Avisma, the world’s largest titanium producer, launched a second manufacturing unit in 2018. The JV focuses on titanium forgings mainly for B777 and B787 Dreamliner. The long-term contracts between both partners cover around 35 percent of Boeing Commercial Airplanes’ demand for the metal, and should sum up to $ 18 billion over the next 30 years. The new facility is located in Titanium Valley, a special economic zone. The investment amounts to 5.5 billion roubles ($83 million), around 200 jobs will be created. Everything starts from titanium sponge, which is fresh raw material. Before it becomes the Dreamliner’s landing gears, the titanium spends 16 hours in the furnace under the careful watch of a melting operator. “Winged metal” should not have any pores. Even a microscopic defect can lead to a flight accident. Industrial work with titanium began simultaneously in the US and USSR in the 1950s. Titanium is expensive but the metal has major advantages over other alloys. Aircraft construction requires the use of materials that can withstand the severe pressures of flight at high altitudes, as well as constant exposure to the elements. Traditionally, aircraft were made of steel, but lighter, more durable materials are now used to extend the life of aircraft and make them more energy efficient. Titanium is as strong as steel but 45 percent lighter. It can withstand long periods of exposure to salt water in marine atmospheres. The strength of titanium makes it difficult to weld, which contributes to its high price compared to steel and aluminum.

Ural Works of Civil Aviation (UWCA) has been a repair and maintenance shop for aircraft engines since 1939. In the last five years, the company established its own production of light aircraft, helicopters and military drones. In 2017, UWCA assembled its first twin-engine aircraft Diamond DA-42T, pre-ordered primarily by pilot schools, under the license from Diamond Aircraft Industries, an Austrian composite aircraft manufacturer. The production started with a local manufacturing depth of 30%. The company announced that it will reduce the share of imported parts, including composite materials, to nearly zero in 2019. The on-board equipment is already completely Russian-made.

UralVagonZavod, a state-owned enterprise, manufactures mainly railroad freight cars (15,000 per year) and battle tanks. The headquarter is located in Nizhny Tagil, 140 km to the north of Yekaterinburg.

Uralmash and Uralkhimmash are manufacturer of machinery and equipment for mining, metallurgy and oil&gas industries trying to develop new products and technologies, a process accelerated by sanctions pushing major Russian companies to pursue a procurement policy “made in Russia”. Greenfield investments and joint ventures are welcomed, as the vision is to establish manufacturing clusters, i.e. for companies producing drilling rigs and drilling equipment.

IT Competence Center 

The Sverdlovsk Region aims to become a Smart City Champion in Russia, and it has good chances to succeed. The Ural Federal University is one of Russia’s leading IT institutions, while Yekaterinburg is the host to around 2.700 IT companies, 5 of which are on the list of the country’s 100 biggest IT enterprises. The Region is already an IT competence center, ranked 3rd behind Moscow and St. Petersburg. 

Logistics

Located in the heart of Russia and at the crossroads between Europe and Asia, Sverdlovsk Region is an important logistic hub with main road and railroad connections to all major destinations in Russia and beyond. Daily seven to ten trains pass through the region from China to Europe.
Note: The domestic road cargo volumes going from Central Russia to Yekaterinburg are higher than the other way around. Following logistics companies offer lower tariffs for empty trucks heading to Moscow.  

International investments 2018 (medium-sized businesses)

Sika (Switzerland) opened a new production site for concrete admixtures.
Ivo Schädler, Regional Manager EMEA says: “With the foundation of the new production site near Yekaterinburg, we are investing in a region that has dynamic growth and a booming construction industry. We have now created the ideal framework for tapping into this potential and further accelerating our growth in Russia.”

Hüttenes-Albertus (Germany) and its local partner announced $20 million investment to localize the production of a chemical binder used for making sand casting molds. The product enables foundries to deliver advanced engine and machine cast parts for automotive and machinery manufacturer. The Joint Venture plans to launch the production in 2020.

Lasselsberger (Austria) acquired Plast-Rifey LLC, the developer of the largest kaolin deposit in Russia. With new investments the company will produce fiber cement plates, and kaolin for Lasselsberger’s ceramic tile plant operating since 2009 in neighboring Ufa. The investments are estimated at $60 million.

For more information, feasibility studies and support please contact MAC International Consulting:

Phone: +7 (343) 312 22 74
E-mail: info@mac-consulting.net
Web: mac-consulting.net
Yekaterinburg