Vanino Regional Update (Russian Far East)

June 2006

Author: Andrey Vasenev, Bisnis Representative in Khabarovsk

INTERNATIONAL COPYRIGHT, U.S. & FOREIGN COMMERCIAL SERVICE AND U.S. DEPARTMENT OF STATE, 2006. ALL RIGHTS RESERVED FOR USE OUTSIDE OF THE UNITED STATES.

SUMMARY

The Vanino District is one of the most dynamically developing regions of the Khabarovsk Krai, as well as an important transportation hub of the Russian Far East. Vanino’s transportation and timber enterprises enjoy a significant share in the region’s overall production. These sectors provide a range of commercial opportunities that may be of interest to U.S. businesses. Such large operations as the seaport of Vanino, Arkaim (timber producer), and SUEK/Daltransugol (coal) use dozens of units of U.S. heavy machinery. The demand for the U.S.-made construction equipment is expected to increase as a $3 billion project for transportation node development will commence soon. The district is also one of the most attractive locations for foreign investment in the Russian Far East.

Geographic location

The Vanino District occupies 9,920 square miles in the eastern part of the Khabarovsk Krai. As of January 1, 2005, its population was 41,200 people. There are 21 settlements and villages in the District. The town of Vanino, its port capital, is situated on the coast of a natural deep-water bay of the Tatarskiy Strait, 566 miles to the east of Khabarovsk and 270 miles to the north of Japan. The climate is marked by monsoons with winds of 13–23 feet a second and with 1–7 stormy days a month between October and April. The average January temperature is – (-18 C), August – (+15 C). The average annual temperature is – (+0.2 C). Annual precipitation is 30.8 inches.

Natural Resources

Ninety percent of the District territory is covered by forests. Conifers, including larch, fir and spruce, account for the primary share of timber resources. Timber resources today are estimated at 219.5 million cubic meters (4.4 percent of the Krai’s total), of which 60 percent are mature forests. During the past few years, forest fires considerably decreased the timber resources of the District. The district also possesses valuable mineral resources, including the Tumnin gold deposit and tin, tungsten and aluminum ore deposits. Vanino is rich with fish resources, including river species, such as loach, sturgeon, umber, Siberian salmon, and hunchback salmon, as well as sea species, such as flounder, navaga, rasp, pollack, herring, iwashi, squid, etc.

Transportation infrastructure

A one-track, 320-mile railroad connects Vanino with Komsomolsk-on-Amur, one of the major industrial cities in the Russian Far East, from which the trains have access to all destinations in Russia. The distance from Vanino to Khabarovsk via the Trans-Siberian Railway is 478 miles, via the Baikal-Amur Railway - 553 miles. A ferry from Vanino links the Baikal–Amur and Trans-Siberian main railroads with the eastern coast of Sakhalin Island. The available track allows shipping up to 15 million tons of cargo annually. In order to double turnover, a reconstruction of the existing track it is required, which will cost an estimated 75 billion rubles ($2.8 billion)

Since spring 1999, the Lidoga-Vanino gravel highway has been providing automobile transportation between Vanino and the major cities of the Russian Far East. During the past 5 years, the road has considerably increased its capacity and the number of cargo trailers grew three times to 1,000 vehicles per month. In 2000, Khabarovsk Krai Association of Automobile Transport Companies developed a technology for transportation of the trailers via the railroad ferry. The Association has initiated an agreement between the seaports of Sakhalin Island, the Khabarovsk Krai, DVTK Freight Forwarding Company, and Sakhmortek to implement this technology. In 2003, a roll-on-roll-off boat was purchased, which allowed for the opening of regular automobile transportation from Vanino (Khabarovsk Krai) to Kholmsk (Sakhalin Island). Cargo is generally transported from the cities/regions of the Russian Far East via the Vanino-Lidoga highway to the Vanino seaport, and then the trailers are rolled on the Vanino-Kholmsk ferry. It takes a maximum of four days to deliver goods from Khabarovsk to Yuzhno-Sakhalinsk. The costs are similar to those of railroad delivery and the timeframe is approximately three times less.

The Vanino Commercial Seaport Joint Stock Company is one of the ten largest ports in Russia, and the third largest port in the Russian Far East. Vanino Bay protrudes 5.2 miles into the continent to the west and southwest. The port area consists of inner and outer channels. The outer channel has an area of 2.32 square miles, and depth of 49.2–65.6 feet, and is navigable year-round. The seaport has undeveloped land and harbor territory, which could allow expansion into a world-class port. A domestic airport, located in the Gatka settlement 30 miles from Vanino, provides regular service to Khabarovsk only.

The distance between Vanino and selected seaports by sea

Port	Distance (miles)
Niigata	677
Yokohama (Sangar Strait)	1,038
Seattle (La Perouse Strait)	4,065
Seattle (Sangar Strait)	4,431
Hong Kong	2,108

industry

The Vanino District’s leading industry sectors are transportation, timber and wood processing, and fishery. These sectors offer best sales prospects for U.S.-made equipment and machinery as well as investment opportunities for American companies. The best sales prospects for U.S. manufacturers include:

· Wood processing equipment, especially dry kilns and sawmills

· Logging and tree hauling machinery/equipment

· Road-construction machinery

· Fishing vessels and tankers

· Fish processing equipment

Transportation Industry

Vanino District’s geographic location predetermines development of a large transportation system in the area. The District transportation industry is represented by the Vanino Seaport JSC, Transbunker JSC, coastal facilities of the Vanino-Kholmsk ferry, Motorcades # 2, 3, 4 JSC and Vanino Automobile Transport Municipal Enterprise, and the affiliates of the Russian Far East Railroad. A number of smaller enterprises provide forwarding, brokerage, inspection, and other services. The industry employs 2,600 people. In 2006, the overall cargo turnover of the Vanino District grew 8.3 percent. The revenue of the transportation industry has increased 14 percent during the year and amounted to $9.7 million; the volume of exports has also increased.

Vanino Seaport JSC

The Vanino Seaport is the largest multi-purpose marine transportation hub in the Khabarovsk Krai and is the eighth largest port in Russia. It provides a full range of cargo handling operations and related transfer of foreign trade and domestic cargo from the marine to the automobile and railroad transport and back.

In 2004, 20 percent of the Port’s stock, previously owned by the federal government, was sold to the Bazoviy Element and RusAl (Russian Aluminum). RusAl – Russia’s largest aluminum producer and exporter invests heavily in the development of the Vanino Seaport, which has traditionally been a transshipment point for Russian aluminum, exported to Japan. Today, the stevedore company spends up to $4.5 million on overall development. The seaport is a major consumer of Caterpillar machinery and equipment (loaders). Some 60 percent of the port cranes are of German origin. Many require replacement.

The Port serves vessels of up to 45,000 tons displacement. It is able to handle up to 15 vessels simultaneously. The company owns 19 berths with the capacity to handle 12 million tons of cargo annually. The Port is equipped with 50 dockside cranes with the 40-ton cargo capacity, 4 mobile cranes with the total capacity of 104 tons, and 150 autoloaders. The total area of the covered storage facilities is 42,100 sq. m., open grounds – 161,400 sq. m.

The port has direct outlets to two independent railways—TransSiberian and Baikal-Amur Mainline (BAM)—linking the port with all territories of Russia and the CIS. The BAM Railway saves from 3 to 7 days for cargo delivery from western territories of Russia thus decreasing transportation costs compared to the Primorskiy Krai ports of Vostochniy and Nakhodka for export and import trans-shipments.

Since 1991, the port has been open to foreign vessels, and regular lines now connect Vanino with Japanese ports of Fushiki-Toyama and Maizuru. The port also serves as a transshipment point for cargo exported to and imported from Korea, the United States, Australia, China and other Pacific Rim countries. Foreign trade cargo traditionally accounts for no less than 50 percent of the seaport’s cargo turnover.

The Terminal of the Vanino-Kholmsk Ferry is a part of the Port’s premises. The ferryboats, employed by the Ferry can simultaneously carry 26-28 railroad cars with cargo as well as a few passenger cars. The Ferry has the capacity to transport up to 3.3 million tons of cargo annually.

The port possesses vacant areas that can be used to further expand the port and allow it to service vessels with the carrying capacity of up to 50 tons.

During 2005, the cargo turnover volume of the seaport grew 8.3 percent and totaled 6.156 million tons (5.7 in 2004). In 2006, it plans to increase the volume of goods processed to 6.3 million tons. The increase of the turnover is attributed to high export volume of round timber and sawn goods (1,840,700 tons) and introduction of coal exports (289,900 tons). The volume of import cargo trans-shipment also increased significantly to 21.1 percent, as well as coasting cargo – 53.6 percent. The Vanino-Kholmsk ferries shipped 1.91 million tons of cargo and 11,900 transit vehicles. Increase of the number of vessels and wagons processes also contributed to the overall increase of the seaport’s cargo turnover. In 2005, the port processed 1,893 vessels and 105,000 wagons.

Transbunker JSC

The Transbunker Joint Stock Company was founded in 1991 by the Rosneft company and Komsomolsk Oil Refinery. The company was established to handle oil and petrochemical products trade and to provide Russian and foreign vessels with bunkering services. Ten percent of the Transbunker stock is owned by the regional administration. Today, Transbunker enjoys a reputation of one of the most successful companies in the Khabarovsk Krai. The company operates a 130,000-ton, onshore oil storage tank and a floating tank with the total capacity of 10,000 tons. Its annual export traffic capacity reaches 500,000 tons of oil products. In 2005, the company’s revenue increased 40.2 percent and totaled 527.3 million rubles ($19.5 million).

Development of the Vanino–Sovetsko-Gavanskiy Transportation Node

A number of large construction projects are currently being implemented in the Muchke Bay of the Vanino District as a part of development of a large transportation node. Further project implementation also requires development of industrial and social infrastructure calling for dozens of miles of pipe laying, additional power resources construction, modernization of roads and communication.

During 2004-2005, the District Administration provided a long-term land lease to six investors:

1) Daltransugol Ltd. (SUEK – Siberian Coal Power Company) – 97.13 ha for 25 years in the Muchke Bay area, three kilometers from Vanino, for construction and operation of the Vanino Baulker Terminal to transship rich coals produced by SUEK. The estimated annual capacity of this potentially Russia’s largest terminal is up to 12 million tons. The coal will be primarily exported to China and Korea. The construction will be completed by March 2008. The estimated costs are $100 million.

2) Prichal Ltd. – 7.09 ha for five years in the northern area of the Vanino Bay for the construction of two berths with the length of 240 meters and depth of 12.5 meters. New facilities will allow uploading up to 500,000 tons of aluminum.

3) Prichal Ltd. – 8.29 ha for five years in the northern area of the Vanino Bay for the construction of trans-shipment complex for ferrous and non-ferrous metals and other general cargo.

4) EuraseFinance Management Company – 23 ha for 25 years for construction and operating of the EuraseVanino Transport-Transshipment Complex with the capacity to process 6 million tons of cargo.

5) Sakha (Yakutiya) Transportation Company – 250 ha for 49 years for construction and operating of the transportation-transshipment complex.

6) Novovanino transportation-transshipment complex is in the stage of the land plot selection.

Timber Industry

Currently, there are 17 timber enterprises operating in Vanino, with the annual capacity to harvest from 20,000 to 120,000 cubic meters of lumber each. During 2005, the District’s timber enterprises harvested 1,276.2 thousand cub. m. of timber, falling below 2004 results by 11.6 percent, and produced 1,131.4 thousand cub. m. of round logs (down 8.8 percent). Severe snow falls contributed to the general production decrease.

Many Vanino enterprises experience a shortage of working capital and need to upgrade woodcutting and wood processing equipment. Taking into consideration that the district has tremendous forest resources and has a favorable geographical location, the timber sector appears to be an attractive target for foreign investments.

Extrales Ltd.

Extrales Limited Liability Company is one of successful medium-sized timber companies operating in Vanino. The company was established in 1994. Today, it harvests approximately 90,000 cubic meters of timber. The primarily share of timber is exported to Japan (40 percent), China (5 percent), and South Korea (55 percent). The company also operates a wood-processing shop to produce particleboard, doors and windows, and wood chips sold on the domestic and Pacific Rim markets. The company imports timber jacks and harvesters from Finland and has industrial capacity to manufacture 80,000 cubic meters of logs and wood products per year.

Arkaim

Arkaim joint venture is the Khabarovsk Krai’s second largest timber producer. In 2006, Arkaim’s timber harvesting volume is expected to total 700,000 cub. m. The Company is also engaged in marketing of Scania trucks, manufacturing of timber harvesting equipment, and runs a shipping company. The company operates five vessels with the capacity of 4-5 tons. It has recently purchased a large wood processing facility and is investing in construction of two plants: a particle board producing plant with the capability to produce up to 100 cu. meters of finished product and a sawing operation with the 300,000 cu. meters annual capacity. The company imports much U.S., Swedish, Finnish production equipment as well as timber hauling equipment specifically for mountainous areas.

Vega Ltd.

Vega, established in 1993, is engaged in timber harvesting and wood processing. The Company employs 400 people and intends to expand its production. In 2003, Vega purchased harvesters and forwarders through NJ-based Hoffman Co.

Tis Ltd.

Tis Ltd. has been expanding the volume of production of sawn goods. During the past three years it increased production 35.7 percent from 4,300 cubic meters in 2003 to 5,800 cubic meters in 2005. The enterprise exports its sawn goods. In order to improve the quality of products in 2004, it purchased Austrian processing equipment and dry kilns.

Fishing Industry

The location of Vanino District on the shore of the Tatar Strait seems to predetermine its involvement in fisheries. Yet, all five fishing enterprises operating in Vanino today are running at a loss. To some extent, this is a result of a reduction of some species of fish and sea products in the Sea of Okhotsk and the Tatar Strait. However, the fishing enterprises view the unfavorable quota policy as the primary reason for losses.

In 2005, the volume of fish and sea products caught by the District’s enterprises increased 7.2 percent and totaled 14,000 tons, or 10.4 percent of the Krai’s total. The fish processing industry produced 16,400 tons of fish products.

Fishing Artel “The 50 Years of October”

Fishing Artel “The 50 Years of October” based in the village of Datta, 20 miles north of Vanino, is one of the largest fishing and fish-processing operations in the Khabarovsk Krai. It traditionally provides up to 92 percent of the District’s total output of the fishery sector. Its coastal fish-processing facilities can process more than 60 tons of fish and sea products daily. Artel exports approximately 80 percent of the production to Japan, Poland, China and Korea. In 2005, Artel produced 14,000 tons of fish products (grew 25.6 percent) for over $8.6 million (grew 4.2 percent)

Today, Artel employs 584 people and operates 18 fishing boats of 0.8 to 3,000 tons displacement. Three vessels are engaged in fishing only—their primary catch is pollack, herring, and saira. Two vessels specialize on crab. Tumnin - large fishing trawler and Artel’s pride is able to fish and process large quantities of sea products. In 2005, Artel installed two new German-made lines for fish processing and caviar production.

Artel has also launched a project for the construction of a cannery in Datta settlement. It will begin operation in 2006 and produce up to 100,000 fish and sea products cans (15 types). In order to implement this $0.7 million project the enterprise invests its own funds as well as attracts external investments. By 2010, Artel plans to increase production of fish products to 13,800 tons (20.4 percent to 2004 figures). Expansion of deep processing operations is a priority for Artel.

Banking

A number of regional and federal banks have opened their branches in Vanino to service one of the most economically active territories in the Russian Far East. The representative offices of Vneshtorgbank, Sberbank, Dalkombank, Rosbank, Regiobank, and Vostokbusinessbank operating in the Vanino District demonstrate its attractiveness for financial institutions.

Vneshtorgbank has been operating in Vanino since 1999. It traditionally finances over 80 percent of the seaport’s transactions as well as trade of oil products.

SMEs, Trade & Catering

Trade is one of the most dynamic sectors in the Vanino District economy characterized by high competition and investment activity. The product turnover is high in all areas of consumer market. In 2005, 73.6 percent of 400 small enterprises and 600 entrepreneurs not registered as legal entities operated in trade and catering sectors. Trade sector employs 2,400 people or 12 percent of the employed population. The volume of paid services provided to the Vanino District population grew 22 percent.

SME report that administrative pressure from control and taxation agencies and barriers in lease and land relations resulting in extensive financial and time consumption are the primary factors hindering business development.

TRAVEL INFORMATION

The trip by train from Khabarovsk to Vanino takes 22 hours. The price of one ticket does not exceed $80. Cars are not comfortable but the services are relatively decent. A one-hour taxi drive from the airport to Vanino costs $40. Taxi within the city is relatively cheap, and a trip to Sovetskaya Gavan (25 miles) costs $25. The only hotel “Vanino” is located in the very center of the city. The rooms and services are decent; rooms cost $40-70. The restaurant is well run and provides good meals. The hotel is usually busy and it is reasonable to book a room in advance.

CONTACT INFORMATION:

BISNIS in Khabarovsk

18 Muravyeva-Amurskiy Street, office 401

Khabarovsk 680000, Russia

Tel/Fax: (7-4212) 306-421

Email: bisnis@vasandr.kht.ru

Contact: Andrey Vasenev, BISNIS representative

Khabarovsk Krai Ministry of Economic Development and Foreign Affairs

19 Muravyov-Amurskiy Street.,

Khabarovsk, 680002, Russia

Email: (7-4212) 329 739 or 325-544

Fax: (7-4212) 322-253 or 328 397

Email: econ@adm.khv.ru

www.adm.khv.ru

Contact: Alexander B. Levintal, Minister

Vanino Municipality Administration

Bogdan Musyanovich, Head of Vanino Municipality

1 Mir Square

Vanino 682860

Tel: 7 (42137) 551 02

Fax: 7 (42137) 551 51

glava@admvan.vanino.ru

www.vanino.org

Victor Nevesely, Deputy Head for Interaction with Federal Structures

Tel: 7 (42137) 551-08

Tatiana Panayeva, Head for Department of Economy

Tel/Fax: 7 (42137) 551 25

econ@admvan.ru

SUEK (Siberian Power Company) JSC,

Daltransugol LLC,

Alexander Uglov, Executive Director

22 Klubnaya Street

Vanino 682860

Tel/Fax: 7 (42137) 755 47

daltransugol@mail.vanino.ru

Extrales Co., Ltd.,

Natalia Namestnikova, General Director

22 Klubnaya Street

Vanino 682860

Tel: 7 (42137) 236 98

Fax: 7 (42137) 508 80

Cell: 8904 289 5544

extrales@extra.vanino.ru

Vanino Commercial Sea Port JSC,

Andrey Kurenshchikov, Technical Director

1 Zheleznodorozhnaya Street

Vanino 682860

Tel: 7 (42137) 573 12

Fax: 7 (42137) 775 75

techdir@vcsp.ru

www.vcsp.ru

Vneshtorgbank, Additional Office in Vanino

Tatiana Maslovskaya, Head of Additional Office

14 Molodezhnaya Street

Vanino 682860

Tel: 7 (237) 776 48, 8914 179 8050

Fax: 7 (237) 740 22

mtg@fvtb.vanino.ru

www.vtb.ru

Vanino District Administration

Tatyana Panaeva, Head of Economic Department

1 Mira Square

Vanino 682860,

Tel: 7 (42137) 55-125

Fax: 7(42137) 55-125

econ@admvan.ru

Arkaim LTD

Oleg Ryabov, Director of the Technical Service Center

20 Sinelnikova, office 208

Khabarovsk 680000

Tel/fax: 7 (4212) 301 003

timber@email.kht.ru

www.arkaim.ru

For more information on Khabarovsk Krai, Russia, visit BISNIS online at http://www.bisnis.doc.gov/bisnis/country/rferegions.cfm

BISNIS (www.bisnis.doc.gov) is part of the U.S. Commercial Service (www.export.gov).