On Bor Glassworks' state-of-the-art production line here, workers in blue overalls churn out windshields for Russian-made Fords and Renaults -- and offer a glimpse of an investment boom transforming Russia's industrial landscape.
The glass company was once so poor it paid its workers with sewing machines and other tradable goods. Now, after an injection of $100 million from Belgian investors, it's a success story: Bor produces a growing share of windows for the Western cars assembled on Russian soil.
"We have a great future ahead of us," says Valery Tarbeyev, Bor's chief executive. "Some people are waiting in line up to six months for a new Ford Focus."
Across Russia, companies are spending billions of dollars to upgrade facilities and expand capacity -- all in an effort to keep pace with surging consumer demand. The activity is the latest stage of an economic turnaround that has delivered seven years of robust growth. Fueled by Russia's vast energy sector but ranging well beyond it, the boom goes a long way to explain Russia's new assertiveness on the world stage.
The revival -- dating roughly back to the 2000 election of Vladimir Putin -- is also a major reason for the president's enormous popularity. Under Mr. Putin, Russia's per-capita gross domestic product has quadrupled to nearly $7,000, and about 20 million people have been lifted out of poverty. Global corporations, such as Intel Corp. and Ford Motor Co., are fast expanding their Russian operations.
For the first time since the end of the Soviet Union, opinion polls show, more people are optimistic about the future than pessimistic. That confidence is reflected in Mr. Putin's high approval ratings, which consistently top 70%.
Russia's recovery began as a bounceback after the 1998 financial crash. With a weakened ruble, domestic manufacturers were better able to compete with costly imports. Once-idled factories were pressed into service and output rose. Then, as global crude prices climbed, the country saw a huge influx of money, further fueling growth.
As Russia's recent oil windfall stimulated domestic demand, imports began to escalate. Local companies found they had to invest in more efficient technology to stay competitive. At the same time, Russia's once-shaky banks shored up lending to industry, while falling inflation reduced the cost of borrowing. Perhaps most importantly, political stability under Mr. Putin gave companies the confidence to invest in their future.
Businesses are now plowing profits back into fixed capital -- assets such as machinery and new buildings. Last year, investment rose by 13.5%, one of the highest annual rates since the Soviet collapse. Whereas companies in the natural-resource sector once accounted for most spending, these days food-processors and auto makers are also feeding the growth. Economists say the diversified investment base assures further growth even if oil prices drop.
Nizhny Novgorod, the region that is home to Bor, shows how wealth once confined to Russia's cash-rich energy sector is now trickling to other industries. "We have no oil, gas or gold," says Gov. Valery Shantsev. "[Yet] our industrial growth rate was double the national average last year."
Nizhny's economy grew by 7% in 2006, as factories making everything from hair-care products to beer reinvested in new production lines. Foreign companies like Swedish retailer IKEA and Citigroup Inc. also arrived to set up new operations.
During Czarist rule, Nizhny was Russia's trading capital, one of its most cosmopolitan cities and the place where European grain prices were set. "We used to have a saying," says Mr. Shantsev: "If St. Petersburg is Russia's head, and Moscow its soul, then Nizhny is its pocketbook."
But under the Soviets, Nizhny became a bastion of the country's defense industry and was declared off-limits to foreigners. It was so isolated that Moscow sent dissident Andrei Sakharov into internal exile there in 1980.
When the Soviet Union collapsed, a dynamic young governor named Boris Nemtsov opened up the region again. Appointed by the Kremlin in 1991, he was one of the first regional leaders to privatize local shops, services and agricultural land -- and in the process attract foreign investors. Under him, Nizhny became a lab for economic reform.
"Nemtsov was on TV every day with his wild, frizzy hair, saying: 'Wake up! Go back to your roots and do business!' " says Kendrick White, an American consultant who has lived in Nizhny since 1992.
But he was powerless to stop the economic slump then engulfing Russia. Stripped of government orders and subsidies, Nizhny's defense plants -- its biggest employers -- were pushed toward bankruptcy.
Bor Glassworks also struggled. Strapped for cash, it and other companies resorted to bartering. One big Russian auto maker, for instance, traded cars for glass. Bor in turn used the autos to settle up with its sand suppliers. Another customer -- a factory near Moscow once owned by Singer Co. -- paid for Bor's glass with sewing machines, which were then given to employees in lieu of wages.
"We were in a constant state of panic," recalls Mr. Tarbeyev, the CEO. "When money came in, you had to decide whether to spend it on wages, electricity or raw materials. You never had enough for everything."
Mr. Tarbeyev realized Bor wouldn't survive on its own and started looking abroad for partners. Finally, in 1997, Glaverbel SA, the Belgian unit of Japan's Asahi Glass Co., bought a stake, which it increased to 85% over the next eight years. Bor gained the financial security it had lacked for most of the decade.
Meanwhile, Nizhny's business climate was souring. Mr. Nemtsov moved to Moscow to join the government and in 1999, voters elected Gennady Khodyrev, the region's Soviet-era boss, as governor. He did little to encourage investment. When executives from Toyota Motor Corp. came to scope out sites for an assembly plant, he famously refused to meet them, sending a deputy instead. His constant run-ins with the regional legislature slowed down decision-making. Enterprise choked amid red tape and raids by tax police, say local business owners.
Things began to change in 2005 when Mr. Khodyrev's term expired. Mr. Putin, who had abolished regional elections for governors, stunned Nizhny's elite by appointing an outsider to replace him: Valery Shantsev, then deputy mayor of Moscow.
Nizhny, where this store is based, has recently seen a huge influx of capital -- much of it riding on the boom in consumer-related sectors like retail, construction and manufacturing.
Kremlin officials hoped that Mr. Shantsev could bring prosperity to Nizhny just as he had done in Russia's capital. He helped turn Moscow from a dark, dowdy city to a glitzy metropolis, crowded with western-style shopping malls and towering office blocks.
Mr. Shantsev's can-do style was a change from the stodgy bureaucracy of his predecessor. But it also had little in common with Mr. Nemtsov's free-market liberalism. Instead, it smacked of Moscow, where the charismatic mayor, Yuri Luzhkov, rules the roost and City Hall has a hand in nearly all major business ventures and construction projects.
Some Nizhny businessmen worried that same cronyism would spread to their city. They feared Mr. Shantsev's dictatorial style. Even today, some legislators complain that important laws are rubber-stamped with little or no debate.
A bald, gruff, 59-year-old who served for decades as a Communist functionary, Mr. Shantsev acknowledges that his rivals call him a despot. He brushes off the criticisms. Russia's problem throughout the 1990s, he says, was too much democracy. "The idea was, the more people there are making decisions, the more democracy there is," he says. "That's not right."
While his politics may be polarizing, few dispute that his arrival has improved Nizhny's economy. Shortly after taking power, he summoned the region's business elite into his office and warned them against evading taxes. Coming just a year after the Yukos affair, when Russia's largest oil company was crushed by multibillion-dollar back-tax bills, they didn't need to be told twice. Budget revenues soared.
He then tried to improve Nizhny's reputation among investors. He created a one-stop shop that fast-tracked the approval of investment projects and publicly dressed down subordinates for foot-dragging. Local business leaders nicknamed him "the Tank."
Authorities boast that over the past year they have approved 350 investments ranging from housing developments to factories. The projects, worth $1.46 billion, are expected to create as many as 58,000 new jobs over the next three years.
"Shantsev has a vision -- he makes things happen," says Robert Felczak, manager of Nizhny's Mega Mall, a $150 million shopping center operated by IKEA, which opened in October.
Under Mr. Shantsev, Nizhny has become a symbol of the investment boom sweeping through Russia's big provincial cities. The skyline is a forest of cranes as new houses, hotels and office blocks sprout up. Porsche and Audi showrooms dot suburban areas while logos like Citibank and Hugo Boss jostle for attention on Nizhny's main drag.
The changes impress Dave Molinari, co-site manager of Intel's Nizhny facility. He says he was "shocked" by Nizhny when he first visited five years ago. "It was dirty, with dilapidated buildings and disastrous roads," he says. Now, he says, "I marvel every day at the changes."
Investment rates in Russia are still far lower than in other booming economies -- amounting to 18% of gross domestic product, compared to 40% in China. Some worry that's not enough to keep the economy afloat should oil prices plummet. Despite a Kremlin drive to diversify away from oil and gas, Russia is far from becoming an export base for Western manufacturers, as China and some Eastern European countries now are.
Political problems like corruption and Russia's autocratic style of government could also imperil the current rebound. "In Russia, with the increased state involvement in the economy, you don't see entrepreneurial dynamism on the scale of the U.S. and China," says John Litwack, lead economist at the World Bank's Moscow office. "If they really want an innovation economy, they need to decentralize."
But Russian and foreign companies are confident enough in the future to invest. Nizhny has recently seen a huge influx of capital -- much of it riding on the boom in consumer-related sectors like retail, construction and manufacturing. Russian oil giant OAO Lukoil has announced a $700 million upgrade of its Nizhny refinery to produce high-quality gas for imported cars. OAO Sibur Holding, a big Russian chemicals company, is lavishing nearly $800 million on a new plant to make PVC vinyls for plastic windows, cables and building materials.
Bor Glassworks has been a big winner in the revival. The only Russian glass producer that makes car windshields to international standards, it's a major supplier to Western auto giants now assembling cars in Russia. Sales of foreign-brand cars topped the one- million mark in 2006, up fourfold in three years. Since 1997, Bor's sales have more than doubled, to $205 million.
Its Belgian owners just spent $16 million on a new line to make a special laminated glass. Ford and Renault SA are already customers. Next on the list is Toyota, which is building a plant near St. Petersburg.
"We have the makings of a boom, not only for auto makers, but also for manufacturers of parts like us," says Mr. Tarbeyev.
Companies that came in under the old administration are also ramping up. Intel, which set up a software development lab here in 2000, has increased its staff from 12 to 500 and will open offices in a new "technopark" being created by Mr. Shantsev. Beer maker Heineken NV is investing around $60 million in a big upgrade of a Nizhny brewery it bought in 2004.
Even older Soviet-era industries are seeing a turnaround. A shipyard that once built nuclear submarines now makes oil tankers for export. The MiG jet fighter plant produces a 6-seat air taxi that shuttles CEOs between Nizhny and other Volga River cities. It's also benefiting from the explosion in Russian defense spending, winning a huge new contract to upgrade the country's fleet of MiG-31 interceptors.
Small businesses are faring well, too. One of them is Karina, a furniture maker owned by Dmitry Birman. He started out in the early 1990s selling posh Italian pieces to Nizhny's nouveaux riche. In 1996 he invested his profits in a small furniture factory. He'd gotten his first break during Russia's 1998 crash, when most people couldn't afford imported beds and wardrobes.
But the business really took off in 2005, when Russia's oil boom gained momentum. Orders for furniture from new private hotels and office blocks surged. More recently, increased state spending on health and education has meant a flurry of contracts for new school desks, hospital bedside tables and kitchens for new low-cost housing projects.
To keep up with demand Mr. Birman is budgeting about $400,000 for a new production line. "It's my biggest investment yet," he says.
Fueled by Oil Money, Russian Economy Soars
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