Ernesto Ferlenghi: ‘A new business localisation model is needed for future development’

“Continue the dialogue that is important for us”

Ernesto, could you explain to us the goal of your visit to Tatarstan?

This isn’t our first visit to the republic. I was here in 2017 when we met with President Rustam Minnikhanov. After that, there was prepared a return visit of a Tatarstan delegation to Milan. Then, besides the signing of a framework agreement with our Association of Italian Industrialists, our production was presented too.

The objective of this visit is to continue the dialogue that is important for us. Tatarstan, without doubt, is one of the most attractive regions in Russia from a perspective of the investment climate. It comes after Moscow. The republic demonstrates steady development. A lot of tax incentives, which are so important for small and mid-sized entrepreneurship developed in Italy, are given here.

Why is Tatarstan attractive for the Italian economy?

Tatarstan is very strong from the point of view of oil production, oil refining and petrochemistry. The leading companies in this sphere are present here. The pharmaceutical industry is also compelling. While Italy traditionally exports mechanical engineering. The finance sector develops here. There are a lot of small companies manufacturing pumps, gate valves. When we talk about the petrochemical complex, we mean a big number of components.

There are a lot of universities here, 44 in total. It is a strong element of staff training. This makes the region attractive for the youth and further development of information technologies

As for the prospect of creating joint enterprises, what Tatarstan companies are interesting for the Italian side?

The experimental sites of the M-7 industrial park and Alabuga Special Economic Zone provide the necessary infrastructure and tax concessions. A joint enterprise can export goods to other Russian regions too. Also, there is a huge Eurasian market covering over 180 million consumers. This can be considered as one market for the potential sale of ideas, services, commodities. Tatarstan has a favourable geographical location. We shouldn’t forget human capital. There are a lot of universities here, 44 in total. It is a strong element of staff training. This makes the region attractive for the youth and further development of information technologies.

“Import substitution became the main driver”

What Italian production can potentially appear in Alabuga SEZ?

Equipment production that is needed for oil-related services could appear there. Mainly the technologies that can be a result of a joint venture’s activity are interesting. A JV between an Italian company and a Tatarstan company that is familiar with the local market is a perfect option.

Import substitution became the main driver. The partners who traditionally exported goods from Italy understand that the new industrial strategy of Russia and particularly Tatarstan changes the market environment.

It is necessary to present yourself as a local investor, create legal companies and work via joint venture instruments. In any case, this provides additional possibilities to attract local capital too.

Mainly the technologies that can be a result of a joint venture’s activity are interesting. A JV between an Italian company and a Tatarstan company that is familiar with the local market is a perfect option

A joint industrial base could be created in Tatarstan and exported to a third party. Tatarstan seriously develops logistics. Direct flights help develop the business mission. It is very big and important support.

Some sectors of the economy haven’t been affected by the sanctions. Small and mid-sized companies can continue operating.

Does it mean you have chosen a strategy of localising Italian businesses?

Yes. If we compare the results in nine months this year with the same period last year, the commodity turnover (between Russia and Italy) has increased, by 43%. But we should understand that oil price plays a key role in export and import commodity turnover. In 2021, it has risen by 60% on average. Exports from Italy to Tatarstan have augmented due to this indicator, but the volume hasn’t. A new localisation model is needed for future development.

How much was the commodity turnover between Italy and Russia in 9 months of 2021?

About $20 billion.

How do you in general assess the trade and industrial relations between Italy and Tatarstan?

We shouldn’t focus only on commerce. It is necessary to switch to another model, which is import substitution, to become the main energy here in the market, to start joint exports.

What are the difficulties of running a business in Tatarstan?

The difficulties are the same everywhere. Healthy competition is created in Russian regions. As for the statistics, Tatarstan is the leader in attractiveness in the country. I don’t see obstacles.

It is necessary to switch to another model, which is import substitution, to become the main energy here in the market, to start joint exports

“90% of our economy consists of small and mid-sized entrepreneurship”

What changes did the pandemic make?

It posed a threat to the whole world. The whole chain of suppliers suffered. Italy didn’t receive all the commodities and couldn’t make the end product. GDP fell seriously enough. But given the fact that 90% of our economy consists of small and mid-sized entrepreneurship, this allows adapting to rapidly changing conditions.

As a result, the Italian market remains the most dynamically developing European market even compared to France and Germany. But there is a problem, which is the debt. After the pandemic, it has on average increased by 30% across the world.

This influenced public companies’ abilities to quickly react. The economy and industry were suspended. At the same time, social costs are rising. Europe needed to make its contribution to support different countries. The balance that was found in the European Union is crucial. It is subsidisation and support for certain sectors that have been hit the most.

What sectors have been affected the most?

Mechanical engineering, services, commerce. But this pushed us into developing information technologies. This year, we expect GDP to grow by 6%.

How much was GDP before COVID-19?

About €2 trillion. In two years, it has fallen by 8-9%.

There are a lot of sectors in Tatarstan that aren’t directly impacted by the sanctions. It is necessary to keep working, keep moving

What about the sanctions today?

There are sanctions. They don’t help develop a business, of course. It should be considered that they impact certain sectors. There are a lot of sectors in Tatarstan that aren’t directly impacted by the sanctions. It is necessary to keep working, keep moving. There is a financing system signed by the Russian Direct Investment Fund and an Italian public fund. Within this agreement, up to €300 million can be used to develop a joint work on the Russian territory, particularly in Tatarstan.

“Who pays for the power transition”

In one of your speeches, you said that the climate agenda had a greater influence on the relationships between Russia and Europe, that precisely this theme would set the development vector in the next decades and become an indicator of how big our countries’ aim for bilateral cooperation is. How do you evaluate this cooperation today?

This theme influences any sector of life. Over 190 countries (here the number varies from 192 to 197) signed the Paris agreement obliging them to gradually reduce greenhouse emissions. This can be achieved through certain financial stimuli, subsidies, modernisation of the industrial infrastructure. I think Italy and Russia and mainly Europe and Russia will play an important role in this process.

Russia is the main energy supplier in Europe. Also, there is a steady tendency for the development of renewable energy sources in Europe. The share of renewable energy sources in Europe is already 38% on average.

Russia understands its obligations to reach carbon neutrality by 2060. In Europe, this task must be performed by 2050. This process is important not only for our and the next generations. But it is also important because competitiveness rises through these processes, investments, higher energy efficiency.

Who pays for the power transition is the main question. Here, some balance between the state and private businesses, a compromise is needed

The Russian government recently adopted a socio-economic development strategy with a low amount of greenhouse emissions through 2050. But significant investments are needed for the environmental transformation of the industry, and it is the key issue for businesses. Most large companies fairly note that the state assumes the climate-related obligations, while enterprises have to invest in modernisation. What do you think is the solution to the problem?

Who pays for the power transition is the main question. Here, some balance between the state and private business, a compromise is needed. Yes, on the one hand, СО₂ emissions into the atmosphere reduce. On the other hand, this costs money not only because it is necessary to raise energy efficiency but also switch to another operating system.

I will put an example of solar panels. In the last 10 years, they have cheapened more than three times and gradually became affordable.

It is hard to imagine how private businesses will assume such a risk and responsibility without the state, subsidies. But the greater economic attractiveness and higher profitability via subsidies make this process real. And it is the future and a new way of electrical energy generation.

The carbon footprint in the EU has decreased by 20% since 2000. At the same, the European countries’ GDP has doubled since then. Do you think such an effect is possible in Russia? And what should be done for this?

GDP in Europe, indeed, has gone up, while greenhouse emissions have decreased. In Russia, unfortunately, emissions even have increased. This happens because the legislation wasn’t yet ready. By 2023-2025, it will be ready, and the first surveys will take place.

Today 40% of the technologies that will be necessary to reach carbon neutrality don’t yet exist. But they will appear by 2050-2060. And this 40% could become a site in Tatarstan

After the introduction of restrictions for a gradual cut in emissions, certain subsidies will be needed. We started monitoring this in Europe in 1997. I don’t doubt that this will happen in Russia, including in Tatarstan where petrochemistry is very powerful. Today 40% of the technologies that will be necessary to reach carbon neutrality don’t yet exist. But they will appear by 2050-2060. And this 40% could become a site in Tatarstan — developments of joint ventures to make these technologies that are necessary to cut СО₂ emissions.