regional inveStMent policy under the iMpact of budget liMitationS and econoMic SanctionS

This article presents the results of research on the impact which budget limitations and economic sanctions have had on regional investment policy External sanctions and sluggish economic growth have affected the social and economic development of the region. Relying on the results of comparative and statistical analysis, the article demonstrates the need for altering the focus of current investment policy from quantitative growth to qualitative enhancement. The article analyses a new trend in the investment policy related to import substitution and the way it is combined with the acceleration of innovative business developments in Sverdlovsk region. The findings and recommendations described in this article can be applied by public authorities of the Russian Federation, by experts in the sphere of regional investment policy and development, and by organisations specializing in investment attraction and collaboration with investors in Russian regions.

all enterprises are involved in innovative undertakings. The country spends four times less on research and development than China, and forty times less than the USA [2, p. 10; 7, p. 10].
According to leading Russian economists, it is necessary to create favourable conditions for economic growth, to build a new growth model based not only on the increases in production factors such as labour and capital, but also in enhancing the effectiveness of their use; that is, in mobilizing every aspect of production [8, p. 25; 15].
It is possible to find solutions to these problems only if we manage to develop an effective economic policy overall, and in its most important components in particular: budget and investment policy at the federal and regional levels.
Apart from the internal impediments, there is a set of measures which are necessary to take so that Russia can be reoriented towards the new markets of the Customs Union countries, and of Asia, Africa, and Latin America.
A competitive economy is essential for the development and entering of new markets. Unfortunately, the pace of development was slow in 2014. The growth factors for the first six months compared with the same period in 2013 are indicated in Table 1 [10], (data source: the Ministry of Economic Affairs of the Russian Federation).
As Table 1 clearly shows, the increase in GDP is 0.7 %, investment decreased by 2.5 %, and consumer prices rose by 1 %. The continuing growth in nominal wages is evident (31,681 rubles against 28,992 rubles) and so also is the money supply collapse (M2) and the double reduction in international reserves.
Given this situation, the Ministry of Finance has been forced to cut spending on the advancement of science, infrastructure and innovations in the 2015-2017 budget forecast. At the same time expenditures in the societal and military spheres are increasing, while the budget deficit remains moderate. All these problems are of serious concern. The reduction of the federal budget was observed in four different sectors in the first quarter of 2014, in comparison with January -April of 2013: -Education, 0.2 % of GDP; -Healthcare, 0.2 % of GDP; -Social policy, 1.1 % of GDP; -Physical culture and sport, 0.04 % of GDP.
The government of the Russian Federation offers three methods of budget implementation: drastic cuts in spending, improvement of the taxation system and increases in the budget deficit. The most heated debates raged over the budget rule: on 18 September 2014 the Russian government passed a draft mid-term budget. But the challenges the country faces are changing the situation so dramatically that the draft budget proposed in summer does not correspond to forecasts of economic growth rates. This extreme measure was a 10 % budget reduction against the planned budget, which equaled 1.5 trillion rubles. Inefficient expenditures are the first to fall under sequestration [3].
The federal budget deficit for 2015-2017 does not go beyond the current budget ruling and is 0.6 % of GDP for each year. Federal budget revenues in 2015 will amount to 20.4 % of GDP and reduce to 18.2 % of GDP in 2017; the federal budget expenditures in 2015 are assumed to be at the level of 21.0 % of GDP and will drop to 18.8 % by the end of 2017. This version of tax and budget policy prioritizes institutional reforms in the medium term [14, p. 10].
The results of the first nine months in 2014 prove that the economic sectors and investment sectors undergo considerable transformations, affecting the situation in general. These facts are also confirmed by the analysts of the 'Development Center' Institute of the Higher School of Economics. They believe that, according to the September macroindices, stagnation of production continues, investment is dropping and the growth rate of trade turnover is low. These experts also pointed out that while manufacturing companies were adjusting to sanctions, inflation rates accelerated (up to 8 % from September to September) and the real value of average wages fell by 0.3 % at the end of the third quarter year-on-year. This has happened for the first time after the crisis in 2008-2009. [5, p. 10] According to calculations of the Russian Ministry of Economic Development, in the short-term and mid-term Russia has sufficient funds to compensate for the major part of the possible losses caused by sanctions; but if tensions escalate, in 2014 however it could lead to a decline in GDP of up to 0.5 %.
The Russian Ministry of Economic Development holds a moderately optimistic view, appealing to the following data ( Table 2) [12].
The object of our research is regional investment policy under severe budget constraints and multiplying economic sanctions, as exemplified by the case of Sverdlovsk region.
The peculiarity of the Middle Urals is that this region has enough resources to cope with these internal and external challenges. Proper usage of these resources demands a scientifically substantiated and effective social, economic and investment policy. These policies should be targeted at achieving precisely-defined and specified goals in the short term, mid-term and long term. To make the right choices it is necessary to determine the right priorities.
The impact analysis of the key social and economic indicators in Sverdlovsk region in 2010-2013, and in Russia overall, demonstrates the extent of stagnation in social and economic growth.  In the last five years the production index in Sverdlovsk region fell from 117.3 % in 2010 to 101.9 % in 2013. A similar trend can be observed in the investment dynamics of fixed capital: from 130.4 % in 2010 to 96.5 % in 2013 (Table 3) [6,13].
The first half of 2014 saw continuing negative processes in the social and economic development of Sverdlovsk region. For instance, the trade turnover in the manufacturing sector was 96.3 % of the same period in 2013; retail trade turnover was 98.3 %, transportation of goods was 94.1 %. At the same time there was an increase in nominal wages, 108.6 %.
The investment policy in the previous five years (2010-2014) emphasised the quantitative investment growth of Sverdlovsk region. In 2012, however, the investment growth stopped and the index of investment in fixed capital began to decline (Table 4) [6,13].
Changes in the economic situation of Russia and of its constituent regions requires an effective regional investment policy which must meet the challenges emanating from the reduction in the volume of federal transfers and the decrease of enterprises` own funds due to recession and decreases in profits. Table 5 shows the dynamics of transfers from the federal budget in the last five years [4]. In total, regional transfers in Russia have fallen by approximately one half, while in Sverdlosvk region the amount of reduction has been two-and-a-half times.
The central budget support will be to a greater extent contingent upon sustained, favourable business conditions which the regions manage to create. Finding the optimal structure of regional investment sources under budget constraints is one of the priorities of any sustainable innovation policy.
Enterprises' internal funds remain as the main source of investment in the fixed capital: although their share in the general investment structure is falling gradually, they still make up one half of the total volume.
The share of the budget money is reducing, especially in terms of federal budget transfers (Table 6). [13].
The state and businesses are the key partners in investment policy implementation, which explains the changes in the investment structure as far as types of property ownership are concerned. The main trend here is the reduction in the share of state property from 33.7 % in 2000 to 9.3 % in 2013. The r-Economy 1/2015 www.r-economy.ru  same period also saw the share of private property almost double from 24.7 % in 2000 to 54.9 % in 2013. (Table 7). [13]. Recently many steps have been taken to enhance entrepreneurship in the Sverdlovsk region. A legislative package was developed in order to support investors undertaking priority investment r-Economy 1/2015 www.r-economy.ru projects within the strategic plan for the development of the Sverdlovsk region. The participants in these projects are granted tax rebates. At the same time, investment in the field of the 'knowledge economy' is merely 1.3 % in research and development, and only 1.8 % in education. Taking this into consideration, it is hardly possible to speak of any innovation development in the regional economy (Table 8). [6].
The effect which the investment has on any enterprise from any industry is determined by the specific structure of investment in fixed capital.
In any innovation economy the biggest effect is achieved by means of investment in the active part of fixed capital, mainly in machinery, equipment, and research and development of new technologies. In Sverdlovsk region only щту half of all investment is spent on these areas, while almost 40 % is spent on buildings (excluding residential buildings) and construction, which is on the predominantly oldindustrial heritage of the region (Table 9). [6].
The main targets and areas of innovation policy in the region should be clearly defined, especially considering the current challenges: that is, serious budget restrictions; economic sanctions; and the need to deal promptly with the problem of import substitution. Therefore, the priority is to identify the major growth points for investment.
The most important condition for investment efficiency is the strict timeline, which requires consolidated efforts from the regional administration and businesses. In all cases, it is necessary to consider the level of societal and economic development in the region, and its industrial structure.
The complicated societal and economic situation in modern Russia, and the intensification of economic sanctions, brought to the agenda the problem of import substitution. This implies solving the problem of funding, especially in agriculture and industry.
In the Middle Urals over 80 % of all industrial production comes from three branches: metallurgy, mechanical engineering (primarily heavy engineering) and the chemical industry.
Thus, the most attractive spheres for import substitution in Sverdlovsk region are: railway engineering; oil and gas equipment production; machinery construction; microelectronics; and the forest industry. This is due to the existing industrial and technological facilities, the potential of cooperative interaction and the stability of market demand. In these fields the government of the Sverdlovsk region has defined growth points and selected enterprises for further development and high-priority funding. For each of them, government experts identified their growth opportunities, the share of imported spare parts and components to be substituted, and the tentative time-limits for completing import substitution.
The selected companies include, for example, the joint stock company "Uralskye Lokomotivy", which is undertaking a project for production expansion. It provides orders for more than 100 Russian radio electronics enterprises; sector-based research; conducts mechanical engineering operations; and carries out metal-rolling production. It is also planning to substitute Ukrainian engines and spare r-Economy 1/2015 www.r-economy.ru parts for "Lastochka" electric trains. At present, the level of localization is 62 %; by the end of 2017 it will be 80 %, so that more than one half of all spare parts will be produced in the Sverdlovsk region.
There are 56 enterprises engaged in the production of oil and gas equipment in the Sverdlovsk region. These embrace practically the whole range of production. Among their clients are the companies: "Gazprom Burenie", "Rosneft", "Surgutneftegaz"; and countries such as Belarus, Turkmenistan, and Azerbaijan.
According to the results of the expert committee's appraisal, the share of foreign spare parts is about 40 % of the cost of the final product.
For machine-tool manufacturing the most promising sphere is the assembly of horizontal boring mills, and bridge-type and turning machine centres with programmed numerical control. The prospective import substitution level for spare sparts is 72 %. It is also planned to build a full-scale plant in the region.
The general recommendation to the regional government is to conduct a theoretically-substantiated integrated questionnaire survey among enterprises. This would enable specialists to obtain comparable data and to develop more complete and reliable guidelines for the active participants in the process.
The next step was taken on 2 October, 2014 by the Ministry of Industry and Science of the Sverdlovsk region, when it prepared a draft sub-program "Cooperation Development and Import Substitution in the Industries of Sverdlovsk Region", as a part of the state program "Development of Industry and Science on the Territory of the Sverdlovsk Region before 2020" [11].
Its main objective is to promote a long-term strategy of regional industrial development by improving the region's performance in the Russian and international markets, and by enhancing interregional cooperation and import substitution in the leading branches of the industries of the Sverdlovsk region.
This requires the following measures: -to expand the interregional and intra-regional production interactions of industrial enterprises of the Sverdlovsk region; -to support the establishment and development of enterprises specializing in import substitution production in the industrial sectors of the Sverdlovsk region; -to raise awareness of the productive capacities of regional industrial enterprises to enhance cooperation and import substitution in the region.
The period for the subprogram implementation is from 2015 to 2020. The subprogram determines the level of cooperation and import substitution capabilities in each of the leading industrial complexes of the region. It also describes the financial and nonfinancial instruments, the organizational measures, and the necessary budgetary funds.
The draft subprogram also specifies all the available funding sources and the total volume of funding for the development of import substitution over a five-year period (28; 3 billion rubles, 86 % of which is extra-budgetary funds). The funding breakdown, by sources and years, is provided.
To take the next step it will be reasonable to provide an overall estimate of the costs of import substitution and to find the sources of funding. This task requires every serious effort since it involves an analysis of the internal and external situation; medium-term forecasts for the development of enterprises; an analysis of changes in cooperation ties and potential markets; a study of price trends, local and international tariffs; product cost calculation; and so on.
In the process of import substitution, regional industrial enterprises will be working in three directions: for themselves; for their cooperation partners; and by completing orders from other Russian regions.
This research determines the following priority areas for an investment policy of Russian regions and provides some relevant guidelines: 1) At present we observe a downward trend in the sources of investment such as federal investment, transfers, regional budget expenditures, enterprises' internal funds and foreign investment. At the same time there is a growing need for investment to modernize the economy and organize import substitution. Under such circumstances the main target of investment policy is to cut back on expenditure and to maximize funding efficiency at all stages.
2) In the complex process of import substitution, it is essential to invest only if import substitution can be combined with the diversification and acceleration of innovative development. This is particularly important for the Sverdlovsk region, with its ageing industrial background.
3) To create the industrial structure of investment development it is vital to develop the 'real' economic sector and the knowledge economy; this is especially significant for the Sverdlovsk region, one of Russia's ten leaders in innovative development.
4) Investment distribution should be based on the 'points of economic growth', especially when they are of regional or federal significance. In the Sverdlovsk region such a 'point of growth' is the special economic zone, 'Titanium Valley'. 5) For each region it is essential to develop specific measures to realize the priority areas and provide close control over the investment process in order to prevent or minimize corruption.