How to Capitalize on Volcanoes

Alexei Chekunkov, CEO of the Far East and Arctic Region Development Fund, telling about Iceland’s experience that may prove useful for Russia.

In 2019, Vladivostok made it to TOP-3 Russian cities most popular with foreign tourists, which is an obvious accomplishment on the part of the macroregion’s capital city. Introduction of electronic visas in the region was an important driver of the tourist flow. However, despite the positive trend, the Russian Far East is little visible on the global tourist map thus far. The Russian Far East attracts 120 foreign tourists per one thousand residents every year —this is quite modest as compared to foreign competitors. For instance, the number of tourists per resident attracted by Iceland is 55 times as high. 

Iceland has just as many things in common with Yakutia, Kamchatka, and Murmansk as with Japan, Qatar, and Singapore. Today, this polar volcanic island with a population of 360,000 situated at the same latitude as Chukotka is among the most well-to-do states in the world: according to the World Bank, the nominal GDP per capita amounted to $73,100 in 2018 (12th place in the world). Should we compare Iceland to the 11 regions of the Russian Far East, it would rank sixth in terms of population (between Sakhalin and Kamchatka), eighth in terms of area (between the Primorye Territory and Sakhalin), and first in terms of economic development with a gross product twice as high as that of Sakhalin: its gross product per capita is 9 times as high as the average for the Far Eastern Federal District. 

Minding that just a couple generations back this was a poor country of fishermen and peasants, it would be interesting to take a closer look at the factors of Iceland’s success that could work in the northern and far-eastern regions of Russia.

Hub and Business

Olafur Grimsson, President of Iceland in 1996–2016, believes that the key to the national success was the student loan program implemented in the 1960s. Every citizen was able to take a 30-year loan to study in any university of the world (Grimsson chose Manchester). As a result, the young Icelanders acquired the skills and competences that were unavailable at home and helped the country fulfil its potential despite the lack of natural resources, except for fish and geysers. 

Similar to the Republic of Korea, Israel, and Singapore, the Icelanders had to use creative approaches when fighting for their place in the global economic sun considering the cards they had on hand. Their position on the shortest route from Europe to America was an important trump card. Iceland managed to get the most out of its transport hub status by launching the industries that account for over two-thirds of its exports: production of aluminum and fertilizers and tourism. Logistics engendered the power engineering complex, industry, and service sector. Despite the impressive hydrogeneration potential, domestic demand was insufficient for the erection of a hydro power plant. The Icelanders invited foreign energy consumers and offered flexible rates pegged to the market price of aluminum to producers. The country learned how to export the power of its rivers as value added of energy-intensive products manufactured from imported raw materials. Today, aluminum and fertilizers account for 20% of exports and the capacities of hydro power plants have reached 2 GW. 

Iceland’s economy is quite business-oriented. In the early 1990s, the government implemented market reforms by reducing the taxes (the income tax rate went down from 48% to 18%) and minimizing the public sector. The government chose to keep only three major state-owned companies: the alcohol and tobacco monopoly, TV and radio company, and a bank. The economy made a full transition to the market mechanisms and the government chose to focus on human capital development. Business makes market decisions by allocating capital to efficient projects, attracting customers, and pushing economic development forward. The national priorities become obvious if we look at the public expenditure structure: Iceland spends 17% of its budget on education (Russia — 4%, China — 15%), 19% on public health (Russia — 4%, China — 7%), and 7% on culture (Russia — 1%, China — 2%). The island does not spend a lot on security and defense (Iceland — 3%, Russia — 29%, China — 17%). 

Obviously, a country of a size of Yakutsk has fewer concerns than a country on the UN Security Council. At that, the quality of public administration is not flawless — just recall the story of Iceland’s bankruptcy during the 2008 crisis. The country follows Chinese philosopher Lao Tzu’s principle: “Governing a nation is like cooking a fish. Too much handling will spoil it”. 

Exporting Experiences

Export of experiences has recently turned into the most profitable and booming type of exports worldwide. Iceland managed to become a powerful magnet for tourists. The tourist inflow is now 5 times as high as it used to be in 2010 and has reached 2.5 mln to secure an income of $3 bln per year. The country may be portrayed as a giant Disneyland on the Arctic Circle offering geysers, glaciers, and caves instead of rides and rollercoasters. The success of the tourist sector was facilitated by 39 airfields spread all across the island and almost 500 hotels and hostels. But people are the cornerstone. 

The Icelanders are both hard-working and resourceful. They know how to get the most out of any scarce resource on hand, and at times, such scarce resource proves to be a bonanza. 

Case in point. A geothermal facility used to discharge mineral-rich water to a small water reservoir. A certain doctor noticed the healing effect of bathing in this water on people suffering from skin diseases and founded a company to commercialize this de facto industrial facility. At present, the Blue Lagoon is both an international landmark attracting 1.3 mln tourists every year and a health recreation facility and a beauty business. The company’s income has exceeded EUR 100 mln and affluent customers are offered rooms in a spa hotel at EUR 1,000 per night.

Intelligent PR

Similar to any success story, chance played its part in the development of tourism. In late 2000s, the share of tourism in Iceland’s GDP was still minor (around 3.5%). And in early 2010, this industry came close to a total collapse. All of a sudden, the now-famous Eyjafjallajökull erupted; clouds of ash both cut Iceland off from the rest of the world and paralyzed air traffic in Europe almost completely. 

English PR professionals came to rescue. They designed an ingeniously simple promotion campaign that became known as Inspired by Iceland by inviting its residents to make posts and upload videos about their land in social media. This initiative united the nation. A third of the island’s population, including the Prime Minister, chose to join the campaign as early as on the next day. Inspired, the Icelanders were dancing with passion against the background of the volcanoes and glaciers and swimming in hot springs to Icelandic singer Emiliana Torrini’s song Jungle Drum. Over 2 mln posts about Iceland were published and many of them proved viral. 

A little later, the skies over Iceland cleared, both literally and figuratively. A major increase in the tourist inflow was recorded as early as next year. An investment of about $2 mln in the PR campaign made it possible to earn billions over the next decade. 

I would like to note that to be successful, this kind of media campaigns to promote areas as travel destinations do not necessarily require any calamity like a volcanic eruption. Multiple countries and even individual cities have been promoting their brands for decades using such campaigns as Incredible India, Malaysia Truly Asia, Visit Istanbul, etc. The effect may not be as speedy as in case of Iceland, but the usefulness and income-bearing capacity of such PR investments is unquestionable. 

Sketch for the Russian Far East

The key driver of Iceland’s success — its business community’s enthusiasm that is not constrained by excessive government interference — may not be expediently replicated in Russia due to certain obvious reasons. Considering the extremely high involvement of the government in the economy, sectoral policy is the key to a faster economic growth. Initially, the government supports the selected sectors to temper and foster international-level businessmen (agriculture is a very good example from recent years). 

Iceland’s case teaches the Russian Far East and Arctic Region about the impressive economic contribution that tourism can make. Besides, the volcanoes in Kamchatka are more picturesque than in Iceland and the Far Eastern seas are warmer.

As opposed to the processing of hydrocarbons, it is impossible to launch tourism through the efforts of powerful state-owned majors. Service is a delicate thing that cannot be introduced from above. This implies that business should be provided with an opportunity to make a good offer in response to infinite demand on the part of half a billion tourists travelling from Asia every year. 

I think that in order to fulfil Russia’s tourist potential, this sector should be granted the status of a strategically important industry similar to agriculture treated as a strategic sector for supplying the country with food. The support measures should be just as ambitious. Similar to the popular regimes of Advanced Special Economic Zones and Free Port, all projects in the tourist sector should be entitled to tax exemptions, lower social payments on payroll, and subsidized loan interest. 

I think that any Russian businessman will concur that it is critically important to put a full umbrella of protection against pressure on the part regulatory and law enforcement agencies over every single tourist business in order to solve the problem unknown in Iceland but topping any list of obstacles to economic growth in Russia. Finally, we should attract young foreigners. Cross-cultural exchanges, openness to the world, and the passion of youth work miracles pretty fast.

 

Authored by the CEO of the Far East and Arctic Region Development Fund (VEB.RF Group)

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