FOREIGN INVESTMENT IN FOREIGN INVESTMENT IN RUSSIARUSSIA

General trendsGeneral trendsA significant rise in investment activity of

enterprises and organizationsHigh world prices for energy productsUnchanged branch structure of investmentOwn funds of enterprises remained the main

source of investment financingStable macroeconomic situation and on-going

economic growth created conditions for attracting foreign investors

General trendsGeneral trends

POTENTIAL POTENTIAL ADVANATAGES:ADVANATAGES:

VAST COUNTRY, STRETCHING ACROSS EUROPE AND ASIA

SPECTACULAR WEALTH IN THE FORM OF EXPLOITABLE NATURAL RESOURCES

LARGE, SKILLED WORKFORCE140 MLN CONSUMERS WITH “ENDLESS”

AND DIVERSIFIED NEEDSMARKET SYSTEM ORIENTATION

FOREIGN INVESTORS INTERESTSFOREIGN INVESTORS INTERESTS1998 “SCHOCK”QUICK ECONOMIC REBOUNDING

(4%)HIGH OIL PRICESRELATIVE POLITICAL STABILITY

UNDER PRESIDENT PUTINMARKET ECONOMY STATUS

OverviewOverviewThe total sum USD 23.4 bn (2005 – USD16.5

bn)Three categories:

FDI

Portfolio

OtherOther investment -50%

Foreign investmentForeign investment

0

10

20

30

40

50

60

70

80

90

1994 1997 2004

FDI

Portfolioinvestment

Other

Accumulated FIAccumulated FI

  2000Jan2003

Jan2004

Jan2005

Jan2006

July2006

Total 100 100 100 100 100 100

Direct 40,4 47,7 45,8 44,1 44,5 48,1

Portfolio 1,3 3,4 2,5 1,9 1,7 1,8

Other 58,3 49,2 51,7 54 53,8 50,1

LEVEL OF FDI ON PER CAPITA LEVEL OF FDI ON PER CAPITA BASIS (2003)BASIS (2003)

Hungary $221

Czech Rep. $118

Poland $84

RUSSIA $15

CUMMULATIVE FDICUMMULATIVE FDI

$18 BLN5% OF DOMESTIC FIXED

CAPITAL

Comparing:China in 2000 - $46 billionUSA in 2001 – more than $200 billion

DISRTRIBUTION OF INVESTMENT DISRTRIBUTION OF INVESTMENT FLOWS (%)FLOWS (%)

Industry 44,2energy 11,6chemical 1,8machinery 4,1timber and cellulose 2,5agriculture 0,2construction 1,5communications 4,4commercial activities 9,5transport 4,5finance, banking, insurance 10,2trade and services 25,3

Geographical structure of FDIGeographical structure of FDI

13,5

14

14,5

15

15,5

16

16,5

17

17,5

Germany USA Cyprus

Geographical structure of FDI Geographical structure of FDI (%)(%)

Germany 18.3

USA 15.4

Cyprus  13.2

UK 10.6 

France  9.7

The Netherlands 6.8 

Italy 4.2

Other 21.8 

TOP TEN INVESTOR SATESTOP TEN INVESTOR SATES№ Total 100% № Total 100% № Total 100%

1 Germany 20.2% 1 GB 15.6% 1 Luxembourg 20.8%2 Cyprus 11.8% 2 Germany 14.5% 2 GB 1.2%3 GB 11.5% 3 Cyprus 14.2% 3 Cyprus 13.5%4 Zwitzerland 6.8% 4 France 12.5% 4 The Netherlands 12.6%5 Virgin Irlands 6.6% 5 Luxembourg 7.5% 5 France 5.8%6 Luxemburg 6.4% 6 The Netherlands 5.9% 6 USA 4.6%7 Frnce 6.0% 7 Virgin Islands 4.9% 7 Germany 4.3%8 The Netherlnds 5.9% 8 USA 3.8% 8 Switzerland 3.8%9 USA 5.7% 9 Switzerland 3.6% 9 Austria 2.0%

10 Finland 3.0% 10 Japan 3.4% 10 Virgin Islands 2.0%

20032002 2004

TOP TEN INVESTOR SATESTOP TEN INVESTOR SATES2004 2005 2006

Total 100 Total 100 Total 100

Luxemburg 20,8 Luxemburg 25,8 UK 17,1

UK 17,2 Netherlands 16,6 Netherlands 16,3

Cyprus 13,5 UK 16 Cyprus 10,5

Netherlands 12,6 Cyprus 9,5 France 7,1

France 5,8 Germany 5,6 India 6,8

USA 4,6 Switzerland 3,8 Germany 5,7

Germany 4,3 USA 2,9 Luxemburg 5,7

Switzerland 3,8 France 2,7 USA 3,3

Austria 2Virgin Isles

(UK) 2,3Virgin Isles

(UK) 2,4

Virgin Isles (UK) 2 Bahamas 1,4 Japan 1,4

Share of total Russian investment abroad:Share of total Russian investment abroad: Belarus 16,1

Iran 15,5

Cyprus 12,6

Netherlands 12,1

Liberia 6,3

Moldova 4,8

Armenia 3,6

Virgin Islands 3,3

USA 2,6

Germany 2

REGIONAL DISTRIBUTION OF REGIONAL DISTRIBUTION OF FOREIGN INVESTMENTFOREIGN INVESTMENT

10 main regions (%)10 main regions (%)

52%

14%

8%

5%5%

4%4% 4% 2%2%

Moscow

Omsk Region

Sverdlovsk Region

St.Petersburg

Chelyabinsk Region

Sakhalin

Moscow Region

Tatarstan

Tyumen Region

Krasnoyarsk Region

LEGISLATION IN FORCELEGISLATION IN FORCEMore than 60 normative documents:

legislative acts on general and special issues of investment activity

The key documents are Federal laws «About foreign investments in the Russian Federation» and «About investment activities in the Russian Federation, accomplished in the form of capital investments» (the latter inured on December 22, 1999).

They include forms and methods of state regulation of investment activities, national regulations for foreign investors, legal and economical grounds of investments in Russia.

Federal law «About agreements on share production» Federal law «About hypothetic (mortgage)» and «About

leasing».

Foreign investors:Foreign investors:

Foreign legal persons; Foreign citizens, including stateless

persons; Russian citizens permanently residing

abroad who are registered in their country of residence to engage in commerce;

Foreign states; International organizations

Legal forms of enterprisesLegal forms of enterprises(Civil Code)(Civil Code)

Full partnershipLimited partnershipLimited Liability CompanyCompany with additional liabilityJoint Stock Company

Foreign Investment may be set Foreign Investment may be set as:as:

Enterprises with foreign equity participation (joint ventures), as well as their subsidiaries and branches;

Enterprises, wholly owned by foreign investor, as well as their subsidiaries and branches;

Branches of foreign legal entities

Restrictions on Foreign InvestmentRestrictions on Foreign Investment Licensing of certain activities: Banking Insurance commodity and stock exchanges Investment companies and investment funds, investment consulting Securities transactions Construction activities Use of natural resources, etc. Sectors restricted by Law: Banking Insurance Communications Limitations in respect of foreign investment by international

agreements to which RF is a part Environmental Regulations

GUARANTIES:GUARANTIES: of provision of foreign investors and taking measures on compensation of their damages and losses in case of nationalization and collisions, accompanied by extraordinary circumstances,

to a foreign investor of free use of his income and gain on the Russian territory,

of unhindered transfer of his gains in foreign currency out of the Russian boundaries,

of reimbursement of damage in case of confiscation and requisition of property, and also in a situation of wrongful acts of state organizations, bodies of local authorities or officials,

of equal protection of the rights, interests and property of foreign investors realized in the form of capital investments, irrespective of patterns of ownership.

The intergovernmental agreements:The intergovernmental agreements:

1. About encouragement and mutual protection of investments - are signed by Russia with 52 countries.

2. On prevention of double taxation - 80 agreements are concluded .

Russia is overcoming hindrances on its Russia is overcoming hindrances on its way to investmentway to investment::

1. Inability of Russian authorities to conduct tax reform.

2. The laws, which do not work.3. Tri-unity – the organized crime, economic crimes

and corruption.

In other words, for today, the problems of investment climate in Russia are characterized not as much as before by legal difficulties, but they exist mostly due to certain difficulties of laws application. And there also are psychological problems.

The plan for the attraction of foreign The plan for the attraction of foreign investment is based on the following investment is based on the following

aims:aims: Realizing Russia's scientific and technical potential, particularly at converted enterprises in the military-industrial sector;

Promoting Russian goods and technology in the foreign market;

Promoting the expansion and diversification of export potential and the development of import-substituting production in certain sectors;

Promoting the flow of capital into regions with surplus labor resources and regions with rich natural resources to accelerate their development;

Creating new jobs and bringing in advanced forms of production organization;

Promoting the development of the production infrastructure.

Special Economic Zones in RussiaSpecial Economic Zones in Russia

Favorable Investment Climate as a Main Condition

for Accelerated Development of the Regional Economy

Mentioned by the first law on foreign investment

Great plans: 11 zonesSpecial government regulations on each zoneAs a result: no legal base

Kaliningrad Special Economic Kaliningrad Special Economic ZoneZoneLegislation in force:

1. THE RUSSIAN FEDERATION FEDERAL STATUTE “On the Special Economic Zone in the Kaliningrad Region” Adopted by the State Duma on November 15, 1995

The special economic zone in the Kaliningrad Region (hereinafter referred to as the Special Economic Zone) shall be established within the limits of the whole territory of this Region, excluding the territories of objects having defensive and strategic importance for the Russian Federation, militarу bases, militarу units, defence industry installations, as well as oil-and-gas production projects of the extracting industries on the continental shelf of the Russian Federation and in the exclusive economic zone of the Russian Federation.

2. AGREEMENT “On delimitating the matters of control and powers between the bodies of state authority of the Russian Federation and the bodies of state authority of the Kaliningrad Region

3. Government Directives from 1998 and 2000

4. Customs Documents

Production Sharing AgreementsProduction Sharing Agreements(1995, 1997, 2003)(1995, 1997, 2003)

Progress towards introducing satisfactory production sharing legislation for Russia continues to be painfully slow;

still a wide gulf between government and politicians;

the lack of clarity about whether or not we need PSAs ;

a PSA is a special economic mechanism which should have its own substantial taxation specifics.