gavin stoddart's presentation
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PRECISE. PROVEN. PERFORMANCE.
Making the Russian Far East attractive -
a business perspective
Presentation for the Second International Business Congress
Gavin Stoddart
Vladivostok, 26 September 2013
www.moorestephens.ru
How do we make the Russian Far East more
attractive for foreign investors?
What does the Russian Far East have to
offer?
Size
• 6.2 m sq km (whole of Europe only 9.9m)
• 36% of Russian land is the Far East
Resources
• Hydrocarbons (oil, gas, coal)
• Timber
• Fish
• Gold
• Diamonds
• Other metals
Location
• Close proximity to markets of China, Korea, Japan (China trade to be $200 bn by 2020)
• Nearest part of Russia to the United States
• Ideally placed as a transport hub for Asia-Europe traffic
• Higher than average productivity The average gross regional product (GRP) of regions
in Russia in 2011 was $13,700, while in the Far East it was $17,500.
• Russian Far East did not stop growing even during the crisis.
What are the opportunities for investors?
• Oil and gas – liquification, processing, chemicals
• Fish – canning, processing
• Timber – furniture, wood products, paper
• Metals - production
Processing raw materials
• 90% of manufacturing capacity has been lost since 1990s
• Imports / shipment from Western Russia have replaced local production
• Opportunities to re-establish manufacturing
Replacing manufacturing
capacity
• Export of raw materials
• Land bridge to Europe Transport
What are the opportunities for investors?
• vast territory with minimal agricultural production
• rich marine environment
• the leading eight APEC countries by population import over 100 million tons of grain per year – more than Russia’s entire production
Agriculture / food
processing
•Nature – scenery and local wildlife both of potential interest to tourists both Russian and foreign •Gambling zone
Tourism
Targets set by the Ministry
Natural gas production to grow from 29.7 billion cubic m 2012 to 35.9 billion cubic m in 2016
The output of commercial products in the oil and gas sector to increase from 654 billion roubles in 2012 to 1.1788 trillion roubles in 2016.
Forecast investment in the mining sector to be 246.2 billion roubles
Timber processing volume will grow from 4,860,000 cubic metres in 2012 to 11,088,000 cubic metres in 2016.
Construction and modernisation of fish processing enterprises in Kamchatka and the construction of a logistical complex in Khabarovsk as well as a Far Eastern innovation and technological trade and logistical fishery complex in the Primorye Territory.
What is the current level of foreign
investment in the Far East?
• Various projects in Sakhalin re oil & gas
• New liquid gas project in Vladivostok
• Talk of oil pipeline to South Korea
• Investments to Primorye gambling zone
• Mazda joint venture in Vladivostok
• POSCO planned development of Vanino Port
There are some high profile
inward investments
• 2012 total investment was US$ 13.6 billion
• Only 16% of this was direct investment
• 93% of investment in extractive industries
• 85 % of foreign investment is in just two provinces, Yakutia and Sakhalin (both natural resource centres)
But, in general level of
investment is low and most is in raw materials
So why is the level of foreign investment so low?
Russia’s Far East is in many ways its “Wild West,” where
hardened Cossacks some 350 years ago and young Soviets
with courage and ambition, fewer than a hundred ― came
to exploit Sakha diamonds and Sakhalin oil.
Quote from a recent (June 2013) article in a Korean newspaper
Issues that are of concern to potential
foreign investors in the Russian Far East
Geographical Infrastructure Rule of Law
Economic Informational Business
process and control
Human Resources
Historical / political
Historical / Political
Japanese / Russian territorial dispute
Poor US – Russia relations
Geographical
Perception that the area is remote
Distances between towns in the Far East
Infrastructure
Roads
Rail
Ports
Air
Power
Communications
Financial, including banking
Economic
Size of the local market: - Population 6.3 million (4.4% of Russia’s total) and has decreased by 25% since 1990s
RDP = $104 billion (5.6% of Russia’s total)
Over dependence on exports of unprocessed natural resources (hydrocarbons alone account for 90% of exports from the Far East) mean the economy is not diverse
Size of projects tends to be large which excludes small / medium-size investors
Perception that taxes are too high
Difficulty raising bank loans locally
Rule of law
Unclear tax position
Customs issues
Fear of bribery / corruption
Informational
Hard to get reliable information about local markets
Lack of understanding of local customs / practice
Not knowing how to find a local partner
Lack of transparency in financial accounting
Human resources
Hard to find employees locally with the necessary skills
Hard to persuade skilled employees from Western Russia to move to the Far East
Hard to persuade foreign employees to move to the Russian Far East
Visa / work permit issues for foreign workers and managers
Business process and control
Physical controls
Management decision making processes
Differences in business culture
At what level should these issues be
addressed?
Federal
Project Regional /
local
What can individual businessmen do?
Before seeking investment
Decide what type of foreign investment is best for the intended purpose / understand the requirements
Understand the cost of obtaining investment
Ensure the business has an appropriate corporate structure
Ensure that the business’s tax affairs are in order
• Certainty is more important than the actual level of tax
• Consider asking for a tax inspection
Ensure that you have a clear financial track history
• Ideally IFRS
• Comprehensive
When approaching investors
Prepare a full business plan
Produce a clear business summary / teaser
Present the case for investment in a way that is in tune with the way the potential investor thinks
Once investment has been made
Clear and workable governance structure
• Danger of 50-50
Put appropriate systems in place
• Financial reporting
• Control of assets etc.
• Meeting investor’s norms
What foreign investors need to do and not
do
• Ensure that you understand local requirements regarding finance
• Take time to understand the business that you are financing
• Ensure that you have an appropriate legal structure
• Be prepared to visit
Do
• Act as if Russian laws and tax rules do not apply to you
• Think that Moscow and the Russian Far East are the same
Do not
Conclusions
Conclusions
• Far East has huge investment potential
• Investment is not happening as much or as fast as it should
• Many factors – variously under control of
– Federal Government,
– Regional / local government
– Individual businesses
• Main things government in the region can do to help individual businesses are
– Improve local infrastructure
– Maintain educational standards
– Provide information that promote positive perception of the region
• Much of the responsibility for whether individual investments go ahead and if they do go ahead whether they succeed lies with individual businessmen we cannot blame others
• Individual businesses should
– Prepare properly
– Present a coherent and logical case for investment
– Understand that persuading somebody to invest is only the start of a successful investment