FOREIGN INVESTMENT IN RUSSIA

General trends A significant rise in investment activity of enterprises and organizations High world prices for energy products Unchanged branch structure of investment Own funds of enterprises remained the main source of investment financing Stable macroeconomic situation and on-going economic growth created conditions for attracting foreign investors

General trends

POTENTIAL ADVANATAGES: VAST COUNTRY, STRETCHING ACROSS EUROPE AND ASIA SPECTACULAR WEALTH IN THE FORM OF EXPLOITABLE NATURAL RESOURCES LARGE, SKILLED WORKFORCE 140 MLN CONSUMERS WITH “ENDLESS” AND DIVERSIFIED NEEDS MARKET SYSTEM ORIENTATION

FOREIGN INVESTORS INTERESTS 1998 “SCHOCK” QUICK ECONOMIC REBOUNDING (4%) HIGH OIL PRICES RELATIVE POLITICAL STABILITY UNDER PRESIDENT PUTIN MARKET ECONOMY STATUS

Overview The total sum USD 23.4 bn (2005 – USD16.5 bn) Three categories: FDI Portfolio Other Other investment -50%

Foreign investment

Accumulated FI 2000 Jan 2003 Jan 2004 Jan 2005 Jan 2006 July 2006 Total100 Direct40,447,745,844,144,548,1 Portfolio1,33,42,51,91,71,8 Other58,349,251,75453,850,1

LEVEL OF FDI ON PER CAPITA BASIS (2003) Hungary$221 Czech Rep.$118 Poland$84 RUSSIA$15

CUMMULATIVE FDI $18 BLN 5% OF DOMESTIC FIXED CAPITAL Comparing: China in $46 billion USA in 2001 – more than $200 billion

DISRTRIBUTION OF INVESTMENT FLOWS (%)

Geographical structure of FDI

Geographical structure of FDI (%) Germany18.3 USA15.4 Cyprus 13.2 UK10.6 France 9.7 The Netherlands6.8 Italy4.2 Other21.8

TOP TEN INVESTOR SATES

Total100Total100Total100 Luxemburg20,8Luxemburg25,8UK17,1 UK17,2Netherlands16,6Netherlands16,3 Cyprus13,5UK16Cyprus10,5 Netherlands12,6Cyprus9,5France7,1 France5,8Germany5,6India6,8 USA4,6Switzerland3,8Germany5,7 Germany4,3USA2,9Luxemburg5,7 Switzerland3,8France2,7USA3,3 Austria2Virgin Isles (UK)2,3 Virgin Isles (UK)2,4 Virgin Isles (UK)2Bahamas1,4Japan1,4

Share of total Russian investment abroad: Belarus16,1 Iran15,5 Cyprus12,6 Netherlands12,1 Liberia6,3 Moldova4,8 Armenia3,6 Virgin Islands3,3 USA2,6 Germany2

REGIONAL DISTRIBUTION OF FOREIGN INVESTMENT 10 main regions (%)

LEGISLATION IN FORCE More 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 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 enterprises (Civil Code) Full partnership Limited partnership Limited Liability Company Company with additional liability Joint Stock Company

Foreign Investment may be set 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 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: 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: 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 way 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 investment is based on the following 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 Russia Special 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 zones Special government regulations on each zone As a result: no legal base

Kaliningrad Special Economic Zone Legislation 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 Customs Documents

Production Sharing Agreements (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.