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U.S. Department of State

Diplomacy in Action

2010 Investment Climate Statement - Russia


2010 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
March 2010
Report
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Overview of Foreign Climate Investment

The investment climate in Russia has strengthened in recent years and presents many promising investment opportunities. Russia recognizes foreign investment’s critical role in the country’s economic development and has encouraged foreign investment by establishing special economic zones, high-technology parks, special tourist regions, and export zones on both federal and regional levels. In July 2009, for example, Russia opened four gambling-oriented special economic zones. Capital account liberalization assisted in raising net inflows to Russia from $40 billion in 2006 to $82 billion in 2007. However, Russia was one of the countries most adversely affected by the financial crisis starting in 2008, with 2009 GDP dropping by 8.7%. From 2004-2008, foreign direct investment (FDI) inflows picked up substantially, rising to over $62 billion in 2008. But because of the economic crisis, FDI inflows decreased from $40 billion during the first half of 2008 to $16 billion in the same period of 2009. The crisis also caused a net capital outflow of $130 billion in 2008, and for the first three quarters of 2009 Russia had a net outflow of over $60 billion. In the last quarter of 2009 the flow reversed direction with net capital outflow for the year estimated at $42 billion.

The investment climate has been undermined by the slow pace of structural reforms and the government’s ever-increasing role in certain sectors of the economy, notably gas and energy. Other government actions have had adverse effects on the investment climate, such as the apparently politically-motivated investigations into businesses (e.g., the TNK-BP oil and gas joint venture, the Mechel coal company, and the investment fund Hermitage Capital Management) and a reluctance to allow foreign investors de facto unfettered access. Rule of law, corporate governance, transparency, and respect for property rights, including intellectual property rights, are gradually improving but remain key concerns for foreign investors. Possible liabilities associated with existing operations (especially environmental cleanup) and inadequate bankruptcy procedures are also factors in the decision to invest. In short, while there is strong interest, many U.S. companies remain cautious about investing in Russia.

There is a legal structure in place to support foreign investors, although the laws are not always enforced in practice. The 1991 Investment Code guarantees foreign investors rights equal to those of Russian investors, although some industries have limits on foreign ownership (discussed below). The 1999 Law on Foreign Investment also affirms this principle of equal treatment. Unfortunately, corruption plays a sizeable role in the judicial system, and the sanctity of contracts is not always upheld (see the Dispute Settlement section).

Numerous laws have been amended in the past decade that serve to increase investment opportunities in specific industries. In 2003, Russia enacted several amendments to the insurance law that liberalized the market, effectively allowing any foreign insurer to set up life insurance operations in Russia as long as the company has an office in the EU via which the investment was made. Since 2005, Russia has introduced several pieces of legislation that have offered reduced customs and tariffs rates on automobile parts to encourage foreign automobile corporations to begin manufacturing their products in Russia. In the spring of 2005, then-president Putin announced four National Priority Projects in health, education, housing, and agriculture. These projects, which aim to tackle some of Russia’s most pressing social and economic needs, provide investment opportunities in sectors such as medical equipment manufacturing, agricultural equipment sales, and housing construction. The 2009 budget for the projects was RUR 450 billion ($15 billion), notably more than the 2008 budget of RUR 330 billion ($11 billion).

Russian government officials have repeatedly stressed the need for foreign investment and technology transfer in the manufacturing sector to facilitate Russia’s successful economic recovery after the financial crisis. At the same time, the government adopted new policies to more effectively control foreign investments in so-called “strategic sectors” of the Russian economy. In May 2008, then-president Putin signed into law the “Strategic Sectors Bill,” which grandfathered already completed acquisitions, specifies 42 activities that have strategic significance for national defense and state security, and establishes an approval process for foreign investment in these strategic areas. According to the law, investors wishing to increase or gain ownership above certain thresholds need to seek prior approval from a government commission headed by Russia’s Prime Minister. With foreign investment down in 2009, this commission has not been active enough yet to get a good sense of its function. But foreign investors fear that the approval process might be non-transparent and burdensome, and that the law could be used to restrict foreign investors seeking to invest in Russia’s strategic sectors.

Russia’s government also tends to favor direct cash injections and joint ventures with local entities, especially state-owned entities, and particularly in Russia’s “strategic sectors.” The energy sector is the most prominent of these; the government continues to tighten its grip and typically limits foreign companies to minority stakes (20 to 25 percent) in larger projects. In December 2008, a resolution was passed that increased the duty on most imported vehicles from 25% to 30, increased the duty on large off-road mining vehicles from 5% to 20%, and imposed a prohibitive duty on cars older than five years. In February 2009, temporary duties ranging from 5% to 15% were imposed on agricultural and mining vehicles for a period of nine months. These duties were extended for another nine months in November 2009, and are effectively permanent. These moves were perceived as a means of helping local manufacturers weather the financial crisis. Less critical sectors, such as consumer products, are relatively unrestricted.

Between 2003 and 2009, the share of Russia’s private sector in GDP decreased from 70% to 65%, according to the European Bank for Reconstruction and Development. Roughly three quarters of the economy has been privatized to date, although the government continues to hold significant blocks of shares in many privatized enterprises. The economic crisis had an adverse effect on the privatization process. However, the government announced in November 2009 that it plans to privatize at least 14 strategic enterprises, among them Russia’s largest shipping company, Sovcomflot, and multiple ports that handle large amounts of crude oil and assets. In total, Russia’s government expects to receive RUR 77 billion ($2.7 billion) from the privatization of state enterprises in 2010.

Treatment of foreign investment in new privatizations is inconsistent and is likely to remain so. Often, foreign investors participating in Russian privatization sales are confined to limited positions and face problems with minority shareholder rights and corporate governance. Potential foreign investors are advised to work directly and closely with appropriate local, regional, and federal ministries and agencies that exercise ownership and other authority over companies whose shares they may want to acquire.

The following tables include the most recent data from indices measuring the investment and business climate in Russia:

Source: WTI (World Trade Indicators)

Index

Year

Percentile Rank (0-100)

Governance Score (-2.5 to 2.5)

MCC Gov’t Effectiveness

2008

45.0

-0.32

MCC Rule of Law

2008

19.6

-0.91

MCC Control of Corruption

2008

15.5

-0.98

MCC Regulatory Quality

2008

31.4

-0.56

Source: World Bank Doing Business/IFC

Index

Year

Ranking 1 (1-183, 1 best)

Ranking 2 (1-183, 1 best)

World Bank Doing Business

June 2008-May 2009

Ease of Doing Business: 24

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MCC Business Start Up

June 2008-May 2009

Business Start Up: 22

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MCC Land Rights Access

June 2008-May 2009

Dealing with Cost Permits: 27

Registering Property: 11

Source: Other

Index/Ranking

Year

Ranking

TI Corruption Index

2009

Ranking (1-10, 10 best): 2.2 (146/180)

Heritage Economic Freedom

2009

Percentile Rank (0-100): 50.8 (146/179)

MCC Trade Policy (Heritage)

2009

Percentile Rank (0-100): 60.8 (trade freedom)

MCC Natural Resource Mgmt

2009

91.2 (0 - 100, 0 best)

Conversion and Transfer Policies
While the ruble is the only legal tender in Russia, companies and individuals generally face no significant difficulty in obtaining foreign exchange. Finding a bank licensed to conduct foreign currency transactions is not difficult, there are no limitations on inflows or outflows of funds for remittances, and there is generally no delay for remitting investment returns. Nonetheless, investors would be well advised to seek expert advice at the time of an investment.

Currency controls exist on all transactions that require customs clearance, which in Russia applies to both import and export transactions and certain loans. A corporation must open a "deal passport" with the Russian authorized bank through which it will receive and service the transaction or loan. A deal passport is a set of documents that importers and exporters provide to authorized banks. Such documents enable banks, the agents of Russian currency control, to monitor payments in respect of the transaction or loan and to report the corporation’s compliance with currency control regulations to the Central Bank. Russia’s regulations regarding deal passports are described under Instructions of the Central Bank of Russia number 117-I of June 15, 2004.

Only authorized banks may carry out foreign currency transactions. According to currency control laws, the Central Bank retains the right to impose restrictions on the purchase of foreign currency, including the requirement that the transaction be completed through a special account. The Central Bank has eliminated security deposit requirements on foreign exchange purchases.

Expropriation and Compensation
The 1991 Investment Code prohibits the nationalization of foreign investments, except following legislative action and where deemed to be in the national interest. Such nationalizations may be appealed to the courts of the Russian Federation, and the investor must be adequately and promptly compensated.

At the sub-federal level, expropriation has occasionally been a problem, as has local government interference and a lack of enforcement of court rulings protecting investors. The embassy is tracking a small number of cases in which U.S. companies are seeking compensation for the loss of their investment or property due to regional government action or inaction.

Dispute Settlement
Russia has a body of conflicting, overlapping, and rapidly changing laws, decrees and regulations, which has resulted in an ad hoc and unpredictable approach to doing business. Independent dispute resolution in Russia can be difficult to obtain since the judicial system is still developing. Courts are sometimes subject to political pressure. According to numerous reports, corruption in the judicial system is widespread and takes many forms, ranging from bribes of judges and prosecutors to fabrication of evidence. In addition, court decisions are at times not executed. The bailiffs, who are charged with enforcing court judgments, report to the Ministry of Justice rather than the courts. They sometimes fail to enforce those judgments due inter alia to legal restrictions and limited trained personnel.

Many attorneys refer Western clients who have investment or trade disputes in Russia to international arbitration in Stockholm or to courts abroad. A 1997 Russian law allows foreign arbitration awards to be enforced in Russia, even if there is no reciprocal treaty between Russia and the country where the order was issued. Russia is a member of the International Center for the Settlement of Investment Disputes and accepts binding international arbitration. Russia is also a signatory to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. However, enforcement of international arbitral awards still requires action from Russian courts and follow-up by bailiffs, which have yet to become consistently effective enforcers of court judgments.

Commercial disputes between business entities are heard in the arbitrazh court system. That court system has special procedures for the seizure of property before trial such that it cannot be disposed of before the court has heard the claim, as well as for the enforcement of financial awards through the banks. Additionally, the International Commercial Arbitration Court at the Russian Chamber of Commerce and Industry will hear claims if both parties agree to refer disputes there. A similar arbitration court has been established in St. Petersburg. As with international arbitral procedures, the weakness in the Russian arbitration system lies in the enforcement of decisions.

Performance Requirements and Incentives
Performance requirements are not generally imposed by Russian law and are not widely included as part of private contracts in Russia. However, they have appeared in the agreements of large multinational companies investing in natural resources and in production sharing legislation. There are no formal requirements for offsets in foreign investments. Since approval for investments in Russia frequently depends on relationships with government officials and on a firm's demonstration of its commitment to the Russian market, this may result in offsets in practice.

The Russian government requires visas and residence permits for businessmen and investors. Work and residence permits must be renewed periodically -- a cumbersome process. Russia’s visa system for residence and work permits is complicated, and potential investors would be well-advised to consult the State Department and U.S. Embassy websites for the latest information on Russian visas: moscow.usembassy.gov/russian-visas.html and travel.state.gov/travel/cis_pa_tw/cis/cis_1006.html. In some sectors, requirements that a certain percentage of staff be Russian citizens may have a negative impact on foreign investors.

Right to Private Ownership and Establishment
Both foreign and domestic legal entities may establish, purchase, and dispose of businesses in Russia. Investment in some sectors that are regarded as affecting national security, such as natural resources, energy, power, communication, transportation, and defense-related industries, may be limited.

Protection of Property Rights
The Constitution and a 1993 presidential decree give Russian citizens general rights to own, inherit, lease, mortgage, and sell real property. The rights of Russian citizens to own and sell residential, recreational, and garden plots are clearly established, with over 40 million properties of this type under private ownership. Mortgage legislation enacted in 2004 facilitates the process for lenders to evict homeowners who do not stay current in their mortgage payments, which in theory should make mortgage lending (and the housing market) more attractive to lenders and developers. However, foreclosures and evictions by lenders are rarely tested within Russia’s legal system. Mortgage lending is in its initial stages, but its growth, up from an estimated $5.5 billion in outstanding mortgage loans in 2006 to $27 billion as of October 1, 2008, has been stymied by domestic credit conditions. Housing prices and transactions fell sharply in the last quarter of 2008 and into 2009. In late 2008, the GOR established the Agency for Restructuring Mortgage Loans to support homeowners affected by the financial crisis through loan restructuring programs. In November 2009, the GOR approved an extension of Agency programs into 2010. Land ownership rights and limitations for foreign investors are discussed in other sections of this report.

While Russia has made significant advances in improving its intellectual property rights (IPR) protection regime, many challenges remain, including the need for reform of Russia’s IPR legal and regulatory framework, a court system with greater expertise in IPR cases, and greater enforcement and investigative efforts from law enforcement and prosecutorial agencies.

Copyright violations (films, videos, sound recordings, and computer software) remain rampant. Legitimate DVD sales are on the rise, however, thanks in part to cheaper legitimate products, a growing consumer preference for high quality goods, and increased law enforcement action against pirates. The local business and entertainment software industries have also reported declining levels of piracy.

Russia’s IPR regime lacks explicit protection for pharmaceutical test data. An amendment to address this concern is pending Russian government interagency approval.

Russia has acceded to the Universal Copyright Convention, the Paris Convention, the Berne Convention, the Patent Cooperation Treaty, the Geneva Phonogram Convention, and the Madrid Agreement. Topologies of integrated microcircuits are protected by Russian law, whereas computer programs have the same level of protection as literary works. The copyright term is “Life + 70.” As part of its WTO accession process, the Russian government is working to ensure that Part IV of the Civil Code, its new comprehensive IPR legislation that went into effect on January 1, 2008, is consistent with the requirements of the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). Essential amendments, however, have not been approved by the National Assembly (Duma). In 2008, Russia applied to join the World Intellectual Property Rights Organization (WIPO) Copyright Treaty and the Performance and Phonograms Treaty, and ratified the two treaties in early 2009.

Transparency of the Regulatory System
The legal system in Russia remains in a state of flux, with various parts of the government continuing to implement new regulations and decrees on a broad array of topics, including the tax code and requirements of other regulatory and inspection bodies. Negotiations and contracts for commercial transactions, as well as due diligence processes, continue to be complex and protracted. Investors must do careful research to ensure that each contract fully conforms to Russian law. Contracts must likewise seek to protect the foreign partner against contingencies that often arise. Keeping up with legislative changes, presidential decrees, and government resolutions is a challenging task. Uneven implementation of laws creates further complications; various officials, branches of government, and jurisdictions interpret and apply regulations inconsistently and the decisions of one may be overruled or contested by another. As a result, reaching final agreement with local political and economic authorities can be a long and burdensome process. Companies should be prepared to allocate sufficient funds to engage local legal counsel to set up their commercial operations in Russia.

Surveys have shown that many entrepreneurs complain about the complexity of the tax code and requirements of other regulatory and inspection bodies. Well-intentioned small- and medium-sized enterprises (SMEs) often go out of their way to follow the law but are then penalized for making mistakes in documentation. They complain that the tax police make no distinction between overt tax-evaders and inexperienced SMEs who do not fully understand the bookkeeping requirements. Companies often have little recourse other than the courts during tax disputes. While firms have successfully appealed to the courts, tax authorities are often slow to implement judicial decisions. Penalties for non-compliance include confiscation of property and freezing a company's bank accounts. Addressing this problem, a new law will go into effect in 2010 that greatly increases the criminal threshold of tax underpayment, forbids pre-trial detention for tax offences, and allows first-time offenders to escape criminal liability for a tax offence if they pay their arrears during the pre-trial investigation.

Efficient Capital Markets and Portfolio Investment
The Russian banking system remains relatively small, with RUR 4.6 trillion ($159 billion) in aggregate capital as of November 1, 2009. The successful implementation of the Deposit Insurance System in 2004 has proved a critical psychological boon to the banking sector, evidenced by growth in overall deposits. Despite measured progress, the Russian banking system is not yet efficiently performing its basic role of financial intermediary (i.e., taking deposits and lending to business and individuals). Even before the financial crisis, the combined value of the assets of Russia’s top 200 banks was just over $1 trillion, and only a quarter of Russians had any kind of a bank account. In the wake of the financial crisis, Russia’s banking sector remains under stress and may undergo further consolidation in the near to medium term.

Russia’s two main stock exchanges are in Moscow: (1) the Russia Trading System (RTS), and (2) the equity trading floor on the Moscow Interbank Currency Exchange (MICEX). After a precipitous drop in 2008, the benchmark RTS index and the MICEX index climbed approximately 130 percent in 2009. The average daily trading volume is difficult to calculate due to incompatibility between different sources and methodologies. Trading volume is largely dominated by large oil and gas companies such as Gazprom, Rosneft, and Lukoil. Trading activity at Russia’s other exchanges, such as the Moscow Stock Exchange and several regional centers, is low.

The Law on the Securities Market, as amended in 2003, includes definitions of corporate bonds, mutual funds, options, futures, and forwards. Companies offering public shares are required to disclose specific information during the placement process, as well as quarterly. In addition, the law defines the responsibilities of financial consultants who assist companies with stock offerings and holds them liable for the accuracy of the data presented to shareholders.

The corporate bond market is currently the most rapidly and dynamically developing sector in Russia's capital markets. High and increasing demand from enterprises for funds in the absence of an effective bank lending system is the main driver of growth. It is also boosted by weaknesses in other sectors of the capital market: the absence of more attractive ruble-denominated alternative asset classes; low and even negative real interest rates on the secondary government securities market; the absence of speculative opportunities on the currency market; and a significant volume of rubles from oil export earnings. In 2008, the face value of new bond issuances was RUR 660 billion. Estimates place the value of 2009 bond issuances at RUR 890 billion.

Steady development notwithstanding, the corporate bond market suffers several problems. It is still quite narrow, which makes it difficult to provide the necessary level of liquidity for relatively small issues, even if the issuer is a blue-chip company. Another problem is the expense of preparation, including development of each issue's parameters, prospectus registration, underwriting services, etc. A 0.8 percent issuance tax adds to that expense. Another barrier to the growth of the market is a provision of the federal law "On Joint Stock Companies", which requires that the volume of a bond issue not exceed a company's authorized (charter) capital.

In addition to the traditional bond market, in 2008 Russia introduced a law creating “stock exchange bonds,” short term commercial bonds traded on exchanges. Issuances started in earnest in 2009. MICEX reported that by September 1, 2009, there had been 28 stock exchange bond issues worth a total of RUR 69.8 billion placed by 8 issuers.

Hostile takeovers are also common in Russia; however, both foreign and local firms are targeted. Private companies’ defenses to prevent hostile takeovers target all potential hostile takeovers, not just foreign.

Competition from State-Owned Enterprises
Despite large-scale privatizations, the seven existing state-owned enterprises (SOEs) still play a large role in the Russian economy. While private enterprises are technically allowed to compete with SOEs on the same terms and conditions, in practice, the playing field is tilted toward SOEs. SOE holding structures and management arrangements (e.g. state representatives as board members) make it difficult for private enterprises to compete with SOEs. Furthermore, specific legal constructions can result in preferential treatment of SOEs. For example, state corporations have no unified legal framework, but are set up under a different law; this case-by-case approach leaves much scope for discretion and lobbying by company insiders.

According to some estimates, federal and regional governments control about 40% of the stock market capitalization in Russia in 2008, compared to only 24% in 2004. SOEs are active in the sectors of banking – 64% of market cap; oil and gas – 47%; and utilities – 37%, as well as in fuel production, metallurgy, and chemical industry. According to the European Bank for Reconstruction and Development, the private sector’s share of GDP fell from 70% in 2003 to 65% in 2009. The Russian government has announced a relatively small privatization plan for 2010, intended to raise about $2.4 billion by selling stakes in 450 enterprises.

Corporate governance of SOEs is characterized by the “dual management” model. The Federal Agency for State Property Management (Rosimushchestvo) is authorized by the Russian government to exercise shareholder rights for federally-owned shares in companies and is responsible for the preparation and nomination of candidates at the annual meetings of shareholders. As a general rule, Rosimushchestvo nominates to a company’s board of directors representatives of the most relevant government body, based on the sectoral characteristics of the business. The sectoral state body thus participates in managing the company through its representatives. In important companies that straddle the sectoral priorities of the government and its political interests, top government officials may be nominated to the boards of directors (e.g. the Minister of Energy is the Chairman of the state-owned oil pipeline company, Transneft). Issues that hamper the efficient operations of SOEs include a lack of transparency, unclear responsibilities of boards of directors, misalignment of managers’ incentives and company performance, inadequate control mechanisms on managers’ total remuneration or their use of assets transferred by the state to the SOE, and reduced disclosure requirements.

Corporate Social Responsibility (CSR)
Over the last decade, globalization and the rapid expansion of large Russian companies’ presence in international markets have led to a new approach to corporate social responsibility. While there is still little pressure from Russian consumers and shareholders for businesses to change their ways, contact with peers, investors, and customers overseas has forced these companies to focus more on their reputations and those of their brands.

The Federal Service for Financial Markets has had a corporate governance code in place since 2002 and has endorsed an OECD White Paper on ways to improve practices in Russia. International business associations such as the American Chamber of Commerce in Russia, the U.S.-Russia Business Council, the Association of European Businesses in Russia, and the International Business Leaders Forum, as well as Russian business associations such as OPORA, the Russian Managers Association, the National Council on Corporate Governance, and the Russian Directors’ Institute stress corporate governance as an important priority for their members and for Russian businesses overall.

When seeking to acquire companies in Western countries or raise capital on international financial markets, Russian companies face international competition and in-depth scrutiny. Whether or not a company adheres to certain CSR standards can affect its bottom line. Consequently, most large Russian companies currently have a policy or strategy for CSR in place or are developing one.

Russian business associations such as the Russian Union of Industrialists and Entrepreneurs (RSPP), Delovaya Rossiya, the Public Organization for Small and Medium Enterprises (OPORA), and the Russian Managers Association, stress CSR and promote CSR initiatives and standards for their members and for Russian businesses overall. For example, in 2004 RSPP developed the Social Charter of Russian Business. In a subsequent update, it was recognized as being in agreement with the standards set out in the UN Global Compact. Today more than 200 Russian companies and organizations have joined the Charter.

Political Violence
Although the use of strong-arm tactics is not unknown in Russian commercial disputes, the Embassy is not aware of cases where foreign investments have been attacked or damaged for purely political reasons. Russia continues to struggle with an ongoing insurgency in Chechnya, Ingushetiya and Dagestan. These republics and neighboring regions in the northern Caucasus have a high risk of violence and kidnapping.

Corruption
Corruption continues to grow in Russia and its pervasiveness is acknowledged regularly both by Russia’s highest officials and society at large. As such, corruption remains a major problem for businesses and investors in Russia. According to Transparency International (TI), Russia scored 2.2 out of 10 this year, up from 2.1 in 2008 – in a nod to the anti-corruption legislation that President Medvedev had enacted in December 2008. Nonetheless, Russia’s 2009 ranking (146th) was far below its 2004 ranking (90th place). In PricewaterhouseCoopers’ 2009 Global Economic Crime Survey, Russia came in last place with 71% of respondents having reported experiencing economic crime, of which bribery and corruption is a major component, in the 12 months previous to the survey.

It is currently estimated that the annual cost of corruption to Russia is $318 billion, about one-third of its GDP. There have been few prosecutions and/or dismissals of high-level corrupt officials that would send a clear deterrent message.

The Government of Russia has repeatedly designated the fight against corruption and the enforcement of law as priorities. Russia is a signatory to the UN Convention against Corruption and to the Council of Europe’s Criminal Law Convention on Corruption. Neither President Medvedev’s Council for the Fight Against Corruption, which was established in the spring of 2008, nor the anti-corruption legislation of December 2008 have yet been effective in reducing corruption. Insofar as the legislation is concerned, implementing regulations have not yet been drafted.

Corruption, including bribery, raises the costs and risks of doing business. Corruption has a corrosive impact on both market opportunities overseas for U.S. companies and the broader business climate. It also deters international investment, stifles economic growth and development, distorts prices, and undermines the rule of law.

It is important for U.S. companies, irrespective of their size, to assess the business climate in the relevant market in which they will be operating or investing, and to have an effective compliance program or measures to prevent and detect corruption, including foreign bribery. U.S. individuals and firms operating or investing in foreign markets should take the time to become familiar with the relevant anticorruption laws of both the foreign country and the United States in order to properly comply with them, and where appropriate, they should seek the advice of legal counsel.

The U.S. Government seeks to level the global playing field for U.S. businesses by encouraging other countries to take steps to criminalize their own companies’ acts of corruption, including bribery of foreign public officials, by requiring them to uphold their obligations under relevant international conventions. A U. S. firm that believes a competitor is seeking to use bribery of a foreign public official to secure a contract should bring this to the attention of appropriate U.S. agencies, as noted below.

U.S. Foreign Corrupt Practices Act: In 1977, the United States enacted the Foreign Corrupt Practices Act (FCPA), which makes it unlawful for a U.S. person, and certain foreign issuers of securities, to make a corrupt payment to foreign public officials for the purpose of obtaining or retaining business for or with, or directing business to, any person. The FCPA also applies to foreign firms and persons who take any act in furtherance of such a corrupt payment while in the United States. For more detailed information on the FCPA, see the FCPA Lay-Person’s Guide at: http://www.justice.gov/criminal/fraud/docs/dojdocb.html.

Other Instruments: It is U.S. Government policy to promote good governance, including host country implementation and enforcement of anti-corruption laws and policies pursuant to their obligations under international agreements. Since enactment of the FCPA, the United States has been instrumental to the expansion of the international framework to fight corruption. Several significant components of this framework are the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (OECD Antibribery Convention), the United Nations Convention against Corruption (UN Convention), the Inter-American Convention against Corruption (OAS Convention), the Council of Europe Criminal and Civil Law Conventions, and a growing list of U.S. free trade agreements.

OECD Antibribery Convention: The OECD Antibribery Convention entered into force in February 1999. As of December 2009, there are 38 parties to the Convention including the United States (see http://www.oecd.org/dataoecd/59/13/40272933.pdf). Major exporters China, India, and Russia are not parties, although the U.S. Government strongly endorses their eventual accession to the Convention. The Convention obligates the Parties to criminalize bribery of foreign public officials in the conduct of international business. The United States meets its international obligations under the OECD Antibribery Convention through the U.S. FCPA.

UN Convention: The UN Anticorruption Convention entered into force on December 14, 2005, and there are 143 parties to it as of December 2009 (see http://www.unodc.org/unodc/en/treaties/CAC/signatories.html). The UN Convention is the first global comprehensive international anticorruption agreement. The UN Convention requires countries to establish criminal and other offences to cover a wide range of acts of corruption. The UN Convention goes beyond previous anticorruption instruments, covering a broad range of issues ranging from basic forms of corruption such as bribery and solicitation, embezzlement, trading in influence to the concealment and laundering of the proceeds of corruption. The Convention contains transnational business bribery provisions that are functionally similar to those in the OECD Antibribery Convention and contains provisions on private sector auditing and books and records requirements. Other provisions address matters such as prevention, international cooperation, and asset recovery. Russia became a signitory in 2003, and ratification occurred in 2006.

OAS Convention: In 1996, the Member States of the Organization of American States (OAS) adopted the first international anticorruption legal instrument, the Inter-American Convention against Corruption (OAS Convention), which entered into force in March 1997. The OAS Convention, among other things, establishes a set of preventive measures against corruption, provides for the criminalization of certain acts of corruption, including transnational bribery and illicit enrichment, and contains a series of provisions to strengthen the cooperation between its States Parties in areas such as mutual legal assistance and technical cooperation. As of December 2009, the OAS Convention has 33 parties (see http://www.oas.org/juridico/english/Sigs/b-58.html) Russia is not a party to the OAS Convention.

Council of Europe Criminal Law and Civil Law Conventions: Many European countries are parties to either the Council of Europe (CoE) Criminal Law Convention on Corruption, the Civil Law Convention, or both. The Criminal Law Convention requires criminalization of a wide range of national and transnational conduct, including bribery, money-laundering, and account offenses. It also incorporates provisions on liability of legal persons and witness protection. The Civil Law Convention includes provisions on compensation for damage relating to corrupt acts, whistleblower protection, and validity of contracts, inter alia. The Group of States against Corruption (GRECO) was established in 1999 by the CoE to monitor compliance with these and related anti-corruption standards. Currently, GRECO comprises 46 member States (45 European countries and the United States). As of December 2009, the Criminal Law Convention has 42 parties and the Civil Law Convention has 34 (see www.coe.int/greco.) Russia is a party to the Criminal Law Convention on Corruption and GRECO; it is not a party to the Civil Law Convention.

Free Trade Agreements: While it is U.S. Government policy to include anticorruption provisions in free trade agreements (FTAs) that it negotiates with its trading partners, the anticorruption provisions have evolved over time. The most recent FTAs negotiated now require trading partners to criminalize “active bribery” of public officials (offering bribes to any public official must be made a criminal offense, both domestically and trans-nationally) as well as domestic “passive bribery” (solicitation of a bribe by a domestic official). All U.S. FTAs may be found at the U.S. Trade Representative Website: http://www.ustr.gov/trade-agreements/free-trade-agreements. There is no free trade agreement between Russia and the United States.

Local Laws: U.S. firms should familiarize themselves with local anticorruption laws, and, where appropriate, seek legal counsel. While the U.S. Department of Commerce cannot provide legal advice on local laws, the Department’s U.S. Commercial Service can provide assistance with navigating the host country’s legal system and obtaining a list of local legal counsel.

Assistance for U.S. Businesses: The U.S. Department of Commerce offers several services to aid U.S. businesses seeking to address business-related corruption issues. For example, the U.S. Commercial Service can provide services that may assist U.S. companies in conducting their due diligence as part of the company’s overarching compliance program when choosing business partners or agents overseas. The U.S. Commercial Service can be reached directly through its offices in every major U.S. and foreign city, or through its Website at www.trade.gov/cs.

The Departments of Commerce and State provide worldwide support for qualified U.S. companies bidding on foreign government contracts through the Commerce Department’s Advocacy Center and State’s Office of Commercial and Business Affairs. Problems, including alleged corruption by foreign governments or competitors, encountered by U.S. companies in seeking such foreign business opportunities can be brought to the attention of appropriate U.S. government officials, including local embassy personnel and through the Department of Commerce Trade Compliance Center “Report A Trade Barrier” Website at tcc.export.gov/Report_a_Barrier/index.asp.

Guidance on the U.S. FCPA: The Department of Justice’s (DOJ) FCPA Opinion Procedure enables U.S.firms and individuals to request a statement of the Justice Department’s present enforcement intentions under the antibribery provisions of the FCPA regarding any proposed business conduct. The details of the opinion procedure are available on DOJ’s Fraud Section Website at www.justice.gov/criminal/fraud/fcpa. Although the Department of Commerce has no enforcement role with respect to the FCPA, it supplies general guidance to U.S. exporters who have questions about the FCPA and about international developments concerning the FCPA. For further information, see the Office of the Chief Counsel for International Counsel, U.S. Department of Commerce, Website, at http://www.ogc.doc.gov/trans_anti_bribery.html. More general information on the FCPA is available at the Websites listed below.

Exporters and investors should be aware that generally all countries prohibit the bribery of their public officials, and prohibit their officials from soliciting bribes under domestic laws. Most countries are required to criminalize such bribery and other acts of corruption by virtue of being parties to various international conventions discussed above.

Anti-Corruption Resources

Some useful resources for individuals and companies regarding combating corruption in global markets include the following:

· Information about the U.S. Foreign Corrupt Practices Act (FCPA), including a “Lay-Person’s Guide to the FCPA” is available at the U.S. Department of Justice’s Website at: http://www.justice.gov/criminal/fraud/fcpa.

· Information about the OECD Antibribery Convention including links to national implementing legislation and country monitoring reports is available at: http://www.oecd.org/department/0,3355,en_2649_34859_1_1_1_1_1,00.html. See also new Antibribery Recommendation and Good Practice Guidance Annex for companies: http://www.oecd.org/dataoecd/11/40/44176910.pdf

· General information about anticorruption initiatives, such as the OECD Convention and the FCPA, including translations of the statute into several languages, is available at the Department of Commerce Office of the Chief Counsel for International Commerce Website: http://www.ogc.doc.gov/trans_anti_bribery.html.

· Transparency International (TI) publishes an annual Corruption Perceptions Index (CPI). The CPI measures the perceived level of public-sector corruption in 180 countries and territories around the world. The CPI is available at: http://www.transparency.org/policy_research/surveys_indices/cpi/2009. TI also publishes an annual Global Corruption Report which provides a systematic evaluation of the state of corruption around the world. It includes an in-depth analysis of a focal theme, a series of country reports that document major corruption related events and developments from all continents and an overview of the latest research findings on anti-corruption diagnostics and tools. See http://www.transparency.org/publications/gcr.

· The World Bank Institute publishes Worldwide Governance Indicators (WGI). These indicators assess six dimensions of governance in 212 countries, including Voice and Accountability, Political Stability and Absence of Violence, Government Effectiveness, Regulatory Quality, Rule of Law and Control of Corruption. See http://info.worldbank.org/governance/wgi/sc_country.asp. The World Bank Business Environment and Enterprise Performance Surveys may also be of interest and are available at: http://go.worldbank.org/RQQXYJ6210.

· The World Economic Forum publishes the Global Enabling Trade Report, which presents the rankings of the Enabling Trade Index, and includes an assessment of the transparency of border administration (focused on bribe payments and corruption) and a separate segment on corruption and the regulatory environment. See http://www.weforum.org/en/initiatives/gcp/GlobalEnablingTradeReport/index.htm.

· Additional country information related to corruption can be found in the U.S. State Department’s annual Human Rights Report available at http://www.state.gov/j/drl/rls/hrrpt/.

Global Integrity, a nonprofit organization, publishes its annual Global Integrity Report, which provides indicators for 92 countries with respect to governance and anti-corruption. The report highlights the strengths and weaknesses of national level anti-corruption systems. The report is available at: http://report.globalintegrity.org/.

Bilateral Investment Agreements
Russia has concluded bilateral investment treaties (BITs) with 65 countries, and 45 of them are in force. In 2009, Russia signed a BIT with Angola and ratified its BITs with China, Indonesia and Venezuela. Two of the BITs that Russia also ratified in 2009, with Qatar and Jordan, came into force in 2009, on June 4th and June 17th, respectively. The United States and Russia currently do not have a bilateral taxation treaty, and there has been no discussion of negotiating one. There is some concern that Russians use the taxation requirements as a way to "raid" or illegally take possession of foreign companies, usually small and medium enterprises.

OPIC and Other Investment Insurance Programs
In an agreement ratified in 1992, the U.S. Overseas Private Investment Corporation (OPIC) was authorized to provide loans, loan guarantees (“financing”), and investment insurance against political risks to U.S. companies investing in Russia. OPIC’s political risk insurance and financing help U.S. companies of all sizes invest in Russia. OPIC insures against three political risks: expropriation; political violence; and currency inconvertibility. To meet the demands of larger projects in Russia and worldwide, OPIC can insure up to $250 million per project and up to $300 million for projects in the oil and gas sector with offshore, hard currency revenues. Projects in the oil and gas sector with offshore, hard currency revenues may be approved for an exposure limit up to $400 million if the project receives a credit evaluation (“shadow rating”) of investment grade or higher. The individual per project exposure limit for financing is $250 million. The maximum combined (insurance and financing) exposure limit to OPIC on a single project is $400 million. OPIC has no minimum investment size requirements. OPIC also makes equity capital available for investments in Russia by guaranteeing long-term loans to private equity investment funds. Detailed information about OPIC’s programs can be accessed at www.opic.gov.

Labor
The Russian labor market remains fragmented, characterized by limited labor mobility across regions and consequent wage and employment differentials. The unemployment rate, using International Labor Organization (ILO) standards, peaked in February 2009 at 9.5 percent following a sharp decline in output, especially in the industrial sector. Since the beginning of March, the labor market has gradually improved. In November, the unemployment rate was 8.1 percent, or 6.1 million people. According to the general forecast, unemployment will worsen slightly in first half of 2010.

Despite an excess of job seekers compared to the number of vacancies throughout 2009, many employers complained about the low quality of applicants’ skills. Even in the banking, finance, and construction sectors, in which layoffs were considerable, it is still difficult for companies to find high quality professionals. This is due in part to weak linkages between the education system and the labor market. In addition, the economy suffers from a general shortage of highly skilled labor. On the other hand, a large number of inefficient enterprises with high vacancy levels offer workers unattractive, uncompetitive salaries and benefits.

According to official statistics, four strikes were registered in 2008, and only one took place from January - October 2009. Independent experts, however, believe that these statistics significantly underestimate the level of labor conflict. Transportation, machine building, and metallurgy are the industries in which labor conflicts have been the most frequent. Wage arrears and layoffs were the most important sources of contention.

Approximately 45 percent of Russia’s workforce is unionized. The GOR generally adheres to ILO conventions protecting worker rights, though enforcement is often lacking. The 2002 Labor Code governs labor standards in Russia. When adopted, it was meant to diminish the role of the government in setting and enforcing labor standards, with trade unions playing a role in representing workers' interests. However, there are no clear enforcement mechanisms for an employer’s failure to engage in good faith collective bargaining. Revisions to the Labor Code since 2002 have included new procedures for investigating industrial accidents and the requirement that businesses employing more than 50 workers must establish a work safety division and create a position for a “work safety specialist.” The enforcement of worker safety rules continues to be a major issue, as enterprises are often unable or unwilling to invest in safer equipment or to enforce safety standards.

Foreign Trade Zones/Free Ports
To date, six Special Economic Zones (SEZs) have been established pursuant to legislation passed in 2005: in Zelenograd and Dubna in the Moscow region (focused on micro-electronics and nuclear technology, respectively); St. Petersburg (information technology); Tomsk (new materials); Lipetsk (appliances and electronics); and Yelabuga (auto components and petrochemicals).

Enterprises operating in industrial-production zones (20 square kilometers) pay lower unified social taxes, and those within progressive-technical zones (2 square kilometers) are allowed to write off all R&D expenses. Both types of zones benefit from reduced land and property taxes and a waiver of customs duties on imports and finished exports.

In 2007, seven special tourist economic zones were established in the Krasnodar, Stavropol, Altai, Kaliningrad, and Irkutsk regions, as well as in the constituent republics of Altai and Buryatia. In June 2008, a tender committee approved the creation of three port special economic zones to stimulate infrastructure development. The locations included the airports of Krasnoyarsk in East Siberia and Ulyanovsk in the Volga area, and the Sovetskaya Gavan port in the Khabarovsk Territory in the Far East.

In late 2009, the Russian Federal Special Economic Zones Management Agency, which was created under the 2005 legislation to manage the zones, was abolished. Its functions were transferred to the Ministry of Economic Development, which will establish a special department to continue work with the zones.

The SEZs are developing gradually, led by the Moscow region and St. Petersburg, but poor infrastructure is hampering their growth. Transportation and logistical challenges make SEZs in more remote regions less attractive. The special tourist economic zone in Krasnodar, site of the 2014 Sochi Winter Olympics, was expected to attract significant foreign investment, but that prospect has become more uncertain in the current financial climate. The SEZ in Kaliningrad, previously established in 1996, has been able to attract some moderate investments, but those in the Russian Far East have had less success.

Foreign Direct Investment Statistics
Table 1 shows flows of foreign investment by country for the first nine months of 2009, compared to the same period in 2008. Total foreign investment declined by 27.8% in the first nine months of 2009, compared to the same period in 2008. According to Russian statistical practice, total foreign investment numbers include direct investment (FDI), portfolio investment, and other investment (largely trade credits). This year, the largest share of foreign investment came from Luxemburg. FDI from Cyprus is consistently high because most FDI coming from Cyprus is actually returning Russian capital. (Note: The data in the Tables below is from the Russian State Statistical Service (RosStat) and may differ from data maintained by the Central Bank of Russia and the U.S. Department of Commerce.)

Table 1: Top Ten Investors - By Year (in USD million)

Country

Jan-Sept. 2009

Jan-Sept. 2008

Total

FDI

Total

FDI

Luxembourg

8,905

N/A

6,267

N/A

Netherlands

8,348

1,066

8,911

4,942

Germany

5,507

1,635

6,528

1,847

Cyprus

5,231

2,092

15,304

4,320

UK

4,231

317

12,550

870

Japan

1,641

N/A

N/A

N/A

France

1,600

537

5,079

671

USA

1,279

92

2,098

216

Virgin Islands (UK)

1,129

359

2,643

1,595

Ireland

595

N/A

999

N/A

All Others

16,272

3,877

15,411

4,740

Total

54,738

9,975

75,792

19,201

The numbers in Table 2 represent an accumulated stock of total foreign investment, which include FDI, portfolio, and “other” investment as of September 30, 2009 compared to the amount, accumulated by the same date in 2008.

Table 2: Top Investors - Accumulated Basis (in USD million)

Country

As of Sept. 30, 2009

As of Sept. 30, 2008

Total

FDI

Total

FDI

Netherlands

49,426

29,171

45,152

38,773

Cyprus

47,042

31,195

54,528

38,561

Luxembourg

37,947

1,039

34,210

1,221

UK

25,622

3,641

31,356

4,460

Germany

19,811

7,420

14,881

5,512

Ireland

9,240

433

8,017

465

France

8,516

2,066

8,515

1,950

USA

7,608

2,790

8,503

3,161

Virginia Islands (UK)

7,444

4,221

7,470

5,111

Japan

6,989

801

N/A

N/A

All Others

42,749

21,324

38,647

18,669

Total

262,394

104,101

251,279

117,883

Source: Federal Service for State Statistics (RosStat)

Table 3 shows total foreign investment by region over the first nine months of 2009, compared to the same period in 2008. Moscow continues to attract the largest volume of investments (51.6% of total foreign investment), mainly due to the concentration of companies' headquarters and the largest concentration of consumers with high purchasing power.

Table 3 – Foreign Investment – Top Regions (in USD million)

Jan-Sep 2009

Jan-Sep 2008

Amount

%

Rank

Amount

%

Rank

Moscow (city)

28,211

51.6%

1

28,339

37.4%

1

St. Petersburg

3,044

5.6%

2

4,806

6.3%

3

Moscow Region

2,793

5.1%

3

5,157

6.8%

2

Sakhalin

2,488

4.5%

4

3,609

4.8%

4

Chelyabinsk Region

1,905

3.5%

5

2,836

3.7%

7

Tatarstan

1,568

2.9%

6

1,322

1.8%

12

Tyumen

1,373

2.5%

7

866

1.1%

15

Leningrad Oblast

1,056

1.9%

8

704

0.9%

22

Sverdlov Oblast

1,001

1.8%

9

1,693

2.2%

11

Kaluga Oblast

984

1.8%

10

835

1.1%

23

Others

10,315

18.8%

25,625

33.9%

Total

54,738

100%

75,792

100.0%

Source: Federal Service for State Statistics (RosStat) (Note: Includes direct, portfolio, and other investment.)
Table 4 shows investment by sector over the first nine months of 2009, compared to the same period in 2009. Total investment in such sectors as trade, extraction of fuel, and transport and communications fell by over 50%, while other real estate, production and distribution of power, gas and water, finance, food, and construction became higher investment growth sectors in 9M08?, compared to the same period in 2007.

Table 4: Foreign Investment: Top Sectors (in USD million)

Jan-Sep 2009

Jan-Sep 2008

%

Amount

%

Amount

Trade

29.7%

16,277

23.6%

17,917

Transport and Communications

15.6%

8,512

3.0%

2,237

Real Estate and Related Services

10.2%

5,593

14.2%

10,767

Extraction of Fuel

7.7%

4,220

8.3%

6,328

Metallurgy

5.9%

3,230

15.2%

11,519

Production of coke and oil products

5.6%

3,053

3.4%

2,559

Finance

3.6%

1,971

4.3%

3,249

Production of vehicles

3.4%

1,864

1.0%

2,341

Food Industry

2.7%

1,475

3.8%

2,858

Production of paper

1.9%

1,052

0.7%

1,452

All Others

13.7%

7,491

19.2%

14,565

Total

100.0%

54,738

100.0%

75,792




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