Russia: Investing

FDI in Figures

Even though FDI flow increased considerably at the beginning of the millennium years (tripled between 2002 and 2007), its level (1.5% of the GDP) remains relatively low in terms of growth of the country and of the Russian economy's potential. They dried up due to the global crisis in 2008/2009, they have been recovering, reaching a 33% year-to-year growth in 2011.

The low FDI performance reflects an investment climate which is still widely perceived as unfavorable abroad. Although, over the last few years, Russia has implemented positive economic reforms, the state's administrative problems and the uncertainties of the rule of law remain significant.

Foreign Direct Investment	2008	2009	2010
FDI Inward Flow (million USD)	75,461	36,500	41,194
FDI Stock (million USD)	213,734	381,962	423,150
Performance Index*, Ranking on 141 Economies	62	57	-
Potential Index**, Ranking on 141 Economies	9	-	-
Number of Greenfield Investments***	574	399	-
FDI Inwards (in % of GFCF****)	20.4	2.4	-
FDI Stock (in % of GDP)	12.7	20.3	-

Source: UNCTAD - Last Available Data.

Note: * The UNCTAD Inward FDI Performance Index is Based on a Ratio of the Country's Share in Global FDI Inflows and its Share in Global GDP. ** The UNCTAD Inward FDI Potential Index is Based on 12 Economic and Structural Variables Such as GDP, Foreign Trade, FDI, Infrastructures, Energy Use, R&D, Education, Country Risk. *** Green Field Investments Are a Form of Foreign Direct Investment Where a Parent Company Starts a New Venture in a Foreign Country By Constructing New Operational Facilities From the Ground Up. **** Gross Fixed Capital Formation (GFCF) Measures the Value of Additions to Fixed Assets Purchased By Business, Government and Households Less Disposals of Fixed Assets Sold Off or Scrapped.

FDI Inflows By Countries and Industry

Main Investing Countries	2010, in %
Cyprus	28.1
Netherlands	8.2
Germany	7.3
Luxembourg	6.6
France	6.1
Ireland	5.3
Bahamas	5.2
British Virgin Islands	4.9
Sweden	4.2

Main Invested Sectors	2010, in %
Finance, insurance	36.3
Manufacturing industry	15.3
Trade, car maintenance	14.5
Mining sector	7.8
Real estate	4.4
Construction	4.1
Information and Communication	3.8

Source: Federal Statistics Service. The figures by country are those of total investment (the Statistics Service does not publish these statistics any longer for FDI only). - Last Available Data.

Form of Company Preferred By Foreign Investors: Closed Joint-Stock Company (AOZT)
A partner's know-how and knowledge of the market can be taken advantage of while keeping a certain control of the company.
Form of Establishment Preferred By Foreign Investors: Investors generally open a branch office first (or a representative office) before creating a subsidiary.
Main Foreign Companies: TNK-BP, Shell, Total, General Motors, Renault, Phillip Morris, Auchan, Nestlé, Cadbury, Carlsberg.
Sources of Statistics: Federal Statistics Service
Bank of Russia
Ministry of Economic Development and Trade
UNCTAD

Why You Should Choose to Invest in Russia

Strong Points: Significant natural resources, investment potential largely under-utilized and a qualified workforce.
Weak Points: Unstable investment climate, complicated and sometimes contradictory accounting regulations and legislations, infringement of intellectual property, many sectors closed to foreign investment as considered strategic.
Government Measures to Motivate or Restrict FDI: The establishment of investment assistance in Russia is still in its infancy, despite many declarations of intent. The government prefers to improve the general investment climate by tax reductions and economic reforms.
Majority foreign ownership is subject to authorization in many sectors, particularly those linked to raw materials, heavy industry and aerospace.

Protection of Foreign Investment

Bilateral Investment Conventions Signed By Russia: Russia inherited 14 bilateral treaties with most of the European countries, China and Canada.
Since then, Russia has signed 34 treaties of which 20 have been ratified (especially with Central European countries, Japan, India, Egypt and South Africa). On the other hand, it has not yet ratified the bilateral investment treaty signed with the United States in 1992.
It has recently asked to renegotiate these contracts, fearing that they may not be compatible with its joining the WTO.
To see the complete list of the countries, click here.
To see the treaties, click here.
International Controversies Registered By UNCTAD: In 2006, there were 9 complaints against Russia registered by the UNCTAD (6th global rank). They were concentrated in the energy sector (the Yukos case), in the building/real estate sector and telecommunications.
Organizations Offering Their Assistance in Case of Disagreement: ICSID , International Center for settlement of Investment Disputes
ICCWBO , International court of arbitration, International chamber of commerce
SCCinstitute , Arbitration Institute of the Stockholm Chamber of Commerce
Member of the Multilateral Investment Guarantee Agency: Yes.

Country Comparison For the Protection of Investors

	Russia	Eastern Europe & Central Asia	الولايات المتحدة	Germany
Index of Transaction Transparency*	6.0	6.3	7.0	5.0
Index of Manager’s Responsibility**	2.0	4.0	9.0	5.0
Index of Shareholders’ Power***	7.0	6.2	9.0	5.0
Index of Investor Protection****	5.0	5.5	8.3	5.0

Source: Doing Business - Last Available Data.

Note: *The Greater the Index, the More Transparent the Conditions of Transactions. **The Greater the Index, the More the Manager is Personally Responsible. *** The Greater the Index, the Easier it Will Be For Shareholders to Take Legal Action. **** The Greater the Index, the Higher the Level of Investor Protection.

Procedures Relative to Foreign Investment

Freedom of Establishment: Usually guaranteed.
Investment in certain domains which might affect national security may be limited.
Acquisition of Holdings: The majority acquisition of holdings in the capital of a local company is authorized in Russia.
Obligation to Declare: No obligatory declaration, except for banks.
Competent Organization For the Declaration: Bank of Russia
Requests For Specific Authorizations: Natural resources, energy, transport, communications, defense industry.

Office Real Estate and Land Ownership

Possible Temporary Solutions: Quite a few companies setting up in Russia begin by renting their premises.
The Possibility of Buying Land and Industrial and Commercial Buildings: Foreign legal entities have the right to buy land, but with certain restrictions. In practice, private ownership of land is impossible in many regions, Moscow among them. A foreign company often obtains a 49 year lease.
Ownership of commercial or industrial buildings poses many fewer problems.
Risk of Expropriation: The 1991 investment code prohibits nationalizations except in the case of legislation intended to protect the national interest. The company can appeal this decision and must receive compensation immediately.
At the regional level, the risk exists even so because of interference from the local government or non-application of certain judicial decisions.

Investment Aid

Forms of Aid: Some sectors can have reduced Customs duties or VAT.
It mainly takes the form of 6 Special Economic Areas with a defined sectoral aim set up in 2005. Companies setting up in these areas (described after) benefit from tax reductions: exemption from property tax and regional tax, rate of unified social tax at 14% instead of 26%, possibility of deducting more than 70% of research and development costs (in innovation areas), etc.
Privileged Domains: In 2005 the government created special economic areas of technological innovation or industrial production.
Innovations: microelectronics, nuclear technology, new information technologies and materials, petroleum chemistry.
Industrial production: household appliances, automobile industry.
Privileged Geographical Zones: Dubna, Zelenograd, Strelma, Tomsk, Yelabuga, Lipetsk
Free Zones: Kaliningrad, Nakhodka, Ingushetia, Magadan
Nearly all the products imported in these areas are exempt from Customs duties. In addition, if the products are processed in these areas and the added value goes over 30%, they can be sent to other parts of Russia without Customs duties.
Organizations Which Finance: Ministry of Economic Development and Trade.
The European Bank for Reconstruction and Development finances investments in Russia, especially in the form of loans.

Investment Opportunities

The Key Sectors of the National Economy: Mining sector, heavy industry, automobile industry, real estate.
High Potential Sectors: Transport and communications, information technologies (services in particular), automobile (spare parts and after sales service especially), aeronautics, distribution.
Privatization Programs: None
Tenders, Projects and Public Procurement: Globaltenders, Tenders & Projects from Russia
Tenders Info, Tenders in Russian Federation
DgMarket, Tenders Worldwide

Sectors Where Investment Opportunities Are Fewer

Monopolistic Sectors: Distribution of water and electricity, export and distribution of natural gas, rail transport, postal services to individuals, and long distance landline telephone.
Sectors in Decline: Textiles, machine tools

Finding Assistance For Further Information

Investment Aid Agency: National agency for direct investment
European Bank for Reconstruction and Development
Federal agency for the Management of Special Economic Areas
Other Useful Resources: Ministry of Economic Development and Trade
Doing Business Guides: Deloitte International Tax and Business Guide
Russia Commercial Guide 2010 - Buy USA

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