CHOOSING AN INVESTMENT DESTINATION IN NW RUSSIA
By Alexei Kim
One key issue for U.S. companies considering any region in Russia is the local legal framework for doing business. In regions such as Northwest Russia, the considerable competition to attract foreign investment has led to the creation of tax and other incentives for companies entering the market. The fact that most regions of NW Russia have adopted investment laws gives U.S. companies a chance to choose an area that provides the maximum advantages for a given investment project.
Both the city of St. Petersburg and the surrounding Leningrad Oblast have adopted investment legislationto stimulate additional investment. Although both sets of laws treat domestic and international investors equally, it is clear that the laws were adopted with the view to attract foreign investors. As the majority of U.S. firms in NW Russia chose St. Petersburg or Leningrad Oblast as an investment site, a brief comparative analysis of St. Petersburg’s and Leningrad Oblast’s investment climates is useful.
St. Petersburg Investment Laws
The St. Petersburg administration’s attitude toward attracting foreign investors has changed over the course of the last several years. The initial attitude was that foreign investors would flood in and the city would be in a position to choose the most desirable investor. As that did not happen, St. Petersburg has undertaken certain steps to attract foreign capital and is currently the main competitor location for Leningrad Oblast. Thus, on July 30, 1998, the city of St. Petersburg adopted the law “On State Support of Investment Activities in St. Petersburg.” The law welcomes investors, provides them with equal rights, and guarantees fair competition for the object of investment. A second law, “On Investment in Real Estate in St. Petersburg,” approved by the governor on the same day, is viewed by investment analysts as a big step toward improving St. Petersburg’s investment climate. In essence, it details how to deal with the city of St. Petersburg and offers an attractive base for companies interested in investing in the city’s real estate market.
The city of St. Petersburg provides the following means of support to investors:
1. City guarantees. The city’s budget guarantees a foreign investor 10 percent of the total cost of the investment project, or up to 25 percent of the funds borrowed by the investor to complete the investment project.
2. Tax benefits to investors. According to the Russian Federation investment law, these tax breaks apply only to those taxes going to the city’s budget.
3. Tax benefits to banks and/or other financial institutions supporting investments.
4. Leasing benefits (i.e., discounted rent). A discount of up to 25 percent is provided to investors during the design of the investment project site, and 40 percent discount applies to the lease of investment project’s site while under construction.
5. Delays on payment for the rights to invest. The St. Petersburg Investment Law provides for the deduction of expenses for infrastructure development from the total value of the investment project.
6. Budgetary support. The city of St. Petersburg can budget certain funds to co-invest in the investment project. The city’s draft budget for 2000 plans to allocate certain funds for budgetary support of investment projects.
Investing in Leningrad Oblast
Leningrad Oblast’s investment law, approved shortly before St. Petersburg’s, attracted a number of big U.S companies. After the law was approved, several U.S. companies originally interested in implementing projects in the St. Petersburg area turned to Leningrad Oblast. Leningrad Oblast is located just on the outskirts of the city and extends to the border with Finland (an EU member). A number of big manufacturers have already established production facilities in the Leningrad Oblast, bringing their suppliers along.
Leningrad Oblast offers the following support to foreign investors:
1. Tax breaks.
2. A guarantee of the stability of the investment climate. This guarantee says that should an increased tax burden (federal and/or local) occur Leningrad Oblast will compensate the investor for the difference. (Compensation, however, is only possible if the local budget has sufficient funds to cover the difference.)
3. Investment tax credit. The new law “On the Tax and Investment Credit in Leningrad Oblast,” adopted by the Leningrad Duma on October 8, 1999, provides new investors with an investment tax credit. If the company is conducting certain investment activity (research of new technology, introducing new technology into an existing project, etc.), Leningrad Oblast will provide investment credit to investors not to exceed 100 percent of taxes paid to the local budget.
4. No payments for the right to invest. Leningrad Oblast does not charge investors for the right to invest. The oblast is working on implementing a number of amendments that will expand the law’s applicability to some new projects, and will qualify modernization of state-owned enterprises as an investment activity.
For a lengthier report on the St. Petersburg city and Leningrad Oblast investment laws, visit BISNIS Online at http://www.bisnis.doc.gov/bisnis/country/9911stpete.htm. For more information on doing business in Northwest Russia, visit www.bisnis.doc.gov/bisnis/country/nw.htm.
Alexei Kim is the BISNIS representative in St. Petersburg.