**CHOOSING ANINVESTMENT DESTINATION IN NW RUSSIA**

 

By Alexei Kim

 

One key issue for U.S. companies considering any region inRussia is the local legal framework for doing business. In regions such asNorthwest Russia, the considerable competition to attract foreign investmenthas led to the creation of tax and other incentives for companies entering themarket. The fact that most regions of NW Russia have adopted investment lawsgives U.S. companies a chance to choose an area that provides the maximum advantagesfor a given investment project. 

 

Both the city of St. Petersburg andthe surrounding Leningrad Oblast have adopted investment legislationtostimulate additional investment. Although both sets of laws treat domestic andinternational investors equally, it is clear that the laws were adopted withthe view to attract foreign investors. As the majority of U.S. firms in NWRussia chose St. Petersburg or Leningrad Oblast as an investment site, a briefcomparative analysis of St. Petersburg’s and Leningrad Oblast’s investmentclimates is useful.

 

St.Petersburg Investment Laws

TheSt. Petersburg administration’s attitude toward attracting foreign investorshas changed over the course of the last several years. The initial attitude wasthat foreign investors would flood in and the city would be in a position tochoose the most desirable investor. As that did not happen, St. Petersburg hasundertaken certain steps to attract foreign capital and is currently the maincompetitor location for Leningrad Oblast. Thus, on July 30, 1998, the city ofSt. Petersburg adopted the law “On State Support of Investment Activities inSt. Petersburg.” The law welcomes investors, provides them with equal rights,and guarantees fair competition for the object of investment. A second law, “OnInvestment in Real Estate in St. Petersburg,” approved by the governor on thesame 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 thecity of St. Petersburg and offers an attractive base for companies interestedin investing in the city’s real estate market.

 

Thecity of St. Petersburg provides the following means of support to investors:

1.    City guarantees. The city’sbudget guarantees a foreign investor 10 percent of the total cost of theinvestment project, or up to 25 percent of the funds borrowed by the investorto complete the investment project.

2.    Tax benefits to investors.According to the Russian Federation investment law, these tax breaks apply onlyto those taxes going to the city’s budget.

3.    Tax benefits to banks and/orother financial institutions supporting investments.

4.    Leasing benefits (i.e.,discounted rent). A discount of up to 25 percent is provided to investorsduring the design of the investment project site, and 40 percent discountapplies to the lease of investment project’s site while under construction.

5.    Delays on payment for therights to invest. The St. Petersburg Investment Law provides for the deductionof expenses for infrastructure development from the total value of theinvestment project.

6.    Budgetary support. The cityof St. Petersburg can budget certain funds to co-invest in the investmentproject.  The city’s draft budgetfor 2000 plans to allocate certain funds for budgetary support of investmentprojects.

 

Investing in Leningrad Oblast

LeningradOblast’s investment law, approved shortly before St. Petersburg’s, attracted anumber of big U.S companies. After the law was approved, several U.S. companiesoriginally interested in implementing projects in the St. Petersburg areaturned to Leningrad Oblast. Leningrad Oblast is located just on the outskirtsof the city and extends to the border with Finland (an EU member). A number ofbig manufacturers have already established production facilities in theLeningrad Oblast, bringing their suppliers along. 

 

LeningradOblast offers the following support to foreign investors:

1.    Tax breaks.

2.    A guarantee of the stabilityof the investment climate. This guarantee says that should an increased taxburden (federal and/or local) occur Leningrad Oblast will compensate theinvestor for the difference. (Compensation, however, is only possible if thelocal budget has sufficient funds to cover the difference.)

3.    Investment tax credit. Thenew law “On the Tax and Investment Credit in Leningrad Oblast,” adopted by theLeningrad Duma on October 8, 1999, provides new investors with an investmenttax credit. If the company is conducting certain investment activity (researchof new technology, introducing new technology into an existing project, etc.),Leningrad Oblast will provide investment credit to investors not to exceed 100percent of taxes paid to the local budget.

4.    No payments for the right toinvest. Leningrad Oblast does not charge investors for the right to invest. Theoblast is working on implementing a number of amendments that will expand thelaw’s applicability to some new projects, and will qualify modernization ofstate-owned enterprises as an investment activity.

 

*For a lengthier report onthe St. Petersburg city and Leningrad Oblast investment laws, visit BISNISOnline at http://www.bisnis.doc.gov/bisnis/country/9911stpete.htm. For moreinformation on doing business in Northwest Russia, visit  www.bisnis.doc.gov/bisnis/country/nw.htm.*

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*Alexei Kim is the BISNISrepresentative in St. Petersburg.*