Having good places tourism department faces decline in the growth In the last ten years, foreign tourism to Russia dropped by 70%, and overall tourism in Russia dropped by 50%. In 2009 this is 11% In 2004 the profit from tourism was $24 million, which is barely 1% of country's GDP
LABOUR RELATIONS & SOCIAL SECURITY Labour code Employers Unions
Labour Code Employer/employee relations are governed by the Labour Code and other special laws. Employment legislation makes it very difficult for the employer to dismiss an employee on disciplinary grounds.
Employers In accordance with the Labour Code, an employer can be an individual or a legal entity
UNIONS Union activity is regulated in accordance with the Federal Law on Professional Unions, their Rights and Guarantees of their Activities. Today, unions in Russia are becoming more active and wielding more power over employers. They are initiating collective negotiations and concluding collective bargaining agreements. Under the Labour Code, the employer shouldtake the opinion of the trade union into account beforeadopting certain internal regulations (i.e., internal policies) or dismissing trade union members
WORKING CONDITIONS Wages & salaries Employment contracts Working hours Paid holidays Equal opportunities Termination of employment
SOCIAL SECURITY Coverage Employee contributions Employers contribution
COVERAGE Social and health security covers pensions, unemployment, maternity and child benefits, illness and other social services
Employee contributions Employees currently do not pay Russian social taxes; employers make all contributions.
Employers contribution Russian social taxes were substantially reduced from 1 January 2001. Currently, companies pay the following on employee compensation: Unified Social Tax Obligatory Pension Insurance Mandatory Accident Insurance
Working culture of RUSSIA Collectivism Egalitarianism Dusha
Political System The 1993 Constitution declares Russia a democratic federative state based on the rule of law and a republican form of government. The president is the head of stateand the prime minister is the head of government. The russian federation is fundamentally structured as a representative democracy. The federal government is composed of three branches:
TIPS TO VISITORS Visa invitation letter Immigration authorities Russian consulate/Embassy Validity of passport Duration of visa process
TYPES OF VISA Business Visa Work Visa Currency The currency of the Russian Federation is the Russian rubles. The ruble is sub-divided into 100 kopecks. The ISO 4217 code is RUB.
CONTINUED Business and social etiquette formal Respectful Same level of people Hand shake Living conditions According to the latest Cost of Living Survey by Mercer Human Resource Consulting. The survey covers and measures the comparative cost of over 200 items in each location, including housing, transport, food, clothing, household goods and entertainment.
Main legal acts: the Constitution, federal constitutional laws,
federal laws, presidential decrees, governmental regulations, and laws of regional constituents of the Russian Federation.
Priority to the rules made by international treaty.
The Constitution recognizes norms of international law and international treaties and agreements with Russia as part of the domestic legal system.
REGULATIONS FOR BUSINESS
Federal Antimonopoly Service (FAS) A government regulator of market competition policy in Russia. Its objective is to ensure compliance with antimonopoly regulations set out in Russian competition law. The FAS has power to: prevent unfair competition; reduce competition; abuse of a dominant position .15% of profits will be charged as a penalty in case of violating competition rules.
PATENTS From 1 January, 2008, Chapter IV of the Civil Code of the Russian Federation came into force. Consequently, many of its provisions are similar to those in other industrialized countries. Examination of merits is required in case of patents. TRADEMARKS Legal protection of a trademark is provided on the basis of its official registration or under international treaties or conventions to which Russia is party.
PROPERTY MARKET Introduction of the land code of the Russian federation in 2001. Introduction of “ One window system” to obtain technical & registration documents. Reclassification of land to another category in order to use agricultural land for other purpose. Advantage of “land code” to municipal authorities. Compliance with planning regulations. Securitisation of loans is also allowed in Russia. In general, Russian law neither imposes major restrictions on foreigners nor makes distinctions between foreigners, Russian legal entities with foreign interest and Russian legal entities/citizens in relation to ownership of land
CORPORATE TRANSPARENCY Improvement in corporate governance. Transparency index has increased, as given below in the chart: Transparent sectors: Telecom, food and retail sector.
Responsibility of Russian company for custom procedure. Due payment of custom along with other requirements. Need to get license to import certain goods. Different Economic zones for custom benefits, like: Baikal Amur Mainline economic zone, East Russia economic zone Central-Northern economic zone, European Russia economic zone, Volga-Uralseconomic zone,
CONTINUED Trans-Ural economic macro zone, South Russia economic zone, Non-Chernozemic economic zone, Siberian economic zone. Custom duty rates of few products, given below:
Customs duty payments for customs convoy are established on an agreed upon basis between the State Customs Committee and the Ministry of Finance of Russia.
Customs duties for storing goods
Customs duty payments for temporary goods storage in warehouses are established on an agreed upon basis.
Customs Regulations for Individuals
Goods that are not intended for use in production or commercial activities may be brought into Russia without duty if their total cost does not exceed 1000 USD and they weight no more than 50 kg. Russian citizens who have spent more than six months abroad may bring up to 5000 USD worth of goods duty-free into Russia.
Name of the areas, where improvement is required to make improved custom policies, are given below:
Lowering of customs duty on imports of technological equipment; Simplification of the customs clearance process; Tighter customs control after customs clearance of goods; Further development of customs integration in the Commonwealth of Independent States.
Central Bank Principal Function is to protect the rouble and ensure its stability. Sole issuer of roubles. Manages most of state budget accounts. Collaborates on the domestic financial market with the Federal Insurance Supervisory Service and the Federal Service for Financial Markets
Banking System Russian banking sector has developed rapidly in recent years. Russian banks have attempted to reposition themselves as retail or universal banks State controlled banks made the largest contribution to the aggregate financial result (48.4%), the share of large private banks was 24.7%, and foreign controlled banks accounted for 19.6%. Banks’ assets have increased, totalling USD 427.1 billion 09, top five banks control 44% of assets The return on assets in 2008 fell from 3.0% in 2007 to 1.8%, and the return on equity was down from 22.7% to 13.3%
Deposits of customers decreased from 78 billion rubles to 39 billion, quickly converted to foreign currency (depositors withdrew 42% of their deposits ) Composition of residents’ expenditure was as follows: 74% in purchase of goods and service, 15% in compulsory payments and taxes, 0.3% in ruble saving, and 10.2% in foreign currency. Bad loans increased by 13 times. Banks themselves actively participated in the stock markets, Banks’ securities showed a loss of USD 3.7 billion
Credit Crunch Banks reduces loan not only to enterprises but also to consumers (retail banking). Enterprises into bankruptcy. fall in demand for residences, offices, automobiles and other sectors. Economic Slowdown DUAL: Shrinking foreign borrowing and price down of export Three waves
Budget Federal budget deficit of 4.6%(as compared to surplus of 8.3% of GDP) - support the real sector, Financial system Gross capital formation contracted 55.4% Fixed capital investment declined 18.9%(Inc 16.5%)
Expenditure Exp for stabilizing currency Except funds also For real estate.
Money laundering Funds equal to or exceeds RUB 600,000 Immovable assets is equal to or exceeds RUB 3,000,000 Money transfers without opening an account collect originator’s name, VAT number, place of residence, and the date and place of birth
Exports/Imports Exports declined 44.8% to $206.3 billion(2008) Exports increased 18% qoq(2009) Imports of machinery, equipment and transport vehicles declined 53.7%(they grew 58.4%.) Net exports increased 33.0% 2009 (they fell 28.4%).
Supply side short(Sectors falling) Overall output fell 18.4% construction sector, 14% in transport, 5.3% in retail trade and 4% in wholesale trade. Industrial output declined 13.5%, Mining fell 3% Manufacturing sector, output was down 19.1% Agricultural output contracted 0.8% (it grew 9.6%)
Labour Market Employed fell by 2.4% (it rose 0.8%). Labour productivity declined by 7.6% (it increased 6.3%). Downfall more in Manufacturing than Service Real wage decreased 3.5% Unemployed increased to 7.6% from 6.2%(23% decrease)
Exchange Rate ruble/dollar rate rose 2.8% in 2009 Q3 as against 5.3% in Q2 real rate of the ruble against the euro declined 0.8% (it rose 3.6%)
Some Rules for foreign currency Resident and Non-Resident companies and individuals can freely perform currency Transactions Russian residents’ use of foreign bank accounts is restricted Advance payments on certain import transactions Residents must draw up a transaction passport, supporting the legal basis for the currency transaction
Leasing Market had grown by over 50% per year. No. of new deals fell 9.4%(RUB 605 billion) Cannot purchase or sale assets so leasing Can be of 25/50 yrs. etc. leasing companies’ portfolios stood at RUB 1.4 trillion
Insurance The Federal Insurance Supervisory Service (FISS) Insurance Market Portfolio Property 33.3%, liability 2.4%, obligatory medical insurance 41.7%, third party motor liability 8.4%, life insurance 2.0%, personal lines 11.4% and other obligatory lines 0.8% 786 insurance companies(Rosgosstrakh, Ingosstrakh, Sogaz) Law obliges insurers to separate life insurance from other types of insurance Small insurers have already lost their licenses
Federal Service for Financial Markets (FSFM) Objectives maintain stability in the financial markets, make the markets more efficient and attractive to investors, increase market transparency and reduce investment risks conditions for issuing and trading securities
Capital Market The Russian Trading System (RTS) leading stock exchange Calculates the RTS Index Used as an indicator The Moscow Interbank Currency Exchange (MICEX) Trading Bonds Organises stock transactions and foreign exchange trading Developing derivatives market
security must be specifically recognised as such in the Russian Civil Code Registration of an issue usually takes about 30 days Equity securities may be offered to the general public open (public) joint-stock companies. closed joint-stock companies & limited liability Floating Shares 30% of the overall issued shares use of promissory notes for debt financing, Also can issue convertible bonds
Accounting Russian Accounting Rules (RAR) International Financial Reporting Standards (IFRS) Some differences The concept of inflation accounting does not exist. Consolidated financial statements are treated as secondary to the stand-alone statutory financial statements
Offices of foreign companies Rules existing in the Russian Federation (RAR); Rules existing in the country where the foreign legal entity is located. Maintain tax accounting under the rules prescribed by the Russian Tax Code
Companies subject to statutory audit All open joint-stock companies Banks and other credit institutions, insurance companies, commodity and stock exchanges & investment funds. Annual sales exceeding RUB 50 million
Tax system The Tax Code of the Russian Federation summarises the general tax principles, rights and obligations of taxpayers and tax authorities, description of taxes payable and other provisions. corporate profits tax rate 20% Final payment is due by 28 March.
Tax treaties As of November 2008, Russia has signed and ratified 69 double tax treaties. Withholding taxes on interest, dividends and royalties are typically reduced by tax treaties
Withholding taxes Accordance with the Tax Code, income received by a foreign legal entity and not attributed to a permanent establishment (PE) in Russia is subject to withholding income tax in Russia 15% on dividends 10% on freight income 20% on some other income(royalties and interest. etc.) 20% of revenue or 20% of margin (24% before 1 January 2009) in relation to a capital gain
Tax Rate Dividends received by Russian legal entities from Russian or foreign legal entities are taxed in Russia at a 9% flat rate 15% tax rate is applicable to dividends paid by Russian legal entities to foreign legal entities Exemption -Invt- RUB 500 million -Own For at least 365 days Flat income tax 13 % Maximum property tax rate is 2.2%. VAT rate is 18%.
Penalties Underpayment of taxes may result in a fine equal to 20% of the underpaid taxes Late filing of a tax declaration carries a penalty of 5% to 10% of unpaid tax per each month Failure to withhold tax may result in a fine of 20%
Special economic zones (SEZ) Technical research, develop industrial Production, development of Russian tourism Benefits exemption from property tax and land tax, and exemption from customs duty and VAT reduced profits tax
Legal Framework - FDI Foreign Investment law -1991 First legal framework conducive to foreign investors The basic tenet of the code was national treatment for foreign investors. Law on Foreign investments in Russia 1999 Elaborate framework to protect the rights of investors. Grandfather Clause - which protects the investor from unfavorable changes in the legal and tax regulation for a period up to 7 years. Resource Usage- Freedom from performance requirement or any commitment to use or export local goods. Labour laws- Freedom of employ any personnel of their choice regardless of their nationality Capital Flow – Unrestricted transfer of funds in freely convertible currencies In case of Expropriation- followed by adequate and prompt compensation Dispute resolution – between foreign party and host country referred to international arbitration without having to go thru local court system. Replaces old license regime with PSA contracts
The currency controls are imposed on the transaction of both export and import type (these include transaction of capital).
There are restrictions regarding the amount of foreign currency which could be kept on the bank account of the residents.
Russian rouble is the only legal currency in the territory of Russia.
IPR- Russia Improved legal framework but suffers from problematic enforcement Member of Paris convention, Universal Copyright Convention, Berne convention and Geneva Convention. After joining WTO- abide by TRIPS, Copyright law, Trademark law, Patents
Competition Regulation Governed by 1995 - Law on Competition and Limitation of Monopolistic Activity Objectives: Level playing field for all players (investors) Setup Anti-Monopoly regulation (Difficult in country like Russia coming from completely Monopolistic markets)
Restricted Sectors Investment is constrained when it comes to some fields of economy such as:
natural resources- foreign ownership can not be more than 11 per cent of the total capital;
banking- can not own more than 12 per cent of total banking capital.;
Special Approvals Foreign investors will need a prior approval in case of : to ventures with more than 50 percent of the total share capital ; the amount of money which is more than 50 million Russian roubles (in case the amount of investment exceeds 100 million Russian roubles – there is an additional registration is required); to projects related to the Russian defense industry (however, in some cases this investment could be prohibited by legislation); to natural resource exploitation;
FDI Inflow In Russia – Sector-wise Breakup The food industry has attracted the highest number of FDI projects - 45 projects, the energy sector is by far the biggest recipient – accounting for $10 billion in 2002-2003. Other major sectors include wood products ($1 billion), consumer goods ($95 million), automotive OEM ($670 million), and metals/mining ($552 million) sectors.
Risks Investors’ opinion 87 Source: questioning of foreign investors «Russia as an object of investments», polledin 2009 г. byFIAC
Russian Transformation 1989-2000 Fall of Soviet union in 1991 Transformation from socialism, central planning, government control to market determined prices & privatization Complex transition process of repositioning itself in the global trading system. To create a functioning market economy out of the ashes of the communist regime.
Economic slump and Political Turmoil GDP contracted 54%, industrial activity reduced by 45% Yeltsin Era 1991-1999 Source: Russia Economic Survey – May 2007 ( US- Russia Business Council)
Putin’s Russia – 2000 to 2008 On average GDP growth rate of 6.5% since 2000 (primarily due to high oil prices ) New era of political stability to push forward economic reforms Source: Russia Economic Survey – May 2007 ( US- Russia Business Council)
BUSINESS ENVIRONMENT STRENGTHS : Land resources OPPORTUNITIES : Russian economy is attracting increasing volumes of FDI as it continues to grow. THREATS: Poor performance on economic indicators the faltering privatization process ageing population
CONTINUED…………. CHALLENGE: declining population, Widespread corruption An oppressive and inefficient bureaucracy Income inequality Inflation weak rule of law Environmental degradation. CULTURAL AND BUSINESS TIPS: Foreigners must have a valid visa to travel to Russia. All foreigners entering Russia must register within 72 hours of arrival Younger Russian business people generally speak English Russians have a different attitude towards official documents - they do not place as much significance on them.
INDUSTRIES Russia is one of the world’s largest energy producers, with oil and gas sales accounting for 70 percent of exports to the Baltic states. Russia is now the world's third-largest exporter of steel and primary aluminum. The increasing purchasing power of the population has been the main driver behind the recent rapid growth of Russia’s retail and consumer sectors.
COAL MINING INDUSTRY Licensing Geology Surveys Complex Program of Deposit Development Transportation and Installation of Mining Equipment Coal Extraction
Market Challenges Long Investment & Manufacturing Cycle Reserves Geological Risks Territorial Location High Capital Intensity Strong Dependence on Export Trade. Equipment Supply Global Competition Strong Variety of Mining Conditions Industry Pressure Low Growth Rates Low Return on Investment
TIPS……. Business Concentration Manufacturing of Products with High Added Value Decreasing of Costs Own Transport Construction of Enrichment Facilities Usage of IT
GROWING SECTORS IN THE MEDIUM TO LO NG RUN: CONSUMER PRODUCTS Russia has one of the most dynamic retail markets in the world. This sector has become more westernized over the last decade due to the increased spending power and demand for a variety of designer and consumer goods. OPPORTUNITIES Most of the consumer goods are imported Few players Stable growth Soviet union never strong in producing consumer goods(cost & quality)
Financial difficulties Inefficient internal distribution Most of the consumer goods are imported high Russian imports duties and other related taxes and costs, imported goods are now relatively expensive, while locally-manufactured products are far more competitive. There is a marked tendency for foreign companies to manufacture in Russia if they can. relatively easy and inexpensive to build a brand name presence in the Russian market.
THREADS(SUPPLY) Major Western brands like Prada, Hugo Boss and MaxMara have entered the market and created strong competition finding the right price/quality mix, distribution, credit and delivery terms, etc. Payment and delivery is difficult(infrastructure,high transportation cost,lack of local regional wholesalers)
ENERGY OIL AND GAS SECTOR Russia is known to have world largest natural gas reserves, and Gazprom presently produces 84% of Russian and over 17% cumulative global gas output. The country’s gas resource development programme to 2030 targets 23.5 Tcm cumulative reserves addition.
BENEFITS Decreased export duties Differentiated MET (Mineral Extraction Tax) rates depending on the complexity of field geology. Improved capital investment incentives (accelerated depreciation Increased tax-deductible portion of MET
APPROACH TO REDUCE OPERATIONAL COST Improving contractor performance Optimization of inventory and infrastructure costs Optimization of supply chain and transportation costs Staff optimization and outsourcing Implementation of energy saving technology Optimization of costs related to repair of wells and surface equipment
PROBLEMS FACED : Growing field development costs Inefficient industry legislation Lack of skilled workforce Difficulty of access to the natural gas market Corruption
COMMUNICATION AND IT The Russian communications and information technology sectors have been developing rapidly and, according to the preliminary estimates of the Ministry of Communications and Mass Media. the telephone systems in 60 regional capitals have modern digital infrastructures; ;; cellular services, both analog and digital, are available in many areas; in rural areas ,the telephone services are still outdated, inadequate, and low density.
OPPORTUNITIES Russia had a total of 187.8 million mobile subscribers, an increase of 15 million from a year earlier. Hardware is the major IT segment, accounting for more than 50% of the sector’s revenue Demand for main line service remains unsatisfied In rural areas, the telephone services are still outdated, inadequate, and low density THREATS: National players,