1. 1Re-ThinkingForeign Investment in RussiaGrayling Think PieceMoscow, June 2011
2. 2Executive SummaryOver the last twelve months, new and formally institutionalized methods of interaction anddialogue with the federal government have brought tangible gains for foreign investors inRussia. A revitalized Foreign Investment Advisory Council (FIAC), the appointment (at DeputyPrime Minister level) of an investment ombudsman, and President Medvedev’s modernizationmanifesto are laying a path to a more stable, predictable, sensible and appropriate investmentand regulatory climate.While some may worry about Duma elections at the end of 2011 and Presidential elections inMarch 2012, we argue that the politics is less important than the intent, that reported differencesbetween President Medvedev and Prime Minister Putin are more imagined or fanciful than real,that reform is set whatever the results of elections.For too long, it has been a difficult challenge for many of our international clients to get clearfederal endorsement for their investments in Russia. The vortex of power is made for Russiansto be controlled by Russians in what outsiders often see as an opulent, Byzantine, chaotic andcynical way. A clear agreement from the Russian government to treat our clients as they wouldmajor domestic investors has usually been achieved with the help of an intensive bilateralpolitical dialogue at the highest level and a round of shaking hands with numerous Russianheavyweights. Political leverage from selected regional governors in exchange for localizingproduction in their regions has also proved to be extremely helpful in getting continuous federalsupport for a multinational company’s development in Russia1.Diplomacy, direct federal contacts and regional leverage continue to be effective and necessaryinstruments for foreign investors to strengthen their foothold in Russia. On top of that a reformedFIAC, which now plays a more meaningful role, and some interventions by the newly appointedInvestment Ombudsman provide more opportunities for international players with sizableinvestments in Russia to structure their relations with the federal centre.The greatest challenge for Russia, post the Presidential election in March 2012, will be to copewith growing ―manual‖ control by Russia’s leadership over the state’s economic and socialdevelopment and the degradation of economic and political competition. This will not make lifeof Russian businesses easier, let alone that of foreign investors. There will be more regulation,the effects of the new Customs Union, and inevitable mistakes. Regulation will be an increasingfact of life, in terms of both quantity and complexity.1http://www.graylingcontent.com/wp-content/uploads/2010/09/Think-Piece-Pharma-2020.pdf
3. 3At the same time the pipeline of changes to get state officials to engage in dialogue withinvestors, including foreign investors, is promising. A white paper has been prepared forbusinesses’ complaints about corruption-intensive areas of state control at different levels, to bereviewed by the federal centre. The Russian President has issued a decree outlining an idealprocess of public consultations of the state authorities with businesses before a new regulationis enacted. Investment ombudsmen offices will be set up in every Russian federal district.Overall, there are good preconditions to re-set the regulatory environment for foreign investorsin Russia. For the benefit of both the Russian economy and foreign investors. It is time to giveRussia another try, to get involved in changing the game.
4. 4ContentsDeclaration of Interest & Special Note 5Political Background 6Economic Background 7Reforming the Foreign Investment Advisory Council (FIAC) 8Foreign Investment Ombudsman 10Grayling Recommendations 12Attachment 1: A Sample of a Draft Application to Join FIAC 13Attachment 2: FIAC Application Process 14Attachment 3: FIAC Members 2010 15
5. 5Declaration of InterestGrayling provides public, government and investor relations services to clients, including majorforeign investors, active in Russia. In the twelve months prior to the publication of this thinkpiece Grayling (our Russian unit) worked for the following companies: 20th Century Fox;Allergan; Altium; AstraZeneca; APCOR; Blackberry; BSA; British Airways; Comitéinterprofessionnel du vin de Champagne; Chartis; Clariant Produkte; Computershare; CreditSuisse; Facebook; Flydubai.com; Fujitsu; Goltsblat BLP; GE Corporate; GE Energy; Dow;GOST; Hitachi; Hotels.com; IKEA; Irdeto; John Deere; Kapsch; Kellogg; Mars; Medtronic; MOL;NBCUniversal; New Yorker; Papa Johns Worldwide; Paramount Farms; Riverbed; Rixos;Sandisk; Saatchi & Satchi; Saxo Bank; SES Astra; Skype; Tarkett; Tenneco; TPG; UlysseNardin; UPS; Wizz Air; Velux; and Yota.In other markets in which Grayling operates, through 70 offices around the world, Grayling mayhave, or currently does, work with these or other firms in other countries.Special NoteThis report and its contents are issued only on behalf of Grayling and statements herein shouldnot, in any way, be imputed to be statements from, endorsed by, or otherwise supported by,individual client firms, unless so stated in the text. Grayling accepts no liability for any errors oromissions in this publication or for any losses or damages incurred by anyone who acts solelyon reliance of the information contained herein, outside of any duty of care Grayling owes to itscontracted clients. This report may be freely quoted subject to crediting its source.
6. 6Political BackgroundIn Russia, 2011 is the year of parliamentary elections (to be held on 4 December 2011) and theyear-previous to Presidential elections (to be held on 11 March 2012).In 2008 alterations to the Constitution were made under which the new President will remain inhis post for six years instead of four. This means that the coming elections will be strategicallyimportant for the country’s development in the following decade.As for the Parliamentary elections, a victory of the Edinaya Rossiya (ED) political party / All-Russia People’s Front coalition around ED can be safely assumed despite the significant fall ofpublic support for the government’s policy over the past twelve months. The Parliamentaryterms have also been altered in 2008, allowing the deputies to remain in their posts for fiveconsecutive years.Investment in the national economy remains ontop of the government’s agenda despite all thepre-election fuss. While Prime Minister Putinmostly overlooks domestic business, PresidentMedvedev has taken up the topic of foreigninvestment. During a recent PresidentialCommittee on Modernization meeting inMagnitogorsk (March 30, 2011) DmitryMedvedev announced a major initiative toreform the country’s business climate, listing adozen measures to be implemented.The March Liberal Manifesto made byMedvedev, and subsequent calls for a cautiousapproach towards national economic policy(―improving the quality of the economy byoverhauling infrastructure, lesseningdependence on energy and spurringinnovation‖) made by PM Putin during hisspeech before the State Duma, essentiallyhighlight the balance between the rhetoric ofboth tandem members. If Medvedev’s movesare supposed to attract liberal democraticvoters, Putin is more on the conservative side.One way or another, foreign investors canhope for a substantial improvement of theoverall investment climate within the nextpresidential term.In the shorter-term, recent weeks saw closer attention to the investment climate in Russia fromboth Putin and Medvedev. Medvedev’s aide, Arkady Dvorkovich, and Putin’s deputy, IgorShuvalov, have been tasked to ―oversee‖ foreign investors and innovation projects in Russia. AsMedvedev’s modernization manifesto:1. The Ministry of Economic Development will getnew powers for the Justice Ministry to take actionto repeal state agency regulations thatunjustifiably obstruct business and investmentactivity. The Justice Ministry will then have theduty to demand that the agencies immediatelyrepeal the anti-business regulations in question.2. Privatization program to be implemented.3. Improving transparency for minorityshareholders through amendments in legislation.4. Removing government officials from theboards of directors of selected state companies.5. Reducing procurement expenditure of largestate-owned companies by 10% within threeyears.6. Introducing a special Investment Ombudsmanfor each federal district, whose job will be toassist companies in carrying out privateinvestment projects, above all, helping them intheir dealings with the executive authorities.7. Reducing social taxes for employers.8. Establishment of Presidential mobile receptionoffices, comprising of Presidential ExecutiveOffice staff, which will be responsible forreceiving information from individuals andcompany representatives, complaints frompeople about the actions or inaction byauthorities, and reacting to this informationaccordingly.9. Publishing of anti-corruption reports in themedia.10. Improvement of higher education.
7. 7for the latter one cannot but notice two parallel projects running: Medvedev’s Skolkovo andPutin’s Agency of Strategic Initiatives.Interestingly, in our day-to-day work we have noticed a new trend: if before, it was safe forforeign investors to engage both Shuvalov and Dvorkovich in discussion of the same issue /idea, it is now becoming increasingly evident that foreign investors are strongly recommendedto use either the President’s or the Prime Minister’s networks to handle their specific issues. Itmay well be that an international company discusses one issue with Shuvalov and another withDvorkovich, but at any rate the foreign investor is supposed to know what issues are to bediscussed in either Presidential or Prime Minister’s camps to avoid duplication of efforts. Failureto do so may slow down the process of endorsement of one’s investment idea / handlingspecific issues relating to Russian operations.Economic BackgroundUnsatisfactory results, achieved by the Russian economy in 2010, are a sign that thedependency on a raw exports economy is inefficient and struggling. Overall economic growth in2010 amounted to only 4%. This fact is acknowledged by the authorities, including the Ministerof Finance Alexei Kudrin, who admitted that the country should achieve at least 6-7% annualgrowth, otherwise the struggle will continue. The recent forecast of the Ministry of EconomicDevelopment shows that Russia is far from this goal – the real economic growth in the comingyears will not exceed 4.5%.This adds to the poor investment climate, which resulted in a drastic decline of foreign directinvestment (FDI) in Russia in 2010. Preliminary figures show that last year the volume of FDIamounted to only 12-14 billion dollars, which is just half of what was invested in the best pre-crisis years. In the same period money outflow exceeded 33 billion dollars. Russia has attractedless private equity money than other emerging markets—$1.4 billion over the past three years,compared with $28.6 billion for China, $15 billion for India, and $5 billion for Brazil, according tothe Emerging Markets Private Equity Association.Government efforts (focused on a handful of industry-specific target development programs andinvestment projects) aimed at reducing the budget deficit seem to have lost momentum. Thisadds to the aforementioned pre-election race issue, when significant budget funding is divertedto economically inefficient, if politically popular, steps such as the lowering of prices on productsand spending on federal political promotion campaigns. Russia’s national economy survived thecrisis years and is still growing mainly because of high prices on oil. As long as oil prices remainhigh the Government will be able to fulfill its obligations and balance the budget deficit. Even anaverage price of 75-80 dollars per barrel would allow Russia to slightly increase its fiscalspending and even allocate some of the funds to the national reserve fund. In case the price forcrude oil falls below this range the Government will be obliged to review the budget for 2012-2013.
8. 8Nonetheless, the Russian Government is conscious of the glaring need to stop scaring foreigninvestors away, not just because it is a question of prestige in the current situation but becauseeven high oil prices do not guarantee stable economic growth. The optimistic goals set by theGovernment can be achieved only through well-executed modernization and a constant flow offoreign investment. ―Achieving modernization, which is the purpose of this Commission’smeeting, requires a major increase in investment. We need technology and we need money inamounts corresponding to Russia’s huge potential. We need the confidence and interest ofRussian and foreign investors‖, – said Dmitry Medvedev during the March 30, 2011 meeting inMagnitogorsk.Surprisingly, despite all the criticism and skepticism, some of the actions proposed by PresidentMedvedev are already being implemented. In particular, Deputy PM Igor Sechin left the post ofChairman of the Board of Rosneft and Energy, Finance and Transport Ministers are to follow hislead before July, 1 2011. In late May, Rostelecom state holding approved a new businessdevelopment strategy by 2015, under which the telecom giant plans to cut operational costs byEUR 0,6 billion. It is also highly likely that social taxes for employers will be reduced from 34%to as low as 26%, at least for small and medium-sized enterprises.Reforming the Foreign Investment Advisory Council (FIAC)The Foreign Investment Advisory Council was established in June 1994 in a combined effort ofthe Russian Government and foreign companies to improve the overall investment climate inRussia, as it was declared then. Today it would be fair to say that the council was formed byforeign oil majors, who aspired to lobby their interests and persuade the Government to passthe bill on ―Production Sharing Agreements‖. After that goal had been achieved, FIAC foralmost 10 years became a get-together club for foreign companies but without a clear purposeand strategy.FIAC is the only officially established and regulated platform for communication anddialogue between foreign investors and the Russian Government
9. 9Years 2007-2008 became a turning point for FIAC when the Government showed that it nolonger needed any advice from its members (it is even rumoured that at some point VladimirPutin wanted to move away from FIAC as a ―pretty useless get-together of unhappy foreigninvestors―). However the Government decided to give FIAC a second chance and proposed areorganization of the council with a head-on effort from the Ministry of Economic Developmentexpressed in a Government decree, under which relevant state Ministries and authorities wereobliged to participate in FIAC executive meetings or its working group’s discussions, whichinstantaneously raised the status of FIAC to the level of an intergovernmental discussion forum.In turn FIAC members were asked to guarantee the presence of their global CEOs once a yearduring the plenary sessions of FIAC, which are traditionally chaired by Prime Minister Putin.FIAC’s organizational structure was reformed as well. An Executive Committee was formedalong with the introduction of several ―think tanks‖ tasked with lifing administrative barriers andimproving investment image plus customs and energy efficiency. As a result FIAC became astrategic playground for public-private dialogue making possible a number of developments instate regulation, which resulted in a certain improvement of the overall investment climate inRussia. FIAC is directly or indirectly responsible for the realization of such measures as:- reduction of customs duties on agricultural raw materials, which do not grow in Russia;- reduction of customs duties on equipment for food production;- free circulation of automobile components, imported under the ―promsborka‖agreements;- introduction of electronic customs declarations;- establishment of a public council within the Russian Federation State Committee forConstruction, Architectural and Housing Policy.- FIAC has also provided expert counsel during the elaboration of the bill ―On foreigninvestments in strategic enterprises‖, of the federal bills ―On patent agents‖ and ―Ontechnology transfer‖ and amendments to the migration regulation and the bill ―On thestatus of foreign workers‖.All these wins have been achieved in the last two years, increasing the council’s influence andmaking it the real government relations instrument in the hands of foreign investors. Our clientswho either have become members of FIAC or have been inside the Council for a number ofyears admit FIAC has become more operationally effective, helping them change the game inthe Russian market.Nevertheless the Government would like to see an even more active FIAC. The Ministry ofEconomic Development authorities maintain that the Russian Government would like to seemore members, including from such sectors as IT, pharma and retail. The Ministry is also readyto consider introducing new ―think tanks‖ within the framework of FIAC for the sake of attractingnew members and improving the public-private dialogue should there be a strong base for sucha move.
10. 10Foreign Investment OmbudsmanDuring a meeting on the investment climate in 2010, President Medvedev instructed theGovernment to elaborate an appropriate mechanism for processing complaints and suggestionsfrom companies that come across various problems in the Russian Federation. As a result the―investment ombudsman‖ position was established in August 2010, which was taken up by FirstDeputy PM Igor Shuvalov. The creation of this position is a logical step as the governmentcontinues to promote economic transparency and improve Russias investment climate.Simultaneously, a Department for Investment Policy and Development of Private/PublicPartnership was established within the Ministry of Economic Development, which processesclaims from foreign companies.The Government has received a total of 67 complaints against federal and regional officials.The complaints relate to various issues, from protection of property rights to connection topower grids. At the moment, 21 cases are being reviewed from a variety of companies.In April, President Medvedev gave public instructions to the following members of the Cabinet topro-actively review issues which investors may be having when interacting with state authorities(by 1 October 2011):Sergey Ivanov Border-crossing related, post and courier service and services at airportsand railway stationsIgor Sechin Technical control and safety in the natural resources sector, geologicalresearch and rational use and protection of natural resourcesIgor Shuvalov Fire safety, visas, work permits and registrationDmitry Kozak Capital construction relatedAlexandr Zhukov Sate sanitary and epidemiological controlAlexey Kudrin Financial markets and taxesThis refers to a proactive strategic review of state services. However, current issues and ideasby foreign investors can be addressed to Igor Shuvalov as an investment ombudsman.Common procedure for filing a complaint by the foreign investor can be visualized as follows:
11. 11CompanyFederal/local authorityI. The company has anissue with the authority.II. A letter outliningthe issue is sent tothe Ministry ofEconomic Dvlpm.Deputy Minister of EconomicDevelopmentStanislav VoskresenskyHead of the Economic Ministry’sDepartment for InvestmentPolicy and Development ofPrivate/Public PartnershipSergei BelyakovIII. The Ministry decidesinternally whether thecase requiresconsideration the letter.is being readdressedwithin the MinistryIV. The case is studied bythe Department andcorresponding authoritiesare being asked to providea formal reply to thecomplaint within 30 days.Aide to First Deputy PrimeMinister Igor ShuvalovAlexei AbramovV. The letter along with the reply from thecorresponding authority and the description ofthe case is sent to the Office of the First DeputyPrime Minister Igor Shuvalov.First Deputy Prime MinisterIgor ShuvalovVI. After final approval byAlexei Abramov the case ispresented to First DeputyPM Igor Shuvalov for finaldecision.VII. First Deputy PM IgorShuvalov may prepare agovernmental decision, whichwould oblige the authority toresolve the issue in question.Minister of EconomicDevelopmentElvira Nabiullina
12. 12Grayling RecommendationsWhat to do What NOT to do- If your company qualifies, considerjoining FIAC- If your company is a FIAC member re-think engagement in this re-borninstitution- Navigate more carefully between theGovernment and the PresidentialAdministration- Engage more proactively at the expertlevel with Russian state authorities (thereare quite a few expert councils in stateauthorities which are meaningful andimpactful). This will allow you to beplugged in the game and subsequentlyhelp you change it to your own andRussian consumers/patients/clients’benefit.- This year can be the right period forannouncing an intention to invest inRussia or even a general commitment tokeep Russia among the world’s prioritymarkets for your company. A foreigninvestor can get a more ―mutuallybeneficial‖ framework from the rulingelite who are bound to stay in powerpost the elections.- Assume the Russian Government isdesperate to have new big names in theFIAC, and that writing an application willautomatically get you on board (only onecompany per year, on average, became amember of FIAC in the past). Or that as anexisting member of FIAC you can leaveyour membership dormant until a really bigissue arises.- Engage both the PresidentialAdministration and the Government fordiscussion of the same topic at the sametime. The executive branch is theGovernment: do not see the PresidentialAdministration as duplicating the structureof the Prime Minister’s Office. However, ifyou are at the initial stage of negotiationsand contemplating an innovation project itmay be a good idea to start with Skolkovo(vs. the Strategic Investment Agency).- Think that you can continue to ignoregovernment relations if your investment inRussia exceeds 5m EUR. Or be extraproactive this pre-election year: you mayend up with imposed commitment unlessyou navigate more carefully.We hope the news from / meetings at the upcoming International Economic Forum in St.Petersburg will demonstrate to your global HQ that Russia should be kept/get a priority status inthe list of the world’s hot investment destinations.Give Russia another chance: engaging Russian authorities now with careful and thoughtthrough navigation can change the game to your benefit in this market.
13. 13Attachment 1: A Sample of a Draft Application to Join FIAC―__‖ June 2011Mr. Vladimir PutinPrime Minister of the Russian FederationChairman of the Foreign Investment Advisory Council in Russia2 Krasnopresnenskaya Emb.103274 Moscow, RussiaDear Mr. Putin,…(Company name) is a leading multinational ___ company. We have about ___ employeesworldwide and operate in more than ___ countries.We are the world’s largest producer of ___. We are among the major players in ___.In 2010, the Company recorded net income of ___ EUR. The Company’s is traded at ___.Together with its subsidiaries and affiliates, our company stands as the ___ largest international___ corporation and is one of major foreign investors working in the ___ Region of Russia.At the moment key investment projects for our company in Russia are ___.The Corporation has already invested about ___ EUR in the development of the Russianeconomy for the past ___ years.We plan to continue our policy of business development both in Russia and other CIS countries.Company expects to invest over ___ EUR in the development of Russian deposits.In view of our development plans for Russia, we would like to become an active member of theForeign Investment Advisory Council.Accordingly, we apply to you with the request to approve our application for FIAC membership.We believe that our extensive knowledge and experience will be a valuable contribution to theefforts of FIAC aimed at improving the investment climate and creating a favorable environmentfor foreign investors in Russia.Sincerely,CEO [global]
14. 14Attachment 2: FIAC Application ProcessThere is an annual rotation (admission/expulsion) of FIAC members and the procedure usuallytakes place during the plenary meeting of FIAC in November. The companies are rarelyexpulsed, and admissions take place even more rarely. As a rule, each year only oneapplication is considered.The procedure is quite simple but takes time.Technically, any foreign investor can qualify for admission if he complies with certainrequirements but in reality it is not enough. The company should present recommendations frompresent members of FIAC and authorized consultants and should pass a certain procedure witha special body which is responsible for the decision-making – the FIAC Executive Committee.The final admission decision is taken by the Head of Government (Prime Minister) onsubmission by the Executive Director of FIAC (Minister of Economic Development), who in histurn relies on findings of the FIAC Secretary (Deputy Minister of Economic Development) andappraisal of the Executive Committee, which is comprised of Heads of the FIAC working groupsand FIAC consultants.Stage I:- Applicant presentation and meeting with FIAC Secretary- Working group on admission on the basis of the Ministry of Economic DevelopmentInvestment Policy Department- Preliminary approval of the filing of an application and its elaboration- An address to the Head of Government (see Attachment 1)- Control in the Government Administration- Control in the Ministry of Economic Development AdministrationStage II:- Appraisal and expert evaluation of the application, consultations and additionsStage III:- Examination of the application by the Preparation Working Group of the FIAC ExecutiveCommittee- Approval by the FIAC Executive CommitteeStage IV:- Approval in the First Deputy Prime Minister Office- Elaboration of a decision and answer of the Head of GovernmentStage V:- Examination during a plenary session and decision- Admission
15. 15Attachment 3: FIAC Members 2010Company Country Name Position1 3M USA George W.BuckleyChairman of the Board, Presidentand CEO2 ABB Sweden Joseph Hogan CEO3 Alcoa USA Klaus Kleinfeld President and CEO4 BASF Germany Dr. JuergenHambrechtChairman of the Board5 BAT UK Richard BurrowsChairman, British American Tobacco6 BHP Billiton UK/Australia AndrewMackenzieGroup President and ChiefExecutive Non Ferrous7 BP UK/USA Tony Hayward Group Chief Executive BP8 Cargill USA Greg Page Chairman and CEO9 Deutsche Bank Germany Dr. JosefAckermannChairman of the Management Boardand the Group Executive Committee10 EBRD Thomas Mirow President11 ENEL s.p.a Italy Fulvio Conti CEO12 ENI s.p.a. Italy Paolo Scaroni CEO13 Ernst&Young USA James Turley Chairman & CEO Global14 ExxonMobil USA Neil W. Duffin President of ExxonMobilDevelopment Company15 Finmeccanica Italy Pier FrancescoGuarguargliniCEO16 Ford MotorCompanyUSA John Fleming Ford Executive Vice President,Chairman and CEO, Ford of Europe17 Intel USA Jane Shaw Chairman of the Bord18 Itochu Corp. Japan Eizo Kobayashi President and CEO19 Kinross GoldCorp.Canada Tye W. Burt President and CEO20 Kraft Foods USA Irene Rosenfeld CEO and Chairman21 Lafarge France Bruno Lafont Chairman & CEO of Lafarge Group22 Mars USA Olivier Goudet Chief Operating Offiecer23 METRO Group Germany Dr. EckhardCordesCEO METRO AG24 Mitsubishi Corp. Japan YorihikoKOJIMAChairman of the Board25 Mitsui & Co. Japan Masami Iijima President and CEO26 Nestle Switzerland Paul Bulcke CEO27 Novartis Switzerland Dr. DanielVasellaChairman & CEO NovartisInternational AG
16. 1628 PepsiCo USA Indra K. Nooyi Chairman and CEO29 Procter& Gamble USA RobertMcDonaldCEO30 Renault France Carlos GHOSN President and CEO31 Royal Dutch Shell UK/Netherlands Peter Voser Chief Executive Royal Dutch Shellplc32 Siemens Germany Peter Loescher President & CEO Siemens AG33 SUN Group India Nand Khemka Chairman34 Sсhlumberger France Andrew Gould Chairman and CEO, SchlumbergerLimited35 Telenor Norway Jon FredrikBaksaasPresident and CEO36 Tetra Pak Sweden Dennis Jonsson President & CEO Tetra Pak Group37 The Coca-ColaCompanyUSA Muhtar A. Kent Chairman of the Board and CEO38 Total France Christophe deMargerieCEO39 Unicredit Italiano Italy AlessandroProfumoCEO40 Unilever UK/Netherlands Paul Polman CEO41 UnitedTechnologiesUSA Louis R.ChenevertChairman and CEO, UnitedTechnologies Corporation42 World Bank Robert B.ZoellickWorld Bank Group President