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Gavin Stoddart's Presentation

  1. 1. PRECISE. PROVEN. PERFORMANCE. Making the Russian Far East attractive - a business perspective Presentation for the Second International Business Congress Gavin Stoddart Vladivostok, 26 September 2013
  2. 2. How do we make the Russian Far East more attractive for foreign investors?
  3. 3. What does the Russian Far East have to offer? Size • 6.2 m sq km (whole of Europe only 9.9m) • 36% of Russian land is the Far East Resources • Hydrocarbons (oil, gas, coal) • Timber • Fish • Gold • Diamonds • Other metals Location • Close proximity to markets of China, Korea, Japan (China trade to be $200 bn by 2020) • Nearest part of Russia to the United States • Ideally placed as a transport hub for Asia-Europe traffic • Higher than average productivity The average gross regional product (GRP) of regions in Russia in 2011 was $13,700, while in the Far East it was $17,500. • Russian Far East did not stop growing even during the crisis.
  4. 4. What are the opportunities for investors? • Oil and gas – liquification, processing, chemicals • Fish – canning, processing • Timber – furniture, wood products, paper • Metals - production Processing raw materials • 90% of manufacturing capacity has been lost since 1990s • Imports / shipment from Western Russia have replaced local production • Opportunities to re-establish manufacturing Replacing manufacturing capacity • Export of raw materials • Land bridge to EuropeTransport
  5. 5. What are the opportunities for investors? • vast territory with minimal agricultural production • rich marine environment • the leading eight APEC countries by population import over 100 million tons of grain per year – more than Russia’s entire production Agriculture / food processing •Nature – scenery and local wildlife both of potential interest to tourists both Russian and foreign •Gambling zone Tourism
  6. 6. Targets set by the Ministry Natural gas production to grow from 29.7 billion cubic m 2012 to 35.9 billion cubic m in 2016 The output of commercial products in the oil and gas sector to increase from 654 billion roubles in 2012 to 1.1788 trillion roubles in 2016. Forecast investment in the mining sector to be 246.2 billion roubles Timber processing volume will grow from 4,860,000 cubic metres in 2012 to 11,088,000 cubic metres in 2016. Construction and modernisation of fish processing enterprises in Kamchatka and the construction of a logistical complex in Khabarovsk as well as a Far Eastern innovation and technological trade and logistical fishery complex in the Primorye Territory.
  7. 7. What is the current level of foreign investment in the Far East? • Various projects in Sakhalin re oil & gas • New liquid gas project in Vladivostok • Talk of oil pipeline to South Korea • Investments to Primorye gambling zone • Mazda joint venture in Vladivostok • POSCO planned development of Vanino Port There are some high profile inward investments • 2012 total investment was US$ 13.6 billion • Only 16% of this was direct investment • 93% of investment in extractive industries • 85 % of foreign investment is in just two provinces, Yakutia and Sakhalin (both natural resource centres) But, in general level of investment is low and most is in raw materials
  8. 8. So why is the level of foreign investment so low?
  9. 9. Russia’s Far East is in many ways its “Wild West,” where hardened Cossacks some 350 years ago and young Soviets with courage and ambition, fewer than a hundred ― came to exploit Sakha diamonds and Sakhalin oil. Quote from a recent (June 2013) article in a Korean newspaper
  10. 10. Issues that are of concern to potential foreign investors in the Russian Far East Geographical Infrastructure Rule of Law Economic Informational Business process and control Human Resources Historical / political
  11. 11. Historical / Political Japanese / Russian territorial dispute Poor US – Russia relations
  12. 12. Geographical Perception that the area is remote Distances between towns in the Far East
  13. 13. Infrastructure Roads Rail Ports Air Power Communications Financial, including banking
  14. 14. Economic Size of the local market: - Population 6.3 million (4.4% of Russia’s total) and has decreased by 25% since 1990s RDP = $104 billion (5.6% of Russia’s total) Over dependence on exports of unprocessed natural resources (hydrocarbons alone account for 90% of exports from the Far East) mean the economy is not diverse Size of projects tends to be large which excludes small / medium-size investors Perception that taxes are too high Difficulty raising bank loans locally
  15. 15. Rule of law Unclear tax position Customs issues Fear of bribery / corruption
  16. 16. Informational Hard to get reliable information about local markets Lack of understanding of local customs / practice Not knowing how to find a local partner Lack of transparency in financial accounting
  17. 17. Human resources Hard to find employees locally with the necessary skills Hard to persuade skilled employees from Western Russia to move to the Far East Hard to persuade foreign employees to move to the Russian Far East Visa / work permit issues for foreign workers and managers
  18. 18. Business process and control Physical controls Management decision making processes Differences in business culture
  19. 19. At what level should these issues be addressed? Federal Project Regional / local
  20. 20. What can individual businessmen do?
  21. 21. Before seeking investment Decide what type of foreign investment is best for the intended purpose / understand the requirements Understand the cost of obtaining investment Ensure the business has an appropriate corporate structure Ensure that the business’s tax affairs are in order • Certainty is more important than the actual level of tax • Consider asking for a tax inspection Ensure that you have a clear financial track history • Ideally IFRS • Comprehensive
  22. 22. When approaching investors Prepare a full business plan Produce a clear business summary / teaser Present the case for investment in a way that is in tune with the way the potential investor thinks
  23. 23. Once investment has been made Clear and workable governance structure • Danger of 50-50 Put appropriate systems in place • Financial reporting • Control of assets etc. • Meeting investor’s norms
  24. 24. What foreign investors need to do and not do • Ensure that you understand local requirements regarding finance • Take time to understand the business that you are financing • Ensure that you have an appropriate legal structure • Be prepared to visit Do • Act as if Russian laws and tax rules do not apply to you • Think that Moscow and the Russian Far East are the same Do not
  25. 25. Conclusions
  26. 26. Conclusions • Far East has huge investment potential • Investment is not happening as much or as fast as it should • Many factors – variously under control of – Federal Government, – Regional / local government – Individual businesses • Main things government in the region can do to help individual businesses are – Improve local infrastructure – Maintain educational standards – Provide information that promote positive perception of the region • Much of the responsibility for whether individual investments go ahead and if they do go ahead whether they succeed lies with individual businessmen we cannot blame others • Individual businesses should – Prepare properly – Present a coherent and logical case for investment – Understand that persuading somebody to invest is only the start of a successful investment