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St. Petersburg's Investment and Financial Strategy

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3.1 Economy and Finance

A severe economic crisis which beset Russia in August 1998 adversely affected all spheres of life in Russia and St. Petersburg. From mid-August to the end of 1998, the exchange rate of the rouble to the US dollar dropped by 3.3 times. Over the same period, prices for consumer and industrial goods in St. Petersburg increased by 2 to 4 times. The buying power of the population significantly decreased, as rouble earnings remained virtually unchanged.

The reduction in the population's disposable income led to a considerable reduction in business activities in St. Petersburg and a consequent deceleration in the investment process. However, despite the financial crisis, St. Petersburg remained an attractive region in terms of investment. An increase in the flow of foreign investment into St. Petersburg's economy was seen in 1998, as compared to the previous year.

The economic situation in 1999 and at the beginning of 2000 was marked by the stabilisation of major macroeconomic indicators in both financial and industrial areas. In the first six months of 1999, the decrease in industrial output slowed down and, by the beginning of 2000, a tendency was observed toward industrial growth. As the economic situation in St. Petersburg continues to improve, foreign investors will show more and more interest in this region.

3.2 Foreign Investment in St. Petersburg

According to the data of the St. Petersburg Statistics Bureau, for the period from January to September 1999, total foreign investment in hard currency amounted to 337.8 million USD and rouble receipts were equal to 939.0 million roubles. The growth in foreign investment amounted to 80%, compared to 27.4% over the same period in 1998.

In St. Petersburg, investments made in the form of international financial loans and trade and other loans predominate (not including loans received from foreign co-owners of enterprises). These investments made up 79.7% of the total hard currency investment for the period from January to September 1999. In Leningrad Oblast, direct forms of investment predominate and make up 76.3% of total invested capital.

Foreign Countries Investing in St Petersburg

January-September 1999, the following countries emerged as the major investors in St. Petersburg: the USA - 114.4 million dollars (33.9% of total dollar contributions to foreign investment), Finland - 70.1 million dollars (20.8%), Luxembourg - 35.4 million dollars (10.5%) and Great Britain - 29.4 million dollars (8.7%).

The biggest rouble investments in St. Petersburg were made by Finland -534.5 million roubles (56.9% of the total rouble investment), the Netherlands - 291.7 million roubles (31.1%) and the USA - 20.2 million roubles (2.1%).

3.4 ST. PETERSBURG'S STRATEGIC PLAN

It was extremely important for St. Petersburg to determine its role in the current situation and to identify key prospects for the city's development. To this end, the City Administration initiated the development of the Strategic Plan of St. Petersburg, adopted on 1 December 1997.

The primary objective of the Plan is to improve the standard of living of St. Petersburg's population. The Plan focuses on the following strategic areas:

  • creating a favourable living environment;
  • creating a favourable cultural and industrial environment; and
  • integrating the city into the world economy.

Plan developers assumed that cities, like companies, compete with each other for investments, for discovering and developing prospective industries and creating new jobs. The Plan out-lines key priorities for businesses, potential investors, governmental authorities and the local public and is meant to assist them in the decision-making process.

The Plan neither replaces nor abolishes other existing plans. It identifies the key directions for city development in priority areas. Despite the long-term nature of the Plan, it includes specific measures that are to be taken in the near future, stipulates completion cri-teria for most of the objectives and estimates costs and effectiveness.

The Plan is intended to be adjusted and amended in the future, as the major objectives and priorities change.

3.5 Programme for the Stabilisation and Further Development of the St Petersburg Economy in 1997-2000, Approved by Resolution of the Government of St. Petersburg ¹4 of 23 JANUARY 1997

The volume of capital investment intended for the city economy is effectively the same as the volume of shortterm loans which cover the budget deficit of St. Petersburg. In this connection, the city urgently needs to transfer the financing of their investment programme to one that uses long-term and medium-term loans.

To this end, the city has defined new principles for its investment policy:

  • transferring to loan financing of the investment programme;
  • transferring from annual planning to intermediate and long-term planning;
  • starting gradually to use loan and equity financing in municipal investments by including an investment component in public utilities tariffs;
  • living priority to projects with a high return on investent and to projects which attract significant amounts of private investment;
  • stimulating activities aimed at attracting long-term loans from the European Bank for Reconstruction and Development and the World Bank for funding city projects;
  • forming investment structures controlled by the city administration (city investment bank, a number of major city investment funds, financial and investment companies) in order to attract and use the funds of individuals and legal entities;
  • developing a leasing framework backed by city guarantees; and
  • providing tax concessions for investors at the local level.

In order to support the investment requirements of the municipal economy and the community's social needs, to secure the long-term financial position of St. Petersburg and to acquire permanent access to borrowed funds, the Administration of St. Petersburg has issued eurobonds in the amount of 300 million US dollars for a period of 2 to 5 years. Eurobonds are national bonds which have a fixed interest rate, lump-sum repayment, and have a par value expressed in hard currency In accordance with current legislation, the eurobonds are being primarily placed outside the Russian Federation. Interest paid to eurobond holders is tax exempt with respect to taxes paid to the budget of St. Petersburg.

In accordance with the Civil Code of the Russian Federation, St. Petersburg is responsible for backing its eurobonds with its own assets, except for assets held by legal entities under operational management and those which, according to the legislation, may only be owned by the state or municipal authorities.

St. Petersburg's Investment and Financial Strategy, Page 2

3.6 Council for Encoraging Forgeign Investment

A council for promoting foreign investment (the Council) was set up under the patronage of the Governor of St. Petersburg on 10 February 1998. It is a permanent advisory body intended to create a favourable investment environment and facilitate the activities of both Russian and foreign investors in St. Petersburg.

The Council's objectives include:

  • summarising local and overseas experience with regard to attracting investment;
  • developing recommendations for the Administration of St. Petersburg with regard to working with investors;
  • providing information to the Administration of St. Petersburg with regard to companies and organisations engaged in investment activities in St. Petersburg; and
  • preparing proposals and drafting investment legislation.

The Council consists of a Chairman (the Governor of St. Petersburg), his two deputies, an Executive Secretary and eighteen Council members. Members of the Council represent St. Petersburg's governmental authorities as well as companies, organisations and institutions engaged in investment activities in St. Petersburg.

The major aspects of the Council's activities are as follows:

  • preparing laws supporting foreign investment;
  • drafting legislation regarding the city's expenditure in the form of guarantees;
  • designing an industrial export support programme;
  • signing St. Petersburg's economic development zone programme;
  • setting up and participating in the activities of the Committee on the IT support of business security;
  • setting up and participating in the activities of a working group for enhancing the image of St. Petersburg among foreign investors;
  • designing proposals on delegating authority over investment solutions to local bodies; and
  • creating a St. Petersburg Investment Centre.

3.7 St. Petersburg Budget for 2000

St. Petersburg's revenue and expenditure budget for 2000 is approved by the Law "On the 2000 Budget of St.Petersburg". The Law provides for an increase in expenditure to be used by St. Petersburg for investment support in comparison with the amount allocated in 1999.

The budget determines the aggregate sum of commitments which St. Petersburg may have with regard to guarantees issued for 2000. The budget provides for expenditure to be directed towards maintaining and developing municipal infrastructure, meeting the city's demand for goods for social welfare and implementing environmental protection measures.

3.8 Investment Laws

Laws adopted in 1998 that encouraged investment activities in the city and granted additional privileges to investors are still in effect in St. Petersburg in 2000:

  • Law of St. Petersburg ¹185-36 of 30 July 1998 «On Governmental Support of Investment Activity in St.Petersburg";
  • Law of St.Petersburg ¹184-37 of 30 July 1998 «On Additions to the Law of St.Petersburg "On Tax Privileges" and
  • Law of St.Petersburg ¹ 191-35 of 30 July 1998 "On Investments in St. Petersburg Real Estate Property".

3.8.1 The Law "On Governmental Support of Investment Activity in St. Petersburg"

The Law stipulates the ways in which governmental support is rendered to investors. Investments may be supported as follows:

  • by providing investors with guarantees from the city of St. Petersburg in order to assist them in attracting funds for investment purposes;
  • by providing investors with tax privileges on taxes due to the budget of St. Petersburg;
  • by providing investors with privileges with respect to leasing St. Petersburg real estate property; and
  • by providing investors with local budgetary support.

    According to the Law, budgetary funds may be used to support investors for the following purposes:

    • to make settlements with investors' creditors against guarantees issued on the investors' behalf;
    • to provide loans to investors;
    • to set up charter capital of business entities founded with the participation of St. Petersburg and other investors; and
    • to finance governmental orders placed by St. Petersburg for goods, work and services produced by the investor.
    3.8.2 The Law "On Additions to the Law of St. Ppetersburg "On Tax Ppriviliges""

    This Law stipulates a number of taõ privileges for companies investing ir fixed assets with regard to those taxe) due to the municipal budget. Types ol privileges and periods of their validity are established based on the Law depending on the scope and period of investment. The Law provides privileges with regard to the following taxes:

    a) Profit tax

    Companies investing in fixed assets are entitled to deduct the aggregate sum of investments from their taxable profit when calculating tax due to the budget of St. Petersburg.

    b) Property tax

    Companies who invested more than 50 million US dollars in fixed assets within the period from 1 January 1992 to 31 December 1999 are fully exempt from property tax in 2000. Companies who have invested from 25 to 50 million US dollars since 1 January 1992 are entitled to use a tax rate reduced by 50% in 2000.

    As of 1 October 1999, companies who have invested over 1 million roubles in fixed assets are exempt from tax with regard to these investments for a period from 8 to 28 quarters (depending on the amount invested).

    c) Land tax

    Companies who own land and invest in real estate construction or reconstruction are exempt from land tax for the period stipulated by the Law.

    d) Privileges for producers of excisable goods

    Producers of excisable goods who have invested more than 5 million US dollars in fixed assets related to production are entitled to the following privileges over a period of five years:

    • a 50% profit tax reduction; and
    • exemption from land and advertising taxes in St. Petersburg.

    e) Privileges granted under international agreements signed by St. Petersburg

    Legal entities, in which both St. Petersburg and foreign investors will participate, may be set up in St. Petersburg based on international agreements concluded between St. Petersburg and the governments of the respective countries. Such legal entities are entitled to the following tax privileges, provided they have contributed at least 1 million US dollars to the charter capital and invested at least 10 million US dollars in material production in St. Petersburg.

    Exemption from the following taxes with regard to amounts due to the budget of St. Petersburg may be obtained for seven years or another period established by an international agreement:

    • profit tax;
    • property tax of legal entities;
    • land tax;
    • vehicle acquisition tax;
    • vehicle owners' tax; and
    • advertising tax.

    3.8.3 The Law "On Iinvestments in St. Petersburg Real Estate Property"

    The Law stipulates the terms and procedures for real estate investments and the rights and obligations of investors and St. Petersburg governmental authorities. The contents of this Law are detailed in item 93.

    St. Petersburg's Investment and Financial Strategy, Page 3

    3.9 Privatisation

    Involving foreign investors in privatisation

    Pursuant to Law of the Russian Federation ¹ 123-FZ of 21 July 1997 «On the Privatisation of State Property and Fundamentals of the Privatisation of Municipal Property in the Russian Federation", the governmental privatisation programme may indicate types of property subject to privatisation which may not be privatised by foreign legal entities and individuals nor by residents of the Russian Federation whose founders (shareholders) or affiliates are foreign legal entities and individuals.

    The current governmental privatisation programme includes certain restrictions on the involvement of foreign investors in privatisation, namely:

    • Foreign investors may be involved in privatising trade, public catering and public service outlets and small industrial, construction and automobile transport entities only upon obtaining the approval of the local authorities;
    • Decisions as to whether foreign investors may be allowed to participate in the privatisation of sites and enterprises engaged in military production (whose military order production exceeds 30% of total output), the oil and gas industry, mining and handling of strategic ores, precious and semi-precious stones, precious metals, radioactive and rare-earth metals, transportation and communication companies indicated in Section 2.2 of the governmental privatisation programme, should be taken by the Government of the Russian Federation and the governments of the republic-members of the Russian Federation whenever a decision is made to allow these sites and enterprises to be privatised; and
    • Foreign investors may not be involved in the privatisation of state and municipal enterprises located in restricted zones, unless otherwise stipulated by the decisions of the Government of the Russian Federation.

    Rseluts of Privatisation in St. Petersburg in 1999

    In January - June 1999, 21 enterprises (entities, sites) were privatised in St. Petersburg (sale/purchase contracts were approved or closed subscriptions for shares were carried out). There were 11 enterprises privatised in the same period of 1998.

    92.5% of the enterprises privatised in 55 St. Petersburg had previously been the property of the subject of the Federation and 4.8% had been federal property

    In January -June 1999, thirteen joint-stock companies were founded in St. Petersburg as a result of privatisation, their aggregate charter capital amounting to 1,666,000 roubles. Twelve of them had been owned by the subject of the Federation. When these joint-stock companies were created, 2,260,000 shares were issued, 1,391,000 (61.5%) of which were sold and 869,000 remained unsold.

    For the six months of 1999, 72.6 million roubles were earned as a result of privatisation in St. Petersburg (including revenue from privatisations of previous years), which is 10% lower than in the same period of the previous year. The majority of the funds, 86.9%, was obtained from the privatisation of property owned by the subject of the Federation. 69.4% of the funds earned from privatising state and municipal property (remaining after compensating employees of the privatised companies) was posted to the budget of the subject of the Russian Federation, 16.2% to the Federal budget and 9.7% to the state agencies which carried out the privatisation.

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