THE RUSSIAN GOVERNMENT DECISION update

Briefing by Maxim Oreshkin and Ernst & Young’s Managing Partner for Russia Alexander Ivlev following the FIAC meeting
16 October 2017 16:00 Gorki, Moscow Region




Excerpts from the transcript:

Maxim Oreshkin: Good afternoon, colleagues,

The Foreign Investment Advisory Council’s annual meeting was held today. It’s an important event where we can discuss issues facing companies that have invested significant amounts of money in the Russian market, and ways of changing regulations to improve the local business environment.

Today’s meeting was held in a generally positive atmosphere given that the Russian economy has begun to recover, and economic growth is underway. Companies can see this in their performance indicators.

An Ernst & Young study revealed an interesting fact, where the number of investment projects in Russia this year has reached an all-time high. We see this from the direct investment dynamics, which reached $14 billion in the first half of 2017. In other words, all numbers are telling us that foreign business is actively coming to Russia again and has a vision of long-term development goals for itself.

Taxation was among the issues that we touched upon today. I will cover several more later on.

FIAC members raised the personal property tax issue (however, the Government has already made all the decisions in this area).

The participants discussed the very interesting question of tax deductions for foreign companies that build infrastructure. This question also concerns many Russian companies. The Government will work in accordance with a new initiative on infrastructure mortgages to reimburse taxes paid by companies that build infrastructure.

Another aspect of infrastructure development concerns a new wave of investments in the electric power industry. The approaches to proposals for Capacity Supply Agreement-2 were discussed. The issue here is about forming a base for sustainable investments in developing the energy sector. There are many foreign companies working in the Russian energy sector, so identifying proper approaches is of critical importance.

We discussed the introduction of electronic veterinary certificates and decided to hold them back for some time to make sure that the process of adding new commodity groups goes unhindered and does not result in erratic supplies.

Promoting exports and making Russian companies part of global production chains that manufacture certain products was discussed separately. Among other things, we discussed food. My ministry will work to help small businesses get certificates recognised by the world's major companies, have them supply products to these companies, and become part of the global market.

Alexander Ivlev (Managing Partner for Russia, Ernst & Young): The Advisory Council has been working in Russia since November 1994. Today, many investors believe this it is indeed one of the most effective tools to establish the right kind of dialogue between international businesses and the governments of different countries.

If we look at the results, we will see an increase in the number of foreign companies that are interested in being represented in the Advisory Council. The fact that 35 senior global executives of major investing companies operating in Russia have joined us today indicates that the council is effective. Out of the 12 instructions issued following the council's meeting last year, nine are already in the process of being deeply studied. We hope that the issues raised by investors will be resolved in the near future. Three issues are still in the works.

This work is effective, and everyone can see it. Foreign companies continue to invest and to work within the Foreign Investment Advisory Council.

Question: This question is for Mr Ivlev. What projects do the FIAC members from among foreign companies plan to start in Russia within the next year or two? What amount of investment in the Russian economy are we talking about?

Alexander Ivlev: I cannot give you exact amounts of foreign investment in Russia. We hope the amount will grow each year, as has been the case lately. Unilever is expanding its presence, as is Cargill. Takeda has begun to localise its production, and plans to launch two types of cancer-fighting products this year. We can see that Nestle and Kindergold are expanding their presence in the Russian regions as well. So, the investments keep flowing in.

We can say from the past year that there are very good examples, such as Sanofi that has started production of insulin which will be exported from Russia to Europe, Germany in particular.

Samsung has begun to manufacture household appliances in the town of Kaluga, which are exported to Europe. The Japanese have begun to actively invest in the pharmaceutical sector. In particular, Mitsui has implemented several projects in Russia.

So, the process is underway, and companies continue to invest. We expect the growth of investments to reach the pre-crisis level.

Maxim Oreshkin: I would add to that creating a predictable environment - both from the point of view of macroeconomic policy and dynamics, and regulations as well - is also of critical importance (this was discussed at today’s meeting as well). For example, I talked with investors in Washington recently. They noted that the Russian Government and the Central Bank have made great strides in structural reforms as related to macroeconomic policy, which ensures the predictability of key performance indicators, which is vital when Russian manufacturing capacities are inserted in the global production chain. Stability of the real exchange rate and other indicators are important for these purposes.

We also talked about regulations, taking note, for example, of the new draft law on non-tax payments, which we worked on in recent months. If it gets adopted, it will ensure a stable environment for companies. Clarity, predictability and transparency are the three pillars that will create the necessary environment for drawing in investors. We do see that investments are on the rise. They are this year, and we believe they will continue to grow actively in the years to come.

Question: Mr Oreshkin, did you discuss sanctions?

Maxim Oreshkin: No, we didn’t. These companies are active in Russia, and we discussed economic and business issues today. When we talk about money and effective investments, political hype about sanctions is of secondary importance.

31st session of the Foreign Investment Advisory Council in Russia
16 October 2017 12:30 Gorki, Moscow Region


The meeting participants discussed proposals for simplifying administrative procedures in various industries, including in the energy, pharmaceutical and agricultural sectors.

Dmitry Medvedev's opening remarks


Briefing by Maxim Oreshkin and Ernst & Young’s Managing Partner for Russia Alexander Ivlev following the meeting

Dmitry Medvedev's opening remarks:





A session of the Foreign Investment Advisory Council in Russia

Good afternoon, ladies and gentlemen,

I cordially welcome you to our country. Traditionally, half way through the autumn at a session of the Foreign Investment Advisory Council in Russia, we openly speak about all pressing topics as well as discuss the steps that need to be taken to implement projects by major international companies in our country.

I hope this format is also advantageous to the Government of the Russian Federation, and, of course, to the global business community, which you represent.

Retrospective


The 30th session of the Foreign Investment Advisory Council in Russia, 17 October 2016


The 29th session of the Foreign Investment Advisory Council in Russia, 19 October 2015


The 28th session of the Foreign Investment Advisory Council in Russia, 20 October 2014


The 27th session of the Foreign Investment Advisory Council in Russia, 21 October 2013


The 26th session of the Foreign Investment Advisory Council in Russia, 15 October 2012

This gives us an opportunity to promptly share opinions, discuss various ideas and approaches, plus get an assessment at the highest level of expertise, which may be even more important.

I would like to say a few words about the situation in Russia.

The Russian economy completed its adaptation to the new environment and challenges that it ran into, and began to grow. The key performance indicators are on the rise, including gross domestic product, industrial output, cargo turnover, as well as exports and imports. The growth rates may vary, but the dynamics are generally positive all across the board. We can safely say that the Russian economy has entered a phase of an upward trend.

This is taking place amid an all-time low inflation rate, which increasingly corresponds to the numbers typical of the developed economies. It has remained within 2 percent since the beginning of the year, 1.7 percent actually, according to Rosstat. In general, we expect moderate numbers for the rest of the year ​​(perhaps, slightly over 3 percent). Such low inflation rates are unprecedented in our country’s recent history.

These positive changes are the result of many efforts, including the Government's anti-crisis activities, targeted support of key industries (which help achieve maximum effect for the economy in general) and, of course, our moderate budget policy.

Maintaining an effective cost structure plus implementing the development priorities which we, ladies and gentlemen, colleagues, have identified in collaboration with you, remains our main approach.

Despite the attempts to economically isolate our country, foreign investors are increasingly interested in cooperating with Russia. The volume of foreign direct investment has more than doubled over the first six months of the year compared to that of the same period last year. Our Foreign Investment Advisory Council (FIAC) has made a tangible contribution to it.

FIAC corporate members are implementing over 20 investment projects in a variety of industries (given the importance and the size of the companies represented in the FIAC, these are all major projects) ranging from energy to digital electronics. In all instances, the thing is about launching or substantially upgrading production facilities and the creation of new capacities. Innovative products are entering the market. The total volume of investments across these projects is estimated at billions of roubles. The total investment contribution of the FIAC members exceeded $165 billion over the entire period of its existence. The geographic reach of these projects includes over 50 Russian regions.

The investment flow has become possible due to focused efforts aimed at improving the business climate. Many ideas and projects in this sphere were generated by FIAC expert groups, in particular, as part of the National Entrepreneurship Initiative. We have been implementing road maps in the critical spheres of state regulation since 2012.





A session of the Foreign Investment Advisory Council in Russia

The results can be seen from the way our international rankings have improved. I would like to emphasise this once again. Russia demonstrated, perhaps, the most impressive rankings in the World Bank’s Doing Business rankings. Over a period of just five years, we have moved up by more than 80 positions. This is how experts assessed our efforts to simplify or speed up many procedures that matter when starting or running a new project in our country. Russia rose from 124th to 40th place among 190 countries. Of course, this in itself is very good, but it doesn’t mean that our work has come to an end and can be recognised as completed.

I will spend a moment talking about our achievements over a period of the past five years, including thanks to our meetings with you. The process of connecting to electricity grids has been made less complicated and now costs only a third of what it used to. The time it takes to register the deeds of real estate has been reduced. The procedure for obtaining a building permit was simplified due to reforms at federal and regional levels. With regard to incorporation procedures, the time involved to open a corporate bank account has been cut. The requirement to advance authorised capital prior to a company's registration has been dropped, and so on and so forth.

Measures have been implemented that have eased procedures for businesses through the introduction of online services. This year, the deadlines for linking up to water discharge systems have been significantly reduced. Requirements for industrial enterprises discharge have been brought into compliance with scientifically based indicators. An opportunity has been provided for adjusting customs declarations after releasing goods into circulation. The list of customs points for a number of goods has also been expanded. The regulations have been optimised for distribution margins for certain food products. Many other things have also been done, and in this connection I want to thank all of you, members of the Advisory Council, for the engaged dialogue with the Government of the Russian Federation.

It should also be noted that member companies of our council have actively worked to expand non-resource exports from Russia. This is one of the priorities of our economic development. We have jointly prepared a set of measures to support export-oriented companies. Certain initiatives have already received the status of a draft law. In particular, amendments have been developed to the Tax Code concerning the application of zero VAT for re-export. The document is being considered by the State Duma and we hope it will be approved.

I would like to emphasise that the obligations we took several years ago concerning the preservation of the tax burden for businesses have all been implemented. Despite the economic crisis and various problems that our economy has been facing we did not raise the overall taxes. I think this is a good achievement of the past few years that have secured a necessary stability, which, in fact, has been reflected in ratings. The Government is going to stick to this policy in the future.

To develop non-resource exports, efforts should be taken to introduce new technology and assist innovative businesses. This is what all of you are involved in one way or another. In turn, I would like to invite you to attend our specialised Open Innovations Forum that is taking place at the Skolkovo Innovation Centre. This year's discussion concerns the digital economy.

I would like to once again thank you all for your work and to add that my colleagues in the Government and I are available for frank communications and discussing any of your questions.