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

www.moorestephens.ru

How do we make the Russian Far East more

attractive for foreign investors?

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.

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 Europe Transport

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

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.

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

So why is the level of foreign investment so low?

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

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

Historical / Political

Japanese / Russian territorial dispute

Poor US – Russia relations

Geographical

Perception that the area is remote

Distances between towns in the Far East

Infrastructure

Roads

Rail

Ports

Air

Power

Communications

Financial, including banking

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

Rule of law

Unclear tax position

Customs issues

Fear of bribery / corruption

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

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

Business process and control

Physical controls

Management decision making processes

Differences in business culture

At what level should these issues be

addressed?

Federal

Project Regional /

local

What can individual businessmen do?

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

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

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

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

Conclusions

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