FOREIGN INVESTMENT LEGISLATION

Under Article I of the Foreign Investment Law

• foreign investors can be: foreign legal persons;

• foreign citizens, including stateless persons; • Russian citizens permanently residing abroad

who are registered in their country to engage in commerce;

• foreign states; • and, international organizations.

Article 2 of the Foreign Investment Law

broadly defines what property can be used as foreign investment as

"all types of material assets and intellectual property invested by foreign investors into entrepreneurial and other types of activity with the aim of deriving profit".

Foreign investment in Russia can take various economic and legal

forms.

According to Article 3 of the Law these include

• Equity Participation In Joint Ventures Founded With Russian Participants;

• The Establishment Of Wholly Owned Subsidiaries; • Acquisition Of Enterprises, Assets, Buildings, Structures, Equity

Stakes In Enterprises, Shares, Bonds, And Other Securities And Other Property Not Prohibited From Foreign Investment By Other Russian Legislation;

• Acquisition Of Rights To Use Land And Other Natural Resources; • Acquisition Of Other Property Rights; And Other Investment

Activities Not Prohibited By Russian Legislation Including Making Loans, Issuing Credits And Offering Property And Property Rights

direct foreign investment

• - acquisition by a foreign investor of not less than 10 percent of the share, shares (contributions) in the authorised (share) capital) of a business organisation incorporated or newly incorporated in the Russian Federation in the form of a business partnership or company in accordance with the laws of the Russian Federation; investment of capital in the main assets of the branch of a foreign legal entity established in the Russian Federation; financial lease (leasing) of equipment specified in Sections XVI and XVII of the Commodity Classification of foreign economic activity of the Commonwealth of Independent States (CC FEA CIS) with the customs value of not less than 1 million roubles made in the Russian Federation by a foreign investor as a lessor;

• The legal regime for business of foreign investors and their use of the profit obtained from the investment may not be less favourable than the legal regime for the business and use of the profit obtained from the investment provided to Russian investors, except otherwise prescribed by federal acts.

• Any foreign investor, or any business organisation with foreign capital established in the Russian Federation where the share of a foreign investor (foreign investors) is not less than 10 percent of the contributions in the authorised capital of the this organisation may fully use the legal protection, guarantees, exemptions provided by this Federal Act when they carry out reinvestment.

2006

• Foreign investment grew 2.7% in 2006 to $55.1 billion from 2005.  Foreign

investment soared 32.4% in 2005..

2007

• Foreign investment grew 120% in 2007. 2.2 times more than in 2006!

The total sum of foreign investment was $120.9 billion.

The accumulated foreign investment was $220.6 billion by the end of 2007.

Forms of investment

• Foreign direct investment (FDI) grew 4.6% in 2006 to $13.68 billion. FDI grew 38.8%

in Russia in 2005. 

•  

The structure of foreign investment in 2007

• Other investment (loans from international organizations, commercial loans)

• 2007 – 50,2%, 2006 – 49.1%.

• Direct foreign investment

• 2007 – 46.7%, 2006 – 47.5%.

• Portfolio investment

• 2007 – 3.1%, 2006 – 3.4%.

First quarter of 2006Legal forms of investment

• Equity investment decreased. 84.6% from 2005. But reinvestment grew 3.4 times.

• loans to companies by foreign co-owners rose 80% to $3.9 billion,

• investment in the form of leasing: 62.7% from 2005 level.

• and other forms of direct investment rose 2.3 times to $922 million.

Russian Investment

• Cumulative Russian investment abroad as of the end of 2006 was $14.3 billion.

• Russian investment abroad grew 67% to $52 billion in 2006.

   The repayment of earlier Russian investment abroad amounted to $45.2 billion, which is

44.5% more than in 2005.

Investment from Russia abroad

• $76.4 billion were invested abroad in 2007. It is 43.6% more in comparison with previous year.

• Accumulated investment abroad was $32.1billion by the end 2007.

The main investors in Russian economy

2006Cyprus 22.6%

Great Britain

The Netherlands 16.4%

Luxembourg 16%

Germany 8.6%

France 2.6%

the British Virgin Islands 3%

Switzerland 2%

The USA 5.4%

including for 85.8% of the stock of direct foreign investment.

2007/Accumulated

20654 49563

18751 39068

26328 29235

11516 29161

5055 11786

2839 8579

5175 7131

6696 5919

21404800

5340 4797

Cyprus

The Netherlands

Great Britain

Luxembourg

Germany

The USA

Ireland

France

the British Virgin Islands

Switzerland

Investment-grade ratings

AAA

AA+

AA

AA-

A+

A

A-

BBB+

BBB

BBB-

Speculative-grade ratings

BB+

BB

BB-

B+

B

B-

CCC+

CCC

CCC-

CC

C

D

Improving rating quality

Declining rating quality

Table 4. Standard & Poor’s: Rating History

Year Event

1998 Russia defaulted on Treasury bills (GKOs, local currency) in August 1998

1999 On May 14, 1999, there was a default on U.S. –dollar-denominated MinFin bonds series III, which were rescheduled in November 1999.

1999 Russia rescheduled US$8 billion of Soviet-era debt payments due to the paris Club in 1999 and 2000.

2000 Russia rescheduled its debts to the London Club of commercial creditors, first in December 1997 and then in February 2000.

Credit Rating

1998 SD

Dec. 8, 2000 Long-term foreign currency rating raised to ‘B-‘ from SD

June 27, 2001 Short- and long-term local and foreign currency ratings raised to ‘B’/’B’

Dec. 19, 2001 Long-term local and foreign currency ratings raised to ‘B+’

July 26, 2002 Long-term local and foreign currency ratings raised to ‘BB-’

Dec. 5, 2002 Long-term local and foreign currency ratings raised to ‘BB+’ and ‘BB’ respectively

Jan 27, 2004 Long-term local and foreign currency ratings raised to ‘BBB-’ and ‘BB+’ respectively, short-term local currency rating raised to ‘A-3’

March, 2007 (S&P)

Entity

LocalCurrency/ forecast

Foreign Currency/ forecast

National Scale

Russian Federation (The) A-/Stable/A-2 BBB+/Stable/A-2 ruAAA/--/--

February, 2008 (S&P)

EntityForeign Currency

LocalCurrency

National Scale

Russian Federation (The)

BBB+/Stable/A-2 A-/Stable/A-2 ruAAA

Why do we worry about investment rating?

Answer

• The amount of investment depends on image of the country. Rating is the main characteristic of image carried out by independent specialists.

• Foreign pension funds, mutual funds will invest providing the country risk is not less than the lowest investment level

• "Russia’s expanded budget surplus since 2000 and high economic growth rates allowed the government to lower the overall volume of government debt to 38% of GDP by the end of 2003 (by the end of 2006 this indicator will be less than 25%), compared with over 110% at the end of 1999," the agency says in its announcement.

Aggregate amount of the Stabilization fund of the Russian Federation

Datein Billion US

dollars in Billion rubles

30.01.2008 157,38 3 851,80

01.01.2008 156,81 3 849,11

01.12.2007 144,43 3 517,05

01.08.2007 127,48 3 263,56

01.04.2007 108,11 2 812,21

01.12.2006 83,21 2 189,52

01.10.2006 70,73 1 894,09

01.08.2006 82,14 2 207,33

Directions of foreign investment

• Raw material extraction $29.4 bln. • Processing industries $43.4 bln. accumulated

investment

• Trade and service $30.5 bln.

• Transport and communication

• Financial sector

• Agriculture, forestry and wood working

• A great change in the investment structure!

• Metallurgical industry (the growth of prices on metal)

The following are obstacles to further development

of the investment field:

• An imperfect tax system which doesn't actively stimulate investment;

• • Underdeveloped financial markets which have yet to provide investment means and capital redistribution;

• • Underdeveloped economic institutes and administrative limitations;

• Low-efficiency mechanisms of government investment.

• CORRUPTION

Investment climate in Russia

Securities market

• Securities market is an economic institute within which take place sale and

purchase transactions of securities between subjects of economy on the base

of demand and supply.

Securities

Inscribed issued securities - securities information on the owners of which

must be accessible to the issuer in the form of a register of security owners,

and conveyance of the rights to which and exercise of the rights secured by

which require mandatory identification of the owner.

Issued securities to bearer -- securities conveyance of the rights to

which and exercise of the rights secured by which

do not require identification of the owner.

Documentary form of issued securities - a form of issued securities under which the owner is established on the basis of

presentation of a duly formalized certificate of the security or, in the event of

deposition of such, on the basis of an entry in the depo account.

Non-documentary form of issued securities - a form of issued securities under

which the owner is established on the basis of an entry in the system of keeping

a register of security owners or, in the event of deposition of the securities,

on the basis of an entry in the depo account.

Clients of the Financial System

• The Household Sector

• The Business Sector

• The Government Sector• Federal level• Regional level• Municipal level

Markets

When firms need to raise capital they may choose to sell (or float) new

securities. These new issues of stocks, bonds, or other securities typically are marketed to the public by investment bankers in what is called the primary

market.

Purchase and sale of already issued securities among private investors

takes place in the secondary market.

Spot MarketA commodities or securities market in

which goods are sold for cash and delivered immediately.

Also called the cash market or physical market

Forward MarketA commodities or securities market in which participants make an agreement about price and time of delivery in

the future

Market

Commodity

Commodity Markets

Commodity Papers Market

Spot Commodity Market

Futures and

Options Commodity Market

Promissory (Commodity) notes,

(Commodity) Bills of Exchange, (Commodity)

Warrants

Money

Money in circulation

Cash in

Hand

Money market

instruments (bills, letters of credit,

and other

instruments)

Stock Market

Financial Market

Other Markets of

Capital

Basic securiti

es (stocks, bonds)

Derivative Securities Market (See Exh.9)

Terminal contracts on

financial assets (futures

contracts, option

contracts, swaps)

Primitive Securities Market (See Exh.9)

Securities Market

Warrants

Securities

A primitive security offers returns based only on the status of the issuer. For example, bonds make stipulated interest payments depending only on the solvency of the issuing firm. Dividends paid to stockholders depend as well on the board of directors’ assessment of the firm’s financial position.

In contrast, derivative securities yield returns that depend on additional factors pertaining to the prices of other assets. For example, the payoff to stock options depend on the price of the underlying stock. Much of the innovation in security design may be viewed as the continual creation of new types of derivative securities from the available set of primitive securities.

Stocks Bonds Bills Certificates of deposit

Warrants Options Contracts Futures

Contracts

Forward

Contract

• IPO - initial public offering is the first sale of stocks in public. For Russia it is still exotic: until recently companies issuing additional stocks tend to allocate new shares by private subscription - among present owners. This approach is effective if the main aim of a company is to save control of the company. However, situation is gradually changing: companies start to orient themselves more neatly on market expansion – and for this it is important to attract investments.

•.

Advantages of IPO• Increased Capital. A public offering will allow a company to raise capital to use for

various corporate purposes such as working capital, acquisitions, research and development, marketing, and expanding plant and equipment.

• Liquidity. Once shares of a company are traded on a public exchange, those shares have a market value and can be resold. This allows a company to attract and retain employees by offering stock incentive packages to those employees. Moreover, it also provides investors in the company the option to trade their shares thus enhancing investor confidence.

• Increased Prestige. Public companies often are better known and more visible than private companies, this enables them to obtain a larger market for their goods or services. Public companies are able to have access to larger pools of capital as well as different types of capital.

• Valuation. Public trading of a company's shares sets a value for the company that is set by the public market and not through more subjective standards set by a private valuator. This is helpful for a company that is looking for a merger or acquisition. It also allows the shareholders to know the value of the shares.

• Increased wealth. The founders of the company often have the sense of increased wealth as a result of the IPO. Prior to the IPO these shares were illiquid and had a more subjective price. These shares now have an ascertainable price and after any lockup period these shares may be sold to the public, subject to limitations of federal and state securities laws.

There are numerous disadvantages to going public.

• Time and Expense. Conducting an IPO is time consuming and expensive. A successful IPO can take up to a year or more to complete and a company can expect to spend several hundreds of thousands of dollars on attorneys, accountants, and printers. In addition, the underwriter's fees can range from 3% to 10% of the value of the offering. Due to the time and expense of preparation of the IPO, many companies simply cannot afford the time or spare the expense of preparing the IPO.

• Disclosure. The SEC disclosure rules are very extensive. Once a company is a reporting company it must provide information regarding compensation of senior management, transactions with parties related to the company, conflicts of interest, competitive positions, how the company intends to develop future products, material contracts, and lawsuits. In addition, once the offering statement is effective, a company will be required to make financial disclosures required by the Securities and Exchange Act of 1934. The 1934 Act requires public companies to file quarterly statements containing unaudited financial statements and audited financial statements annually. These statements must also contain updated information regarding nonfinancial matters similar to information provided in the initial registration statement. This usually entails retaining lawyers and auditors to prepare these quarterly and annual statements. In addition, a company must report certain material events as they arise. This information is available to investors, employees, and competitors.

• Decisions based upon Stock Price. Management's decisions may be effected by the market price of the shares and the feeling that they must get market recognition for the company's stock.

• Regulatory Review. The Company will be open to review by the SEC to ensure that the company is making the appropriate filings with all relevant disclosures.

• Falling Stock Price. If the shares of the company's stock fall, the company may lose market confidence, decreased valuation of the company may effect lines of credits, secondary offering pricing, the company's ability to maintain employees, and the personal wealth of insiders and investors.

• Vulnerablility. If a large portion of the company's shares are sold to the public, the company may become a target for a takeover, causing insiders to lose control. A takeover bid may be the result of shareholders being upset with management or corporate raiders looking for an opportunity. Defending a hostile bid can be both expensive and time consuming.

2005 EMEA IPO Activity

Country Total Capital Raised(US $ M)

Number of IPO

France $18.291 58

United Kingdom $8.138 117

Russia $4.932 11

Germany $4.707 23

Netherlands $3.472 4

Italy $3.245 16

Switzerland $2.846 10

2006

• IPO in RUSSIA

Company RosneftTicker type ROSN

Ticker type on Stock Exchanges LSE:ROSN; MICEX:ROSN; RTS:ROSN 

Industry oil and gas

Country RUSSIA

Legal entity Open Joint Stock Company "NK "Rosneft"

"NK "Rosneft“ is one of the biggest vertically integrated company in Russia. There are 40 daughter enterprises included in its organizational structure, which place almost in all Russian regions.

Organizational structure:•14 oil and gas extraction enterprises•15 merchandising companies•3 oil processing companies•4 auxiliaries departments•Institutes of Research and development

The Biggest IPO

• Oil reserves are estimated at 15 billion barrels. Approximately this reserves can be extracted for 28 years with current intensity of development.

• Due to IPO company attracted $10, 4 billion. It placed 14.3% of its stocks on Russian and

London stock exchanges.• Before IPO 100% of "NK "Rosneft“ belonged to

state company JSC “Rosneftegas”.

STS mediaCompany STS Media / CTC Медиа

Ticker type CTCM

Ticker type on Stock Exchanges NASDAQ:CTCM 

Industry Media

Country RUSSIA

Legal entity STS Media Inc.

STS Media one of the biggest Russian media holding.

2 TV channels: STS and Home belong to STS Media.

Shareholder of STS Media: 39.8% - Modern Times Group (Swedish company), 26,49% - Alfa-bank, 9,99% - Baring Vostok Capital Partners Fund, 5,4% —FidelityInvestments Fund.

• Due to IPO company attracted $346 million. It placed 16.4% of its stocks on

NASDAQ.

Cherkizovo Company Cherkizovo

Ticker type GCHEG

Ticker type on Stock Exchanges LSE:CHE; РТС:GCHEG 

IndustryFood (meat producer and

processor)

Country RUSSIA

Legal entity OJSC «The Cherkizovo group»

Organizational structure:

•9 meat processor

•5 chicken farms

•4 pig farms

•1 chicken processor

•20 merchandising houses

Due to IPO company attracted $251.3 million. It placed 27.8% of its stocks on LSE.

Shareholders:• Cherkizovsky Group Ltd. - 55%• Agricultural complex “Pticeprod” - 2.43%• Pacific Agro Ltd. Corp. – 0.68%• Morgan Stanley Bank – 0.6%• Other shares belongs to managers of the

company

• Depositary Receipts (DRs), which include ADRs, GDRs, Euro DRs and NYSs, are negotiable U.S. securities that generally represent a non-U.S. company's publicly traded equity. Although typically denominated in U.S. dollars, Depositary Receipts can also be denominated in Euros. Depositary Receipts can be eligible to trade on all U.S. stock exchanges as well as on many European stock exchanges.

Advantages may include(for the company):

• Expanded market share through broadened and more diversified investor exposure with potentially greater liquidity, which may increase or stabilize the share price.

• Enhanced visibility and image for the company's products, services and financial instruments in a marketplace outside its home country.

• Flexible mechanism for raising capital and a vehicle or currency for mergers and acquisitions.

• Enables employees of U.S. subsidiaries of non-U.S. companies to invest more easily in the parent company.

Advantages may include(for the holders):

• Quotation in U.S. dollars and payment of dividends or interest in U.S. dollars.

• Diversification without many of the obstacles that mutual funds, pension funds and other institutions may have in purchasing and holding securities outside of their local market.

• Elimination of global custodian safekeeping charges, potentially saving Depositary Receipt investors up to 10 to 40 basis points annually.

• Familiar trade, clearance and settlement procedures.• Competitive U.S. dollar/foreign exchange rate

conversions for dividends and other cash distributions.• Ability to acquire the underlying securities directly upon

cancellation.

Types of Depositary Receipt Facilities

Depositary Receipt facilities may be unsponsored and sponsored

Unsponsored Depositary Receipts

Unsponsored Depositary Receipts are issued by one or more depositaries in

response to market demand, but without a formal agreement with the company.

Sponsored Level I Depositary Receipts

• Simplest method for companies to access the U.S. and non-U.S. capital markets.

• Level I Depositary Receipts are traded in the U.S. over-the-counter (OTC) market with prices published in the "Pink Sheets" and on some exchanges outside the United States.

• Establishment of a Level I program does not require full SEC registration and the company does not have to report its accounts under U.S. Generally Accepted Accounting Principles (GAAP) or provide full Securities and Exchange Commission (SEC) disclosure.

• Essentially, a Sponsored Level I Depositary Receipt program allows companies to enjoy the benefits of a publicly traded security without changing its current reporting process.

• Currently, sponsored Level-One DR programs are the most popular form of depositary receipt program.

Sponsored Level II and Sponsored Level III Depositary

Receipts

• Level II and Level III Depositary Receipt programs require SEC registration and adherence to applicable requirements for U.S. GAAP. These types of Depositary Receipts can also be listed on some exchanges outside the United States.

Sponsored Level II

• Level II Depositary Receipts are exchange-listed securities but do not

involve raising new capital.

Sponsored Level III Depositary Receipts

• Level III programs typically generate the most U.S. investor interest because capital is being raised.

Name of the company Date of SEC permission

Places of trade

Mosenergo 01.10.95 Berlin, Frankfurt, Berlin, Frankfurt

LUKOIL 1996 Berlin, Frankfurt,

NASD OB Berlin, Frankfurt

LUKOIL (p)   London, Berlin, Frankfurt, NASD OB Berlin, Frankfurt

Seversk plant 05.02.1996 Berlin, Frankfurt, NASD OB Stutgart

Tatneft 1997 London, Berlin, Frankfurt, NASD OB Berlin, Frankfurt

Irkutskenergo 1995 Berlin, Frankfurt

NASD OB

Vympelcom 1996 NYSE, Berlin,

Surgutneftegas 1996 Berlin, Frankfurt NASD OB Stutgart

GUM 1996 Berlin, Frankfurt,

NASD OB Stutgart

Chernogorneft 22.03.1996 Berlin, Frankfurt

NASD OB Stutgart

Gazprom 1997 London, Berlin, Frankfurt, Dusseldorf, Munchen, Hamburg

…

New structure of foreign direct investments

• The largest deals of the beginning of 2006:

• purchase of Krasny Vostok by Turkish Efes Breweries for $364 million,

• purchase of a stake in Rusenergosbyt by Italian Enel for $105 million

• acquisition of a stake in Power Machines by German Siemens for $93 million

New direction of investment

• Foreign investors already do not confine their efforts to Moscow and go to the

regions.

For example, Nizhny Novgorod

• In the Nizhny Novgorod Region Swedish IKEA is building Mega Mall (investments of $120 million),

• Italian Freudenberg Politex is building a plant for production of chemical fibers ($25 million)

• Dutch Heineken is modernizing Nizhny Novgorod-based Volga brewery (EUR60 million).

• The Russia: Investment Destination (March 2005) -a survey conducted for the Foreign Investment Advisory Council (FIAC) and the Economy Ministry of Russia

• Respondents: 158* international companies, primarily headquartered in Europe and the United States

77%

55%

46%

40%

31%

30%

22%

17%

88%The size of the domestic market

Sustained growth rates of the domestic economy

Macroeconomic stability

Domestic technological and scientific potential

Cheap energy and raw materials

Administrative reforms to reduce bureaucracy and corruption

Favorable tax regime

High quality and low cost of human resources

Overall political stability

77%

55%

46%

40%

31%

30%

22%

17%

88%The size of the domestic market

Sustained growth rates of the domestic economy

Macroeconomic stability

Domestic technological and scientific potential

Cheap energy and raw materials

Administrative reforms to reduce bureaucracy and corruption

Favorable tax regime

High quality and low cost of human resources

Overall political stability

What are the top five advantages of Russia?

Some overseas investors believe that at this juncture the biggest risk is not being in Russia.

Two factors are at play here:

• Competitive push. Russia/CIS is frontier territory. For any company with pretensions to global presence, given its size and potential it is necessary to be there either as an early entrant to raise barriers to others, or as a follower to prevent rivals getting too far ahead.

• Market pull. Because of its history, Russia’s economy is structurally different from those of the advanced west. In western economies most sectors, particularly in consumer areas, are so competitive that excess profits are immediately competed away. In Russia as a result of the privileging of heavy industry in the Soviet era, both consumer and small company sectors in general are relatively underdeveloped.

As one professional put it, ‘you can’t be a world player if you’re not in Russia.’

In some areas, such as energy, the window of opportunity for shaping the sector is already closing. In others, such as financial services and consumer goods, the next three to five years will be crucial.

The Sakhalin Region

• The Sakhalin Region administration worked out a regional strategic development program up to the year 2020 and, upon its approval by the Russian Federation Government, has begun implementing it.

• The program is based on investments into the oil and gas, fishing, timber and tourist industries. Up to the year 2020, about $55 billion will be invested into Sakhalin's economy, which will make the Region one of the leaders in terms of investment and per capita GRP.

• The Sakhalin Region is rich in mineral resources. It holds 4th, 7th, 12th and 13th places in Russia for explored reserves of gas condensate, gas, coal, and oil, respectively.

• PSA-based major oil and gas projects - such as Sakhalin-1 and Sakhalin-2 - have been implemented in the Region by Russian and foreign companies for 10 years now to turn it into a leading energy supplier for Russia and Asia-Pacific Region's nations.

• In 2006 oil production began under the Sakhalin-1 project.

• Its participants are: Exxon Neftegas Limited (30%), Rosneft (20%), India's ONGC (20%) and Japan's SODECO (30%).

• Developing dynamically is oil and gas production under the Sakhalin-2 project

• The participants in it are exclusively foreign companies: the British-Dutch corporation Royal Dutch/Shell (55% of the stock), and the affiliates of Japan's Mitsubishi (20%) and Mitsui (25%).

• foreign companies:

• the British-Dutch corporation Royal Dutch/Shell (55% of the stock),

• and the affiliates of Japan's Mitsubishi (20%) and Mitsui (25%).

The following trends were seen in the Russian M&A market :

• Foreign investments in the form of M&A are becoming more diversified

• Major Russian companies are actively expanding abroad. Some are securing their resource base, while others are seeking new markets for growth, including neighboring CIS countries.

• In 2005, we saw a substantial increase in the role of the state on the M&A market: 44% of the total deal value with Russian targets involved state-controlled companies acting as buyers.

• International and domestic capital markets are playing an increasingly important role in acquisition deals financing. The opportunities for both debt and equity financing have broadened. Public offerings have become a notable source of funds, with over USD 6 billion raised by Russian companies in 2005.

• In 2005 we registered a substantial increase in midsized M&A transactions.

Investment in Russia and Russian investment activity

• steel sector

• After the privatization of the Russian steel sector had been completed (with the sale of a 17% government owned stake in MMK by the end of 2004), domestic players commenced upon an active expansion into foreign steel markets. The largest deals were Severstal's purchase of the Lucchini Group and Evrazholding's win of a tender for Vitkovice Steel and its acquisition of Palini et Bertoli.

• The further expansion of Russian metallurgical companies abroad is anticipated. Domestic players will either purchase upstream assets such as bauxite deposits to secure their resource base or invest into production capacities to achieve growth outside Russia.

Food & Beverages

• Food and beverages companies traditionally attract foreign investments as the sector is associated with few political complications and directly benefits from rising disposable income and consumption levels. Deals with Russian companies operating in the sector amounted to USD 2.7 billion, which is twice as high as the previous year's value.

• By the end of the last year, the lion's share (about 80%) of the Russian beer market was commanded by foreign brewing companies. In recent acquisitions, Heineken and InBev (formerly Interbrew) have added to their Russian assets both in Moscow and the regions.

• As a part of Heineken's aggressive expansion into the regions of Russia it announced the purchase of four brewing companies in Russia: Patra, Stepan Razin, Baikal Beer Company, and Ivan Taranov Brewery. The latter was the largest M&A transaction in the sector, and it became the seventh brewing company acquisition by Heineken in Russia since August 2004.

• InBev also strengthened its position on the Russian market, acquiring Tinkoff, well-known in the premium beer segment, for USD 201 million.

• The third notable acquisition in the brewing sector was BBH's purchase of a 25.9% stake in Yarpivo Brewery based in Yaroslavl.

• Brewing has long been favored by foreign investors, and many of the obvious opportunities have now been tapped. At the beginning of 2006

• Thus, Ochakovo is now the last large independent brewing company remaining in Russia. Consolidation in the brewing industry is almost completed.

• In 2005 Coca-Cola purchased Multon, a major Russian juice producer. This

expansion into the Russian non-carbonated beverages segment was accomplished at a price of USD 501

million.

Banks with a developed retail business continue to be the most attractive segment

for foreign investors:

• • In 2005, Societe Generale Group strengthened its position in mortgage and consumer loans by acquiring DeltaCredit in Moscow and Promek-Bank in Samara.

• The Dutch TBIH Financial Services Group purchased a controlling stake in Novosibirsk-based Arka-Finance engaged in consumer lending.

• Italy's Banca Intesa acquired KMB bank, which focuses on small business lending, for USD 90 million.

Some foreign players (e.g., ICICI, Hansabank) acquired small-sized Russian banks mainly for the purpose of getting licenses and entering the market.

Automotive and Machinery

• Siemens, who has been targeting Power Machines for quite a long time, received

the approval from the Federal Antimonopoly Service for a 20.62% stake purchase in the company and announced the acquisition in the beginning of 2006.

Thus, Siemens now owns a 25% plus one share in Power Machines, which is

important for strengthening Siemens's position in Russia.

Other industries

• The most notable transactions were the acquisition of the Grand Hotel Europe, St.

Petersburg by the British luxury hotel group Orient-Express Hotels and Resorts

and the sale of the Ukraina Hotel by Moscow city authorities for USD 274

million.

Other industries

• Finnish Sanoma Magazines expanded to regions of Russia and Ukraine by

spending USD 201 million to acquire Independent Media Holding and its

subsidiaries

The following trends were seen in the Russian M&A market in 2005:

• Foreign investments in the form of M&A are becoming more diversified: the interest has partly shifted from Russian natural resource industries to consumer products and financial services sectors. In the food & beverages sector, 80% of the deal value was generated by foreign acquirers, while in financial services the same rate reached almost 50%.

• Major Russian companies are actively expanding abroad. Some are securing their resource base, while others are seeking new markets for growth, including neighboring CIS countries.

• In 2005, we saw a substantial increase in the role of the state on the M&A market: 44% of the total deal value with Russian targets involved state-controlled companies acting as buyers. With the acquisitions of the Siberian Oil Company (Sibneft) and Yuganskneftegas the state now controls a large share of the Russian oil reserves and production. We also expect an increase of foreign investments in the form of joint ventures with state-controlled companies, resembling Kazakhstan's model of oil & gas sector development.

• International and domestic capital markets are playing an increasingly important role in acquisition deals financing. The opportunities for both debt and equity financing have broadened. Public offerings have become a notable source of funds, with over USD 6 billion raised by Russian companies in 2005.

• In 2005 we registered a substantial increase in midsized M&A transactions (deals worth USD 10 – 200 million). Both the value and volume of these transactions grew by over 80% year-on-year. We see the potential for acceleration in the activity of private equity firms in Russia. And we expect that the majority of private equity investments will be via mid-market transactions: Russia does not have an established venture capital culture as yet, thus, large deals with PE financing lie in the future.

Adding up Regional Strategies

• Russia will never accomplish the national task of doubling the GDP unless similar ambitious goals are also set at the regional level. Today, less than a forth of Russia’s regions are ready for such a task.

Welcoming investors

• two conclusions • The first seems banal at first glance: it is impossible to

significantly improve the investment climate without developing a strategy for social and investment development of Russia’s regions and municipalities. When even the municipalities in a region have an investment strategy or development program, things are far better for both investors and regional authorities. While this first conclusion may seem banal, the second is almost paradoxical: only about two dozen regions (less than a forth!) have any kind of strategy.

• The remaining regions have put no effort at all into moving toward investment-based development. We have tried to figure out what unites these twenty more progressive regions. It turns out that they all have the same problem. Before adopting new strategies, all these regions experienced a decline in investment. It seems that everyone else is waiting for the other shoe to drop.

• In addition, strategy is an important factor in increasing a region’s attractiveness to investment. It simplifies negotiations with investors significantly.

• Every country has its own way of interpreting this approach. At the same time, the experience of other countries demonstrates that certain economic relationships must almost always be present: - investment should equal 20-25% of the GDP (the level of capitalization);- direct foreign investment should be no less than 15-17% of the total domestic investment; - fixed asset depreciation should not exceed 30-35%.

• In other words, it will not be possible to double the GDP at the national level unless Russia sees

a stable influx of significant amounts of investment, according to our estimates at least

• $1.11 trillion,• including at least $170 billion in direct foreign

investment for 2004-2013. • This means that the overall amount of

investment in fixed assets must double and the amount of foreign investment must quadruple

(*4) compared to the average yearly investment rates of 1995-2002.

The Investment Rating Results

• The investment climate in Russia is stabilizing. The number of marginalized regions is declining and the number of “middle-class” regions is growing. The difference between Moscow and St. Petersburg and outlying suburbs is shrinking Only smaller regions, the autonomous ethnic federation subjects, are exceptions to these general positive trends.

Investors, Politicians, and Bureaucrats•

Officials make all the difference, especially when it comes to investment climate. However, the opposite is also true: the electorate’s mood depends heavily on the conditions the region has created for investors.

• Investment risk represents the likelihood of the loss of investments or income from investments. The integral risk evaluation consists of seven different risk types. A region’s rank in terms of each kind of risk is determined according to its relative deviation from the Russian national average risk, which equals one.

• Investment potential takes macroeconomic characteristics into account, such as the geographical concentration of industrial facilities, consumer demand, and other factors. The aggregate investment potential of a region consists of eight individual potential factors, each of which in turn is defined by an entire group of indicators. Each region’s potential ranking depends on a quantitative estimate of its potential as a portion of the total potential of all 89 Russian regions.

• High potential – moderate risk (1B) - 4 regions.High potential – high risk (1C) - 1 region.Average potential – moderate risk (2B) - 15 regions.Average potential – high risk (2C) - 5 regions.Low potential – minimal risk (3A) - 1 region.Reduced potential – moderate risk (3B1) - 27 regions.Reduced potential – high risk (3C1) - 5 regions.Insignificant potential – moderate risk (3B2) - 16 regions.Insignificant potential – high risk (3C2) - 11 regions.Low potential – extreme risk (3D) - 4 regions.

• The number of “marginalized” regions is declining steadily

• – i.e. the regions with extremely high risk or very low potential.

• The investment potential of the regions closest to Russia’s two biggest cities, Moscow and Leningrad Provinces, grew particularly rapidly.

The Wave Effect

• Investment climate is not only defined by local authorities. It is also defined by neighboring regions. The Russian investment climate gets increasingly worse as one moves east and south. The waves of economic development expand in concentric rings from Russia’s investment core.

Russia’s investment profile

• Regions with the best investment climates are for the most part concentrated in European Russia.

• The Northwest, Central, and Privolzhsky Federal Districts have particularly favorable climates.

• Almost two thirds of Russia’s investment potential is concentrated in these regions, and investment risk per region is lower than the national average.

NOVGOROD OBLAST

NOVGOROD OBLAST LAW

• Article 1. Tax Benefits for Entities Implementing Investment Projects

• Article 2. Tax Benefits Concerning Taxes Paid to the Oblast Budget

• Article 3. Entities profit tax benefits

• Article 4.Corporate Property Tax Benefits

• Article 5. Land Tax Benefits

• Chapter VI. Guarantees of Investing Entities' Rights. • Protection of Investment

•

Chemicals

• More than 90 % of chemical products in the Novgorod oblast is produced by "Akron" (phosphate and nitric mineral fertilizers, synthetic ammonia, methanol, synthetic tars, plastics, etc. ). 80% of its products is exported. Such chemical industry enterprises as "Novgorodsky zavod steklovolokna", "Pfleiderer-Chudovo" and "Mineral" operate in our region

Food industry

•"Novgorodsky myasnoy dvor" (meat products), "Laktis"(dairy produce and juice) are the largest modern domestic enterprises of the food industry. As for foreign representatives of this industry they are the following: "Cadbury" (chocolate products) and "Dirol" (chewing gum).

Electronics

•Such Novgorodian enterprise as "Kvant" produce digital TV sets, microwave ovens, satellite antennae, etc. "Transvit" specializes in the production of updated transformers and illuminating devices. Electronic components including microschemes, semi-conductors and diodes are produced by "Planeta".

Machine building

• "Novgorodian machine building plant", using new technologies, produces equipment for the production and packing of liquid and paste products which are successfully sold at the Russian and European markets. Produce of "Energomach" (electric equipment), "Agrokabel" (cables), "Industrial company "Splav" (equipment for nuclear power stations), "Novgorodian plant "GARO" (modern vehicle repair equipment), "RASTR" (industrial TV watching systems), "Borovichsky kombinat ogneuporov" (refractory materials) are well-known in Russia.

Timber and wood-processing industry

• The leading enterprises of this sector are "Chudovo-RWS" and "Parfinsky plywood factory" (laminated plywood of world standard). They export the majority of their products .Furniture production is being developed in Novgorod the Great and Borovichi. High quality furniture is produced by using modern technologies. "Solntse" produces matches of different kinds.