administrative barriers to investment … administrative barriers to investment within subjects of...

RUSSIA

ADMINISTRATIVE BARRIERS TO INVESTMENT WITHIN SUBJECTS OF THE RUSSIAN FEDERATION

September 2001

Foreign Investment Advisory Service a joint service of the

International Finance Corporation and

The World Bank

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PREFACE

In early calendar year 2000, the Foreign Investment Advisory Service (FIAS) received requests to carry out a series of studies on “Administrative Barriers to Investment within Subjects of the Russian Federation.” The requests came from the Administrations of Novgorod, Leningrad, St. Petersburg, Sverdlovsk, and Tomsk and the Federal Ministry of Antimonopoly Policy and Entrepreneurship Support (MAP). This study of administrative barriers to investment focuses on the day-to-day experiences of businesses. The study analyzes all the procedures that an average investor (foreign or domestic) must follow in order to start a new investment, as well as routine interactions between businesses and government agencies during normal business operations. The report documents the steps that must be followed, how long they take, and how much they cost. These procedures are compared across the five regions participating in the study, and also across other transition and emerging market economies.

During the field work, the FIAS team interviewed representatives of both private investors and the relevant public sector agencies, to gain an understanding of “both sides of the story.” The face-to-face interviews with businesses were supplemented with a survey of private businesses in each of the regions participating in the study. The analysis takes into account the perceptions of private investors and the views of government officials about their goals and constraints, as well as FIAS’s experience in other countries. The recommendations of the study are designed to provide useful information to guide the ongoing reform process at the policy and legal levels, but more importantly, at the level of the detailed regulations and day-to-day implementation.

FIAS distributed draft versions of the report to MAP and to the regional administrations of Novgorod, Leningrad, St. Petersburg, and Sverdlovsk in February 2001, and presented the draft report in workshops in each location in March. The draft report for Tomsk was submitted in May and the workshop to discuss the report took place in June. The main sections of the report were also posted on the MAP website. For their cooperation and support, we thank everyone we interviewed in the federal, regional, and local agencies; in the regional administrations of Novgorod, Leningrad, St. Petersburg, Sverdlovsk, and Tomsk; and in the municipal administrations of Chudovo, Kovezhnikovo, Pervuralsk, Tosna, Velikii Novgorod, and Yekaterinburg. FIAS also thanks all the private sector representatives whom we interviewed in the course of this study and those who answered our survey questionnaire. We also thank those who provided feedback on the draft report. FIAS benefited from assistance from many sources, especially the Russian company “Invest-In,” which provided consulting services, and from the British Know How Fund, and the U.S. Agency for International Development, which provided co-financing. FIAS is fully responsible for the information, analysis, and recommendations contained in the report.

The report is designed in modular format so that individuals can find and detach individual sections of interest to them. The report is structured as follows: Executive Summary

• Common Executive Summary for all clients • Regional Executive Summary for each of the regional clients

I. Introduction and Overview Technical Chapters II. Start-up Procedures

• Federally mandated and common start-up procedures • Region-specific start-up procedures for each regional client

III. Procedures for Locating a Business • Federally mandated and common locating procedures • Region-specific locating procedures for each of the regional clients

IV. Operating Procedures • Federally mandated and common operating procedures • Region-specific operating procedures for each of the regional clients

Appendices: Hard copies of appendices available in Russian only

TABLE OF CONTENTS PREFACE EXECUTIVE SUMMARY EXECUTIVE SUMMARY - LENINGRAD OBLAST EXECUTIVE SUMMARY - NOGVOROD OBLAST EXECUTIVE SUMMARY - ST. PETERSBURG EXECUTIVE SUMMARY - TOMSK OBLAST CHAPTER I INTRODUCTION ........................................................................................................................I-1 A. Framework of the Report ......................................................................................I-2 B. Current Investment Environment and Performance ...........................................I-12

C. Division of Labor between the Federal, Regional, and Local Levels of Government Regarding Administrative and Regulatory Procedure ...................I-16

D. Summary of FIAS Investor Survey Findings......................................................I-20 Figures Figure 1.1 Foreign Investment Process Flowcharts

General Chart—Business Organization Migration Chart Company Registration Procedures Opening Bank Accounts for Foreign Equity Procedures Regulated by Customs Employment of Workers General Scheme of Project Approval in the Russian Federation: Phases and Participating Agencies Loan, Credit, and Currency Procedures Regulated by the Central Bank

Figure 1.2 Foreign Direct Investment Per Capita in Five Regions Figure 1.3 Investment Per Capita in Main Capital of Enterprises and Organizations

with Foreign Capital Participation Figure 1.4 Investment in Main Capital Per Capita Figure 1.5 Number of Enterprises Figure 1.6 Top Six Obstacles to Investment Figure 1.7 Difference Between Average and Region Numbers For the Top ten

Obstacles Figure 1.8 Perception of Relations between Federal Government and Private

Companies

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Figure 1.9 Perception of Relations between Regional/Local Government and Private Companies

Figure 1.10 Governance Obstacle to Business Figure 1.11 WBES Survey of Obstacles to Investment in Russia Appendixes Appendix 1.1 Terms of Reference for Study of Administrative Barriers to Investment Appendix 1.2 The Division of Labor Between the Federal, Regional, and Local Levels

of Government with Regard to Administrative Barriers to Investment in the Russian Federation

Appendix 1.3 Description of FIAS Survey of Private Enterprises in Russia CHAPTER II ACRONYM .................................................................................................................................. IV START-UP PROCEDURES ...................................................................................................... II-1 A. Obtaining Visas and Work and Residence Permits ............................................ II-1

1. Obtaining a Visa ..................................................................................... II-1 2. Accreditation of the Inviting Organization ............................................. II-4 3. Registration of Foreign Citizens ............................................................ .II-5 4. Work Permits and Confirmations ........................................................... II-5 5. Sanctions and Inspections ....................................................................... II-8 6. Residence Permits................................................................................... II-9 7. Analysis................................................................................................... II-9 8. Rcommendations................................................................................... II-14

B. Company Registration ...................................................................................... II-16

1. Legal Forms .......................................................................................... II-16 2. Registration of a Company without Foreign Investment...................... II-20 3. Registration of a Company with Foreign Investments ......................... II-20 4. Registration with the State Registration Chamber of the Ministry of Justice in Moscow ............................................................................ II-21 5. Registration of Amendments to a Company Charter............................ II-22 6. Registration of a Representative Office................................................ II-23 7. Importation of Equipment to be Contributed to the quilty Capital of

the Company ......................................................................................... II-27 8. Payment of Equity Capital .................................................................... II-30 9. Procedures to Open a Type “k” Bank Account by Nonresidents ......... II-32 10. Procedures for Opening a Bank Account by a Newly Established

Company ............................................................................................... II-33 11. Analysis................................................................................................. II-33 12. Recommendations................................................................................. II-44

C. Taxpayer Registration....................................................................................... II-46

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1. Tax registration ..................................................................................... II-46 2. Registration with State Social Security Funds...................................... II-49 3. Analysis................................................................................................. II-49 4. Recommendations................................................................................. II-50

D. Registration with the State Committee for Statistics .................................................... II-50

1. Registration Procedure.......................................................................... II-50 2. Reporting to the Statistical Committee ................................................. II-51 3. Available Information........................................................................... II-52 4. Analysis................................................................................................. II-52 5. Recommendations................................................................................. II-53

E. Antimonopoly Clearance .................................................................................. II-54

1. To Establish a Company ....................................................................... II-55 2. For Mergers and Acquisitions............................................................... II-55 3. Petition or Notice .................................................................................. II-55 4. Analysis................................................................................................. II-60 5. Recommendations................................................................................. II-62

F. Issuance and Regulation of Shares ................................................................... II-62

1. The Stock Exchange ............................................................................. II-62 2. Registrars .............................................................................................. II-63 3. Corporate Securities.............................................................................. II-64 4. Reporting and Disclosure of Information Requirements ...................... II-65 5. Analysis................................................................................................. II-66 6. Recommendations................................................................................. II-70

G. Licensing........................................................................................................... II-71

1. Construction Licensing ......................................................................... II-71 2. Transportation Licensing ...................................................................... II-79 3. Internet Service Provider Licensing...................................................... II-83

Tables Table 2.1 Costs and Processing Times for Single and Double-Entry Visas Table 2.2 Costs for Multiple-Entry Visas Table 2.3 Costs to Extend the Duration of a Visa Table 2.4 Registration Procedures Table 2.5 Importation of Equipment as Equity Capital Table 2.6 Registration Procedures in Selected Countries Table 2.7 Registration with the State Committee for Statistics Table 2.8 Licensing Procedures Table 2.9 Transportation Licensing (regional specifics) Figures Figure 2.1 Registration of a Representative Office of a Foreign Company Figure 2.2 Registration/Country Comparisons

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Appendix II-1 Visa application form Appendix II-2 Work permit Appendix II-3 Work confirmation Appendix II-4 Information card to register a legal entity Appendix II-5 Information card to register amendments to a company charter Appendix II-6 Tax registration application, Ministry for Taxes and Charges Appendix II-7 Tax certificate from the Ministry for Taxes and Charges Appendix II-8 Property tax registration form Appendix II-9 State Social Security Fund registration form Appendix II-10 Licensed activities Appendix II-11 Staff qualifications for licensing Appendix II-12 Legal and technical information for licensing Appendix II-13 Information on quality control systems for licensing Appendix II-14 Environmental protection, and fire and work safety information for

licensing Appendix II-15 Transportation licensing application Appendix II-16 Transportation license, information on cars that will be used for

transportation Appendix II-17 Transportation license, information on fixed assets, equipment, and

means of control Appendix II-18 Transportation license, personnel qualifications information Appendix S-II-1 Application for company registration in Sverdlovsk Oblast Appendix S-II-2 Sketch of the company stamp Appendix S-II-3 Registration card CHAPTER II (PART 2): REGIONAL VARIATIONS LENINGRAD OBLAST..........................................................................................................II-L-1 A. Company Registration .....................................................................................II-L-1 1. Registration of Companies with Local Capital....................................II-L-1 2. Registration of Amendments to a Company Charter...........................II-L-2 3. Availability of Information ..................................................................II-L-3 4. Registration of Companies with Foreign Investments.........................II-L-3 5. Registration of Amendments to a Company Charter...........................II-L-4 6. Receiving Permission for Registration in State ...................................II-L-5 7. Availability of Information ..................................................................II-L-5 B. Analysis............................................................................................................II-L-5 C. Recommendations............................................................................................II-L-5 NOVGOROD OBLAST ......................................................................................................... II-N-1

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A. Company Registration .................................................................................... II-N-1 1. Registration of Companies with Local Capital................................... II-N-1 2. Registration of Amendments to a Company Charter.......................... II-N-2 3. Availability of Information ................................................................. II-N-3 4. Registration of Companies with Foreign Investments........................ II-N-3 5. Registration of Amendments to a Company Charter.......................... II-N-4 6. Availability of Information ................................................................. II-N-5 7. Receiving Permission to Register with the State Registration

Chamber.............................................................................................. II-N-5 B. Analysis........................................................................................................... II-N-5

1. Attitude ............................................................................................... II-N-5 2. Problems ............................................................................................. II-N-5 3. Availability of Information ................................................................. II-N-6 4. Registration of Local Companies........................................................ II-N-6

C. Recommendations........................................................................................... II-N-7 ST. PETERSBURG ................................................................................................................. II-P-1 A. Company Registration ..................................................................................... II-P-1 1. Registration of Companies with Local Capital.................................... II-P-1 2. Registration of Amendments to a Company Charter........................... II-P-2 3. Availability of Information .................................................................. II-P-2 4. Registration of Companies with Foreign Investments......................... II-P-3 5. Registration of Amendments to a Company Charter........................... II-P-4

6. Receiving Permission to Register with the State Registration Chamber............................................................................................... II-P-4 7. Availability of Information .................................................................. II-P-4 B. Analysis............................................................................................................ II-P-5 1. Problems .............................................................................................. II-P-5 2. Availability of Information .................................................................. II-P-5 C. Recommendations............................................................................................ II-P-6 TOMSK OBLAST...................................................................................................................II-T-1 A. Company Registration: Tomsk Oblast............................................................II-T-1

1. Company Registration Procedure ........................................................II-T-1 2. Analysis................................................................................................II-T-5 3. Recommendations................................................................................II-T-6

B. Immigration Procedures...................................................................................II-T-7

1. Obtaining Visa and Accreditation of the Inviting Organization..........II-T-7 2. Registration of Foreign Citizens ..........................................................II-T-7 3. Work Permits and Confirmations ........................................................II-T-8

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4. Analysis................................................................................................II-T-8 5. Recommendations................................................................................II-T-8

C. Product Certification........................................................................................II-T-8 CHAPTER III ACRONYMS ...........................................................................................................................III-iii LOCATING THE BUSINESS .................................................................................................. III-1 A Introduction........................................................................................................ III-1

1. Main Findings ........................................................................................ III-1 2. Land Allocation and Project Approval .................................................. III-3

B. Government and Laws ....................................................................................... III-5

1. Basic Laws............................................................................................. III-5 2. Property Rights ...................................................................................... III-7 3. Taxes, Rents and Prices ....................................................................... III-11 4. Leasing and Lease Terms..................................................................... III-12 5. Analysis................................................................................................ III-13 6. Recommendations................................................................................ III-17

C. Identifying and Evaluating Property................................................................ III-19

1. General Description ............................................................................. III-19 2. Analysis................................................................................................ III-25 3. Recommendations................................................................................ III-26

D. Phase I: Location Approval ............................................................................. III-27


E. Public Utilities ................................................................................................. III-41


F. Forming the Property and Registering Rights ................................................. III-48

1. General Description ............................................................................. III-48 2. Analysis................................................................................................ III-52 3. Property Formation and Registration Recommendations .................... III-53

G. Phase II: Design Review and Building Permission ........................................ III-54 1. General Description ............................................................................. III-54 2. Analysis................................................................................................ III-61

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3. Recommendations................................................................................ III-74 H. Inspections and Occupancy.............................................................................. III-76


Tables Table 3.1 Range of Taxes, Rents and Prices Per Square Meter/Per Annum in

Selected Localities Table 3.2 Local Agencies Participating in Phase I Approval Table 3.3 Average Number of Months for Phase I Project Review (Location

Approval) Table 3.4 Average Commercial/Industrial Utility Tariffs in Selected Localities Table 3.5 Registration Fees for Selected Transactions in Selected Regions Table 3.6 Average Months for Design Review (State Expertise and Issuance of

Building Permit, by Region Table 3.7 Total Average Months from Commencement of Project Review to

Issuance of Building Permit, by Region Table 3.8 Duration and Fees of Steps in Project Approval Process Figures Figure 3.1 General Scheme of Project Approval in the Russian Federation: Phases

and Participating Agencies Figure 3.2 Access to land: Severity of Obstacle Figure 3.3 International Comparison of Land Acquisition Figure 3.4 International Comparison of “Project Review through Issuance of

Building Permit Figure 3.5 Access to Building Permit: Severity of Obstacle Appendix III-1 SniP 11091-95: Instruction on the Procedure of Development and

Approval of the Design and Budget Documentation for Construction of Enterprises, Buildings and Structures

Appendix III-2 Minstroi Letter BE-19-4/9 of February 13, 1996, “On Improvement of the Construction Project Approval Procedure”

Appendix III-3 Copy of Typical APZ format CHAPTER III (PART 2): LOCATING PROCEDURES..................................................... III-L-1 LENINGRAD OBLAST........................................................................................................ III-L-1 A. Identifying Property ....................................................................................... III-L-2 1. Property Market ................................................................................. III-L-2 2. Investor Relations .............................................................................. III-L-3 3. Professional Services for Investors.................................................... III-L-4 4. Analysis.............................................................................................. III-L-4

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5. Recommendations.............................................................................. III-L-5 B. Acquiring Property......................................................................................... III-L-6 1. Real Estate Tenure ............................................................................. III-L-6 2. Acquisition Procedures ...................................................................... III-L-6 3. Taxes, Rents, and Prices .................................................................... III-L-7 4. Analysis.............................................................................................. III-L-8 5. Recommendations............................................................................ III-L-10 C. Phase I Project Approval ............................................................................. III-L-11 1. General Description ......................................................................... III-L-11 2. Analysis............................................................................................ III-L-11 3. Recommendations for Phase I ......................................................... III-L-13 D. Public Utilities ............................................................................................. III-L-13 E. State Expertise and Building Permission..................................................... III-L-14 1. In General......................................................................................... III-L-14 2. Analysis............................................................................................ III-L-14 F. Property Formation and Registering Property Rights.................................. III-L-15 G. Inspections and Occupancy.......................................................................... III-L-15 Appendix III-L-1 Resolution of the Leningrad Oblast Government #328 of July 25,

1996 "On temporary Regulations of Development and Approval of Preliminary and Final Project Documentation for the Construction of Enterprises, Buildings and Structures on the Territory of Leningrad Oblast".

NOVGOROD OBLAST ........................................................................................................ III-N-1 A. Identifying Property in Novgorod.................................................................. III-N-2

1. Novgorod Real Estate Market............................................................ III-N-2 2. Investor Relations in Novgorod ......................................................... III-N-3 3. Professional Services in Novgorod.................................................... III-N-4 4. Novgorod Property Market and Investor Relations ........................... III-N-4

B. Acquiring Real Estate in Novgorod............................................................... III-N-5

1. Real Estate Tenure in Novgorod........................................................ III-N-5 2. Taxes, Rents, and Prices in Novgorod ............................................... III-N-5 3. Novgorod Tenure Analysis ................................................................ III-N-6 4. Recommendations.............................................................................. III-N-6

C. Phase I Project Approval ............................................................................... III-N-7

1. General Description ........................................................................... III-N-7

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2. Main Differences with National System............................................ III-N-7 3. Analysis.............................................................................................. III-N-9 4. Recommendations............................................................................ III-N-11

D. Public Utilities ............................................................................................. III-N-11

1. General Description ......................................................................... III-N-11 2. Analysis............................................................................................ III-N-14 3. Recommendations............................................................................ III-N-14

E. State Expertise and Building Permission..................................................... III-N-14

1. General Discussion .......................................................................... III-N-14 2. Analysis............................................................................................ III-N-15 3. Recommendations............................................................................ III-N-16

F. Forming the Property and Registering Property Rights............................... III-N-16

1. General Discussion .......................................................................... III-N-16 2. Analysis............................................................................................ III-N-16

G. Inspections and Occupancy.......................................................................... III-N-17 Appendix III-N-1 Detailed Schematic of the Project Approval Process in Novgorod

City. Appendix III-N-2 Provisiion "On Regulation of City Planning Activity on the

Territory of Veliky Novgorod" #447 of Septembner 24, 1998. ST PETERSBURG .................................................................................................................III-P-1 A. Identifying Property ........................................................................................III-P-3 1. Real Estate Market..............................................................................III-P-3 2. Investor Relations ...............................................................................III-P-3 3. Professional Services for Investors.....................................................III-P-4 4. Analysis...............................................................................................III-P-5 B. Acquiring Property in St. Petersburg ..............................................................III-P-8 1. Land Tenure ........................................................................................III-P-8 2. Acquisition Procedures .......................................................................III-P-9 3. Taxes, Rents, and Prices ...................................................................III-P-10 4. Analysis.............................................................................................III-P-11 5. Recommendations.............................................................................III-P-12 C. Phase 1 Project Approval..............................................................................III-P-12 1. General Description ..........................................................................III-P-12 2. Analysis.............................................................................................III-P-14 3. Recommendations.............................................................................III-P-16 D. Public Utilities ..............................................................................................III-P-17

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1. General Description ..........................................................................III-P-17 2. Analysis.............................................................................................III-P-18 3. Recommendations.............................................................................III-P-19 E. State Expertise and Building Permission......................................................III-P-19 1. Analysis.............................................................................................III-P-20 2. Recommendations.............................................................................III-P-21 F. Property Formation and Registration of Property Rights .............................III-P-21 G. Inspections and Occupancy...........................................................................III-P-22 Appendix III-P-1 St. Petersburg Governor's Resolution ##952-r of September 25, 2000

"Regulation for Drafting and Approval of Investment-Tender Documentation for Allocation of Real Estate Properties and Property Rights on Investment Terms.

Appendix III-P-2 Summary of St. Petersburg Governor's Resolutions on Approval of Construction Projects and Allocation of Land Sites for their Implementation in 2000 Based on the Decisions of the Investment-Tender Commission.

Appendix III-P-3 St. Petersburg Governor's Resolution #339 "On the Procedure of Drafting and Issuing Legal Acts of St. Petersburg Administration on Issuing Permits for Construction, Capital Repair and Reconstlruction to Property Owners".

TOMSK OBLAST................................................................................................................. III-T-1 A. Identifying Property in Tomsk....................................................................... III-T-2 1. Real Estate Market............................................................................. III-T-2 2. Investor Relations in Tomsk .............................................................. III-T-3 3. Professional Services in Tomsk ......................................................... III-T-4 4. Analysis of Tomsk Real Estate Market and Investor Relations ........ III-T-4 5. Recommendations.............................................................................. III-T-5 B. Acquiring Real Estate .................................................................................... III-T-6 1. Real Estate Tenure ............................................................................. III-T-6 2. Land Taxes, Rents, and Prices ........................................................... III-T-7 3. Analysis.............................................................................................. III-T-8

4. Recommendations.............................................................................. III-T-9 C. Phase I Project Approval ............................................................................. III-T-10 1. General Description ......................................................................... III-T-10 2. Comparison with National Model.................................................... III-T-14 3. Analysis............................................................................................ III-T-15 4. Recommendations............................................................................ III-T-18 D. Public Utilities ............................................................................................. III-T-19

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1. General Description ......................................................................... III-T-19 2. Analysis and Recommendations ...................................................... III-T-22 E. State Expertise and Building Permission..................................................... III-T-23 1. General Discussion .......................................................................... III-T-23 2. Analysis of State Expertise and Building Permission...................... III-T-23 3. Recommendations............................................................................ III-T-25 F. Forming the Property and Registering Property Rights............................... III-T-25 1. General Discussion .......................................................................... III-T-25 2. Analysis of Forming the Property and Registration ........................ III-T-26 G. Inspections and Occupancy.......................................................................... III-T-26 Tables Table 3.9 Project Approval and Building Acceptance Process in Tomsk City Table 3.10 Average Number of Months for Phase I Project Review (Location

Approval) Table 3.11 Average Number of Months for Design Review (State Expertise) and

Issuance of Building Permit Table 3.12 Total Average Months from Commencement of Project Review to

Issuance of Building Permit CHAPTER IV: OPERATING PROCEDURES ....................................................................... IV-1 A The Taxation System in Russia.......................................................................... IV-1 1. Profit Tax ............................................................................................... IV-1 2. Value Added Tax ................................................................................... IV-7 3. Excise Tax.............................................................................................. IV-9 4. Social Insurance ................................................................................... IV-11 5. Tax on Property of Enterprises ............................................................ IV-13 6. Sales Tax.............................................................................................. IV-15 7. Advertising Tax ................................................................................... IV-15 8. Road-Users Tax ................................................................................... IV-15 9. Vehicle Owners Tax ............................................................................ IV-16 10. Small Business Taxes .......................................................................... IV-17 11. Rescheduling Tax Payments ................................................................ IV-23 12. Investment Incentives .......................................................................... IV-27 13. Tax Reporting ...................................................................................... IV-27 14. Penalties ............................................................................................... IV-28 15. Tax Control .......................................................................................... IV-29 16. Appeals ................................................................................................ IV-33 17. Disputes of Tax Audits ........................................................................ IV-34 18. Analysis of Tax Administration........................................................... IV-35 19. Recommendations................................................................................ IV-43

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B. Export and Import of Commodities ................................................................. IV-45 1. Introduction.......................................................................................... IV-45 2. Registering Foreign Economic Activities............................................ IV-46 3. Customs Procedure at the Local Customs House ................................ IV-48 4. Calculation of Custom Clearing Costs: Custom Tax, Excises,

Handling Fees ...................................................................................... IV-49 5. Product Certificate Documentation...................................................... IV-51 6. Customs Brokers and Other Customs Agents...................................... IV-52 7. Special Licenses................................................................................... IV-53 8. Analysis................................................................................................ IV-54 9. Recommendations................................................................................ IV-60 C. Foreign Currency Control land Banking Operations ....................................... IV-62 1. General Description ............................................................................. IV-62 2. Current Operations vs. Capital Movement Operations........................ IV-63 3. Procedures for Obtaining Central Bank Permission for Securing a

Loan from a Non-resident for a Period Exceeding 180 Days.............. IV-64 4. Procedures for Registering a Loan Agreement with a Non-resident

at a Local Division of the Central Bank............................................... IV-65 5. Procedures for Obtaining Central Bank Permission for Currency

Transactions Concerning Export and Import of Goods ....................... IV-66 6. The Rights of Local Divisions of the Central Bank............................. IV-67 7. Current Foreign Currency Operations on the Internal Market............. IV-68 8. Cash Regulations ................................................................................. IV-69 9. Analysis................................................................................................ IV-69 10. Recommendations................................................................................ IV-75 D. Monitoring of Export and Import Activities.................................................... IV-76 1. Description........................................................................................... IV-76 2. Analysis................................................................................................ IV-79 3. Recommendations................................................................................ IV-80 E. Product Certificate ........................................................................................... IV-80 1. Introduction.......................................................................................... IV-80 2. Certificate of Imported Products.......................................................... IV-81 3. Products Certificate for Production in Russia...................................... IV-82 4. Analysis................................................................................................ IV-84 5. Recommendations................................................................................ IV-87 APPENDIX IV-1 Calculation (tax declaration) of tax on actual profit APPENDIX IV-2 Calculation (tax declaration ) on value added tax APPENDIX IV-3 Tax calculation on excises APPENDIX IV-4 Calculation register for the social security fund (Form-4 15/11/99 #71) Calculation register for pension fund Calculation register for federal and regional funds of obligatory

medical insurance

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Calculation register for fund of employment APPENDIX IV-5 Calculation of average cost of property Calculation of tax on property APPENDIX IV-6 Calculation of tax on sales APPENDIX IV-7 Declaration of tax on advertising APPENDIX IV-8 Calculation of tax on maintenance of housing fund and objects of

social cultural sphere APPENDIX IV-9 Declaration of tax on road users APPENDIX IV-10 Declaration of tax on vehicle owners APPENDIX IV-11 Calculation of the single tax on aggregate income (gross revenue) APPENDIX IV-12 Application to central bank for credit transaction registration APPENDIX IV-13 List of goods for export under license of MEDT APPENDIX IV-14 List of goods for import under license of MVES APPENDIX IV-15 Application for expertise of non-receiving currency earnings CHAPTER IV (PART 2): REGIONAL INVESTMENT INCENTIVES LENINGTRAD OBLAST ..................................................................................................... IV-L-1 A. Available Investment Incentives.................................................................... IV-L-1 B. Analysis of Regional Investment Incentives.................................................. IV-L-3 1. General Analysis................................................................................ IV-L-3 2. Leningrad Analysis ............................................................................ IV-L-5 C. Recommendations Regarding Regional Investment Incentives .................... IV-L-7 1. General Recommendations ................................................................ IV-L-7 2. Leningrad Recommendations ............................................................ IV-L-7 Appendix IV-L-1 Methods of calculation of payback period and the actual payback

period of investments for realization of tax beneficial regime on the territory of Leningrad oblast.

NOVGOROD OBLAST ........................................................................................................IV-N-1 A. Description of Available Tax Benefits ..........................................................IV-N-1 1. General Requirements for Preferential Taxation ...............................IV-N-2 2. Approval Procedure for an Investment Project..................................IV-N-2 3. Stability of Terms of Investors ..........................................................IV-N-3 4. Rules for Calculation of Payback Period ...........................................IV-N-3 B. Analysis of Regional Investment Incentives..................................................IV-N-4 1. General Analysis................................................................................IV-N-4 2 Analysis of Novgorod Investment Incentives....................................IV-N-7

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C. Recommendations Regarding Regional Investment Incentives ....................IV-N-8 1. General Recommendations ................................................................IV-N-8 2. Nogvorod Recommendations.............................................................IV-N-8 Appendix IV-N-1 Rules for calculation of moment of full payback, calculated

payback period and other specifics of application of incentives for organizations involved in investment project in the Novgorod region.

ST. PETERSBURG ............................................................................................................... IV-P-1

A. Available Investment Incentives.................................................................... IV-P-1 B. Analysis of Regional Investment Incentives.................................................. IV-P-3

1. General Analysis................................................................................ IV-P-3 2. St. Petersburg Analysis ...................................................................... IV-P-6 C. Recommendations Regarding Regional Investment Incentives .................... IV-P-6 1. General Recommendations ................................................................ IV-P-6 2. St. Petersburg Recommendations ...................................................... IV-P-7 Hard copy of appendix available in Russian only Appendix IV-P-1 Application forms for tax incentives in St. Petersburg TOMSK OBLAST: TAXES AND INVESTMNT INCENTIVES........................................ IV-T-1 A. Regional Taxes and Tax Benefits .................................................................. IV-T-1 B. Analysis of Regional Investment Incentives.................................................. IV-T-6 1. General Analysis................................................................................ IV-T-6 2. Analysis of Tomsk Investment Incentives......................................... IV-T-9 C. Recommendations Regarding Regional Investment Incentives .................. IV-T-10 1. General Recommendations .............................................................. IV-T-10 2. Tomsk Recommendations................................................................ IV-T-10

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EXECUTIVE SUMMARY Overview of Administrative Barriers i. The activities of private businesses in the Russian Federation today are still severely over-regulated. There are too many procedures, many of which no longer serve any legitimate governmental purpose, and these procedures are in most cases more complicated than they need to be. There is too much uncertainty, as interpretation and enforcement of laws—from registering a new company, to acquiring land, to paying taxes—change rapidly and depend on which government official is doing the interpreting or enforcing. There is too much corruption—from high-level officials who demand “partnership” in companies that look like they will be profitable ventures—to the lowest level customs or expertise official. Russia suffers in comparison with most other emerging markets in these respects, even in comparison with other transition economies such as those in central Europe and the Baltic region. These conclusions apply to all private firms, whether their owners or managers are Russian or foreign. ii. A team from the Foreign Investment Advisory Service (FIAS) has analyzed these problems—called administrative barriers—at the requests of the administrations of Novgorod, Leningrad, St. Petersburg, Sverdlovsk, and Tomsk and the Federal Ministry of Antimonopoly Policy and Entrepreneurship Support. Fieldwork in each of the regions, in the summer 2000, provided details on the problems (and how they differ) in each region as well as their basis in federal legislation. During the field work, the FIAS team interviewed both private investors and officers of the relevant public sector agencies, to gain a detailed understanding of “both sides” of the story. The face-to-face interviews with businesspeople were supplemented with a survey of private businesses in each of the regions participating in the study, in order to get firmer results from a larger number of investors. We have also used FIAS knowledge of the determinants of investment decisions, gained in advising more than 100 countries over 15 years, to understand the different responses we have heard regarding Russia. iii. Figure 1 shows the six major obstacles we found, based on the survey results. These include problems with tax rates, tax administration, and corruption, which are all closely related to administrative barriers to investment, plus inflation, finance, and the judiciary, which are largely outside the scope of this study.1

1 There are some inherent contradictions in these findings, which are common throughout the world: businesses want lower taxes, better (and probably more expensive) government services, and lower inflation. In the case of this survey it is likely that the complaints about inflation reflect the high inflation of the recent past rather than the current, less severe inflation.

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Figure 1 Top Six Obstacles to Investments

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iv. Large, former state-owned firms can manage the procedures because they have established relations with many of the key officials. Large foreign investors can hire lawyers, accountants, consultants, and agents to help them through the procedures. Smaller firms, both foreign and domestic, are more often deterred by the procedures because they have neither connections nor resources to pay for hired expertise to help them. v. It should be noted that one of the major difficulties in investigating administrative barriers in a setting such as Russia is the significant difference between existing investors and “potential” investors. Government officials at all levels in Russia want to see more investment. Some of this might plausibly come from existing businesses making new investments to expand or upgrade their facilities or to introduce new production lines or new services. However, much of the new investment will have to come and should come from new investors. vi. The problem is that existing investors, and their attitudes and perceptions, are not necessarily representative of potential investors. In this regard, for all the bitter complaints and harsh criticisms, the findings of the FIAS interviews and surveys are probably biased in favor of the status quo, relative to the views of the potential investors that Russia wants to attract. It has therefore been necessary to filter and interpret the views of existing businesses to find clues about the needs of potential investors and to judge priorities for reform. In particular, the notorious “un-level playing field” in the Russian Federation must be viewed as a fundamental deterrent to new investment. vii. The FIAS findings are confirmed by many other sources. The World Business Environment Survey of 80 countries carried out in early 2000 also found tax and regulations at the top of the list of complaints by businesses in Russia (to a degree worse than most other central and East European countries), followed by inflation and policy instability.2 Euromoney, in a recent survey of foreign direct investment in Russia, also put tax issues at the top of the list of problems, followed by insecure property rights, customs, and risk of political change.3 Transparency International ranked Russia 79th (alongside Ecuador and Pakistan) out of 91 countries in their corruption perception index for 2001.4 Finally, according to The Wall Street Journal and the Heritage Foundation’s Index of Economic Freedom, Russia ranked 127th out of 155 countries, with especially poor ratings for monetary policy, the fiscal burden, trade policy, and regulations.5 Low Investment Levels as a Result viii. Russia as a whole has been clearly under-performing in terms of both gross domestic private investment and foreign direct investment. Gross domestic investment in the Russian Federation contracted severely from 1990 to 1998, and has only recently started expanding again. For most of the period 1992 to 1999, foreign direct investment constituted less than

2 World Bank, “World Business Environment Survey,” forthcoming. 3 Euromoney Internet Securities Inc. Emerging Markets Data, http://www.securities.com/cgi-bin 4 Transparency International, http://www.transparency.org/documents/cpi/2001/cpi2001.html. 5 http://www.heritage.org/news/2000/nr110100indexoverview.html.

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1% of Russia’s GDP, compared with 3% to 4% or more of GDP in Poland and Romania, and even higher rates in other countries in central and Eastern Europe. Figures 2 and 3 show how Russia compares with other large emerging market economies and other European transition economies, respectively.

Figure 2 Foreign Direct Investment in Large Emerging Market Economies

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ix. Not only the amounts of investment, but the activities in which it has been concentrated, are symptoms of grave problems. The “missing investors” are readily identifiable. FIAS noted in its first report on Russia (1992) that the only foreign investors coming to Russia were those that had to be there. This included investors in the extractive sectors, plus brand-name consumer-goods producers, but almost no one else. The pattern has not changed much since then. Notably sparse are the export-oriented manufacturers and others involved in the new “globalized” production system, which are so prominent in other transition economies, including central Europe, the Baltics, East Asia, and Latin America. x. For example, Russia should have a clear comparative advantage in the world economy in the production of research and development–intensive, high-technology goods and services, based on its highly educated workforce and a critical mass of world-class scientific talent in a diverse range of disciplines. However, Russian exports of new high-technology products have been meager, and Russia’s participation in and influence on global developments in this sector has been disappointingly limited. Although there are other problems hampering their activities (e.g., unclear intellectual property rights and lack of marketing expertise), it is worth considering whether the tangle of regulatory red tape has been a substantial hindrance to Russia’s involvement in the most dynamic and lucrative sectors of the world economy, which require speedy responsiveness to the world market. xi. Among domestic investors, the data are equally revealing. Unusually, there are a greater number of large and medium firms than small firms in the statistical base in most of the regions participating in the study. In most countries, including most central European countries, there is an exactly opposite pyramid-shape structure of firms: a few large firms, more medium-sized firms, and many more small firms, many of which are new startups. Most startups fail, but this is normal and healthy. Those that survive are usually important sources of growth and employment.

Key Findings and Recommendations xii. Administrative barriers are important components of the reason private investment in Russia has been so low for the past 10 years. They are not the whole story; our recommendations are intended to complement the ongoing reform effort (e.g., the reforms initiated by the Ministry of Economic Development and Trade, the new tax code, the new land code, etc.). While the direction of such reforms is now clear, and the pace of reform has definitely accelerated, all the participants recognize that there is still a great deal of work ahead. In addition to the ongoing policy and legal reforms, which are well underway, there is a need to develop detailed regulations to accompany the new legislation, and beyond that, a need to ensure that new procedures are implemented efficiently, consistently, and fairly throughout the Russian Federation.

xiii. The FIAS recommendations should therefore be viewed in context: they are designed specifically to improve the investment environment, but may need to be weighed with other, equally pressing economic goals. Some of the recommendations are about relatively clear obstacles that need to be removed in order to improve investment levels; others are broader issues that will probably be harder to address, but also need to be improved in order to encourage higher investment.

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xiv. The study of administrative barriers to investment uncovered at least three distinct problem areas that could be described as choke points for investment. These are access to land, a burdensome tax regime, and onerous regulations on foreign economic activity.

1. The relative lack of a secondary (private) market for land forces the great majority of investors to deal with the state as land-lord and makes it difficult to value real estate assets. This is how many regional governments control and/or intervene in the investment process, which probably deters many potential investors. Many regional governments clearly prefer to rent land rather than sell it, and go so far as to set rental rates that are much lower (in present value terms) than the sales price and often even lower than land taxes.

Recommendations:

• The regions should encourage the development of a secondary market in

land by privatizing more land along with buildings, as allowed by federal law.

• Rental rates, sales prices, and land taxes should be based as much as possible on market values. In particular, rental rates should include (and therefore be higher than) land taxes, and the sales price should be approximately equal to the present discounted value of rent (excluding land taxes).

2. The tax regime for business is improving, but still represents a formidable

source of state control over private enterprise. Tax rates and tax regulations were cited by survey respondents as the most severe obstacles to investment in Russia. In addition to the complaints about high tax rates and complex tax structures (which are being addressed in the development of the new tax code), most businesses are also burdened by procedural problems in tax administration (the aspect of the tax system to which this report limits its focus).

Most interviewees (including investors, private accountants, and even tax inspectors) agreed that tax inspections are heavily influenced by “revenue targets,” which can (and usually do) include fines and penalties. Meanwhile, it appears some companies are not in the system at all, and others allegedly collude with tax inspectors to evade taxes. Tax inspectors can assess penalties regarding infractions of rules that have nothing to do with tax and even against technical errors that have no effect on calculated tax payments. It was also widely agreed by tax inspectors and taxpayers alike that tax arrears (again, including penalties) can drive an otherwise healthy company into bankruptcy. This risk significantly deters new investment. Even without such risks, investors in Russia need to devote significantly more resources to accounting activities than they do in countries with less cumbersome tax structures.

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Recommendations:

• The ongoing efforts to streamline the tax regime and spread the tax burden more fairly should be accelerated.

• Tax calculations should be based primarily on the tax accounts of individual enterprises, rather than arbitrary revenue targets.

• To the extent that revenue targets are continued for planning purposes, they should explicitly exclude revenues from fines and penalties.

• Major businesses (e.g., measured by regional market share) that pay little or no taxes (and their owners) should be liable to audit by inspectors from a different region.

3. Foreign exchange controls, customs procedures, and other controls on foreign

economic activity were the source of many complaints, and are clearly a significant deterrent to export-oriented investment (particularly foreign direct investment, where investors can easily choose a different location).6 The main complaints include the following:

• The restricted list of transactions that are considered “current” and the

practice of defining all other transactions as “capital” and subject to heavy controls and severe penalties, which adds significantly to business risk and delays;

• The requirement to change 75% of gross foreign exchange earnings within 7 days of receipt, which adds significantly to costs;

• Delays and corruption within the customs administration and monopolistic behavior among customs brokers with close ties to the customs administration;

• Regional-based licensing of foreign economic activity, which is cumbersome, an unnecessary impediment to efficient business operations, and often discriminatory; and

• Controls on the trade of some goods which lead to lengthy delays and uncertainty and add to the costs and risks of foreign economic activities.

Recommendations:

• Revise and expand the list of transactions that can be considered “current

account” in line with practices of the Organization for Economic Cooperation and Development as well as International Monetary Fund norms, and reduce penalties.

• Relax the foreign exchange sales requirement to apply only to transactions in excess of an established threshold (e.g., $25,000); reduce the amount required for exchange (e.g., to 30%) and aim to phase it out completely;

6 These issues were also prominent in the 1999 report by the Expert Institute and Ernst and Young, “The Investment Climate in Russia.”

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allow 30 days for the exchange; allow the rule to apply only to net foreign exchange positions.

• Vigorously pursue customs reforms both to simplify procedures and to combat corruption; eliminate special relationships between the customs administration and particular customs brokers and ensure a competitive market for customs brokerage services.

• Eliminate the practice of registration of foreign economic activity; at a minimum, urgently require all regions to recognize the registrations issued by any other region.

• Reduce the list of goods subject to foreign trade controls and speed up approval procedures.

xv. More generally, the study of administrative barriers to investment identified three broad themes covering a complex of problems that appeared in many of the administrative procedures we examined. These include the problem of the lack of competition in the economy; the inconsistent implementation and interpretation of laws and regulations; and the habit of government agencies establishing their own consulting firms. These were especially problematic in gaining access to land, the construction permit process, and customs; but also tax, sector licensing, foreign exchange, immigration, and several other procedures.

1. Ultimately, there is a critical need for much stronger competition within the economy of the Russian Federation. In the Western, developed economies it is competition between firms that is the engine of growth. Most rapidly growing economies around the world and throughout history have been open to trade and investment (both internationally and inter-regionally) and thus subject to robust competition. This is true, for example, of both the southeast Asian and Latin American countries that have grown the fastest over the past 20 years.

Foreign direct investment is a particularly effective stimulant to growth, by providing not only new sources of capital, but more importantly, new technology, and the most effective management and marketing methods. The very essence of economic development is the rapid and efficient transfer and adoption of “best practice” across borders. Foreign direct investment is particularly well suited to effect this and translate it into broad-based growth, not least by upgrading human capital. There is also significant evidence that these benefits of foreign direct investment have substantial spillover benefits to the domestic economy.

The famous McKinsey report of 1999, unsurprisingly, linked the lack of competitiveness in Russia to a lack of competition—not only internationally—but also within its own borders.7 Further, the International Institute for Management Development, working for the World Economic Forum, ranked Russia last in terms of overall competitiveness in its list of 47 developed and emerging market economies in 2000 and 45th of 49 countries in 2001.8

7 McKinsey Global Institute, 1999, Unlocking Economic Growth in Russia, http://mgi.mckinsey.com/mgi/russian.asp 8 International Institute for Management Development; http://www.imd.ch/wcy/ranking/ranking.cfm.

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Particularly among many older Russian bureaucrats and businessmen, there seems to be a lingering suspicion that competition is “wasteful” and unnecessary, that big companies are inherently superior to small ones, and that established firms are more trustworthy than new startups (even though many large, former state-owned firms have an abysmal record of arrears and broken contracts). This attitude in turn reinforces the problem of the un-level playing field and deters the investment that Russia and its regions need in order to keep up with growth in the world economy. In addition, there seems to be a tremendous fear of bankruptcy, although this process is necessary to ensure that assets can move from dying or stagnant firms to more dynamic businesses. Bankruptcy is an inherent component of market economies. Yet Russian governments waste enormous subsidies (including repeated forgiveness of arrears) on large companies, which starves start-ups of the resources they need to grow, and discriminates against smaller, younger firms that are more likely to offer innovation, growth and employment opportunities.

Recommendations:

• Regional and local governments should establish policies that open their

economies to competition, including new investment, without discriminating over the type of investment or the identity of the investor. Officials that facilitate new investment and competition should be rewarded; those that are found to deter it should be subject to sanctions.

• Regional and local governments should stop subsidizing individual companies, including generous rescheduling of arrears or granting subsidized credit of any kind. Firms that cannot solve their financial arrears should be allowed to go into bankruptcy and either reorganized with new management or liquidated to allow assets to be acquired by more dynamic firms.

2. The problem of inconsistent implementation and interpretation of laws and

regulations was a recurring theme. Businesses interviewed by FIAS were nearly unanimous in stating that success in overcoming administrative barriers depended heavily on “personal contacts.” Even a majority of officials interviewed by FIAS admitted that “knowing a business” was an important influence on their decision-making process. This seems to be especially a problem in land acquisition, the entire construction permit process, and customs, but also affects most investment procedures to some degree. Unfortunately, such inconsistency in treatment, in turn, can give rise both to cronyism and to corruption. Corruption was revealed to be among the top three barriers to investment (after tax rates and tax regulations) in the FIAS survey.

Even where corruption is not an issue, and even if two differing interpretations are both “reasonable,” investors often cannot tolerate an outcome that treats

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competing companies differently. A firm that is treated more harshly by the tax authorities than another firm faces obstacles and costs that the other firm avoids. A firm whose imports are held up at the border is seriously disadvantaged relative to a rival whose imports clear customs expeditiously. A start-up enterprise whose construction permits are delayed may suffer if a competitor enjoys a head start. For this reason, inconsistency (especially within an administrative jurisdiction) cannot be dismissed as a “minor” problem. The very existence of an un-level playing field deters new investors, who know they are unlikely to earn a profit in competition with firms favored by the authorities. Foreign investors in particular expect a regulatory regime that operates like a “vending machine” (in the words of Max Weber):9 a businessman inserts a proper application and/or an official fee and the expected good, service, or permit is delivered. This is a fundamental premise of the rule of law in a market economy, but is seriously lacking throughout the Russian Federation. Even relatively progressive, business-friendly jurisdictions in Russia fall into the trap of relying on “individual assistance” to investors instead of simplifying procedures. As investment levels grow, as they should, such administrations will discover that it is impossible to provide individual assistance to all or even most investors. They usually end up helping only a favored few, which exacerbates the problem of the un-level playing field and deters many potential new investors.

Recommendations:

• In all government agencies, it is necessary to improve the consistency of

treatment of investors. Regulations and inspections should be standardized as much as possible, but it is even more important to revise decision-making procedures to ensure that the burden of proof is clearly on the government to show that a business is in violation of regulations before any approval is denied or any steps are taken against it (with the exception of major, immediate dangers to public health/safety).

• Officials should be rewarded (at least in part) on the basis of favorable outcomes using objectively verifiable indicators (e.g., fewer industrial accidents or fires within a particular jurisdiction) and even-handed treatment of constituents. Officials that are found to treat different businesses on a discriminatory basis over the same set of regulations should be subject to sanctions.

• Investment incentives that favor only a small number of firms should be abolished in favor of measures that mitigate the tax burden for all investments in startup firms, expansions, and upgrades, without need for discretionary approval.

3. Exacerbating the problem of “personal contacts,” many government agencies

that lack adequate resources to carry out their jobs properly are trying to raise 9 Weber, Max, 1968 Economy and Society. Edited by Guenther Roth and Claus Wittich.

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money by offering “consultancy services” to their constituents. A typical example is the State Sanitary/Epidemiological Service, which may offer consultancy services to the same developers who must apply to the Service during the construction permit process and submit to their inspections. This creates obvious problems of conflict of interest, but cannot be solved without taking into account the need for financial resources to carry out legitimate regulatory functions—either from higher fees or more resources from general government revenues.

Recommendations:

• Government agencies should have clearly defined areas where they should

provide information either free (e.g., all relevant laws, regulations, and official instructions/interpretations), or for a fee that reflects the cost of gathering and providing the information (e.g., data from registries, statistical agencies, cadastres, etc.).

• Fees for standard services (e.g., on-site construction inspections) should be clearly defined, publicly available, and set to cover the relevant costs.

• Government agencies should (within a relatively short period of time) be prohibited from offering consulting or advisory services beyond those described above. Such services should be provided by the private sector on a competitive basis.

• Similarly, government agencies should not have exclusive relationships with a single commercial company (e.g., for visas) in order to provide services to constituents. Rather, government agencies may post a list of a large number of private companies that can provide consultancy services.

Recommendations about the Reform Process xvi. All reforms at the regional and local levels (including implementation of federal reforms) would benefit from two further changes in the process of reform itself:

• There should be a regular dialog between policy-makers, representatives of the business community, and representatives of government agencies over the reform process. Although the normal democratic process establishes the overall reform agenda, it is very useful to have the input of the “stakeholders” (i.e., those involved with and affected by reforms) in the development of the more detailed regulations and procedures that govern the implementation of reforms. In particular, representatives of the business community should help establish the priorities for reform, and provide feedback about the success of the reforms (e.g., whether they are having the desired impact). In addition, knowledgeable members of both the business community and government agencies can be useful sources of ideas for improving procedures. However, it is also necessary to guard against “cronyism” by ensuring both diversity among the business representatives, and regular turnover every year or two.

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• Progress with reforms should be monitored on a regular basis. Such monitoring should include both hard data from the various government agencies (e.g., data about the volume of work, and the time required for processing, as well as beneficial outcomes such as new business creation, investment volume, reductions in industrial accidents, etc.) In addition, there should be regular surveys of the business community to document their experiences regarding the cost and time-requirements associated with government procedures. Such data can be used to verify whether the reforms are having their desired impact, and can guide efforts to improve the reform process.

xvii. In fact, such activities should ideally be institutionalized, as the reform process is in fact never at an end. Even so-called mature market economies are continuously reforming and improving their investment environment in order to stay competitive in a dynamic global economy. Detailed Recommendations for Reform xviii. In addition to the general reforms listed above, this study of administrative barriers to investment has identified a large number of more specific and concrete reforms for both the federal level of government and within each of the regions participating in the study, for each of the main investment procedures. Each of the regions participating in the study has its own Executive Summary, below, highlighting recommendations relevant to each regional administration. The main recommendations are summarized in matrix form, below, including references to the technical chapters where the detailed descriptions of procedures, analysis and comparisons, and more detailed recommendations are presented. Next Steps xix. This report provides an extensive review of investment procedures and recommendations for removal of administrative barriers to investment. The draft report was circulated to the FIAS clients at both the federal level and regional level. Most of these clients provided useful review and feedback, which has been incorporated in the final version of the report. xx. FIAS also visited each of the clients to discuss the draft report in a workshop format. On the basis of these discussions, the relevant stakeholders can prioritize and refine the recommendations and discuss follow-up measures. On the basis of the workshops, FIAS and its clients should agree on an action plan for reform. xxi. FIAS is also willing and able to provide follow-up assistance, depending on the desires of its clients and the availability of resources. Although FIAS itself is not in a position to provide detailed technical assistance in most of the areas covered in the report, its comparative advantage lies in working with clients to oversee the process of reform, facilitate

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dialog between regional governments and the business community, monitor impact, and guide ongoing revisions (i.e., to work with clients on the “reform process” as described above). FIAS can also help identify other donors, international agencies, and experts who can provide more detailed assistance as needed.

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EXECUTIVE SUMMARY

LENINGRAD OBLAST i. Leningrad Region’s regional administrative center is in St. Petersburg, but the region and St. Petersburg are separate entities and have equal status of subjects of the Russian Federation. In addition to sharing borders with the European Union and several significant seaports presently under reconstruction, the region is able to draw upon the sophisticated business services now developing in St. Petersburg. It therefore benefits from investors who want to be in close proximity to St. Petersburg (e.g., to enjoy the infrastructure, markets, skilled labor force, etc.) but to avoid the administrative complexity and the relatively high tax burden of the city. ii. The region enjoys a good reputation among many foreign and Russian investors and is considered to be proactive in its support of investments. According to EA-Ratings, Leningrad is among the top ten recipients of foreign investment, with a stock of about $915 million, or about $547 per capita. Overall investment in the region has been roughly comparable with the other regions participating in the study, and Leningrad shares the common problem that large and medium enterprises still outnumber small enterprises, which are more likely to provide the growth, dynamism, and employment opportunities needed in a healthy market economy. iii. According to a survey of the business community conducted in conjunction with the FIAS project, more businesses view the Regional and local governments in Leningrad Oblast as “helpful” than “unhelpful”, and also see an improvement in this regard over the past five years. (See Figure L-1). iv. Figure L-2 shows the ranking of obstacles for businesses in Leningrad Oblast, on the basis of the FIAS survey. The survey results are quite useful and reliable for an assessment of the views of existing businesses in the region about administrative barriers. However, neither the survey nor the face-to-face interviews carried out by FIAS can assess the opinions of potential investors. Given the desire of the authorities to increase investment, the survey results should be analyzed by considering the possibility that existing businesses have managed to establish “good working relationships” with the various state agencies, but that potential investors may be deterred by an un-level playing field. v. According to the survey results, registering a new business is relatively easy. The biggest complaints of investors are about the functioning of the judiciary, the high tax rates, and corruption. While taxes and corruption are common problems throughout Russia, the degree of complaint about the judiciary in Leningrad (for which investors appear to blame the Federal government more than the Regional) is somewhat unusual and may warrant further investigation. (See Figure L-3, which compares Leningrad with other regions participating in the study).

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Figure L-1

Perception of Business/Government Relations

- 4 5 - 3 0 - 1 5 0 1 5 3 0 4 5- 4 5 - 3 0 - 1 5 0 1 5 3 0 4 5

V e ry h e lp fu l M ild ly he lp fu l V e ry u nh e lp fu l M ild ly u n he lpfu lP erc en t o f re sp o n d en ts d e s c rib in g G o v e rn m en t a s :

Perception of relations between Federal Government and Private Companies

Perception of relations between Regional/local Government and Private

N o vg o ro d O b la s t'

S t. P e te rs b u rg

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A ve r. o f 5 re g io n s

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Figure L-2

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18c) W ater and sewage

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major /ser iousmo derate

Lenin grad O blast: Rating of O bstac les (1 - no o bstac le , 5 - m a jor obst ac le) L ening rad Ob last : P ercentage o f firm s ticked majo r ( 1 ), ser ious (2 ) , and m odera te ( 3 ) ob st ac les

iii

Figure L-3

Difference between the average and regional numbers (percent = [region/average-1]*100)

-30 -20 -10 0 10 20 30 40

1. Registering a new business

2. Business (sector) Licensing

3. Customs/Foreign Trade Regulations

4. Labor regulations

5. Foreign currency/exchange regulations

6. Exchange Rate

7. Environmental regulations

8. Government inspections (e.g. fire, etc.)

9. Tax regulations/administration

10. High tax rates

11. Access to land (purchase or long-term rent)

12. Access to construction permits

13. Access to financing in general

14. Access to foreign banks

15. Access to local non-bank investors/partners

16. Access to foreign non-bank investors/partners

17. Immigration permits for expatriats

18. Infrastructure (phone, electricity, water, roads)

18a) Phone

18b) Electricity

18c) Water and sewage

18d) Roads

19. Policy instability/uncertainty

20. Inflation

21. Functioning of the judiciary

22. Corruption in public sector

23. Corruption in private sector

24. Favoritism/cronyism

25. Street crime/theft/disorder

26. Organized Crime/Mafia

27. Govt/ private sector anti-competitive practices

Sverdlovsk Oblast'Leningrad Oblast'St. PetersburgNovgorod Oblast'

iv

vi. Complaints about customs procedures, foreign trade regulations, and foreign exchange controls were similar to those in St. Petersburg, probably reflecting the relatively large number of firms engaged in foreign economic activities. Unfortunately, the Leningrad Regional Administration has relatively little control over regulation of these activities. vii. The region’s approach to project approval does not differ dramatically from other localities. The procedures are well documented in the region’s “Investment Guide,” which helps improve transparency. However, the procedures themselves are lengthy and cumbersome. Further, there is a clear attitude within the Administration that, although it is not a legal requirement, they expect all investors to come to them, even if they don’t need to obtain a site from the state and don’t want to apply for incentives. This attitude itself deters many potential investors who dislike interference from government officials. viii. The region’s reputation and success in attracting investment have come in spite of the formal procedures for project approval, not because of them, and the region is a good illustration of the strategy of working with investors on an individual basis to facilitate the investment process. The problem for Leningrad is that if investment levels increase, it is clear that the administration will be unable to devote the same degree of “personal attention” to each investor. Therefore, if improvements are not made to simplify procedures, new investors will likely experience more difficulties. ix. In particular, if the investment environment in St. Petersburg improves significantly, there will be less of a motivation for the marginal investor to choose Leningrad Oblast over St. Petersburg itself. It would therefore be beneficial for the Regional Administration to review the investment approval procedures, streamline them, make them more automatic, ensure consistent treatment, and take steps to guard against the attitude that all investors need to establish a personal relationship with the District or Oblast Administration. x. Although complaints about taxes are high on the list of complaints of investors in Leningrad Oblast, businesspeople assign most of the blame to the Federal government. At the Regional level, Leningrad Oblast has been noted for its tax incentives for new investment, which were enacted by its 1997 Law On Investment Activity in the Leningrad Region. xi. Leningrad’s tax incentives can significantly alleviate the burden of taxes on investment. They are relatively clear and objective. However, in many cases, they contribute to the un-level playing field, by granting benefits to one company that may be competing with other companies that do not benefit from the incentives. Although theoretically available to all investors, the procedures for calculating the “payback period” for companies that are investing to upgrade facilities, expand production, or open new lines of production are extremely complicated and costly to calculate. This deters many smaller businesses, who are therefore at a competitive disadvantage in relation to larger companies. It would therefore be beneficial for Leningrad to develop more simple, automatic procedures for granting investment incentives, and to avoid creating an un-level playing field.

v

xii. In addition, in order to ensure that the unified tax for small business yields the desired results (i.e., an increase in investment and ultimately an increase in overall tax revenues), it may be useful to undertake a rigorous analysis of both the investment data and the tax revenue data associated with the unified tax, and to use it to make appropriate adjustments. xiii. Further, it is important to reconsider the common practice of allowing government agencies to create their own “consulting firms” to work with their clients on cumbersome and confusing procedures and regulations, for a fee. Leningrad Oblast is by no means unique in this practice, but it is probably contributing to the feeling that some firms (e.g., probably those that are willing and able to pay the consultancy fees of the various state agencies) receive favorable treatment. The Federal Government has indicated that it wants to discourage and eventually phase out such practices, and to ensure that the private sector can develop such services on a competitive basis. xiv. However, it is clear that part of the motivation for agencies to offer consulting services is to increase their revenues. In many cases, it appears that agencies are not allowed to charge user fees that would cover the cost of providing their mandated services. Their budgetary resources are also probably insufficient for their needs. In principle, services that are primarily “public goods” should be covered by general budgetary resources, and services that primarily benefit individual companies or people should be subject to “user fees.” It may therefore be helpful to analyze the cost of the services being provided to individual clients (e.g., for construction permits) and to calculate reasonable fee levels that should be charged. Such fees should be standardized and publicized, to ensure that all companies are treated on an equal basis. Services other than those directly connected with official responsibilities should be left to the private sector. xv. It is clear that an important part of Leningrad’s strategy for attracting investment is to strive to ensure it is among the most business-friendly regions in Russia. As other regions improve their investment environment, and as Federal reforms continue to de-regulate the economy and remove administrative barriers throughout the nation, Leningrad will have to work hard to stay among the leaders of reform. Whatever reforms the Leningrad Administration chooses to implement, it should monitor the impact of the reforms in terms of the day-to-day experiences of its business community. FIAS therefore recommends that the Leningrad Oblast administration sponsor a detailed survey of the costs to the business community of key administrative procedures, and repeat the survey after reforms have been implemented in order to determine whether the reforms are having the desired impact. It should also be possible to gather data from many of the agencies themselves about the volume of their work and the speed with which it is processed, which can also serve as a measure of progress. xvi. Another way to ensure that Leningrad maintains and improves its business-friendly environment is to ensure that the business community has an opportunity to provide its input to the on-going reform process at the regional and local level. It would

vi

be beneficial to meet with a representative sample of the business community on a regular basis in order to discuss up-coming reforms. In order to guard against further allegations of cronyism, it would be beneficial to ensure both a good diversity of views from the private sector (e.g., both small business and large business; foreign and domestic; and a range of sectors) and regular turnover among representatives of the business community. xvii. A high-level conference of top policy-makers and representatives of the business community should meet regularly to establish the priorities and direction of the reform agenda. Once goals and priorities and general strategy have been agreed, smaller “working groups” including technocrats from the relevant agencies and knowledgeable members of the private sector (e.g., construction contractors for construction permits; certified auditors and corporate accountants for tax incentives, etc.) should meet to develop the details of a particular reform measure. If necessary, outside experts should be invited to provide expertise and examples of “best practice” both internationally and within the Russian Federation. Resources for the implementation of such recommendations can likely be solicited from the donor community.

vii

EXECUTIVE SUMMARY

NOVGOROD OBLAST i. Novgorod Oblast and its main cities, in particular Vilikii Novgorod and Chudova, have been particularly effective in attracting foreign direct investment, including plants for Dirol (Vilikii Novgorod), Cadbury Schweppes (Chudova) and the Pfiederer Corporation (Chudova). The region has a good location in northwest Russia, between Moscow and St. Petersburg, but its main attraction has been a facilitating government.

ii. There are approximately 160 foreign companies operating in Novgorod Oblast. According to EA-Ratings, there is a stock of over $302 million of foreign investment in the region, or over $414 per capita, which is slightly higher than the comparable figure for St. Petersburg, and among the top ten in regions in the country. Overall investment levels are comparable to the other regions studied by FIAS on a per-capita basis, and Novgorod shares the common problem that large and medium firms still greatly outnumber small firms, which are more likely to provide the growth, dynamism, and employment opportunities needed in a healthy market economy.

iii. On the basis of the face-to-face interviews conducted by the FIAS team, it is clear that Novgorod has a very business-friendly environment, compared to most of Russia. The Governor, Vice-Governor, and the mayors of key districts in the Oblast are generally accessible to investors and willing and able to help solve administrative problems faced by investors. However, there are still many problems at lower levels of government, and small investors don’t receive as much effective support as large investors.

iv. On the basis of the survey of investors perceptions carried out as part of the FIAS project, it also appears that Novgorod is well regarded by the business community. More businesses described the Regional and local governments as being helpful than those who described it as “unhelpful”, and most also agreed that the regional and local governments were more helpful now than they were five years ago. (See Figure N-1).

v. Figure N-2 shows the ranking of obstacles for businesses in Novgorod, on the basis of the FIAS survey. The four biggest complaints of businesspeople in Novgorod are high tax rates, tax regulation, inflation, and policy instability, which are largely national problems. The next six are, to some significant extent at least, subject to amelioration by the Novgorod authorities: corruption, crime (both organized and unorganized), favoritism, and government inspectors (which probably is a particular focus of corruption). The other complaints are either less strong, or national problems, or both.

vi. Figure N-3 shows how Novgorod compares with other regions on the same set of problems. Novgorod compares favorably in the functioning of the judiciary, access to land and construction permits, public sector corruption, and business licensing. These are all strengths to build on. (The fact that there are relatively few complaints about foreign

i

Figure N-1


- 4 5 - 3 0 - 1 5 0 1 5 3 0 4 5- 4 5 - 3 0 - 1 5 0 1 5 3 0 4 5

V e ry h e lp fu l M ild ly he lp fu l V e ry u nh e lp fu l M ild ly u n he lpfu lP erc en t o f re sp o n d en ts d e s c rib in g G o v e rn m en t a s :


Perception of relations between Regional/local Government and Private Companies







ii

Figure N-2

12345

17 . Im m ig ra ti o n p e rm i ts fo r e x p a tri ats

1. R eg is te rin g a n e w b u s in e s s

4. L a b o r r e g u la ti o n s

3. C us to m s /Fo re i g n Tra d e R e g u l ati o n s

1 8 c) W a ter a n d se w a g e

1 8 b ) E le c tri ci ty

1 8 a ) P h o ne

5. F o re i gn c u rr e nc y /e xc ha n g e re g u l a tio n s

2. B u s in e s s ( se c to r) L i c e ns i n g

18 . In fr a str uc tu re ( p ho n e , e l e ctr ic ity , w a te r, ro a d s )

7. E n v ir o nm e n ta l re g u l ati o n s

6. E x ch a n g e R a te

15 . A c ce s s to l o c al n o n -b a n k in v e sto rs /p a rtn e rs

27 . G o vt/ p r iv a te se c to r a n ti- co m p e ti t iv e p ra c tic e s

11 . A c ce s s to l a n d (p u rc h a se o r lo n g -te r m re n t)

12 . A c ce s s to c o n s tru cti o n p e rm i ts

21 . F u n cti o n in g o f th e ju d i c ia ry

16 . A c ce s s to fo r e ig n n o n -b a n k in v e sto rs /p a rtn e rs

14 . A c ce s s to fo r e ig n b a n ks

1 8 d ) R o a d s

13 . A c ce s s to fi n a n ci n g in g e n e ra l

8. G o ve r n m e nt i n s p ec ti o ns (e .g . f i re , e tc .)

24 . F a vo ri t i sm /c ro n y is m

26 . O rg a n i ze d C ri m e /M a fia

22 . C o r ru p ti on i n p u b li c s e c to r

25 . S tre e t c ri m e /th e ft/d is o rd e r

23 . C o r ru p ti on i n p ri va te s e cto r

19 . P o l ic y i n st ab i l ity /u nc e rta in ty

9. T a x re g u l a tio n s /a d m in i str a tio n

20 . In f l a tio n

10 . H i g h ta x r a tes

0 2 0 4 0 6 0 8 0 1 0 0

m a jor /s e r iousm o de r a te

N ov go ro d O bla s t: R a ting of O bs t ac le s ( 1 - no obs t ac le , 5 - m a jor ob s ta c le ) N o v gor o d Ob la s t: P e r c e nta g e of f irm s tic k e d m a jo r ( 1 ), s e r ious ( 2 ), a nd m ode r a te ( 3 ) ob st a c le s

iii

Figure N-3


-30 -20 -10 0 10 20 30 40






6. Exchange Rate




10. High tax rates









18a) Phone

18b) Electricity


18d) Roads


20. Inflation









iv

economic activities might reflect the relative lack of companies engaged in those activities.) Novgorod compares unfavorably in "favoritism/cronyism", crime10, and corruption in the private sector (as well as inflation, over which it has no control.) Thus the results suggest that the Novgorod Oblast and Municipal Administrations should focus on corruption (in particular among government inspectors), favoritism, and crime.

vii. The survey results are quite useful and reliable for an assessment of the views of existing businesses in the region about administrative barriers. However, neither the survey nor the face-to-face interviews carried out by FIAS can assess the opinions of potential investors. Given the desire of the authorities to increase investment, the survey results should be analyzed by considering the possibility that existing businesses have managed to establish “good working relationships” with the various state agencies, but that potential investors are deterred by an un-level playing field.

viii. In this regard, Novgorod authorities should also take note that “favoritism/cronyism” is listed as a significant problem in the region, and that it is a significantly bigger complaint in Novgorod than it is in the other regions participating in the study. It is interesting to note that corruption in both the public and private sectors are listed as bigger obstacles than favoritism, and that most survey respondents place more blame for this on the regional government than the Federal government. However, Novgorod rates somewhat better than the other regions in terms of public sector corruption.

ix. This suggests that Novgorod could further improve its investment environment by working to improve the consistency of implementation of rules and regulations, and to ensure that small businesses are not neglected while officials are trying to assist large businesses with their bureaucratic problems. In this regard, it is likely that Novgorod will benefit from the liberalization of Federal policies. As federal level policy leads to de-regulation, the difficulties faced by all businesses should be reduced. Nevertheless, it would be helpful for Novgorod officials to seek to standardize treatment of all businesses and to ensure that small businesses receive their fair share of support and assistance.

x. It is therefore important to reconsider the common practice of allowing government agencies to create their own “consulting firms” to work with their clients on cumbersome and confusing procedures and regulations, for a fee. Novgorod is by no means unique in this practice, but it is probably contributing to the feeling that some firms (e.g., probably those that are willing and able to pay the consultancy fees of the various state agencies) receive favorable treatment. The Federal Government has indicated that it wants to discourage and eventually phase out such practices, and to ensure that the private sector can develop such services on a competitive basis.

xi. However, it is clear that part of the motivation for agencies to offer consulting services is to increase their revenues. In many cases, it appears that agencies are not allowed to charge user fees that would cover the cost of providing their mandated 10.The fact that businesses in Novgorod and Leningrad rate crime as more of a problem than those in St. Petersburg and Yekaterinburg, where crime rates are higher, is probably related to differences in how "accustomed" to the problem business are. Nevertheless, the complaints are sincere.

v

services. Their budgetary resources are also probably insufficient for their needs. In principle, services that are primarily “public goods” should be covered by general budgetary resources, and services that primarily benefit individual companies or people should be subject to “user fees.” It may therefore be helpful to analyze the cost of the services being provided to individual clients (e.g., for construction permits) and to calculate reasonable fee levels that should be charged. Such fees should be standardized and publicized, to ensure that all companies are treated on an equal basis. Services other than those directly connected with official responsibilities should be left to the private sector.

xii. The findings on taxes are particularly interesting for Novgorod. The survey results suggest businesses are bothered by high tax rates and difficult tax regulations in Novgorod even more than in other regions, and that businesses blame the Regional government more than the Federal government for their tax problems. During the FIAS interviews with individual companies, it appeared that relations between the Novgorod tax inspectorate and taxpayers was particularly difficult. However, the Novgorod tax inspectorate itself seems to be under strong pressure to meet revenue targets that might be unrealistic. Some businesses in the region stated that they routinely take their disputes with the Tax Inspectorate to court, and usually win their cases. The Tax Inspectorate, however, is often instructed to appeal such cases to a higher level, even though it usually fails to gain a favorable ruling.

xiii. FIAS is recommending to the Federal level of government that it shift away from reliance on revenue targets for Tax Inspectorates and toward a reliance on the accounts of individual taxpayers. Both tax inspectors and taxpayers in Novgorod should have the opportunity for more training in Russian and international accounting standards, how such standards should be used in the calculation of tax, proper calculation of VAT, tax treatment of exports, and related issues.

xiv. Novgorod’s tax incentives can significantly alleviate the burden of taxes on investment. They are relatively clear and objective. However, in many cases, they contribute to the un-level playing field, by granting benefits to one company that may be competing with other companies that do not benefit from the incentives. Although theoretically available to all investors, the procedures for calculating the “payback period” for existing companies that are investing to upgrade facilities, expand production, or open new lines of production are extremely complicated and costly to calculate. This deters many smaller businesses, who are therefore at a competitive disadvantage in relation to larger companies. It would therefore be beneficial for Novgorod to develop more simple, automatic procedures for granting investment incentives, and to avoid creating an un-level playing field.

xv. In addition, in order to ensure that the unified tax for small business yields the desired results (i.e., an increase in investment and ultimately an increase in overall tax revenues), it may be useful to undertake a rigorous analysis of both the investment data and the tax revenue data associated with the unified tax, and to use it to make appropriate adjustments.

vi

xvi. With regard to land and construction issues, Novgorod Region, and in particular Vilikii Novgorod, have made serious efforts to improve the national model by implementing a number of new approaches to project approval. Investors have a generally favorable impression of the city and the region, which was also reflected in the FIAS survey. Investors appreciate the willingness to try new approaches, active and well-managed regional and municipal administrations, and the fact that Novgorod is a smaller and easier place in which to do business. Certainly influential is the fact that the project approval process can be faster by a significant factor than the process in other jurisdictions studied, and almost twice as fast as in the much larger cities of St. Petersburg and Yekaterinburg.

xvii. Summary: An important part of Novgorod’s strategy for attracting investment has been to ensure it is one of the most business-friendly regions in Russia. Its success has been widely noticed, among other places by a short article in The Economist some years ago. But as other regions improve their investment environment, and as Federal reforms continue to de-regulate the economy and remove administrative barriers throughout the nation, Novgorod will have to work hard to maintain its lead. Whatever reforms the Novgorod Administration chooses to implement, it should monitor the impact of the reforms in terms of the day-to-day experiences of its business community. FIAS therefore recommends that the Novgorod Oblast Administration sponsor a detailed survey of the costs to the business community of key administrative procedures, and repeat the survey after reforms have been implemented in order to determine whether the reforms are having the desired impact. It should also be possible to gather data from many of the agencies themselves about the volume of their work and the speed with which it is processed, which can also serve as a measure of progress.

xviii. Another way to ensure that Novgorod maintains its business-friendly environment is to ensure that the business community has an opportunity to provide its input to the on-going reform process at the regional and local level. It would be beneficial to meet with a representative sample of the business community on a regular basis in order to discuss up-coming reforms. In order to guard against further allegations of cronyism, it would be beneficial to ensure both a good diversity of views from the private sector (e.g., both small business and large business; foreign and domestic; and a range of sectors) and regular turnover among representatives of the business community.

xix. A high-level conference of top policy-makers and representatives of the business community should meet regularly to establish the priorities and direction of the reform agenda. Once goals and priorities and general strategy have been agreed, smaller “working groups” including technocrats from the relevant agencies and knowledgeable members of the private sector (e.g., construction contractors for construction permits; certified auditors and corporate accountants for tax incentives, etc.) should meet to develop the details of a particular reform measure. If necessary, outside experts should be invited to provide expertise and examples of “best practice” both internationally and within the Russian Federation. Resources for the implementation of such recommendations can likely be solicited from the donor community.

vii

EXECUTIVE SUMMARY

ST. PETERSBURG i. The St. Petersburg region is a “subject of the Federation.” It consists of the city of St. Petersburg and a surrounding region of approximately 25 smaller districts and municipalities. As a subject of the Federation it has a broader legislative authority than mere municipalities. ii. St. Petersburg has many natural attractions for investors as an international port city, a cultural/ intellectual center, a large concentrated local market with a skilled and diversified labor force and the supporting institutions of a major city, and a relatively “western” orientation. It has privatized a relatively large amount of land, such that it has one of the largest “secondary markets” for land in Russia (which is, nonetheless, still very limited compared to, e.g., the Central European and Baltic countries). iii. Investment in St. Petersburg has therefore been relatively strong compared to most other regions is Russia. According to EA-Ratings, the stock of foreign investments in St. Petersburg is $1.9 billion, or $413 per capita. This places it in the top ten regions in Russia, but behind both Leningrad Oblast and Novgorod Oblast in per capita terms. Overall investment in the region is roughly comparable with the other regions participating in the study, and St. Petersburg enjoys a significantly higher ratio of small firms to large and medium firms than the other regions, although it is still a much smaller ratio than is found in the Central European and Baltic states. iv. St. Petersburg is complex in its physical, political, and bureaucratic structure. Its size and complexity are reflected in the project approval process. On the basis of the interviews and surveys conducted for this report, it is fair to say that the city is not enjoying the reputation among investors that it should, given its strategic location, qualified work force, and the obvious attractions of its natural setting and urban environment. One professional with projects in the region and in two adjoining regions ranked the city lower than the other two in terms of ease of project development. Another made the point that whereas officials in other regions had good intentions toward investment projects or at worst were neutral toward a project, the attitudes and behaviors of St. Petersburg bureaucrats were often an impediment to investment. v. Although new investment in St. Petersburg is still increasing, the fact remains that St. Petersburg is still not living up to its full potential in terms of attracting investment. In part, St. Petersburg has suffered from the 1998 financial crisis and its aftermath: the stronger controls on foreign currency movements has almost certainly had a deterrent effect on investment in the tradable-goods sector and in export-oriented manufacturing in particular. Difficulties with customs administration appears to have contributed to a diversion of cross-border trade from St. Petersburg port to the highway from Finland. But FIAS work in Russia before the crisis showed that St. Petersburg was already falling out of favor with investors. Many still located there because they needed something that the city had to offer, but many of the other investors, who could locate elsewhere, found other sites with a more business-

i

friendly administration. Investor's complaints about the city include a lack of land, severe problems with utilities, a bureaucracy still characterized by “command and control” attitudes, a disregard for the time or costs of project approval, and the existence of a sense of competition rather than cooperation among bureaucratic agencies. Some manufactures preferred to locate in Leningrad Oblast, just outside the city limits of St. Petersburg, in part to enjoy lower costs but also to enjoy a more business-friendly environment. vi. On the basis of the survey of investors perceptions carried out as part of the FIAS project, it also appears that St. Petersburg has a mix of positive and negative attributes. For example, compared to other regions in Russia, businesses have easier access to financing, and the infrastructure is regarded as superior. However, less than 15% of businesses described the city administration as even “mildly helpful” and 42% described it as “somewhat unhelpful” or “very unhelpful.” In addition, survey respondents indicate the problems are worse now than they were five years ago. (See Figure P-1). vii. Figure P-2 shows the ranking of obstacles for businesses in St. Petersburg, on the basis of the FIAS survey. The survey results are quite useful and reliable for an assessment of the views of existing businesses in the region about administrative barriers. However, neither the survey nor the face-to-face interviews carried out by FIAS can assess the opinions of potential investors. Given the desire of the authorities to increase investment, the survey results should be analyzed by considering the possibility that existing businesses have managed to establish a reasonable working relationship with the various state agencies, but that potential investors are deterred by an un-level playing field, among other things. viii. The biggest complaints of businesspeople in St. Petersburg are high tax rates, cumbersome tax regulation, and corruption in the public sector, which are common complaints throughout the Russian Federation. However, particularly for corruption, survey respondents put more blame on the Regional authorities than the Federal authorities. ix. Customs and foreign trade regulations are rated as prominent problems, as well as foreign exchange controls. These are much more serious complaints in St. Petersburg than in other regions (see Figure P-3), but this is almost certainly related to the fact that firms engaged in foreign economic activity represent a much larger proportion of the business community in St. Petersburg than in the other regions involved in the FIAS study. Nevertheless, the survey findings suggest that St. Petersburg would benefit from efforts to ease the regulatory burden on companies involved in foreign trade and to take more vigorous action against the corruption that pervades customs procedures and the favored positions of “Rostok” with the Customs Service and “VISA” with the Immigration Service. x. Regarding access to land, St. Petersburg benefits from one of the largest “secondary markets” in land in the Russian Federation. It is procedurally much easier to buy land on the secondary market from a private seller than to buy or rent land from the state. However, the fact remains that the availability of land on the secondary market is still extremely limited, so that most investors must still deal with the City Administration. A major source of

ii

Figure P-1


- 4 5 - 3 0 - 1 5 0 1 5 3 0 4 5- 4 5 - 3 0 - 1 5 0 1 5 3 0 4 5

V e r y h e lp fu l M ild ly h e lp fu l V e r y u n h e lp fu l M ild ly u n h e lp fu lP e rc e n t o f r e s p o n d e n ts d e s c r ib in g G o v e rn m e n t a s :



N o v g o r o d O b la s t '

S t . P e te r s b u r g

L e n in g r a d O b la s t '

S v e r d lo v s k O b la s t '

T o m s k O b la s t '

A v e r . o f 5 r e g io n s

iii

Figure P-2

12345

18b) E lec trici ty

1. R egis tering a new bus ines s

18c) W ater and sewage

4. Labor r egulations

18a) P hone

18. Infr astr uc ture ( phone, electr ic ity , water, roads )

7. E nv ir onm ental regulations

6. E x change Rate

24. F avori tism /c rony is m

17. Imm igration perm its for ex patriates

15. A c ces s to loc al non-bank inv estors /partners

2. B us ines s ( sec tor) Lic ens ing

27. G ovt/ pr iv ate sec tor anti- competi tiv e prac tic es

25. S treet c rim e/theft/dis order

26. O rganized Crime/Mafia

18d) Roads

5. F oreign c urr enc y /exc hange regulations

8. G over nm ent ins pec tions (e.g. fi re, etc .)

16. A c ces s to for eign non-bank inv estors /partners

23. Cor ruption in private s ector

13. A c ces s to financing in general

11. A c ces s to land (purc hase or long-ter m rent)

14. A c ces s to for eign banks

12. A c ces s to c ons truction perm its

3. C us tom s /Foreign Trade Regulations

20. Inflation

19. P ol ic y inst abi l ity /unc ertainty

21. F unctioning of the judic iary

22. Cor ruption in public s ec tor

9. T ax regulations /adm inistr ation

10. High tax r ates

0 20 40 60 80 100

major/serious

mod erat e

St . P et ersb urg: Rating of O bst acles ( 1- no obstacle, 5 - major ob stacle) S t. P et ersbu rg: P ercentag e of f irm s ticked majo r ( 1), serious ( 2), and mod erat e ( 3) ob stacles

iv

Figure P-3


-30 -20 -10 0 10 20 30 40






6. Exchange Rate




10. High tax rates









18a) Phone

18b) Electricity


18d) Roads


20. Inflation









v

complaint from investors interviewed by FIAS is the failure of the city to ensure reasonable coordination between the various agencies that an investor must work with during the approval process. For this reason, St. Petersburg is judged by investors to be significantly worse than neighboring Novgorod and Leningrad, which are competitors for investment. xi. In order to improve the situation, it is critical for the St. Petersburg administration to improve the coordination between the various agencies involved in the land acquisition process. Even basic information about real estate at the moment is fragmented between different agencies, and resources are wasted on duplicative databases. It would be helpful to create a consolidated information service that can provide an investor with information about all available real estate options and facilitate the acquisition of real estate from the government. The example of Vilikii Novgorod would be a useful one to follow. Land use regulations should be made more transparent and applied more consistently. The Investment Tender process should be revised to make it more business friendly. xii. Further, it is important to reconsider the common practice of allowing government agencies to create their own “consulting firms” to work with their clients on cumbersome and confusing procedures and regulations, for a fee. St. Petersburg is by no means unique in this practice, (although its Investment Management Department is a prominent example) but it is probably contributing to the feeling that some firms (e.g., probably those that are willing and able to pay the consultancy fees of the various state agencies) receive more favorable treatment than others. The Federal Government has indicated that it wants to discourage and eventually phase out such practices, and to ensure that the private sector can develop such services on a competitive basis. xiii. However, it is clear that part of the motivation for agencies to offer consulting services is to increase their revenues. In many cases, it appears that agencies are not allowed to charge user fees that would cover the cost of providing their mandated services. Their budgetary resources are also probably insufficient for their needs. In principle, services that are primarily “public goods” should be covered by general budgetary resources, and services that primarily benefit individual companies or people should be subject to “user fees.” It may therefore be helpful to analyze the cost of the services being provided to individual clients (e.g., for construction permits) and to calculate reasonable fee levels that should be charged. Such fees should be standardized and publicized, to ensure that all companies are treated on an equal basis. Services other than those directly connected with official responsibilities should be left to the private sector. xiv. It is clear that an important part of St. Petersburg’s strategy for attracting investment must be to improve its investment environment and to ensure that all government agencies work together to facilitate investment and to reduce unnecessary administrative barriers. As other regions improve their investment environment, and as Federal reforms continue to de-regulate the economy and remove administrative barriers

vi

throughout the nation, St. Petersburg will have to work hard to keep up with other regions that have already made more progress in improving their investment environment. xv. Since taxes are a major source of complaint (as in all regions) it may also be helpful to take further steps to mitigate the tax burden. Given the many natural attractions of the city, there is no particular need to resort to tax incentives. However, in order to ensure that the unified tax for small business yields the desired results (i.e., a reduction in the tax burden on small firms, an increase in investment and ultimately an increase in overall tax revenues), it may be useful to undertake a rigorous analysis of both the investment data and the tax revenue data associated with the unified tax, and to use it to make appropriate adjustments. xvi. Whatever reforms the St. Petersburg Administration chooses to implement, it should monitor the impact of the reforms in terms of the day-to-day experiences of its business community. FIAS therefore recommends that the St. Petersburg Administration sponsor a detailed survey of the costs to the business community of key administrative procedures, and repeat the survey after reforms have been implemented in order to determine whether the reforms are having the desired impact. It should also be possible to gather data from many of the agencies themselves about the volume of their work and the speed with which it is processed, which can also serve as a measure of progress. xvii. Another way that St. Petersburg can improve its business environment is to make more intensive use of its Council on Foreign Investment. The Council has already proven to be a valuable mechanism for dialog between the public and private sector, but there is a danger that participants can lose interest if there are not tangible benefits resulting from the work of the Council. FIAS recommends that the Council meet and review the draft report on Administrative Barriers to Investment, and agree on a few high-priority areas for early and vigorous action. Technical working groups, which should also include representatives of both the relevant government agencies and knowledgeable members of the business community, can work out detailed proposals for concrete action. The Council should then agree on a specific Action Plan: what specific reforms are proposed, who would be responsible for implementing them, and when they should be completed. The Action Plan can then be submitted to the St. Petersburg City Administration for formal approval. xviii. In addition, the Council on Foreign Investment should agree on monitoring instruments (as described above). The agreed Action Plan should be monitored at two levels: (1) Have the reforms been enacted? (e.g., has legislation been amended as agreed? Have official procedures been changed as agreed?) and (2) Are the reforms having the desired impact ?(e.g., are applications for building permits being processed in a shorter period of time? Do business surveys show that businesses find building permit procedures to be faster and fairer since the reforms have been enacted?) Using such information, the Council can revise and update the Action Plan: successful reforms can be crossed off the list; reforms that appear to be unsuccessful can be revised; new priorities can be added to the list. In this way, the reform agenda of the St. Petersburg

vii

administration can be kept "on track" and effective in achieving the Administration's goals of attracting more investment.

viii

EXECUTIVE SUMMARY

TOMSK OBLAST i. The Tomsk region, in the center of western Siberia, encompasses nearly 500,000 square kilometers. It has a population of 1 million people, of whom 477,000 live in the regional capital, the city of Tomsk. This report is based on a visit to the region and discussions with public officials and private sector business people in the city of Tomsk, as well as in the smaller city of Kovezhnikovo. ii. The region has approximately 150–200 medium-size and large enterprises. There are oil and gas deposits in the north, and several significant and successful private agricultural enterprises in the south. Science and education are well developed; there are six universities with 65,000 students in Tomsk, with a relatively high proportion involved in the hard sciences and advanced technology. A large portion of the regional economy derives from two large state-owned enterprises in nuclear technologies. Tomsk was and remains a center of the Russian nuclear research and production industry, and was closed to foreigners and most Russians until the 1990s. iii. On the one hand, the concentration of advanced technical skills and potential for research and development activity should be a strong attraction for foreign investment. On the other hand, the fact that Tomsk was “closed” for so long means that the region seems somewhat provincial to visitors and in some ways insufficiently welcoming to foreign investment. iv. Tomsk Oblast has a strong reputation for the strength and creativity of its large scientific community, which is an ideal base for research and development activity, especially for industries that utilize advanced physics. Russia in general (and Tomsk Oblast in particular) should enjoy a strong comparative advantage in high-technology goods. However, the world market for such goods is extremely dynamic, and products that are delayed in reaching the world market are in danger of being considered obsolete. It is therefore important to avoid unnecessary bureaucratic delays in investment procedures or in getting Tomsk products onto the world market. v. Though Tomsk has no “trophy” foreign investment projects, about 60–80 companies with some foreign capital operate in the region. Eleven new businesses with foreign participation were registered in 2000. Businesses with foreign investment include trade and consumer products (40% of the total), programming, production of equipment and materials, oil and gas extraction (2–3 enterprises in the north), and beer production. A visual inspection of Tomsk city showed that new construction projects consist primarily of retail shops, residential houses, small enterprises, and workshops. vi. The region has enacted the law “On Investments in Tomsk Oblast” that provides tax and other incentives to investors. Incentives are limited, reportedly difficult to obtain and, in

i

fact, only a handful of enterprises have qualified to date. The incentives are discussed in further detail in the tax policy section of this report. vii. According to a survey of the business community conducted in conjunction with the FIAS project, by a small margin, more businesses view the Regional and local governments in Tomsk Oblast as “helpful” than “unhelpful”. (See Figure T-1). This places Tomsk approximately in the middle of the five regions studied by FIAS. However, in terms of future goals, it may be best to strive to increase the number of firms that rate the Regional/Local administration as “neutral” by simplifying investment procedures so that investors no longer need as much help to complete them. (See Figure T-2). In fact, if investment levels increase (e.g., to the proportional levels seen in Poland or Hungary), then it would not even be possible for the Oblast Administration to help each investor individually. viii. Figure T-3 shows the ranking of obstacles for businesses in Tomsk Oblast, on the basis of the FIAS survey. The survey results are quite useful and reliable for an assessment of the views of existing businesses in the region about administrative barriers. However, neither the survey nor the face-to-face interviews carried out by FIAS can assess the opinions of potential investors. Given the desire of the authorities to increase investment, the survey results should be analyzed by considering the possibility that existing businesses have managed to establish “good working relationships” with the various state agencies, but that potential investors may be deterred by an un-level playing field. ix. According to the survey results, registering a new business is relatively easy. The biggest complaints of investors are about taxes (both high tax rates and complicated tax administration), access to financing, the functioning of the judiciary, and corruption. While taxes and corruption are common problems throughout Russia, the degree of complaint about access to financing and about the functioning of the judiciary are somewhat unusual and may warrant further investigation. (See Figure T-4, which compares Tomsk with other regions participating in the study). Immigration procedures, and access to land and construction permits were also the source of complaint more in Tomsk than in the other regions. x. Although immigration problems are not a source of complaint for most businesses in Tomsk (since there are still relatively few companies with foreign investments in Tomsk Oblast), interviews with expatriate personnel in the region reveal that this may be a significant impediment to foreign direct investment in the region. Although the relevant legislation in the region allows foreign visitors 72 hours before they need to register, the habit of requiring immediate registration is still the norm. Hotels in Tomsk region do not register foreign visitors, as is the common practice in all the other regions studied by FIAS. This leads to two problems for potential foreign investors: (1) In practice, they need to make contacts in Tomsk before they can even visit the region (so that they can be formally “invited” by a registered inviting organization) and (2) if they are not aware of the practice in Tomsk, they might arrive and be unable to find any accommodation. FIAS therefore recommends, as a matter of urgency, that the Tomsk Oblast administration makes sure that foreign visitors receive the benefit of the 72-hour period for registration and helps to ensure that OVIR and the hotels cooperate to allow foreign visitors to carry out registration formalities in most hotels in the region.

ii

Figure T-1


- 4 5 - 3 0 - 1 5 0 1 5 3 0 4 5- 4 5 - 3 0 - 1 5 0 1 5 3 0 4 5

V e ry h e lp fu l M ild ly he lp fu l V e ry u nh e lp fu l M ild ly u n he lp fu lP erc en t o f re sp o n d en ts d e s c rib in g G o v e rn m en t a s :

Perception of relations between Federal Government and Private








iii

Figure T-2

Percent of private firms describing Federal Government as “ neutral”

Percent of private firms describing Regional/local Government as “ neutral”

0

1 0

2 0

3 0

4 0

5 0

6 0

7 0

Novgorod O

blast'

St. Petersburg

Leningrad O

blast'

Sverdlovsk Oblast'

Tom

sk Oblast'

Aver. of 5 regions

N o w 5 y e a rs a g o

0

1 0

2 0

3 0

4 0

5 0

6 0

7 0

Novgorod O

blast'

St. Petersburg

Leningrad O

blast'

Sverdlovsk Oblast'

Tom

sk Oblast'

Aver. of 5 regions

N o w 5 y e a rs a g o

iv

Figure T-3

12345

Phone

Registering a new business

Govt/ private sector anti-competitive practices

Exchange Rate

Labor regulations

Electricity

Water and sewage

Infrastructure (phone, electricity, water, roads)

Foreign currency/exchange regulations

Immigration permits for expatriats

Environmental regulations

Business (sector) Licensing

Access to local non-bank investors/partners

Organized Crime/Mafia

Roads

Favoritism/cronyism

Customs/Foreign Trade Regulations

Government inspections (e.g. fire, etc.)

Access to foreign non-bank investors/partners

Corruption in private sector

Street crime/theft/disorder

Access to land (purchase or long-term rent)

Access to construction permits

Access to foreign banks

Inflation

Policy instability/uncertainty

Tax regulations/administration

Corruption in public sector

Functioning of the judiciary

Access to financing in general

High tax rates

0 10 20 30 40 50 60 70 80 90 100

majormoderate

Tomsk Oblast: Rating of Obstacles (1- no obstacle, 5 - major obstacle) Tomsk Oblast: Percentage of firms ticked major (1), serious (2), and moderate (3) obstacles

v

Figure T-4

Tomsk Oblast: Difference between the average and regional numbers (percent = [region/average-1]*100)

-20 -15 -10 -5 0 5 10 15 20






6. Exchange Rate




10. High tax rates









18a) Phone

18b) Electricity


18d) Roads


20. Inflation








Better--► ◄--Worse

vi

xi. It would also be beneficial for the Regional Administration to review the investment approval procedures, streamline them, make them more automatic, ensure consistent treatment, and take steps to guard against the attitude that all investors need to establish a personal relationship with the District or Oblast Administration. xii. Although complaints about taxes are high on the list of complaints of investors in Tomsk Oblast, businesspeople assign most of the blame to the Federal government. Nevertheless, it may be beneficial for both Regional/District Tax Inspectors and businesspeople in Tomsk Oblast to receive training in business finance, to become more familiar with international accounting standards, and to learn more about tax treatment of exports (including, e.g., export of services and electronic commerce). xiii. Tomsk’s tax incentives are relatively modest in scope (primarily tax credits for property tax). However, the approval process is lengthy and discretionary, including subjective criteria such as “social important”, an expertise process by an expert appointed by the Oblast Administration, and ultimately a need for approval by the Duma as well. Such a process adds to the investor’s delays and risks. Only a handful of investors have benefited from the incentives, which is an indication that the existing incentive regime is not particularly effective in attracting new investment. It would therefore be beneficial for Tomsk to develop more simple, automatic procedures for granting investment incentives. xiv. Further, it is important to reconsider the common practice of allowing government agencies to create their own “consulting firms” to work with their clients on cumbersome and confusing procedures and regulations, for a fee. Tomsk Oblast is by no means unique in this practice, but it is probably contributing to the feeling that some firms (e.g., probably those that are willing and able to pay the consultancy fees of the various state agencies) receive favorable treatment. The Federal Government has indicated that it wants to discourage and eventually phase out such practices, and to ensure that the private sector can develop such services on a competitive basis. xv. However, it is clear that part of the motivation for agencies to offer consulting services is to increase their revenues. In many cases, it appears that agencies are not allowed to charge user fees that would cover the cost of providing their mandated services. Their budgetary resources are also probably insufficient for their needs. In principle, services that are primarily “public goods” should be covered by general budgetary resources, and services that primarily benefit individual companies or people should be subject to “user fees.” It may therefore be helpful to analyze the cost of the services being provided to individual clients (e.g., for construction permits) and to calculate reasonable fee levels that should be charged. Such fees should be standardized and publicized, to ensure that all companies are treated on an equal basis. Services other than those directly connected with official responsibilities should be left to the private sector. xvi. It is clear that an important part of Tomsk’s strategy for attracting investment will be to strive to ensure it is among the most business-friendly regions in Russia, and a place where high-technology firms can develop new products and get them onto the market (both Russian and world markets) without unnecessary delays. Whatever reforms the Tomsk Administration chooses to implement, it should monitor the impact of the reforms in terms of

vii

the day-to-day experiences of its business community. FIAS therefore recommends that the Tomsk Oblast administration sponsor a detailed survey of the costs to the business community (including the cost of delays) of key administrative procedures, and repeat the survey after reforms have been implemented in order to determine whether the reforms are having the desired impact. It should also be possible to gather data from many of the agencies themselves about the volume of their work and the speed with which it is processed, which can also serve as a measure of progress. xvii. Another way to ensure that Tomsk maintains and improves its business-friendly environment is to ensure that the business community has an opportunity to provide its input to the on-going reform process at the regional and local level. It would be beneficial to meet with a representative sample of the business community on a regular basis in order to discuss up-coming reforms. In order to guard against further allegations of cronyism, it would be beneficial to ensure both a good diversity of views from the private sector (e.g., both small business and large business; foreign and domestic; and a range of sectors) and regular turnover among representatives of the business community. xviii. A high-level conference of top policy-makers and representatives of the business community should meet regularly to establish the priorities and direction of the reform agenda. Once goals and priorities and general strategy have been agreed, smaller “working groups” including technocrats from the relevant agencies and knowledgeable members of the private sector (e.g., construction contractors for construction permits; certified auditors and corporate accountants for tax incentives, etc.) should meet to develop the details of a particular reform measure. If necessary, outside experts should be invited to provide expertise and examples of “best practice” both internationally and within the Russian Federation. Resources for the implementation of such recommendations can likely be solicited from the donor community.

viii

MAIN FINDINGS AND RECOMMENDATIONS

START UP PROCEDURES

Federal Novgorod St. Petersburg Leningrad Region Sverdlovsk Region Tomsk region Obtaining a Visa (Technical Chapter II-A-1&2)

1. A company can issue invitations for business visas only after registration with an affiliate of the Ministry of Foreign Affairs (MFA), which are not operating in all of the 89 regions; 2. The process of applying for a visa is significantly more complicated than in other countries. Recommendations: 1. MFA should seek a working cooperation with local PVS (units of Ministry of Internal Affairs) rather than affiliated “consulting firms”; over time, responsibilities for visa extensions should be returned to the local PVS. 2. The process to obtain a visa should be simplified, e.g., by issuing at least single entry visas without requiring visa invitations. (See Chap. II-A-8)

Novgorod registration and visa department offers prolongation and exchange of single-entry business visas into 12 month multi-entry at very low price; Recommendations: see Federal and St. Petersburg.

Mandatory contract relationship with commercial firm, Visa ZAO, for visa support servicing, costs 20% higher than at other affiliates of the MFA; monopolist position; this situation is not fostered by any official regulation or legal act. Recommendations: The MFA should end the close connection between its affiliate and Visa ZAO; it should ensure that other firms could compete with VISA; See also Federal recommendations.

Recommendations: See Federal and St. Petersburg.

Recommendations: See Federal.


Bold: high priority to improve the investment environment; italics: can be accomplished relatively quickly.

1

Federal Novgorod St. Petersburg Leningrad Region Sverdlovsk Region Tomsk region

Registration of foreign citizens (Technical Chapter II-A-3)

1. Difficult and restricted registration procedures lead to falsified registration applications; 2. There are varying approaches to old regulations concerning restricted movement of foreigners inside the country; 3. Foreigners often have to give up their passport and visa for two or three days during the registration process.

Very liberal approach to registration, getting maximum reliable information; see also Federal.

Registration procedure is linked to inviting organizations, which are advised to register additionally with PVS; foreigners can only obtain registration in district where inviting organization is located; for accommodation in private households, foreigner has to provide additional approving documents from apartment house administration. See Federal.

See Federal. See Federal. Registration procedure is linked to inviting organizations, which are advised to register additionally with PVS; Hotels in Tomsk region do not register foreigners themselves as is done in other regions and reportedly do not furnish rooms to foreigners without prior PVS approval. See Federal.

Recommendations 1. Giving foreigner’s name, passport and visa numbers and address of in Russia can take place at Immigration upon entry; special approvals concerning residence in private households should be abolished; 2. Old regulations concerning restrictions of free movement of foreigners should be abolished; 3. The registration process should be finalized promptly so that foreigners are not forced to give up identification documents. (See Chap. II-A-8)

Recommendations: The registration process for foreigners when they arrive in the region should be simplified; the hotels should be allowed to accommodate foreigners without registration up to 72 hours, not requesting prior PVS approval.

2

Federal Novgorod St. Petersburg Leningrad Region Sverdlovsk Region Tomsk region

Obtaining work confirmations & permits (Technical Chapter II-A-4,5,6)

1. Work permits for expatriate workers from non-CIS countries can only be obtained at the Ministry for Federation Affairs, Ethnics, and Migration Policy in Moscow; 2. In some regions it is difficult to invite foreign work force even during erection and assembling assignments for specialized imported equipment. (See Chap. II-A-8)

See Federal. See Federal. Local regulations demand an additional decision from the municipal level for work permits See Federal.

Local level very reluctant to issue work permits for workers; introduced special commission which rejects many applications. See Federal.

See Federal.

Recommendations: 1. It should be possible to obtain work permits for workers at the local level. 2. A simpler procedure should be introduced especially for machinery assembling and erection assignments, limited to 6 months. (See Chap. II-A-8)



Recommendations: This regulationshould be revised, as it is not in conformance with the federal legalframework.

Recommendations: It should be possible to appeal to the Ministry for Federation Affairs, Ethnics, and Migration Policy in Moscow, if the regional commission rejects applications. See Federal.

See Federal.


3

Federal Novgorod St. Petersburg Leningrad Sverdlovsk Tomsk Company registration (Technical Chapter II-B)

Absence of unified and comprehensive legal base which creates significant impediments. Wide-ranging differences in the registration process and procedures between the regions of the RF and between the municipalities in the regions. Limited availability of information. Registration procedures for companies with foreign investments are very consistent and automatic. Recommendations: - Adopt the law on state registration of legal entities. - Set up a uniform registry of legal entities, so that basic information on companies is publicly available anywhere in the country. - Abolish the requirement to go to Moscow to register a company with foreigninvestments, regardless of the size of investment or the sector of activity.

- Eliminate requirement for temporary registra-tion certificates for companies with foreign investment.

- Unify the forms and reconsider the documentary requirements (i.e., introduce a single business registration form). - Institute a single business identification number system. - Utilize information technology and databases to share informa-

For major problems see federal description. Recommendations: - Unify the registration of companies in the Novgorod Oblast under a single registration authority that would be in charge of creation and maintenance of a unified register/database. - Institute clear system of disclosure of information. Adopt the practice of disclosure of information on companies applied by the State Registration Chamber in Moscow.

- Improve the exchange of information with the regional State Commit-tee for Statistics and the regional Tax service. - Adopt public postings at the Registration offices and prepare informational materials of all the requirements to be fulfilled and the

The processing times are too long, limited working days for submission of the documents. For other major problems see federal description. Recommendations: - Further consolidate at the St Petersburg Registration Chamber the registration of the companies still serviced in the municipalities. - Institute clear system of disclosure of information. Adopt the practice of disclosure of information on companies applied by the State Registration Chamber in Moscow. - Accept the documents for all registrations 5 days a week. - (See Chap. II-B-12 and Chap. II, Part 2-P-C)

The processing times are too long. For other major problems see federal description. Recommendations: - Institute clear system of disclosure of information. Adopt the practice of disclosure of information on companies applied by the State Registration Chamber in Moscow. (See Chap. II-B-12 and Chap. II, Part 2-L-C)

The processing times are too long; excessive documentary require-ments; inefficient decision making process. For other major problems see federal description. Recommendations: - Unify the registration of companies in the Sverdlovsk Oblast under a single registration authority that would be in charge of creation and maintenance of a unified register/ database of companies. - Redesign the decision making process for company registration and delegate the powers from Regional Administration to appropriate Registration officials. - Institute clear system of disclosure of infor-mation. Adopt the practice of disclosure of information on companies applied by the State Registration Chamber in Moscow. - Eliminate requirement

The Tomsk City registration chamber does not issue registration certificates upon registration of a company, which has caused serious problems for regional companies. For other major problems see federal description. Recommendations: - Unify the registration of companies in the Tomsk Oblast under a single registration authority that would be in charge of creation and maintenance of a unified register / database of companies of Tomsk Oblast. - Adopt a standard form of registration certificate and issue it to companies upon registration - Institute clear system of disclosure of information. Adopt the practice of disclosure of information on companies applied by the State Registration Chamber in Moscow. - Adopt public postings at the registration offices

4

Federal Novgorod St. Petersburg Leningrad Sverdlovsk Tomsk tion among government agencies. - Institute a clear system of disclosure of information on companies. - Establish a requirement to notify the registration authority of changes in the executive body of a company. - Allow for a fee system for processing information requests. - Review the procedure for in-kind contribution to the charter capital of the company, both for foreign and local investors. (See Chap. II-B-12).

processing times. (See Chap. II-B-12 and Chap. II, Part 2-N-C)

for temporary registra-tion certificates for companies with foreign investment. - Adopt public postings at the Registration offices and prepare informational materials of all the requirements to be fulfilled and the processing times. (See Chap. II-B-12 and Chap. II, Part 2-S-C)

and prepare informational materials of all the requirements to be fulfilled and the processing times. - The Tomsk city Registration department should reduce the processing time for registration of companies with local capital to the 3 day-term provided for in the presidential decree

5

Federal Novgorod St. Petersburg Leningrad Sverdlovsk Tomsk region

Taxpayer Registration

Technical Chapter II-C

Registration procedures are very consistent and automatic. Obligatory processing within 5 days. Four Social funds being consolidated. Recommendation: Work toward unitary registration for most businesses, including sharing of information between Registration Chambers, the statistical services, the Tax Authorities, and the Social Funds for purposes of basic registration. Simplify procedures for announcing change of address.

(See Chap. II-C-4)

(see Federal) Recommendation: Ensure registration forms are readily available at Registration Chamber as well as at Tax Inspectorate.





6

Federal Novgorod St. Petersburg Leningrad Sverdlovsk Tomsk Registration with the State Committee for Statistics (Technical Chapter II-D)

Registration procedures are very consistent and automatic. The same information needs to be submitted for the state registration and tax registration. Statistical reporting requirements are massive; the process is extremely paper-intensive. Recommendations: - Eliminate the registration with the State Committee for Statistics as a separate process. - Improve the cooperation between the company and tax registration authorities and the regional divisions of the State Committee for Statistics. - Decrease mandatory and comprehensive reporting requirements by maximizing the use of sample statistics and utilize electronic means of information transmission. (See Chap. II-D-5)

(See Federal) Problematic for companies located in remote municipalities - only the central bureau of the Novgorod Region State Committee for Statistics can assign the statistical codes, not the district divisions. Recommendation: - Allow district divisions of the Novgorod Region State Committee for Statistics to register the companies and assign statistical codes, as is practiced in Leningrad region. - Improve the co-operation between the Company and tax registration authorities and the regional divisions of the State Committee for Statistics. (See Chap. II-D-5)

(see federal) Recommendation: Improve the co-operation between the company and tax registration authorities and the regional divisions of the State Committee for Statistics.

(See Chap. II-D-5)


(See Chap. II-D-5)


(See Chap. II-D-5)


(See Chap. II-D-5)

7

Anti- monopoly clearance (Technical Chapter II-E)

Federal: Lack of coordination between the company registration authorities and the regional divisions of MAP in informing companies of MAP clearance requirements. The requirement to receive prior approval often applies to companies that do not have any significant market share, which wastes resources, hence the control over concentration of economic power is not quite effective. Approval procedures are very consistent across regions and companies. Recommendations: - Enhance the coordination between the regional divisions of MAP and the registration authorities. - Revise upward the threshold established in the Law on Competition for necessity to receive the approval from MAP or set it differently for various broad categories of industry to reduce the number of needless examinations the MAP must pursue. (See Chap. II-E-5)

The Issuance and Regulation of Shares (Technical Chapter II-F)

Federal: Requirements for open and closed joint-stock companies are not adequately differentiated. Lack of information on the requirements of the FCSM and their interpretation of the legislation; applicants often referred to “affiliated” consulting firms. Low standards for the disclosure of information on company performance; the information prescribed by law on the performance and financial condition of an enterprise is withheld from the investors by managers. problems associated with the work of the registrars. Recommendations: - The procedure for issuing securities should be simplified, especially the procedure for registration of securities that will not be publicly traded. - The FCSM should adopt a more “open door” policy. There should be no special relationships with any particular consulting firms. - Ensure full disclosure of information on companies and their performance. Adopt the International Accounting Standards to enhance the reliability of accounts of companies. - Prohibit the dependency of share registrars on the issuers or large shareholders. (See Chapter II-F-6)

8

Licensing (Technical Chapter II-G)

Federal Novgorod St. Petersburg Leningrad Sverdlovsk Tomsk

Construction (Technical Chapter II-G-1)

Absence of clear legal regulation and uniform requirements throughout the RF. FIAS observed (1) varying documentary requirements in different regions, (2) no straightforward calculation of the cost of the license, (3) different interpretation of the minimum term of license, (4) no clear understanding of the insurance requirements, and (5) different approaches to registering licenses issued in other regions. Recommendations: - Review the existing practices and adopt new regulations on licensing of construction activity, in accordance with the Law on Licensing. Stipulate comprehensive requirements (documents, qualifications, fees, terms) for licensees, Provide clear mandate and subordination of the regional construction licensing centers. (See Chap. II-G-1-b)

Evidence of inconsistent treatment and favoritism toward Novgorod firms (see Federal) Recommendations: Revise the regional legal acts governing the construction licensing to incorporate the changes of the Federal system, in accordance with the Law on Licensing:

- establish maximum processing time; - establish a clear fee structure; - oblige the regional licensing center to issue the license for 3 years, if the company fulfills all the requirements.

(See Chapter. II-G-1-b)

Usually consistent treatment for routine licensing (see Federal) Recommendations: Revise the regional legal acts governing the construction licensing to incorporate the changes of the Federal system, in accordance with the Law on Licensing: - establish maximum processing time; - establish a clear fee structure; - oblige the regional licensing center to issue the license for 3 years, if the company fulfills all the requirements. (See Chapter. II-G-1-b)

Inconsistent treatment; favoritism toward “known” companies; others often referred to affiliated consulting firms (see Federal) Recommendations: Revise the regional legal acts governing the construction licensing to incorporate the changes of the Federal system, in accordance with the Law on Licensing: - establish maximum processing time; - establish a clear fee structure; - oblige the regional licensing center to issue the license for 3 years, if the company fulfills all the requirements. (See Chapter. II-G-1-b)

Inconsistent treatment; favoritism toward “known” companies; others often referred to affiliated consulting firms (see Federal) Recommendations: Revise the regional legal acts governing the construction licensing to incorporate the changes of the Federal system, in accordance with the Law on Licensing: - establish maximum processing time; - set concrete fee structure; - oblige the regional licensing center to issue the license for 3 years, if the company fulfills all the requirements. (See Chapter. II-G-1-b)

9

Trans- portation (Technical Chapter II-G-2)

Federal: Businesses do not view transportation licensing as an obstacle. Very consistent treatment of applicants. A. Operating problems – illegal regional fees (ecological, road and bridge haulage, etc) on roads for carriers going in transit through

regions; problematic to receive the International Route Carrier (CARNET TIR) booklet.

Recommendations: - Eliminate the duplicative checks of clearances issued by other agencies. - Eliminate the practice of imposing “fees” for carriers transiting through regions. (See Chap. II-G-2-b)

Internet Service Provision (Technical Chapter II-G-3)

Federal: The relevant government regulations have not been revised to incorporate the changes set forth by the new law on licensing. Businesses do not have any major problems in obtaining the licenses necessary for ISP and treatment of applications is usually consistent. However businesses question the transparency of the process and requirements, since the licensing is not governed by the normative acts of the Government, but by the internal instructions of the Ministry of Communications. Operating problems: Terms for interconnection - ISPs report to be the victims of discriminatory behavior in getting access to connections in terms of price, quality, and even the opportunity to get access to the network itself. Recommendation: - Review existing practices and adopt new regulations on licensing of communications activities, in accordance with the law on

licensing. New regulations should stipulate comprehensive list of activities to be licensed, set forth uniform guidelines and requirements (documents, qualifications, fees, terms) for licensees, and provide a clear procedure for appealing the decision of the licensing body in case the company disagrees with the decision.

- Consider abolishing licensing of secondary ISPs, which do not construct their own nets and use the leased lines of public network operators or primary ISPs, that posses their own lines. In order to monitor and control them define standards of privacy and security of communications.

- Establish clear standards and rules for monopoly telephone operators regarding provision of connection to ISPs, not leaving the issue of interconnection at the discretion of monopoly operators.

(See Chap. II-G-3-b)

10

LOCATING PROCEDURES

Federal Novgorod St. Petersburg Leningrad Region Sverdlovsk Region Tomsk Finding Property

(Technical Chapter III-C)

Lack of information resources such as advanced cadastres and registries hinders property location. Information resources not easily accessible to citizens and real estate professionals. Recommendations: Further develop information resources; adopt information policy that emphasizes public access to government held information; adopt transparent building and land use regulations, including local zoning ordinances; reduce government role in real estate advisory services. (See Chap. III-C-3).

Good investor relations; good facilities and availability of information from government agencies; highly developed Geographic Information System and zoning ordinance. Recommendations: See Federal recommendations. (Chap. III-C-3 and Chap. III, Part 2-N-A).

Fragmented bureaucratic responsibilities for assisting investors to locate suitable property. Incomplete and fragmentary information resources held by different agencies. Recommendations: See Federal recommendations. Develop common information policy and resources; stop wasting resources on fragmentary data bases of competing bureaucracies; create “one window” that can provide investor with information on all available options; adopt transparent building and land use regulations, including zoning ordinance and historic preservation standards. (Chap. III-C-3 and Chap. III, Part 2-P-A).

Relatively good investor relations concentrated at the regional level for all significant investment projects. Information resources only moderately developed. Zoning system slowly introduced in a few key municipalities. Recommendations: See Federal recommendations. Develop common information policy and resources for all kinds of investors; further develop transparent land use and building regulations, including zoning ordinances. (Chap. III-C-3 and Chap. III, Part 2-L-A).

Fragmented bureaucratic responsibilities for assisting investors to locate suitable property. There is no “one window” agency for basic information. Poor public access to information resources. Recommendations: See Federal recommendations. Develop information policy emphasizing public access; create “one window” that can provide investors with information on all available options. (Chapter III-C-3) and Chap. III, Part 2-S-A).

Appears to treat investors fairly. There is no “one window” agency for basic information. Poor public access to information resources. Recommendation: See Federal recommendations. Develop information policy emphasizing public access; create “one window” that can provide investors with information on all available options. (Chapter III-C-3) and Chap. III, Part 2-T-A).

11

Federal Novgorod St. Petersburg Leningrad Region Sverdlovsk Region Tomsk

Acquiring Property (Technical

Chapter III-B)

Land laws are not supportive of private land ownership; slow pace of privatisation. Recommendations: Assert Federal interest in enforcing privatisation laws and encouraging further development of private real estate markets; clarify land ownership issues among levels of government; remove conversion restrictions on urban land with “agricultural” use designation; relax restrictions on land ownership; enact land code; revise tax and privatisation laws to make ownership as attractive as leasing for both investors and local governments. (See Chap. III-B-3)

Limited private secondary market and rights of ownership; cities typically will sell land to large foreign investors if requested, but not to Russian firms and investors. Recommendations: Further real estate privatisation and use market prices; impose both a land tax and land rent on leased land; and increase size of the private secondary market.

(See Chap. III-B-3 and Chap. III, Part 2-N-B).

Limited private secondary market and rights of ownership; though the city does not hinder land privatisation by private enterprises it will not sell land to new investors who have no properties. Unique Investment Tender process that is widely considered ineffective and unattractive to investors. Recommendations: Encourage further privatisation and development of secondary market, and use market prices; impose both a land tax and land rent on leased land. Revise and simplify the Investment Tender process. Develop the procedure of land allocation through direct negotiations with the city. (See Chap. III-B-3 and Chap III, Part 2-P-B)

Virtually no secondary market in land. Land ownership is presently not available to investors. Regional administration’s own economic development plans influence decisions on allocation of land. Recommendations: Further real estate privatisation and use market prices; impose both a land tax and land rent on leased land; and increase size of the private secondary market; allow all owners of buildings to privatise land. (See Chap. III-B-3 and Chap III, Part 2-L-B)

No secondary market in land. Land ownership is presently not available to investors. Regional administration’s own economic development plans influence decisions on allocation of land. Recommendations: Further real estate privatisation and use market prices; impose both a land tax and land rent on leased land; and increase size of the private secondary market. Simplify the procedure of land privatisation. (See Chap. III-B-3 and Chap III, Part 2-S-B)

Virtually no secondary market in land. Land ownership is presently not available to investors. Privatization discouraged by very high prices. Recommendation: Further real estate privatisation privatisation and use market prices; impose both a land tax and land rent on leased land; and increase size of the private secondary market; allow all owners of buildings to privatise land. Increase marketability of leases of city-owned property. (See Chap. III-B-3 and Chap III, Part 2-T-B)

12


Location Approval

(Technical Chapter III-D)

Too many requirements applied without distinguishing among projects on the basis of importance and marginal impact; poor management structure leading to waste of time and resources. Recommendations: Eliminate unnecessary requirements and procedures. Enforce “open door” at all agencies. (See Chap. III-D-3).

Can be quick – from 4-12 months, depending upon complexity of the project and degree of interest of local administration. Special treatment for large foreign investors. One of Russia’s few operational zoning laws, and a unique Technical Requirements Commission that meets on a weekly basis. Recommendations: Refine zoning law and extend to other cities in the region. Begin to adapt procedures to the reality of projects with privately owned land and structures. (See Chap. III-D-3 and Chap. III, Part 2-N-C).

Inefficient and time consuming, only partly explained by historic districts; can take 8-24 months, depending upon complexity and degree of interest of the administration. Unique procedure of the project approval for the privately owned land and structures. Recommendations: Adopt series of laws on land use and development controls described in the City Investment Plan; adapt project approval procedures to privately owned land and structures. (See Chap. III-D-3 and Chap. III, Part 2-N-C).

Can be quick – from 4-18 months, depending upon complexity of the project and degree of interest of local administration. Special treatment for large foreign investors but some Russian firms complain of interference. Unique, interactive Investment Commission hearings before start of formal process may facilitate. Recommendations: Refine zoning law and extend to other cities in the region. (See Chap. III-D-3 and Chap. III, Part 2-N-C).

Inefficient and time consuming, can take 12-18 months, depending upon complexity and interest of the administration; two administration commissions approve the proposed project, one of which requires an economic feasibility analysis and is entitled to reject the project on the basis of the region’s master economic development plan. Foreign investors advised to take Russian partners. Recommendations: Simplify the approval procedure; avoid government intervention in market decisions. (See Chap. III-D-3 and Chap. III, Part 2-N-C).

Can be reasonably quick – from 7-12 months, depending upon complexity of the project and degree of interest of local administration. More difficulties with infrastructure. Economic feasibility studies eliminated. City planning commission sometimes a bottleneck. Recommendation: Accelerate development of zoning and land use regulations. Begin to adapt procedures for private markets. (See Chap. III-D-3 and Chap. III, Part 2-T-C).

13


Public Utilities

(Technical Chapter III-E)

Infrastructure is a national problem; the national system presently lacks the legal foundation, management and financial tools for needed investment, resulting in excess charges against new investment. Recommendations: Coordinated Federal and regional effort to create improved legal and regulatory base for infrastructure finance and investment.

(See Chapter III-E-3)

Typical of other Russian regions. Issuance of technical conditions for connection can take from 1 week (preliminary) to 6 months (final). Recommendations: Better regional regulatory approach to infrastructure improvement demands by monopolists. (See Chap. III-E-3 and Chapter III, Part 2-N-D)

Typical of other Russian regions. Issuance of technical conditions for connection can take from 45 days (preliminary) to 2 years (final). Recommendations: Better regional regulatory approach to infrastructure improvement demands by monopolists. (See Chap. III-E-3 and Chapter III, Part 2-P-D)

Typical of other Russian regions. Efforts being made to rationalize ownership structure of distribution facilities. Issuance of technical conditions can take from 1 month (preliminary) to 18 months (final). Recommendations: Better regional regulatory approach to infrastructure improvement demands by monopolists. (See Chap. III-E-3 and Chapter III, Part 2-L-D)

Typical of other Russian regions. Issuance of technical conditions for connection can take from 6 to 18 months. Recommendations: Better regional regulatory approach to infrastructure improvement demands by monopolists. (See Chap. III-E-3 and Chapter III, Part 2-S-D)

Few problems with electrical service; heating and hot water are bigger problems. Issuance of technical conditions for connection can take place relatively quickly. Recommendation: Better regional regulatory approach to infrastructure improvement demands by monopolists. (See Chap. III-E-3 and Chapter III, Part 2-T-D)

14


Registration of Property and Property Rights (Technical Chapter III-F)

National registration system is developing at a measured pace; will be a long term process; working reasonably well in most localities at the time. Larger problems in forming property objects prior to registration of rights. Recommendations: National law of public utility easements may accelerate process of defining the property; allow licensed private sector architects to prepare building “technical passports.” (See Chap. III-F-3)

Typical of national system. Recommendations: See Federal recommendations.





15


Plan Review (State Expertise) and Building Permit

(Technical Chapter III-G)

An “anarchy of bureaucrats;” inadequate management procedures resulting in very little control over time and an inefficient procedure. Ambiguous and contradictory laws and regulations. Most problems with health and safety requirements of manufacturing processes and equipment, not with facilities construction. Many agencies (e.g. Fire, Safety, Sanitary and Epidemiological, and Environmental) expect applicants to sign consulting contracts. Recommendations: Eliminate unnecessary requirements and procedures stronger oversight of performance of the reviewing agencies. Establish quick administrative appeals procedures with independent boards of appeal. Phase out consultancies in public agencies. (See Chapter III-G-3).

Typical of national system. Relatively quick – 3-6 months depending on complexity and interest of the local administration. Recommendations: See Federal recommendations.

Typical of national system. Complaints of excessive bureaucracy and unfriendly environment – can take 5-10 months depending on complexity and interest of the local administration. Recommendations: See Federal recommendations.

Typical of national system. Complaints of excessive bureaucracy and unfriendly environment – usually takes 6-8 months depending on complexity and interest of the local administration Recommendations: See Federal recommendations.

Typical of national system. Complaints of excessive bureaucracy and unfriendly environment – usually takes 6-8 months depending on complexity and interest of the local administration. Recommendations: See Federal recommendations.

Typical of national system. Relatively quick: 5 - 7 months depending on complexity and interest of the local administration. Local GASN is like “one-stop shop”. Recommendations: See Federal recommendations.

16


Construction Inspections and Final Acceptance (Technical Chapter III-H)

Relies primarily on the work of licensed private sector professionals; relatively few complaints. Most complaints focus on the work of the Sanitary & Epidemiological Service, and not the Architectural and Construction Inspection. Recommendations: Formally eliminate the remaining requirements and procedures that are inappropriate in a private property market; eliminate ambiguities and contradictions in building regulations to avoid undue discretion and abusive inspection practices. (See Chap. III-H-3)






17

OPERATING PROCEDURES

Federal Novgorod St. Petersburg Leningrad Sverdlovsk Tomsk Structure of Business Taxes

(Technical Chapter IV-A, sections 1 thru 12; 20, and 21)

Extremely complex; most firms must pay about 20 different taxes; many taxes payable at multiple levels of government; Combined burden is high; normal deductions for business expenses often disallowed. Recommendations: Streamline tax structure; harmonize definition of tax base for corporate income tax (including deductions from taxable income) with norms prevailing in advanced market economies. (See Chap. IV-A-1 thru 12, 20,& 21)

Asset-based taxes (e.g., property tax) are a burden on new investments; turnover taxes are a burden on SMEs. (Both sales tax and "communal tax" are still in place); advertising tax is a burden on producers of consumers goods, esp. new entrants. Simplified business tax for small business available. Recommendations: Further streamline tax structure; monitor performance of small business taxes both in terms of revenues and impact on investment rates. (See Chap. IV-A-1 thru 12, 20& 21)

Asset-based taxes (e.g., property tax) are a burden on new investments; advertising tax is a burden on producers of consumers goods, esp. new entrants. Simplified business tax for small business available. Recommendations: Monitor performance of small business tax both in terms of revenues and impact on investment rates. (See Chap. IV-A-1 thru 12, 20& 21)


Asset-based taxes (e.g., property tax) are a burden on new investments; advertising tax is a burden on producers of consumers goods, esp. new entrants, and is harshly enforced. Simplified business tax for small business available. Recommendations: Monitor performance of small business tax both in terms of revenues and impact on investment rates. (See Chap. IV-A-1 thru 12, 20& 21)


18

VAT rebates (Technical Chapter IV-A, sections 2, 20, and 21)

Rebates to exporters to some CIS members are problematic; those to all countries usually slow, sometimes due to Treasury disbursement delays rather than the Tax Inspectorates; however tax inspectors are also legitimately concerned about abuse. New procedures have been introduced. Recommendations: Clarify rules for VAT within CIS to avoid double-taxation; monitor performance of new VAT rebate procedures; ensure that exporters with good track record receive rebates within one month; take steps to avoid disbursement delays from Treasury.

Tax Reporting/paying

(Technical Chapter IV-A-15, 20&21)

Extremely complex; many taxes payable at multiple levels of government; separate account numbers for each tax. Tax Inspectors often unhelpful and fail to assist taxpayers make timely corrections to their tax returns; Treasury often fails to transfer taxpayer payments and notify Tax Inspectorate on timely basis. Recommendations: Work to simplify tax structure; avoid requiring separate payments to multiple levels of government; improve dissemination of regulations, guidelines on interpretation, etc., including to general public. Encourage tax inspectors to disseminate regulations, guidelines on interpretation, etc., thru seminars in cooperation with private sector tax accountants; encourage tax inspectors to correct mistakes of taxpayers in their returns; improve reliability of Treasury transfers and notifications to Tax Inspectorate.

Penalties (Technical Chapter IV-A-16, 20&21)

Tax penalties have been adjusted several times and are not quite as severe as in the past; however tax inspectors are still very aggressive with penalties in order to meet arbitrary revenue targets. Inspectors discouraged from distinguishing between "honest mistakes" and true evasion, and are often over-eager in applying severe penalties in connection with minor mistakes as well as new legislation/regulations that businesses are not yet familiar with. Recommendations: Ensure penalties are excluded from revenue targets for Tax Inspectorates; reduce penalties for "honest mistakes" and for mistakes related to new legislation/regulations.

Tax Control

(Technical Chapter IV-A-17, 20,&21)

Excessive reliance on tax inspections; very frequent tax inspections; over-reliance on revenue "targets", resulting in excessive pressure on Tax Inspectors to assess fines, and in sometimes overly aggressive stance toward tax payers. Recommendations: Work toward "voluntary compliance" strategy with most sophisticated businesses and increase reliance on professional, certified auditors; increase emphasis on standard tax accounting principles at the firm level, (including providing necessary training to both tax inspectors and to private accountants to ensure consistent interpretation); rely less on arbitrary revenue "targets;" exclude penalties from revenue targets.

19

Federal Novgorod St. Petersburg Leningrad Region Sverdlovsk Region Tomsk Investment Incentives (Technical Chapter IV-A-14; for Regional level: Chapter IV, Part II)

Most federal level investment incentives are modest and automatic, although some are industry- specific. The tax code currently does not allow the Regions to offer incentives for taxes that are designated as "Federal" taxes. On the other hand, regions are allowed to offer incentives on turnover taxes, which creates an unlevel playing field. Recommendations: Federal tax incentives for specific industries should be eliminated. No incentives should be allowed on turnover taxes or VAT. Invest-ment tax credits for asset taxes should be available automatically for investments in depreciable assets, with interest rates for the deferred tax liabilities at least equal to the Central Bank refinancing rate. (See Chap. IV-A-14,20&21)

Incentives are offered for most Regional taxes during the pay-back period of a new investment or expansion; applications for incentives must be approved by Regional Government; criteria are objective, leaving little room for discretion; calculation of pay-back period somewhat complicated for new investments and very complicated for expansions, upgrades, and additions to existing investments. Recommendations: Consider introducing automatic incentives that do not require approval (e.g., tax credit with market interest rates); simplify calculation of pay-back period, especially for expansions, upgrades, and additions to existing investments; reduce reporting requirements. (See Chap. IV,Part II-N)

Relatively few incentives, which is appropriate for a region that naturally attracts a lot of investment; most incentives are automatic and administered directly by the Tax Inspectorate. Some are restricted to large investors (no longer available after 2000) or aimed at excise producers. Recommendations: Eliminate special incentives for producers of excise goods to avoid discriminating between industries. (See Chap. IV,Part II-P)

Incentives are offered for most Regional taxes during the pay-back period of a new investment or expansion, plus two years; applications for incentives must be approved by Regional Government; criteria are mostly objective, but there is room for discretion; calculation of pay-back period somewhat complicated for new investments and very complicated for expansions, upgrades, and additions to existing investments. Recommendations: Consider introducing automatic incentives that do not require approval; streamline approval process and reduce discretion; simplify calculation of pay-back period, especially for expansions, upgrades, and additions to existing investments; reduce reporting requirements. (See Chap. IV,Part II-L)

Few incentives offered; incentives are unstable from year to year; criteria are vague and discretionary; application procedures and reporting requirements are lengthy, confusing, and burdensome. Recommendations: Maintain stable investment incentives that relieve tax burden on new investments as well as expansions, upgrades, and additions to existing investments; criteria should be objective and preferably automatic, with minimal reporting requirements. Avoid credits and guarantees for commercial risk. Consider offering guarantees for political risk. (See Chap. IV,Part II-S)

Some incentives offered for regional taxes. Investment law lacks clarity. Duration of benefit for property tax not clearly defined. Procedures are lengthy and cumbersome, with excessive discretion. Expertise appointed by Regional Government. Guarantees against “worsening of conditions” are unclear. Recommendations: Clarify investment law, especially duration of property tax benefit; criteria should be objective and preferably automatic, with minimal reporting requirements. Remove requirement for case-by-case approval by Duma. Clarify guarantees. (See Chap. IV,Part II-S)

20

Federal Novgorod St. Petersburg Leningrad Region Sverdlovsk Region Tomsk Disputes/ Appeals (Technical Chapter IV-A-18 thru 21)

Appeals procedures within Tax Inspectorates are viewed by business as biased against them; courts are perceived as more fair, although they often still lack expertise. Tax Inspectorates sometimes feel pressure to appeal court cases they have lost. Over 60% of court cases are won by Taxpayer. Recommendations: Ensure that revenue targets do not factor into appeals decisions, which should be judged strictly on the merits of each individual case. Tax Inspectorates should appeal court cases only in extra-ordinary circumstances. (See Chap. IV-A-18 thru 21)

Businesspeople said they frequently take the Tax Inspectorate to court. Tax Inspectorate said they are often expected to appeal court decisions if they lose, in part to ensure achievement of revenue targets. Recommendations: See Federal.

Businesspeople said they only take cases to court that they are very sure of. Recommendations: See Federal

Businesspeople said they only take cases to court that they are very sure of; further, judiciary is considered by business as problematic. Recommendations: See Federal

Businesspeople said they rarely take the Tax Inspectorate to court. Recommendations: See Federal.

Businesspeople said they only take cases to court that they are very sure of. Recommendations: See Federal.

21

Registration of enterprises’ foreign economic activities (FEA) Technical Chapter IV-B

Federal: Documentary requirements are reported to be excessive. For companies that are active in several regions the requirements are often complicated. Regional branches are reluctant to recognize licenses issued in other regions. This violates the concept of the “single economic space.” Recommendations: Reduce the documentary requirements.

Allow the companies to acquire rights to perform import-export operations in all the Regional Divisions of Customs regardless of where the company has initially been registered and regardless of its legal address. (See Chapter IV-B-9)

Customs services’ revenue targets (See Chap. IV-B-9)

There are fixed revenue targets for customs services. Customs service activities are mainly evaluated on the basis of their financial performance concerning revenue targets, including fines. Recommendations: Evaluation of customs services activities should primarily be linked to work efficiency and less to financial targets. Fines and penalties should be explicitly excluded from the revenue targets.

Complexity of customs system (See Chap. IV-B-9)

Very complicated legal framework; lack of transparency of customs system fails to ensure proper goods clearing and encourages half-legal, gray customs processing. Recommendations: Legal framework has to be restructured and extensively simplified; new regulations should secure a) simplification of procedures; b) reliance on invoices rather than other valuation methods in most cases; and c) fewer physical inspections (i.e. reliance on established risk factors plus random physical inspections).

Customs processing (See Chap. IV-B-9)

Long processing times from 10 to 14 days for border crossing and customs declarations. Complicated declaring system with 5-step declaring procedure (EU: 2 steps) and 15 different customs treatments (EU: 5 modes); Recommendations: Downsize customs declaring steps to 2 or 3 and customs treatments to not more than 7.

Customs tariffs (See Chap. IV-B-9)

Customs tariffs from 5-20%11 are still very high for some goods, making half-legal or illegal customs schemes very attractive. Customs duties exemptions for import equipment are difficult to obtain and only in very restricted cases available. Recommendations: Customs tariff for investment goods should be lowered (e.g., to a level of not more than 5%) for all investors, both foreign and domestic, instead of offering exemptions.

11 According to government decree No. 886, 27 Nov. 2000.

22

Federal Novgorod St. Petersburg Leningrad Region Sverdlovsk Region Tomsk Development of competition in Customs Brokerage (See Chap. IV-B-9)

1. Concerning broker services a SCC daughter, Rostek, often receives special conditions from customs services, 2. Rostek, which is a competitor to other customs broker, is organizing obligatory customs broker training courses.

Problems with a local customs point, which do not approve releasing of spare parts under a guarantee letter without certification, which is the usual procedure at other customs points in this and other regions. See Federal.

Even worse image concerning corruption than in other regions. See Federal.

Report about conflict with Rostek at border checkpoint, which demanded that the private broker cancels all operations at the border checkpoint. Poorly equipped border checkpoints. Lack of competition is a major disadvan-tage for investors. See Federal.

Complaint hot line is equipped with answering machine, but it seems calls are not followed-up. Customs house official openly admitted that they provide better conditions to “our people” (i.e. Rostek). Lack of competition is a major disadvantage for investors. See Federal.

Customs procedures very rigorous. Many companies prefer to buy from importers/ agents via Moscow. See Federal.

Recommendations: “Affiliated companies” like Rostek should be clearly separated from SCC, with no special treatment, and required to compete on an equal basis with other customs brokers. (See Chap. IV-B-9)

Recommendations: Standardize procedures for release of spare parts. See Federal.


Recommendations: Antimonopoly law should be applied to state owned struc-tures like Rostek. See Federal.

Recommendations:Regional administrations should ensure fair competition between Customs brokers See Federal.


23

Federal Novgorod St. Petersburg Leningrad Region Sverdlovsk Region Tomsk Monitoring of foreign currency operations (Technical Chapter IV-C)

1. Definition of current and capital movement operations leads to many problems during day to day business activities; 2. This concerns especially foreign trade operations with transaction times longer than 90 days, and also mid- and long-term loans from non-residents. 3. Burden of proof in case of foreign currency deficiency is on companies and penalties are harsh.

CB affiliate wants to play a central role in foreign trade monitoring and is trying to be more involved than most CB affiliates in other regions. See Federal

See Federal See Federal Better acquainted with export operations than with other foreign trade operations; less experience with foreign investors. Positive that CB affiliate is not participating in foreign trade control commission.

CB affiliate assumes a central role in foreign trade monitoring. See Federal.

Recommendations 1. Definitions of current and capital movement operations should be liberalized, taking criteria established by the International Monetary Fund and normal practice in OECD as examples; 2. Approval mechanisms for foreign trade operations should be limited to very significant volumes, e.g., exceeding US$ 10 million; instead, Central Bank should set up a negative list of operations which requiring reporting.

Recommendations The regional CB affiliate should concentrate on major role, the monitoring of banks, and less on foreign trade monitoring. See Federal

Recommendations See Federal

Recommendations See Federal

Recommendations Prepare staff of Regional CB for potential operations involving foreign investors. See Federal

Recommendations The regional CB affiliate should concentrate on major role, the monitoring of banks, and less on foreign trade monitoring. See Federal

24

Federal Novgorod St. Petersburg Leningrad Region Sverdlovsk

Region Tomsk

3. Burden of evidence should be turned back to state institutions, banks should be obliged to inform control institutes, but these institutes should have to establish clear evidence of the companies violations before taking steps against them. (See Chap IV-D-10)

25

FOREIGN CURRENCY CONTROL/BANKING OPERATIONS

Mandatory sales of foreign currency revenue

Mandatory sales of 75% of gross foreign currency revenues within 7 days leads to problems and additional costs for those firms which export and import at the same time. Recommendations: Mandatory sales should be downsized (e.g. to 30%) and calculated on net foreign exchange positions and eventually phased out. The time period should be extended to 30 days. Transactions under a specific limit (e.g US$25,000) should be free of any mandatory sales.

Foreign currency purchasing and saving restrictions

Problems with restrictions of foreign currency purchasing (100% ruble deposit) and saving, especially problematic for small companies Recommendations: A threshold of US$ 10,000 or US$ 25,000 should be introduced, under which foreign currency can be freely purchased, saved and spent. The deposit regulation should be abolished, because it is not really effective anymore.

Cash control CB requires commercial banks to monitor cash transactions and cash balances of its business clients. Recommendations: This requirement should be abolished.

26


Export Control (Technical Chapter IV-D)

1. Major role today: representative offices of the MEDT are involved in decisions on fining companies for lacking FC revenue (see FC control); 2. Many products on export license list for which export licensing do not seem strictly necessary, e.g., berries and mushrooms.

See Federal. MEDT representative sees its role in price controlling of exports, in addition to participating in FC control decisions. See Federal.

See Federal and St. Petersburg.

MEDT representatives see their structure as a service unit for companies, involved in foreign trade; offers information services with Russian trade representatives abroad; See Federal.

Many export transactions need clearance for “dual use” technology, which requires approval from Moscow. MEDT representatives play helpful role. See Federal.

Recommendations:

1. Independent institutions like chambers of commerce should be assigned to issue conclusions on allegations about failure to receive foreign currency revenues; 2. The list of products, for which export licenses have to be obtained, should be revised. (See Chap. IV-C-3).


Recommendations: An additional controlling body besides customs, tax inspection etc. is not needed anymore; MEDT representatives should not try to involve themselves in control processes, but protect firms from too much state control. See Federal.

Recommendations: See Federal and St. Petersburg.

Recommendations: Very progressive approach, which could be used as an example for other regions. See Federal.

Recommendations: Need to ensure clearances take place without undue delays. See Federal.

27

Obtaining certifications (See Chap. IV-E-5)

Few problems with obtaining certifications in Russia. Certification costs lower than in Western Europe or USA. List of goods with mandatory certification from GosStandard and Customs are not identical. Recommendations: There should be only one list of goods, for which certification has to be obtained, which should be agreed between GosStandard and Customs.

Role of GosStandard centers (See Chap. IV-E-5)

Unclear role of GosStandard centers: state institutes or self-sustainable commercial entities; potential conflict of interests, since regional control authorities and certification institutes are very closely linked in GosStandard centers; in most regions state certification inspectors are financed by commercial activities of certification departments. Recommendations: Introduce a clearer division between inspecting and certifying functions. As a long- or midterm consideration, the role of GosStandard should be more clearly defined as fully state controlled or as a self-sustainable agency, licensed by the state.

Federal Novgorod St. Petersburg Leningrad Region Sverdlovsk Region Tomsk Adaptation to international standards (See Chap. IV-E-5)

Many discrepancies with international standards, mostly in favor of Russian low price producers;

Co-operation with Swiss Certification system,

Obtained ISO 9001 certification.

See Federal Obtained ISO 9001 certification.

Limited service; many certifications take place in Novosibirsk. See Federal.

Recommendations: 1. Eventual adaptation to international standards should be implemented. 2. GosStandard should achieve mutual acceptance with standardization systems from EU or OECD countries, maybe issuing a negative list mentioning those products for which a Russian standard will still be needed.





Recommendations: Expand service to more products, based on regional demand. See Federal.

Special certifications (See Chap. IV-E-5)

Most difficulties with approvals, certificates and checks from other institutes, especially fire inspection and sanitary inspection;

28

Recommendations: The order of obtaining such special approvals and certificates should be revised to reduce bureaucratic discretion by ensuring the burden of proof is on public agencies; the process should be monitored very thoroughly; inspection institutes should be held liable for mistakes or fraud; there should be a special contact person at higher level for reporting bribery allegations.

29

CONTENTS CHAPTER I INTRODUCTION..........................................................................................1

A. Framework of the Report .................................................................................2

B. Current Investment Environment and Performance ......................................12

C. Division of Labor between the Federal, Regional, and Local Levels of Government Regarding Administrative and Regulatory Procedure ..............16

D. Summary of FIAS Investor Survey Findings.................................................20

Figures Figure 1.1 Foreign Investment Process Flowcharts

General Chart—Business Organization Migration Chart Company Registration Procedures Opening Bank Accounts for Foreign Equity Procedures Regulated by Customs Employment of Workers General Scheme of Project Approval in the Russian Federation: Phases and Participating Agencies Loan, Credit, and Currency Procedures Regulated by the Central Bank

Figure 1.2 Foreign Direct Investment Per Capita in Five Regions Figure 1.3 Investment Per Capita in Main Capital of Enterprises and Organizations with

Foreign Capital Participation Figure 1.4 Investment in Main Capital Per Capita Figure 1.5 Number of Enterprises Figure 1.6 Top Six Obstacles to Investment Figure 1.7 Difference Between Average and Region Numbers For the Top ten Obstacles Figure 1.8 Perception of Relations between Federal Government and Private Companies Figure 1.9 Perception of Relations between Regional/Local Government and Private

Companies Figure 1.10 Governance Obstacle to Business Figure 1.11 WBES Survey of Obstacles to Investment in Russia Appendixes Appendix 1.1 Terms of Reference for Study of Administrative Barriers to Investment Appendix 1.2 The Division of Labor Between the Federal, Regional, and Local Levels of

Government with Regard to Administrative Barriers to Investment in the Russian Federation

Appendix 1.3 Description of FIAS Survey of Private Enterprises in Russia

CHAPTER I

INTRODUCTION 1. In early calendar year 2000, the Foreign Investment Advisory Service (FIAS) received requests to carry out a series of studies to examine administrative barriers to investment within subjects of the Russian Federation. The requests came from the administrations of Novgorod, St. Petersburg, Leningrad, Sverdlovsk, and Tomsk (see Terms of Reference in Appendix 1.1), and the Federal Ministry of Antimonopoly Policy and Entrepreneurship Support. The main goal of each of the requests was to provide recommendations to increase the rate of direct investment.

2. The purpose of this study is fourfold:

• To develop a comprehensive guide to investment procedures in the participating regions as of the year 2000 and provide step-by-step details of all the application requirements an investor must fulfil to become fully operational as well as most routine interactions between businesses and government agencies during normal business operation.

• To analyze other factors affecting investment decisions that may result from the legislative and regulatory environment.

• To draw comparisons among the five regions of the study and to compare the administrative barriers to investment in Russia with other nations with which it competes.

• To identify existing delays, inefficiencies, and other problems associated with investment procedures and routine business regulations, and to make recommendations for improving them.

3. The economic reforms in the Russian Federation proceeded fitfully during the first several years after the breakup of the Soviet Union. However, the reform agenda is now largely agreed within the federal government, and the reforms are starting to progress more steadily and rapidly. Therefore, the portions of the report that function as an “investment guide” are likely to be out of date in a relatively short time. Unlike similar investment guides prepared for many other developing countries, which represent a snapshot in time and a motivation for reform, this report must be much more forward-looking, and is intended to assist the both the federal government and the regional administrations in prioritizing their ambitious reform agenda.

4. The rest of this introductory chapter presents the framework for analysis for this report, an overview of the current investment environment and performance, a description of the division of labor between the federal, regional, and district-level governments within the Russian Federation and a summary of the findings of FIAS’ business survey, conducted as a part of the project in each of the participating regions.

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A. Framework of the Report

5. The model for analysis of administrative barriers to investment consists of a number of core processes divided into three main process groups, which include the following:

• Start-up procedures, including entry issues for foreign investors (work permits and temporary and permanent residency work permits for foreign investors and expatriates), registration issues (the enterprise registration process for all investors, including company registration, tax registration, social fund registration, and statistical registration), and antimonopoly clearance and other procedures such as importation of capital equipment, opening bank accounts, issuance of shares, sector licensing, etc. (Chapter II).

• Procedures for locating the investment, including procedures to obtain an investment site, land use permission, construction permits, inspection approvals, hooking up utilities, and receiving permission to occupy and use the premises (Chapter III).

• Operating procedures, including tax reporting, customs procedures, foreign exchange controls, and product certification (Chapter IV).

6. Each of the technical chapters covers the common or federally mandated investment procedures, followed by a description of the unique features of each of the regions that participated in the study. The chapter appendixes contain copies of principal forms required for each procedure.

7. Each technical chapter is divided into subsections according to the main procedures that investors experience (e.g., registration procedures, licensing procedures, etc.). Each procedure is described in a way that documents, in as much detail as possible, the various steps required to establish a new business and to begin operations in full compliance with existing laws and regulations. The licenses or approvals required, their application procedures, and criteria for qualification are all detailed. The fees or processing payments are noted, as are typical processing times for each step. In most cases these are average processing times reported by the agencies for projects with no unusual characteristics or problems. Actual processing times encountered by individual firms may often be significantly longer.

8. The descriptions of each of the procedures are followed by an analysis that includes the problems experienced by investors, comparisons between the regions and between Russia and other transition countries, and an assessment of the benefits and drawbacks of the existing procedures.

9. Finally, after the analysis, the subsections for each procedure include recommendations for improving the procedures where appropriate. FIAS makes every effort to understand the underlying policy goals of the procedures, and to offer recommendations designed to make the procedures more cost-effective, transparent, and consistent in their implementation. In some cases, FIAS may recommend that a procedure be eliminated

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entirely if it is no longer necessary in the context of the reformed policy framework for investment. Recommendations are based on the objectives of simplifying application procedures for investors while enhancing the ability of government to screen key information properly, and make appropriate judgments.

10. Figure 1.1, which consists of several process flowcharts, provides an overview of all the steps a new foreign investor must go through. Tables 1.1 through 1.3 at the end of the chapter summarize all procedures (including the relevant institutions, duration, and fees) in each region.

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Migration procedures, getting

an invitation, visa, . etc.

RegistrationOpening bank accounts for foreign equity

GettingLicenses

Varies bysector

Customsprocedures

See customschart

Employment ofexpatriates

Employment chart

Planning &Construction

SeePlan & Constr.

Chart

Procedures ofloan, credit,currency etc.regulated bycentral bank

See CB chart

Receivingincentives

Business can bestarted

End of businessorganization process

BankSee

RegistrationChart

Decision to start business

General Chart - Business Organization

Entrepreneur See Migration Chart

Varies byAdministrationI-4

Migration Chart

Investor's residence Russian consulate

Ministry of ForeignAffairs

1

Start

PVS

3

Passport & visa for

registration 5

6Arrival Registration

4

Departure to Russia

Hosting

Temporary company

Visa

2 Confirmation telex

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Company Registration Procedures

Beginning Preparation of

documents

Investor, businessman,

Payment of half ofequity Temporary registration

RegionalAdministration|State

Registration Chamber

Registration with theStatistics Services

Ordering thecompany seal

(optional)

Regional Division ofState Statistics

Committeeconsulting or law firm See equity payment

chartA firm making

seals

Getting permanentregistration certificate

Registration in TaxInspectorate

Receiving taxpayercertificate

Registration in Pension Fund, Fund of Compulsory Medical

Insurance, Fund ofEmployment, Fund of Social

Insurance

Getting Accreditation Ministry of External

Affairs

Ministry of ExternalAffairs

Registration ofparticipant in external

economic activity

Customs

Notification ofAntimonopoly

Committee

End

Pension Fund, Fund ofCompulsory Medical Insurance, Fund of Employment, Fund of

Social Insurance

State Tax Inspectorate Administration|StateRegistration Chamber

AntimonopolyCommittee

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Opening Bank Accounts for Foreign Equity

Investor's account in an overseas bank

Temporary foreign currencyaccount for money transfer

operation

Conversion to rubles

investmentsForeign currency Ruble

investmentsWhat currency to

invest?

Investment account innational currency called

account "K"

Temporary foreign currencyaccount for transferring

equity capital

Company registration

Regular foreign currency account

Conversion to rubles when required

currency account

Regular national

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Procedures Regulated by Customs

Customs

Registration of participantin foreign economic activity

Equipment or goodsimportation

Customs, Company

Payments of custom

Custom clearance

Customs

End

duties

Beginning

Bank, Customs

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Employment of Workers

Accreditation with

Ministry of Foreign Affairs

Employment ofExtension ofvisas

Local registration and VisaDepartment of MinistryInternal Affairs, Ministry of

External

Registration on arrivalReceivingvisasforeign

workers Work permit

Ministry of Foreign Affairs

MigrationService Company Ministry of

Foreign Affairs

Employment of localworkers

End Beginning

Local registration and Visa Department of Ministry of Internal Affairs

Recruiting agencies (optional)

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•APZ•Land Allocation

Decision•Design

Authorization

Building PermitApplicationfor

land andproject

approval

Phase I Review

(Location)

Phase II Review

StateExpertise

LandConveyance &Registration of

Land Rights

BuildingAcceptance &Registration ofBuilding Rights

GASNMayor’s Office

ChiefArchitect

LandCommittee

Chief Architect

Mayor’s Office

Registry

Chief Architect

Mayor’s Office

Chief Architect

Land Committee

GIOP

Fire

Police(Traffic & Roads)

EnvironmentalCommittee

Sanitary &Epidemiological

GASN

Utility Firms

Others

State IndependentExpertise(UGVE)

EnvironmentalCommittee

OtherAgencies

Participatingin

Phase Ireview

CommitteeOn

EmergencyPreparedness

GASN

StateCommission

onAcceptance(All Phase II

Agencies)

Bureauof Technical

Inventory

Registry

PHASE

A

G

E

N

C

Y

General Scheme of Project Approval in the Russian Federation:Phases and Participating Agencies

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Loan, Credit and Currency Procedures Regulated by the Central Bank

Registration ofloan|credit

Central Bank

Loan|credit permit

Central Bank

Sale|Purchase of

Central Bank

Loan|credit permit, ifcredit is more than 90

days End

currency

Beginning

Central Bank

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B. Current Investment Environment and Performance 11. Russia as a whole is clearly under-performing in gross domestic private investment and foreign direct investment. Gross domestic investment in the Russian Federation contracted during most of the 1990s, and has only recently started expanding again. Foreign direct investment constituted less than 1% of GDP in the Russian Federation from 1992 to 1998, compared with 3% to 4% or more in Poland and Romania, and even higher rates in many other countries in central and Eastern Europe.12

12. Data on foreign direct investment inflows in each region are available from the State Statistics Committee. A comparison of the five regions in the study is presented in Figure 1.2. It shows that most regions are performing at a higher-than-average level for Russia in its entirety. Investment in the main capital13 of enterprises and organizations with foreign capital participation (a broader measure of foreign investment) shows a slightly different pattern (Figure 1.3). St. Petersburg has many natural attractions for foreign investment, so it should be expected to attract a large amount. Novgorod, by contrast, has relatively few natural attractions, yet has managed to attract significant amounts of foreign investment by making the investment climate as business-friendly as possible. Leningrad has clearly benefited from “spillover” investment from businesses that want to enjoy the good features of St. Petersburg but avoid the bureaucratic difficulties and higher taxes. Sverdlovsk and Tomsk have very few such investments.

13. Overall investment in the main capital (including purely domestic investments) for each of the five regions is presented in Figure 1.4. There is not a great deal of variation in these figures, which suggests that all regions are suffering from similar problems, but it is interesting to note that Sverdlovsk and Tomsk show the highest rates of investment in that time period.

14. Among domestic investors, the statistics show a greater number of “large and medium” firms than of “small” firms in the statistical base in each of the regions that participated in the study (Figure 1.5). Most countries, including most transition countries, demonstrate a distinct pyramid structure of firms: a few large firms, more medium-sized firms, and a much larger number of small firms, many of which are new start-ups. These data indicate that Russia is under-performing in encouraging small business, which is a critical source of dynamism, growth, and employment opportunities for a healthy, market economy.

12 The data cited are from the International Monetary Fund’s International Financial Statistics, drawn from the central banks of each member country. Data from the State Statistics Committee of the Russian Federation show somewhat higher figures for foreign direct investment in Russia, but may not be comparable with those of the other countries listed. 13 Investments in the main capital include expenses on construction works of all kinds; on purchase of machines and equipment, industrial instruments, and other products.

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Figure 1.2

FDI Per Capita

-

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

1996 1997 1998 1999

Year

Am

ount

(US$

)

St.Petersburg Leningrad Region Novgorod RegionSverdlovsk Region Tomsk Region

Figure 1.3

Investment Per Capita in Main Capital of Enterprises and Organizations with Foreign Capital Participation (US$)

-

100,000

200,000

300,000

400,000

500,000

600,000

1995 1996 1997 1998Years

Am

ount

St. Petersburg Leningrad Region Novgorod RegionSverdlovsk Region Tomsk Region

Source: State Statistics Committee, Regions of Russia Report, 1999

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Figure 1.4

Investment in Main Capital Per Capita (billions of Rubles, 1998)

010002000300040005000

1992 1993 1994 1995 1996 1997 1998Year

Am

ount

St. Petersburg Leningrad Region Novgorod RegionSverdlovsk Region Tomsk Region

Figure 1.5

111,800

54,717

12,100 13,7142,700

10,30025,900

54,409

4,700

17,147

0

20,000

40,000

60,000

80,000

100,000

120,000

St.Petersburg Leningrad regionNovgorod region Sverdlovskregion

Tomsk region

Number of Enterprises

Small Large & Medium

Source: State Statistics Committee, Regions of Russia Report, 1999

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The Example of the Sausage Inspector One regional government official interviewed by FIAS made a point about the continuing need for regulation even within a market-based economy. “Our citizens need to be sure that their sausages have been properly inspected, or they would be afraid they could get sick or even die.” Of course there is always a need for government regulation to ensure public health and safety and protection of the environment, for example. The question is how those regulations are enforced. The official admitted that the sausage maker would sometimes have to offer the sausage inspector a bottle of vodka “to make sure he does his job properly” and does not unduly waste the time of the sausage maker during the inspection process. But why would the sausage inspector want to waste the time of the sausage maker? Presumably, his goal is to ensure the quality of sausages sold to the public. The question is whether the established procedures of the sausage inspectorate and the incentives facing the individual sausage inspector are in line with those goals. If there is no way to verify whether he has done his job properly, then the bottle of vodka may become a bribe for the sausage inspector to overlook his responsibilities and let bad sausages onto the market. If the sausage inspector is underpaid, he may threaten to close down the operations of the sausage maker if he does not received his bottle of vodka. He may even accept two bottles of vodka to go across the street and harass the competing sausage maker. Part of the goal of this report is to offer recommendations to improve regulatory procedures so that they achieve their goals, and do so as efficiently and fairly as possible.

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C. Division of Labor Between the Federal, Regional, and Local Levels of Government Regarding Administrative and Regulatory Procedure.14

15. One of the main problems facing investors in Russia is the incomplete and contradictory nature of Russian legislation. There are numerous contradictions between federal and regional legislation that result in a splitting of the federal economic space into much smaller zones. This in turn increases the transaction costs and adds to the political and economic risks facing entrepreneurs.

16. There are also numerous sublegal regulations that are created by the various ministries and state agencies. These are a result of the sporadic development of federal legislation and contradictions between valid federal laws. These contradictions in turn provide opportunities for arbitrary decisions by officials, and facilitate the growth of corruption and the creation of new administrative barriers.

17. Article 72 of the Constitution of the Russian Federation established a relatively long list of activities that are deemed to be the “joint responsibility” of the federal government and the regions (“Subjects of the Russian Federation”), but the division of labor and lines of authority remain indistinct. This situation not only weakens the vertical ties in the governmental structure, but also contributes to horizontal friction between different regions.

18. The Constitution of the Russian Federation guarantees the rights of the citizens to free economic activity in the “unified economic space” of the Federation, including free movement of the goods, services, and financial assets. Article 74 prohibits the establishment of customs borders, duties, taxes or any other obstacles for the free movement of goods, services, and financial assets within the Federation, with restrictions allowed only

Article 72 of the Constitution

of the Russian Federation

1. The joint jurisdiction of the Russian Federation and the subjects of the Russian Federation include a) providing for the correspondence of the constitutions and laws of the Republics, the charters and other normative legal acts of the territories, regions, cities of federal importance, autonomous regions or autonomous areas to the Constitution of the Russian Federation and the federal laws; b) protection of the rights and freedoms of man and citizen; . . . ensuring the rule of law, law and order, public security, border zone regime; c) issues of possession, use, and disposal of land, subsoil, water, and other natural resources; d) delimitation of state property; e) nature utilization, protection of the environment, and ensuring ecological safety…; g) coordination of issues of health care…including social security…; i) establishment of common principles of taxation and dues in the Russian Federation; j) administrative, administrative procedure, labor, …, land, water, and forest legislation; legislation on subsoil and environmental protection;

k) personnel of the judicial and law

14 The text for this section is based on a paper prepared by the Higher School of Economics, on the subject of “The Division of Labor between the Federal, Regional, and Local levels of Government with regard to Administrative Barriers to Investment in the Russian Federation.” The full text of this report is contained in Appendix 1.2.

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according to federal laws (i.e., the subjects of the Russian Federation are prohibited from passing laws interfering with commerce within the Federation).

19. In addition, there is a specific list of “prohibited acts” (i.e., acts creating obstacles for competition or infringing on the rights of business entities) by executives, local governments, and officials in the law, “Concerning competition and restriction of monopoly activity in the commodity markets.”15

20. A number of the federal ministries16 play a special role in the regulation of investment activity and in reform of existing administrative barriers:

The Ministry on Economic Development and Commerce is responsible, inter alia, for:

• State social and economic policy (including investment policy) and the methods of regulation of the economy; it coordinates the activities of other federal executive authorities in this sphere.

• The basic principles of regional economic policy, economic basis of relations between the federal center and the Subjects of the Russian Federation.

• Analysis and preparation of proposals to improve the executive authority structure.

• Coordination of federal executives’ activities in attracting foreign direct investment.

• Control of state procurement procedures.

The Ministry on Antimonopoly Policy and Support of Entrepreneurship is responsible, inter alia, for: • Implementation of state policy and management in the field of the prevention,

restriction, and suppression monopoly activity, unfair competition; development of business and competition in the commodity markets.

• Development of proposals regarding the regulation and development of small business.

• Verifying observance of antimonopoly legislation of the Russian Federation by executive and local government bodies and commercial and noncommercial organizations, and monitoring federal legislation concerning state support of business, protections to ensure the rights of consumers, advertising, and legislation concerning natural monopolies.

The Ministry of Justice is responsible for the following: • Coordination of the law-making activities of federal executive bodies.

15 Concerning competition and restriction of monopoly activity in the commodity markets, 22 March 1991, Articles 7–9, as amended in 1992, 1995, 1998, and 2000. 16 Information on responsibilities and functions of ministries is available at the following address: http://www.government.ru/institutions/ministries.

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http://www.government.ru/institutions/ministries

• Examining legal drafts of legislative and other normative acts that are under consideration by federal executives, the president of the Russian Federation, and the government of the Russian Federation.

• Legal examination of the normative legal acts of the Subjects of the Russian Federation for their conformity to federal legislation.

21. The General Prosecution office and other enforcement bodies also control observance of legislation. The Ministry of Antimonopoly Policy and Support of Entrepreneurship, for example, cannot directly influence the legislative branch, except by recommendation and proposal, or by operating through the General Prosecution office.

22. The state duma has a Committee for Protection of the Rights of Investors, which is also engaged in the problem of administrative barriers.

23. In practice, the Office of the President plays one of the main roles in the development of new legislation (including legislation concerning investment and economic activity in particular). Although the Office of the President does not have the constitutional function of an executive body de jure, it is probably the most influential member of the system of state governance of Russia de facto. The presidential administration has specific levers of authority that allow it to govern the country through the executive authority structures. Frequently, it results in duplication of functions between the Government of Russian Federation and the Administration of the President.

24. The current legislative base in the Russian Federation leaves executive authorities with significant opportunities for further policy decision-making: closing of gaps, explanation of unclearness, reconciliation of contradictions, etc. For junior-level bureaucrats, such instructions, letters, and decisions of their superiors have decisive meaning, even if the content of such documents contradicts the actual legislation. For example, tax inspectors usually follow the instructions of their superior office, even in contradiction to the relevant tax legislation and court rulings. In such cases the courts may cancel whatever penalties have been imposed on taxpayers, but the same tax inspectors often persist in their interpretations.

25. At the federal level the most important administrative barriers include the following:

• Inconsistencies between laws, gaps in legislation, and general instability of the legislative base.

• An unequal approach to taxpayers, including special agreements with the largest taxpayers, special payment arrangements, writing-off arrears and restructuring of tax debts on a negotiated basis.

• Granting of tax, customs, and other privileges to some categories of business entities or some business entities on the basis of case-by-case negotiation.

• An excessive number of supervising executive bodies. • Inefficient management of state property, including such questions as

privatization, rent and land tax, participation in the management of companies where the state is one of the owners.

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• Noncompetitive procurement procedures, establishment of preferential procurement prices to certain categories of suppliers, and the infringement of contractual obligations.

• Intervention in the management process of business entities. 26. Territorial branches of the federal authorities depend on the regional administration in the great majority of the Subjects of the Federation. According to data from the General Prosecution Office, the regional authorities have promulgated more than 1700 legislative acts in 1999, about one-third of which do not correspond to the Constitution of the Russian Federation.

27. Territorial branches of the federal authorities do not formally report to any regional authorities. Nevertheless, they are often under informal pressure from the heads of regional administrations. As such influence is often explained, the staff of the territorial offices of the federal authorities can meet various obstacles in securing normal public service (including health care, for example) if they are not “loyal” to the local administration. Of course, the situation is not the same for all ministries or all regions.

28. Similarly, the regional structures of the judicial system often receive informal financing and other resources from regional and district administrations, which is contrary to federal legislation. It is therefore alleged that such administrations influence the outcome of judicial proceedings. Regional structures of the judiciary often rely on regional administrations for repair of offices, payment for communications services, electricity, and so on, although this practice is prohibited by Russian legislation. Investors are particularly nervous about the possibility of regional officials interfering in bankruptcy cases (which can be initiated, for example, by the regional or district tax inspectorate).

29. A number of administrative barriers are created at the regional and local levels, including the following:

• Restrictions on the sale, purchase, and exchange of goods, services, or resources from one regional jurisdiction to another, including inter-regional investments.

• Illegal intervention in price setting.17 • Active influence of assigning arbitration managers to insolvent enterprises. • Impediments to inter-regional immigration of people. • Creation of obstacles for business entities in collecting creditor debts (for

example, payment of electric power and housing municipal services, medicines, etc.) from other business entities.

• Unreasonable refusal in licensing or reduction of the validity period of licenses and collection of additional levies for issuing licenses that have been not stipulated in federal legislation.18

17 For example, in autumn 1999, some governors tried to fix food prices. Governors also took part in setting official electricity tariffs, including special rates for certain consumers. 18 For example, Federal Law 158, Concerning licensing some types of business, dated 25 September 1998, and Decision of Government 326 of 11 April 2000.

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D. Summary of FIAS Investor Survey Findings

Debatable Point: Business Perceptions are Not Objective

Of course perceptions by definition are not “objective” in the scientific sense, and many government officials therefore object to the use of business surveys as an instrument in guiding policy-making or measuring the performance of governmental bodies.

However, there is an important sense in which business perceptions are objective facts: every businessman relies on his perceptions in making business decisions. In particular, investors’ perceptions drive their decisions on whether, where, and how much to invest in what types of activities.

For this reason, interviews with investors and surveys of business opinion are very useful, and the media’s reporting of business perceptions are often extremely influential. In this regard, no government official who wants to attract investment can afford to dismiss the opinions of investors. Even if they are based on misperception, the “burden of proof”inevitably on the administration to either disprove negative allegations about the business environment or to take credible steps to improve them.

is

In fact, the business community trusts what it hears from its own members much more than any government pronouncement. Potential investors, as part of their “due diligence” always spend a great deal of time talking to existing investors in a particular location, and put much more weight on their private conversations with other businessmen about their day-to-day experiences than on either official legislation or government statistics. Therefore, even if the media and the business community tend to exaggerate or to dwell on the negative, it is usually more useful for government officials to work with the business community to address their concerns than to try to deny the validity of those concerns. This report offers recommendations to address the concerns of investors surveyed and interviewed during the course of the study.

30. In addition to the face-to-face interviews carried out during the study of administrative barriers to investment, FIAS conducted a survey of businesses about a range of related issues, including the quality of services of various government agencies and the severity of various obstacles to business activity. Most businesses that participated in FIAS focus groups or face-to-face interviews filled out a survey form. In addition, FIAS sent survey questionnaires to more than 1,200 businesses in the five regions (excluding a few manufacturing sectors, which were to be covered by a similar survey),19 and received more than 40 responses from each region that participated in the study (for more details, see Appendix 1.3).

31. The survey and the face-to-face interviews both suffer from the problem that they focus on existing investors, although the real need is to find the deterrents to new investment. In this regard, the findings of the survey are likely to be overly positive, relative to the views of potential investors. However, the ranking of problems of existing investors, especially within each region, is probably very reliable. Comparisons between the regions, albeit interesting, are probably less reliable due to differences in standards and expectations between business communities across regions.

32. There was considerable agreement on the major obstacles facing investors: tax rates and regulations, corruption, inflation, access to financing, and the functioning of the judiciary (Figure 1.6). This study considered tax administration directly, and issues related to corruption indirectly. The issue of the functioning of the judiciary arose in connection with disputes between businesses and government agencies.

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19 The response rate to the mailings was about 10%, which is a typical response rate for survey mailings.

Figure 1.6: Top Six Obstacles to Investments

Percentage of respondents ranking obstacles as “major/serious” or “moderate”

T a x R a t e s

0

1 0

2 0

3 0

4 0

5 0

6 0

7 0

8 0

9 0

1 0 0

N o v g o r o d S t .P e t e r s b u t g

L e n in g r a d S v e r d lo v s k T o m s k

T a x A d m i n i s t r a t i o n

0

1 0

2 0

3 0

4 0

5 0

6 0

7 0

8 0

9 0

1 0 0

N o v g o r o d S t . P e t e r s b u r g L e n i n g r a d S v e r d l o v s k T o m s k

C o r r u pti o n i n th e P u bl i c S e c to r

0

1 0

2 0

3 0

4 0

5 0

6 0

7 0

8 0

9 0

1 0 0

N o vg o r o d S t.P e te r s bu r g

L e n i n g r a d S ve r dl o vs k T o m s k

I n f l a t i o n

0

1 0

2 0

3 0

4 0

5 0

6 0

7 0

8 0

9 0

1 0 0

N o v g o r o d S t .P e t e r s b u r g

L e n i n g r a d S v e r d l o s k T o m s k

A c c e s s t o F i n a n c i n g

0

1 0

2 0

3 0

4 0

5 0

6 0

7 0

8 0

9 0

1 0 0


L e n i n g r a d S v e r d l o v s k T o m s k

E f f e c t i v e n e s s o f t h e J u d i c i a r y

0

1 0

2 0

3 0

4 0

5 0

6 0

7 0

8 0

9 0

1 0 0


L e n in g r a d S v e r d lo v s k T o m s k

33. A middle-tier of obstacles revealed by the survey included government inspections, and access to land and construction permits, all of which were topics included in the administrative barriers studies. Business licensing, company registration, and infrastructure were relatively minor problems according to most survey respondents, whereas labor and environmental regulations were generally not considered problems at all.

34. There was also significant regional variation. For example, in Sverdlovsk, access to financing was regarded as the second largest obstacle to investment, whereas there were significant complaints about customs and foreign trade regulations in Leningrad. Leningrad firms ranked the functioning of the judiciary as the top obstacle, whereas Novgorod firms only ranked it 15th.

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35. The variations in the survey results across regions are worth examining, especially for procedures that are primarily governed by federal policy, which are supposed to be consistent throughout the Federation. Figure 1.7 highlights some of the noteworthy differences between the regions. Any variation within 10 percentage points should be considered minor (e.g., infrastructure), but differences of more than 10 or 20 percentage points are worthy of examination.

36. The reasons for the discrepancies may vary from issue to issue. For example, the bigger complaints about crime in Novgorod and Leningrad than in St. Petersburg and Sverdlovsk (Yekaterinburg) are probably more a reflection of the expectations of businesses located there than actual rates of crime. Inflation is not under the control of regional governments, so the degree of dispersion in this area is difficult to interpret.

37. On the other hand, most firms have to acquire land and construction permits. In this regard, Novgorod’s higher ratings relative to those of St. Petersburg and Sverdlovsk are probably meaningful. Similarly, the functioning of the judiciary (a significant problem in Leningrad), access to financing (a problem in Sverdlovsk), and favoritism/cronyism (a problem in Novgorod) show wide variation and may merit further investigation. This report on administrative barriers to investment considers land and construction issues directly, and corruption and favoritism indirectly, but it does not examine the judiciary or the financial sector.

38. Another interesting feature is the difference in perception between the federal government and regional/local governments and between each of the regional governments. The FIAS survey asked enterprises whether they perceive the state as helpful or unhelpful in doing business. In general, enterprises had stronger opinions (both favorable and unfavorable) of their regional administration than the federal government, which is a common reaction throughout the world (Figures 1.8 and 1.9).

39. Examining the perception of the different regional governments more closely, the survey shows significant variation between the five regions. Both Novgorod and Leningrad received more favorable responses than unfavorable ones. Severdlovsk displayed a wide divergence of views, which may indicate a significant problem with an “un-level playing field.” The responses for St. Petersburg Oblast were largely unfavorable (Figure 1.9) and from Tomsk, they were almost evenly divided.

40. The FIAS survey of Russia was a simplified version of a larger survey instrument, the World Business Environment Survey, which was completed in early 2000 and includes responses from 80 countries. In Russia, the survey also found “excessive tax and regulations” at the top of the list of complaints by businesses (Figure 1.10).

41. Another related survey, the 1999 Business Environment and Enterprise Performance Survey, focused on transition economies, including Russia. These data show that firms’ perceptions of governance obstacles to business in Russia are in most cases worse than average for most of Eastern Europe and states of the former Soviet Union. In particular, Russia ranks significantly worse in the areas of “policy instability” and “tax and regulation” (Figure 1.11).

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42. Obstacles such as administrative barriers to investment have been studied in many countries, not only by FIAS, but by other organizations as well (inspired by the work of Dr. Hernando de Soto in Peru).20 A recent study by economists at the World Bank and Harvard University concluded that countries with heavier regulation of entry have higher corruption and larger unofficial economies, but not better quality of public or private goods as a result of the regulation (which is the usual justification for such regulations).21 According to the definitions of the researchers, Russia has 16 separate entry procedures (excluding, for example, access to land and any special licenses). This places Russia at 72 out of 75 countries studied. In terms of official cost and time requirements, it ranks roughly in the middle (however, the assessment does not take into account “unofficial” costs and delays beyond the official time requirements). The study showed that wealthier, market-oriented economies have few regulations and administrative barriers to investment, higher quality public and private goods, lower corruption, and smaller unofficial economies than the developing and transition economies, and concluded that most of the extra regulations imposed on business start-ups in developing and transition economies were not serving their intended purpose.

20 De Soto, Hernando. The Other Path.. New York: Harper and Row; 1990. 21 Djankov, Simeon, Rafael La Porta, Florencio Lopex de Silanes, and Andrei Shleifer. The Regulation of Entry. National Bureau of Economic Research Working Paper 7892; 2000.

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Figure 1.7

Worse than Better than average

-30 -20 -10 0 10 20 30 40

10. High tax rates


22. Corruption in publicsector

20. Inflation

13. Access to financing ingeneral

21. Functioning of thejudiciary


23. Corruption in privatesector



Novgorod Oblast St. PetersburgLeningrad Oblast Sverdlovsk Oblast Tomsk Oblast

Difference Between the Average and Regional Numbers (percent = [region/average-1]*100)(for the top 10 obstacles)

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- 4 5 - 3 0 - 1 5 0 1 5 3 0 4 5- 4 5 - 3 0 - 1 5 0 1 5 3 0 4 5

V e r y h e l p f u l M i l d l y h e l p f u l V e r y u n h e l p f u l M i l d l y u n h e l p f u lP e r c e n t o f r e s p o n d e n t s d e s c r i b i n g G o v e r n m e n t a s :

Figure 1.9 Perception of relations between Regional/local Government and Private Companies

Figure 1.8 Perception of relations between Federal Government and Private Companies

N o v g o r o d O b l a s t '

S t . P e t e r s b u r g

L e n i n g r a d O b l a s t '

S v e r d l o v s k O b l a s t '

T o m s k O b l a s t '

A v e r . o f 5 r e g i o n s

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Figure 1.10

W B E S S u r v e y o f O b s ta c le s to In v e s tm e n t in R u s s ia

0 .0 00 .5 01 .0 01 .5 02 .0 02 .5 03 .0 03 .5 04 .0 0

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Figure 1.11 Governance Obstacle to Business

Excessive Taxes and

Street

Organized

Malfunctioning Policy

Inflation

Financial

Russia

Eastern Europe Average

Former Soviet Union Average

Governance Obstacles to Business

Note: The thick blue line represents the severity of each obstacle for business performance in the country you chose. Distance from the origin indicates higher obstacles, and thus poorer governance performance on each dimenThe thin green line represents the average severity of each obstacle in the countries in the former Soviet Union. The thin red line indicates the average severity of each obstacle for the countries in Eastern Europe (outside the former Soviet Union).

Results are based on the firms' perceptions of how much each of these factors affect their performance. Results are scaled from 0 (no obstacle, least negative influence on the firm) to 1 (serious obstacle, maximum negative influence on the firm).

Based on relative rating of each obstacle by the country's enterprises

Source: "Seize the State, Seize the Day: State Capture, Corruption, and Influence in Transition" (PRWP 2444, http://www.worldbank.org/wbi/governance/).

Estimates are subject to a margin of error, and thus precise rankings ought not tobe inferred. These charts are based on research in progress, and in no way reflect the official position of the World Bank, its Executive Directors, or the countries they represent.

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Table 1.1. START UP PROCEDURES

FEDERAL REGIONS PROCESS DURATION FEES INSTITUTION NOVGOROD ST. PETERSBURG V. LENIN

GRAD SVERDLOVSK TOMSK

1. Invitation forsingle-entry business visa

10 days R 167 Ministry of Foreign Affairs

Must go to St. Petersburg or Pskov

Ministry of Foreign Affairs has a satellite private firm for issuing invitations

Must go to St. Petersburg

Available in Yekaterinburg

2. Invitation formultiple entry business visa

25 days R 1, 503 Ministry of Foreign Affairs

Must go to St. Petersburg or Pskov

Ministry of Foreign Affairs has a satellite private firm for issuing invitations

Must go to St. Petersburg

Available in Yekaterinburg

Institution: Technical Office of MFA at Regional Administration or MFA Office in Barnaul. Duration: Additional time 2-3 days for papers transportation.

3. Receiving visa 2 weeks $ 70 Russian consulate in foreign country

Prices are given for Russian Consulates in USA. IN other countries, prices may vary.

4. Urgent businessvisa

2 days $ 150 Russian consulate in foreign country


5. Multiple-entrybusiness visa

No less than 3 days

$ 200 Russian consulate in foreign country


6. Urgent multiple-entry business visa

1 day $ 200 Russian consulate in foreign country


7. Foreigner’sregistration in Russia

1 day R 21 OVRIR Foreign visitor must register within 3 days of arrival in Russia. NOTE: In Tomsk region foreigner needs to have registration before accommodation in hotel.

8. Opening of the banking account type И

10 days No An authorized bank If the foreign investor pays his equity capital in rubles he needs to open the investment account of type “I”.

9. Payment of the charter capital

1 day Equity An authorized bank The payment of equity capital through the authorized bank is made if the equity capital is formed of money contribution.

10. Registration ofcompany with domestic investments

Not uniform (see regions)


Regional and Municipal Bodies

Institution: Municipal; Separate body in each municipality of the region (in Novgorod - City Registration Department; in other municipalities - can be the Economic committee). Duration: Novgorod – Max. 30 (usually 7) days, remote

Institution: Regional; Registration Chamber of St.Petersburg. Duration: 3 days Fees: 5 MROT if equity capital is less than 250 MROT; 2% of equity capital if it is more than 250 MROT

Institution: Regional; Registration Chamber of Leningrad region or its branches in municipalities. Duration: 3 days Fees: 10 MROT if equity capital is less than 250 MROT; 5 MROT + 2% of

Institution: Municipal; Separate body in each municipality of the region (in Yekaterinburg – City Registration Department with branches in city districts). Duration: Max. 30 days (usually 15 in Ekaterinburg, 7-15 in remote municipalities). Fees:

Institution: Municipal; Separate body in each municipality of the region (in Tomsk city – City Registration chamber, in other municipalities – a designated department). Duration: Max. 30 days (usually 7 days). Fees: 10 MROT

1



municipalities - 3 days. Fees: 8 MROT for closed JSC and LLC; 10 MROT for open JSC.

equity capital if it is more.

15 MROT

11. Registration of the company with foreign investments (with equity capital less than R 100,000)



Regional Institution: Economic Committee of the Administration of Novgorod Region Duration: 3 days Fees: 8 MROT for closed JSC and LLC; 10 MROT for open JSC.

Institution: Registration Chamber of St.Petersburg Duration: 30 days Fees: 1,5 MROT for joint ventures; 200$ for 100% FDI companies.

Institution: Registration Chamber of Leningrad Region (central bureau) Duration: 30 days (can be less) Fees: 10 MROT if equity capital is less than 250 MROT; 5 MROT + 2% of the equity capital if it exceeds 250 MROT.

Institution: Registration department of Ministry of Economy of Sverdlovsk region Duration: 30 (20) days Fees: 15 MROT – registration fee, 2 MROT – fee for including into state register

Institution: Foreign Economic Relations Department of the Regional Administration Duration: 30 (1-3) days Fees: 10 MROT – registration fee.

12. Registration ofamendments to the Charter of company



Duration: Duration: Max. 30 (usually 3 days) in Novgorod; 3 (1-2) days in districts and for companies with foreign investments. Fees: 1 MROT

30 days Fees: 0,5 MROT;

Duration: 30 days (can be less, e.g. for address change – 1 day). Fees: 5 MROT

Duration: 30 days Fees: Free of charge.

Duration: Max. 30 (usually 5 days) in Tomsk city; 3 (1-2) days in districts and for companies with foreign investments. Fees: 10 MROT for companies with domestic investment. 5 MROT for companies with foreign investments.

2



13. Registration of the company with foreign investments (with equity capital more than R 100,000)

21 day; Expedited service - 7 days.

TOTAL:

R 1120 from 01.01.2001, (for expedited registration- R 1269.04 before 01.01.2001; R 1520 from 01.01.2001) Registration fee: 4 MROT (8 MROT for expedited registration). Fee for publication in "SRC Bulletin": 3 MROT + 20% VAT. Fee for inclusion in to the database of SRC: 3 MROT + 20% VAT

State Registration Chamber of Ministry of Justice (located in Moscow)

14. Registration ofamendments to the charter of company with foreign investments (with equity capital more than R 100,000)

21 day; Expedited service - 7 days.

TOTAL: R 768.10 before 01.01.2001; R 920 from 01.01.2001

Registration fee: 2 MROT. Fee for publication in "SRC Bulletin": 3 MROT + 20% VAT. Fee for inclusion in to the database of SRC: 3 MROT + 20% VAT


15. Registration inTax Inspectorate

5 days No State Tax Inspectorate. No federal law on the procedure of registration; but procedures are standard.

Must take place within 10 days of company registration.

16. Registration inPension Fund

1 day No Pension Fund Must take place within 30 days of company registration.

17. Registration withCompulsory Medical Insurance

1 day No Fund of Compulsory Medical Insurance


18. Registration atEmployment Fund

1 day No Employment Fund Must take place within 30 days of company registration.

19. Registration atSocial Insurance Fund

1 day No Fund of Social Insurance


R 935.08 before 01.01.2001;

3



20. Getting taxincentives

1 month No There are some tax incentives on Federal level on Profit tax, VAT and other taxes. They are automatic and declared in Federal Laws (See report)

Tax incentives: Property Tax; VAT; all local taxes; incentive on Profit tax was cancelled. The problem of incentive on profit tax of the organizations that were previously granted tax incentive has not been solved. It takes a month to get the resolution on incentives.

The tax incentives are automatic. There is an incentive on profit tax. There is also incentive on property tax. They are automatic. Other tax incentives are only for very big investors, and are not available after 2000. There are also tax incentives for producers of excise goods.

There are very few incentives. Availability of incentives changes each fiscal year. Approval procedures are discretionary.

Tax incentives on property tax, other regional/ local taxes. Duma approval required. Expertise appointed by Olbast administration.

21. Accreditation ofthe representative offices of foreign companies

21 day; Expedited service - 7 days. (see regions for extra requirements)

For 1 year - 1000$ For 2 years - 2000$ For 3 years - 2500$ (see regions for extra require-ments)


Institution: Novgorod Territorial Division of the Russian Chamber of Commerce and Industry (acts as intermediary and takes documents to Moscow SRC). Duration: 3 days to get approval in Economic Committee of region; 21 day to register. Fees: From 1700$ per 1 year of accreditation to 3700$ per 3 years

Institution: Registration Chamber provides approval, but registration has to be made in Moscow in SRC or RCCI. Duration: 30 days to get approval; 21 day to register. Fees: Approval – free; Accreditation - For 1 year - 1000$ For 2 years - 2000$ For 3 years - 2500$

Institution: Registration Chamber provides approval, but registration has to be made in Moscow in SRC or RCCI. Duration: 30 days to get approval; 21 day to register. Fees: Approval – free; Accreditation - For 1 year - 1000$ For 2 years - 2000$ For 3 years - 2500$

Institution: Ministry of Economy provides approval, but registration has to be made in Moscow in SRC or CCI. Duration: 30 days to get approval; 21 day to register. Fees: Approval – free; Accreditation - For 1 year - 1000$ For 2 years - 2000$ For 3 years - 2500$

Institution: Foreign Economic Relations Department provides approval, but registration has to be made in Moscow in SRC or CCI. Duration: 30 (1-3) days Fees: Approval – free; Accreditation For 1 year - 1000$ For 2 years - 2000$ For 3 years - 2500$

4



22. Registration withthe State Committee for Statistics



Regional Divisions of the State Committee for Statistics

Duration-Fees:

5 days – 67,5 rubles 1 day – 84 rubles 3 hours – 135 rubles

Institution:

Statistics Committee or its branches in districts (the same body for two regions) Duration-Fees:

5 days – 63 rubles 1 day – 113 rubles 3 hours – 189 rubles

Duration-Fees: Practical time is around 1 hour, fee – 190 rubles.

Duration-Fees: Practical time: around 1 hour; fee: R178 (x2 in the northern districts of the region).

23. Registration ofissue of shares for closed or open JSCs

Registration of shares issue – 30 days; Registration of report on shares issue – 15 days.

No processing fee. However, companies are subject to a special tax for the shares issue at a rate of 0,8% of shares value.

Territorial Divisions of the FCSM

See Federal. See Federal. See Federal. See Federal. See Federal.

24. Receivingclearance from the MAP

30 (max 45) days for viewing petition; 15 days to raise objections to notification.

Petition – 150 MROT; Notification-free.

Regional Division of MAP


25. Licensing ofconstruction activities

30 days by law By law Not more than 10 MROT (before 01.01.2001 – RUR 834.9 ~USD30;

from 01.01.2001 RUR 1000 ~USD 37)

See Regions Institution: Construction licensing center, subordinate to the Architecture and Urban Construction Department of the Novgorod region administration Time required in practice:

1.5–2 months to receive license Fees in practice (depends on the

b f

Institution: St. Petersburg licensing center, structural division of the St. Petersburg administration Time required in practice:

1–1.5 months to receive license Fees in practice (depends on the number of licensed works):

R9,000

Institution: Leningrad region construction licensing center. The licensing center is in charge of the entire northwest territory, can also issue a federal license. Time required in practice:

2 months to receive license Fees in practice

Institution: Licensing commission, which consists of civil servants and private sector representatives, headed by the chief architect of the Sverdlovsk region. The licensing center prepares assessments on applicants for the commission Time required in practice:

Up to 3 months to receive license Fees in practice

Institution: The Construction Activity Licensing Center, in the Tomsk Oblast Licensing Chamber. Each license has a list of works and services which can be done under this license (prepared by Gosstroi). Time required in practice:

2 – 3 weeks. Fees in practice (depends on the number of licensed works):

5



number oflicensed works):

(max. R15,000 for all 20 types of works)

R60–120 per employee for a 1-year license Additional requirements: The director of the company has to have relevant professional education of constructor, architect, engineer, etc.; hiring professionals is not enough Pre-licensing expertise of the applicants on the conformity with the requirements 100% prelicensing expertise Fees for expertise Included in the fee for license Term of license 3 years by law Usually for 1 year; 3 years for well-known companies. Registration of license issued in other region:

Registration is extremely problematic. Fee is ~R800. Attitude

Additional require-ments: Need to obtain additional license for historical renovation works from the Inspection for Preservation of Historical Monuments. Extremely difficult for Russian companies and almost impossible for foreign companies. Pre-licensing expertise of the applicants on the conformity with the requirements 100% prelicensing expertise. Conducted either by specialists of the licensing center or accredited specialized companies Fees for expertise On average about R4,000 Term of license 3 years by law One year for new companies; more than 90% of licenses issued for 3 years. Registration of license issued in other region: Registration is automatic and free of charge

(depends on the number oflicensed works):

(depends on the number of licensed works):

R22,000 Additional requirements: To renew a license a company must present recommendation letters from its clients, addressed to the licensing center Pre-licensing expertise of the applicants on the conformity with the require-ments Most companies undergo prelicensing expertise, it takes 3–4 weeks Fees for expertise On average, R2,000–R3,000 Term of license 3 years by law Usually for 1 year; 3 years for well-known companies Registration of license issued in other region: Registration can be problematic. Fee is ~R130.

On average, R8,000 Additional require-ments: To renew a license a company must present recommendation letters from its clients, addressed to the licensing center Pre-licensing expertise of the applicants on the conformity with the requirements 100% prelicensing expertise Fees for expertise Included in the fee for license Term of license 3 years by law One year for new companies; 3 or even 5 years for well-known companies Registration of license issued in other region: Registration is automatic only for companies from regions that are parties to the URAL agreement on reciprocity. Attitude Indifferent.

3 MROT for applications and 10 MROT for each license. Additional requirements: Diversified company engaged in construction needs at least one of its senior managers to be a construction specialist; for a company that is specialized in construction, the director has to be a construction specialist with appropriate training and experience. Pre-licensing expertise of the applicants on the conformity with the requirements 100% prelicensing expertise Fees for expertise Included in the fee for license Term of license 3 years by law 3 or even 5 years for well-known companies Registration of license issued in other region: Free/automatic registration of companies with Federal license; easy registration of member of “Siberian Agreement.” Attitude Businesslike.

6



Unreformed approach.

charge Attitude Cooperative, open-minded.

Attitude Not helpful

26. Licensing oftransportation activities

30 days by law 3MROT + 0,7MROT per vehicle per year - limited license (for company’s own transportation purposes within Russia); 3MROT + 1,4MROT per vehicle per year - standard license (with in Russia commercial transportation); 12MROT + 6MROT per vehicle per year - international license. (see regions for extra requirements)

Regional Divisions of the Transportation Inspection

Time required in practice:

2-3 weeks to receive license, to renew – less than 1 week; 1-2 days to get license cards. Additional Fees:

0,1 MROT for application and R 20 per licensing card. Contact points: 3 branches in the region, where company can submit documents. License is issued in the central office. Registration of license issued in other region: Required. Registration is automatic.


2 – 3 weeks to receive license. Additional Fees:

R 50 per licensing card Contact points: 1 application point in the city. Registration of license issued in other region: Required. Registration is automatic.


1-2 weeks to receive license, to renew ~ 1 week. Additional Fees:

NO Contact points: 12 branches in districts, which issue licenses, except for international license. Registration of license issued in other region: Required. Registration is automatic.


2 – 3 weeks to receive license. Additional Fees:

NO Contact points: 24 branches in districts, which issue licenses, except for international license. Registration of license issued in other region: Not required

Time required in practice: License is issued the same day Additional Fees: 0,5 – 6 MROT per licensing card. Contact points: 1 application point in the region Registration of license issued in other region: Not required

27. Licensing ofinternet companies

60 days. The reported average time by companies is 3 months (includes preparation of documents and review at the Ministry).

40 MROT per license per region.

Ministry of Communication and Information Systems (located in Moscow)


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