Moscow City and Moscow Oblast The following materials were written by Olga Ananina and Yevgeny Schukin, BISNIS Representatives in Moscow, and are available via the United States Department of Commerce Business Information Service for the Newly Independent States (BISNIS) Web Site at http://www.bisnis.doc.gov/bisnis/COUNTRY/9906regov.htm and http://www.bisnis.doc.gov/bisnis/country/9910moscow.htm. Moscow City This report profiles the largest and most developed city in Russia, Moscow. Moscow attracts investor attention with its advanced infrastructure, large population, and great number of business opportunities. The report will focus on business infrastructure, investment legislation, industry highlights, future investment projects, as well as ongoing projects and key contacts. Activities by the foreign business community will also be reviewed. To find additional information about particular industry in Moscow, refer to other FCS reports available on the Internet. General Moscow is Russia's capital and largest city. It covers the area of over 1,000 sq.km. (about the size of Dallas, TX) and is the 21st largest city in the world with 9.3 million people. Its total workforce numbers over 5 million (or 8% of Russia's total employment). Pensioners account for 24% for the population, and the population under age 16 is 18%. Unemployment is reportedly the lowest in Russia at 2.2%. The city's budget allocates 40% of its expenditures for social purposes. As a national capital, Moscow concentrates government, financial, and economic structures, as well as foreign embassies, representative offices of international companies and banks, and all other advantages of the capital, which makes it attractive to investors. It is also a transportation and telecommunications hub. The city has absorbed most of Russia's foreign direct investment (nearly 67% of Russia's FDI has been invested in Moscow since 1994); The city collects as much as 80 percent of Russia's taxes and contributes about 30 percent of the Federal budget; As a major financial, administrative and representative city, Moscow accumulates nearly 85% of all Russia's financial resources; Moscow is also a huge consumer market, accounting for nearly 28% of total Russian goods turnover. Moscow is the largest scientific and educational center in Russia. Its higher education system includes 86 colleges, institutes, academies and universities enrolling over 500,000 students. Moscow State University, Moscow State Technical University (Bauman Technical University), Moscow Aviation Institute, the Russian Academy of Civil Services, and the Finance Academy are among the largest educational institutions in Russia. Government Moscow city administration is headed by the Mayor (currently Yuri Luzhkov), who also holds the Prime-Minister position of the City government. Moscow is divided into 10 administrative districts that are further divided into 128 raions. Each raion has its local elected authority (Uprava). The Moscow city Duma, the city's legislative assembly, consists of 35 deputies. The Duma, the mayor, and the vice-mayor of the city of Moscow are elected for a four year term. The next mayoral election will take place in December 1999; a new city Duma will be elected in 2001. Business Infrastructure Moscow as Russia's capital accumulates most of the country's financial and informational flows, and is by many standards the most convenient city in Russia in terms of doing business. It is at the intersection of the main transportation routes within the country and abroad. Many foreign companies start their businesses in Moscow, where they can establish necessary government contacts and receive support and informational assistance, and then expand to other regions of Russia. Western businessmen in Moscow can access modern telecommunications, hotels, westernized office space as well as a developed residential housing market and a diversity of restaurants and cultural life. Moscow city's business infrastructure includes: 5 airports (including Sheremetevo 2, international) hosting 53 different airlines; train stations, with a railroad network of 509 km within Moscow; 3 inland river ports with ocean access via canals to the Volga, St. Petersburg and the Black Sea; a subway system among the largest and most reliable in the world carrying 9.5 million people daily; a road network totaling 4,650 km. Nearly 200 hotels, of which 15 have high Western-class rating, including 3 Marriott hotels, the National, the Sheraton Palace Hotel, the Radisson, the Metropol and others. Office Space There are a dozen major business centers that provide office space throughout Moscow. Moscow's 1.2 million square meters of office space, however, is low compared with, for example, 40.7 million sq.m in Paris. Roughly 12 percent of the space is of international standards. According to estimates, approximately 150,000 sq.m (or 10 percent) of office space is available in 30 office properties in central Moscow (within and just outside the Garden Ring). Currently, the Moscow office market is a tenant's one, and prices have declined by 30-50 percent after the crisis to less than $600 per sq.m a year, but still more expensive than those in Paris and Frankfurt ($500/sq.m/yr). Telecommunications The City phone market is served primarily by Moscow City Telephone Network (MGTS), the major Russian cable provider. Most foreign companies in Moscow, though, prefer private digital overlay providers, such as Comstar, DirectNet, Combelga, Sovintel, and Global One, rather than MGTS. The cellular phone market in Moscow is divided among three major operators: BeeLine (D-AMPS, GSM-800, GSM-1800 standard), Mobile Telephone network (MTS) (GSM-900 and GSM-1800 standards) and Moscow Cellular Communications (MSS) (NMT-450 standard, SOTEL Federal network). Altogether they offer 24 tariff plans for different subscribers. Banking And Finance Moscow has attracted 60% of Russian banks and over 80% of their capital. There were some 1,372 banks in Moscow in 1998, among which 36 were banks with foreign capital. The 1998 financial crisis shook Russia's banking system, spurring foreign companies to transfer their accounts to banks with more credibility. U.S. banks, such as Chase Manhattan, Citibank, Bank of America and Bank of New York provide banking services in Moscow but chiefly to large corporate clients. VISA, MasterCard, EuroCard credit and debit cards are also accepted by a limited number of Russian banks. The insurance market in Moscow is served by only a small number of foreign companies due to current legislative limitations. Foreign insurance companies are not allowed to provide life insurance, mandatory medical insurance, or to be engaged in government-authorized insurance programs. Currently, foreign insurers are barred from holding more than 49 percent of the charter capital of insurance companies in Russia. The largest American insurer on the market is AIG-Russia. Russia's three major securities trading floors are in Moscow: the Moscow Interbank Currency Exchange, the Moscow International Stock Exchange and the Moscow Central Stock Exchange, as well as the Russian Trading System, an OTC stock market. Moscow's share of Russia's stock trading turnover is around 95%. Commodities are traded at the Metal Exchange, the International Food Product Exchange, and Moscow Autoexchange. Customs Moscow customs consists of 4 city local authorities and 7 Moscow regional authorities, that include 47 customs posts and 143 offices. Moscow Customs receives over 30% of Russia's total declarations, more than any other region of Russia. Industry Moscow is the largest industrial center of Russia. Lack of locally available raw materials is compensated for by good transportation and by the concentration of major enterprises in aviation, space, radio-electronic and automotive industries, as well as in light and food processing industries, metallurgy, power generation, chemical industries and construction. Moscow City Financial Management (MCFM) Co., on behalf of the Moscow City Government holds stakes in more than 700 companies in Russia, including over 500 in Moscow. Owning the companies means providing assistance to them, so the 1999 Moscow city budget includes 1.36 billion rubles ($60 million) allocated for city-owned industrial enterprises. Power Generation. According to the Moscow Statistics Committee, this sector was the most profitable industry in Moscow in 1998 ( Return on Investments is as much as 24%). The industry maintains output at 1992 levels, has one of the lowest asset depreciation ratios (under 50%), and employs 8% of Moscow workforce. The salary level in the sector is twice the city's average. Mosenergo (the city holds a third of the stake, and RAO UES, the Russian State Power monopoly, the city holds 50.87%) is the major supplier of power in Moscow, controlling more than 20 power stations and substations in the city of Moscow. Food-processing, the most developed industry sector in Moscow, is the only industry that has fared well in the post-Soviet years. Production is at 75.7% to 1992 levels. The industry consists of 130 big and medium-sized companies, including meat-processing, dairies, distillers, confectioneries, bakeries, breweries and others, that employ a total of 64,000 people. They produced nearly 30% of Moscow regional output in 1998, doubled from 15% in 1992. The industry's profitability is 14.2%, one of the highest among Moscow's industrial sectors. Industry leaders include companies that managed to replace their outdated equipment using cheap ruble credits in the early 90-s, such as: Krasny Oktyabr, Russia's largest confectionery; Krystal, Russia's largest distiller and producer of the famous Stolichnaya vodka; Ochakovo brewery and non-alcoholic beverage producer; the Cherkizovsky food-processing company; and the Lianosovsky dairy and juice producer. Construction was a boom sector in Moscow for the most of the 1990s. Both municipal and private house constructions led the market through the period, since the great demand made it lucrative. Moscow municipal administration was at the time the largest customer. Technology and locally-produced building materials are far from compliance with international standards. There are 492 large and medium companies, as well as 23,000 small companies in the sector, employing 730,000 people (or over 14% of Moscow's workforce). Unlike Turkish and Scandinavian companies, U.S. companies are not widely represented in the sector. Auto Manufacturing. Among 330 industrial companies, AZLK Moskvich, a car manufacturer, and AMO ZIL, a truck, light truck and refrigerator producer, are the largest ones. Due to excess capacity, a bloated workforce and old equipment, inefficiency reigns, and output in the industry in 1998 was 91.1% less than in 1990. After both companies were acquired by the Moscow Government in the mid-1997, their production more than doubled in 1998. Although the companies are technically insolvent, City Hall is unwilling to bankrupt such industrial giants, since it would lead to dramatic layoffs (ZIL employs 24,000 workers, while AZLK gives jobs to 12,000 workers). Moreover, it would affect companies' suppliers in the regions-ZIL has nearly 1,500 suppliers, while AZLK receives auto parts from over a thousand companies in Russia. Recently, both companies have achieved significant improvements. AZLK has initiated a project with Renault, which at the first stages supplied its engines and then decided to assemble the Megane brand at AZLK's facilities (the first Megane was made in May, 1999). ZIL is pursuing an agreement with either Volvo or Renault to assemble their trucks at ZIL's premises. Machinery contributes 21.7% to the city output, less than a half as much as in 1992. Light industry includes 129 large and medium-sized enterprises and employs 40,000 people. Before 1992 the industry contributed a significant portion of regional output (17%), but has since failed to compete with cheap imports. The total decrease in production was 83.6% from 1992 to 1997, and 40% of companies that still work are insolvent. Nevertheless, the Moscow city government is striving to sustain the sector by granting tax and rent breaks, and subsidizing them from its budget. The crisis is caused by depreciated equipment (over 50%), poor management, and, consequently, low productivity. Besides, many companies lack raw materials they used to purchase in Kazakhstan, Uzbekistan and other NIS countries. Tourism. Since the Iron Curtain was lifted, many foreigners have flooded in to explore the unknown country. The first place they usually came to was Moscow. At first, the city was very unprepared to meet tourist's expectations of convenience. Nowadays, Moscow has become a more European-level city with numerous of luxury hotels, customized restaurants, modern telecommunication and transportation utilities, renovated and built-up historical and cultural sites, as well as tourist agencies and currency exchanges. Top-flight hotels, however, remain among Europe's most expensive. Developing hotels and tourism and recreation industry is a keen priority for the Moscow government. The tourist infrastructure includes 179 Moscow hotels, 4,500 travel agencies, 13 insurance companies and 16 motor vehicle fleets. Moscow welcomed over 2.6 million visitors in 1998, which accounted for 70% of total Russia's guests. Altogether, they spend over $2.5 billion annually. Americans traveling to Russia contributed a fairly modest 5.8% of that total. The foreign community permanently living in Moscow, is estimated at around 50,000. The scientific and industrial sector in Moscow area is represented by 460 former defense enterprises, or 40% of Russia's defense enterprises and more than 70% of Russia's scientific potential (in terms of people involved). The sector also includes research institutes and design bureaus that invent new technologies, materials and devices and help to produce precision tools and instruments, communication equipment, as well as goods for petrochemical, atomic, space and aviation industries and consumer's goods (including household equipment). The companies in the sector are well equipped, have highly qualified personnel and testing sites and laboratories to assimilate high technologies. Among the companies are the Sukhoi, Tupolev, and MAPO MIG aircraft design bureaus; the Zelenograd technological park, which includes mainly high-technology companies, research institutes in electronics, and precision machinery, like Micron, Proton, and many others. Small Business. Moscow is home to 176,400 or 20.2% of all Russia's small businesses, according to Goskomstat, the State Statistics Committee. Half of small businesses operate in the consumer market or provide services and account for 44% of all retail turnover and 73% of all housekeeping services. A third of small companies are active in industrial sector, construction and scientific research. Within the small business community, 11,000 have foreign participation, employing more than 60,000 people and generating nearly 7% of total small business output of products and services. Small business employs approximately 1.1 million people and contributes up to 15.3% of the city's budget revenues. Consumer Market The multi-million population of the megapolis attracts both domestic and Western producers, who could find quick turnover or test consumers' demand for their new brands in a market where almost 30% of all goods in Russia are sold. Moscow is able to absorb a tremendous quantity of goods and services. Solid day-to-day demand enables producers from the regions to benefit from higher margins. Russia's regional companies target their production to Moscow consumers' habits. Salaries in Moscow are generally twice as high as Russia's average, so higher-cost products can find buyers. Almost 20% of the city's tax revenues comes from retail markets. Fruits and vegetables are normally supplied by areas within a three-four hours' driving distance from the city. But other regions and countries often take advantage of Moscow's large consumer market. Although local specialized food markets offer cheap food stuff (usually 15-20% less than in the stores), the Moscow city Government is trying to make over a hundred markets more sophisticated by organizing trading sites, banning spontaneous selling, and signing agreements with major agricultural regions for centralized supplies of food to the city. The average Moscow family spends 43% of its income to buy food (up from 34.0% in 1997), and over 40% for consumer products. In 1998 families' incomes were affected by the financial crisis, a per capita monthly income of over $250 was earned by 37.1% of families, down from 44.7% in 1997. Investment Climate Moscow has attracted the majority of the foreign investors in Russia. According to the Moscow Registration Chamber and Moscow Migration Service, over 15,000 representative offices of international companies from more than 130 countries, as well as 12,000 foreigners are currently registered in Moscow for tax purposes. Annually, more than 2,000 companies join the Moscow business community. Foreign direct investments have been increasing over the years, from $4 billion in 1996 to $9 billion and $8 billion in 1997 and 1998, respectively. The seven biggest investor countries (France, Germany ,the US, the UK, Cyprus, Switzerland, and the Netherlands, accounted for 96.7% of all investments in Moscow for 1998. Statistically registered investments to Moscow can be accepted with an assumption that most Russian as well as foreign companies have their Russian headquarters in Moscow. Additionally, Moscow is borrowing money from Western financial institutions, normally, no more than 15% of budget income at any time. Moscow has made 7 municipal bond issues totaling $ 2.7 billion. So far, Moscow has met all its debt obligations to foreign creditors. Moscow's current credit rating by Standard & Poors is "CCC-" with negative outlook for the long term, and 'C' for short term funds. Moscow has its own Currency Reserve fund that accumulates gold and precious metals, to help financing of its projects and pay off its loans and credits. Moscow authorities have formed a legal framework to promote foreign investment in the city. It provides: that foreign companies can purchase rights for the long-term lease of land plots. The maximum lease period is 49 years with a possible prolongation of the lease agreement for another 49 years; A city law on foreign investment is now being drafted and may provide for the granting of additional benefits to investors out of the city budget; The city government encourages and supports foreign investments in the form of partnerships (currently the city administration's investment portfolio includes 420 promising joint-stock companies); Moscow has the right to attract credits with guarantees provided by its budget; and as the major municipal property owner, it can secure investments and credits by its property; In addition, the city government can grant significant tax breaks to investment projects that create facilities deemed important to the city. The Moscow administration offers tax credits. Usually, investors enjoy a tax holiday for four years. Foreign business. Foreign businesses have invested mainly in business infrastructure development, such as construction of modern trade outlets, restaurants, hotels, improving the financial system, telecommunications, and informational and consulting services. Most western direct investors have been large companies that could afford the risk of the initial investments. There are over 2,000 U.S. major companies registered in Moscow, and total U.S. FDI into Moscow to date has accounted to more than 28% of total FDI. As noted, many companies only have their head offices in Moscow, while production sites are in the regions, especially for oil and gas companies. Among others the most active include Procter & Gamble, Caterpillar, PepsiCo, Coca-Cola, Johnson & Johnson, Philip Morris, Mars Inc., Cargill, and others. Among U.S. companies, that have invested into the city of Moscow and/or have their production premises or major business are McDonald's ( $180 million for construction of its over 30 site Moscow network), Western Tobacco Investments ($85 million for Ligett-Dukat joint cigarette factory), Global USA ( invested $50 million for the 7 supermarket chain), Coca-Cola, and Trinity Motors. American companies providing services include UPS, DHL, the big five auditing, consulting and accounting firms, up to 50 legal companies and their associates, as well as banks and investment companies. Due to financial crisis in August 1998, many foreign companies that had active operations in Russia experienced hard times. Companies that were highly dependent on inputs from abroad suffered losses. Those that have left Moscow so far include: Britain's Del Monte International, fruit juice producer, who left exposed to the drop in Russian purchasing power by weak local production. Tricon Global Restaurants (Pizza Hut's Moscow franchise) and Dunkin' Donuts (8 outlets) have left Moscow also blaming the 1998 economic downturn, with higher costs for raw materials imports. Hershey's has closed its office, although its products continue to be sold here. Foreign Trade The city of Moscow, as well as other Russian regions, is a sovereign trading partner. For the last 4 years it had annual trade turnover between $24 and $30 billion. The financial crisis caused 20% decrease of trade turnover to $24.4 billion in 1998 compared to 1997. Imports, fell 21.6% to $13.4 billion, more than exports with 15.7% decline to $11.0 billion. The trade turnover with NIS countries has halved from 1995 through 1998 to $3.2 billion, with positive trade balance of $1.1 billion. According to Moscow customs, key Moscow export goods include oil, diesel fuel, bearings, cars, trucks and electric equipment. Imports are more customer-oriented, and include meat, butter, citrus fruits, vegetable oil, sugar, alcoholic beverages, tobacco, medicines, clothes and textiles, leather shoes, ferrous metals, electric machines and equipment. Major Projects Moscow City has initiated numerous construction projects to improve its current infrastructure. The most significant among them include: 1. "Moscow-City," the most ambitious, an $8 billion International Business Center project. The preliminary work and the first stage of the construction has been completed. It is planned to finish the construction by 2020. The whole project is divided into several separate subprojects for construction: Office complex on Taras Shevchenko embankment; Park-city; the Center; Aquapark; Power plant; Mini-metro; and Rapid transit railway system "Sheremetyevo - Moscow-City". The City administration invites foreign investors to participate in the project giving substantial preferences, tax breaks (including income and property taxes) and beneficial lending agreements (with the right to buy property within the Center) to participants. The project is supervised by Moscow International Business Association (MIBA). 2. Reconstruction of Gostiny Dvor, a trade center, which will include hotel accommodations, office space and other business facilities. As of April 1, 1999 $ 251.4 million have been spent for the project. Total investments required amounts to $150 million. The Moscow Municipal Loan Committee (Moscomzaim) holds 100% stake in the project. 3. Kursky Square, a retail and entertainment center, will cover 1.85 hectares of land near Kursky railway station, a main transportation hub in Moscow. The construction is under development and total investments are as much as $150 million. Total space available for renting will be 44,920 sq.m. 4. The City Government has planned to renovate a number of the city's hotels, including Rossiya hotel for approximately $235 million, the Moskva hotel for $240 million, the Peking complex for $200 million, Peter I (former Budapest) hotel for $100 million, as well as other hotels including Ostankino, Tourist, and Volga hotel facilities. Moscow Oblast Politically stable Moscow Oblast offers a unique mix of opportunities to local companies and foreign investors. Although the oblast surrounds Russia's capital city, it generally does not have prices, rent or production costs as high as those found in the city itself. Yet it is close enough to benefit from the capital in several ways. Companies operating in the oblast can take advantage of lower production costs while maintaining access to the capital's consumer market, which is ready to absorb virtually anything. In the city and the oblast, companies do not face the liquidity problems endemic in other Russian regions. Furthermore, located around the city of Moscow, Moscow Oblast benefits from superb (by Russian standards) infrastructure. Proximity to the capital (it takes 2.5-3 hours to drive from the center to the most outbound district) and good infrastructure allow quick delivery of goods to the capital. Even though the 6.5 million people living in oblast create a large consumer market, approximately 60% of the entire regional agricultural output is supplied to the city of Moscow. Geography And Infrastructure The Moscow Oblast, also called Podmoskovie, surrounds the city of Moscow and occupies 47,000 square kilometers. Forest covers 42% of the land which is also rich with building and silicate sand, phosphorites, kaolin and brick earth, and raw materials for cement. The oblast has a well-developed transportation network. 11 railroads cross the region; automobile roads provide extensive connection with other regions. The Moscow and Oka rivers are used for shipping cargo; and four civilian and a number of military airports are located in the oblast. Moscow Oblast bank Vozrozhdenie, and state-owned giant Sberbank have established themselves in the region and this ensures access to banking services throughout Podmoskovie. The oblast administration uses them as its agent banks and has recently announced city-based Avtobank as its agent as well. The region also ranks second in Russia for the level of telecommunications (telephones per household). Most cellular network providers (operating in D-AMPS (800), GSM (900/1800), GSM-900, GSM-1800 standards, and NMT-450 standards) cover Moscow Oblast with their services. Courier services are also available in Podmoskovie. For U.S. exporters it would be of interest to know that the Moscow Oblast Customs Department oversees seven customs posts (Schelkovskaya, Zelenogradskaya, Odintsovskaya, Podolskaya, Noginskaya, Zhukovskaya, Lyuberetskaya) and processes one-third of Russia's total trade turnover. The network of temporary warehouses is being improved. Currently, there are 210 temporary warehouses in the Moscow Oblast that occupy 904,000 square meters, and 48 customs open and closed warehouses. Steps are being taken towards renovation of the regional customs system. Large customs warehouses strictly for clearing transit, re-export, and other types of goods designated for Moscow Oblast are being established. Administrative Structure Although the city of Moscow is the capital of the Moscow Oblast, the oblast and the city are two separate administrative entities with no hierarchical relationship (unlike in other regions with the exception of St. Petersburg). Thus, the statistics provided below for Moscow Oblast do not include numbers for the city of Moscow. Moscow Oblast is divided into 39 districts (rayon) with local administration; 38 cities have independent status, which means they are subordinated directly to the Oblast Administration and not to the rayon where they are located. Rayon administrations can be key players in lobbying for investors and creating favorable conditions for project implementation. Since regions are less saturated with foreign investment than the capital, investors might be more able to attract special attention from the regional government. Good relationships with the local government could diminish administrative barriers as well. Industrial Potential Moscow Oblast has tremendous industrial potential. It specializes in machine building (represented mainly by electronics, instrument-manufacturing, and airspace), metal processing, and production of chemicals, construction materials, and textiles. Other industrial sectors, such as pharmaceuticals, printing and publishing, are also represented; the importance of the food-processing industry and energy sector in regional output is increasing. The region's agricultural output comprises 10% of the total Russia's agricultural production and consists mainly of meat, eggs, and dairy products. The output of the defense sector, known for its outstanding technologies and human resources with specialized skills and education, comprises 30% of gross regional output. Podmoskovie is a leading innovation center in Russia, with 20% of all scientific research facilities of the country located on its territory. Despite overall industrial growth in the region, a few companies and certain industry sectors are experiencing difficulties. Besides financial difficulties, shortages of raw materials previously delivered from former-Soviet republics and increased prices have become a significant problem. For example, oblast textiles factories are no longer able to purchase cotton from Uzbekistan, or to afford expensive cotton from Turkey (which has been the leading supplier in the recent years). To gain access to lower-priced materials, the Moscow Oblast Government signed an agreement with the government of Uganda for utilizing 220,000 hectares of African land for growing cotton that will then be supplied directly to the Moscow Oblast enterprises. Similar agreements are being signed with other countries. Currently, in Ceylon there are two tea plantations where tea is grown for the Moscow Oblast, and two factories for initial tea-processing. The cash economy, while more prevalent in the oblast than in Russia as a whole, is incomplete, and barter transactions remain common. Tax Privileges To facilitate the development of those industry sectors that are currently in a vulnerable economic position, Moscow Oblast adopted a law "On Tax Privileges in Moscow Oblast" in June 1997. The law endorses tax privileges for Russian producers and foreign investors that are active in production business of the Moscow Oblast economy. Among others, regional tax privileges are applicable to the following sectors: Scientific organizations: the regional profits tax is decreased by 50%; Meat-processing plants: regional property and road fund taxes are decreased by 50%; Enterprises producing baby-food: exemption from taxes on profits received from actual baby food production; Companies producing and selling vaccines for polio: exemption from profits tax. The exemption is to equal the difference between the production cost and federal government subsidies; Textiles and light industry: property tax is reduced by 50%; Defense sector: property tax is reduced by 50%; Dairy (milk-processing) sector: exemption from profits tax; the road fund tax is decreased by 50%; Public catering organizations: property and road fund taxes are decreased by 50%; Leasing companies: property and road fund taxes are decreased by 50%. Tax Privileges - Investment Policy Potential foreign investors are eligible for industry-specific tax breaks, and also for oblast tax privileges under Article 44 of the law "On Tax Privileges Granted in Moscow Oblast" if they invest $1 million in a project in Moscow Oblast. If an investment in the form of currency, machinery, equipment, or real estate is made into the industrial and agribusiness sectors, or into construction of industrial infrastructure within three years, the investor is entitled to profits, property, and road fund tax privileges. The regional property and road fund tax breaks are decreased by 50% for three years after the completion of the project. The profits tax exemptions are gradated. Thus, the profits tax is 10% during the 18 months after the project generates the first profit. Upon the expiration of these 18 months, the tax is stated to be 15% for a year. Special conditions are stipulated if the investment is carried out in parts within the three-year time frame. Projects with especially large value could be subject to a government decree granting even further privileges. In May of 1999, the Governor of Moscow Oblast signed an amendment to the regional Law "On Tax Privileges in Moscow Oblast" effective January 1, 1999. The amendment grants tax exemptions to those investors that invest over $5 million into production of substances of genetically-engineered human insulin in Moscow Oblast. The investors are exempt from the regional taxes and taxes to the local road fund for two years starting from the date when the total amount of funds transferred to the account of the organization for production of genetically-engineered human insulin is equal to or exceeds $5 million. Regional Law "On Guarantees On Carrying Out Investment Activities In Moscow Oblast" Moscow Oblast Government plays a strong role in creating a favorable investment climate. The latest step in creating the legal base for foreign investment was the Law "On Guarantees on Carrying out Investment Activities in Moscow Oblast" (published in the Moscow Oblast official press on March 16, 1999), which is to provide government guarantees by Moscow Oblast to Russian and foreign investors and protect their rights. The law guarantees legal protection of investment activities; compensation in case of nationalization or requisition of investments; protection from unlawful actions (or lack of actions) by Moscow Oblast government agencies; grandfather protection in case regional law is changed; and protection of property rights and income spending options. The regional government also guarantees on a case-by-case basis partial compensations to creditors if the debtor does not pay back the principal in the time period stipulated in the contract. The Law "On Guarantees on Carrying on Investment Activities in Moscow Oblast" also determines the conditions under which an investor may be applicable for investment tax credit that would allow the investor to reschedule its tax payments from one to five years by decreasing tax payments and making consequent credit payments. Implemented Investment Projects During the last six years, Podmoskovie has reportedly attracted $2 billion in foreign investment and established 510 joint projects with foreign entrepreneurs (62 were registered in 1998.) Although the crisis has impacted the 1998 level of foreign direct investment (bringing FDI down from the expected $1 billion to $735 million), the total volume of investment increased by 1.8% compared with 1997. The following districts attracted the greatest amount of investment: Solnechnogorsky ($136 million), Naro-Fominsky ($108.9 million), Zhukovky ($44 million). Other rayons that attracted significant investments in 1998 are Kashirsky, Klinsky, Leninsky, Odintsovsky, Stupinsky, and Domodedovsky. During the 1998, 40 projects with foreign participation were under construction in Podmoskovie. The projects were mainly in sectors such as food processing, beverage production, machine building, and textiles. Opportunities For Foreign Investors As the purchasing power of Russian consumers has dropped since mid-1998 and importers have become more risk-averse towards purchasing items that they are not sure they can sell, Russian imports decreased by 19.1% in 1998. Being lower in price and frequently of equal quality, some domestic products (especially foodstuffs) are now in demand. For example, domestic yogurts are preferred to imported ones as being more "natural", containing less preservatives, and of course, as cheaper alternatives. Due to the rubles depreciation, domestic producers have gained from 10% to 20% of market share. Despite this temporary windfall, domestic producers need investments to continue their growth. Because many of them have obsolete equipment and lack resources, yet have facilities equipped with the necessary infrastructure, investments in the local consumer-oriented industry could be a good opportunity for U.S. companies interested in entering or staying on the Russian market. Most foreign investors in Moscow have focused on production of consumer goods (50% of total joint projects registered in the Moscow Oblast); wholesale and retail (10%); construction and building of industrial entities (10%); production of construction materials (5%); and other. The district overviews will detail possible opportunities for investment. Small Business In The Region Many investment opportunities are offered by the small business sector, which accounts for over 30,000 enterprises in the oblast. Small business enterprises in the oblast generate approximately 12% of regional revenues. Despite the mobility of small enterprises, they encounter multiple problems such as taxation and bureaucracy. The Small Business Association of Moscow Oblast, headed by a former entrepreneur and Regional Duma Deputy Andrey Tishkov, is a non-government organization whose mission is to promote the development of small business. The Association lobbies for the interests of small business enterprises, and maintains information and a list of investment projects in the oblast. It was also the initiator of a legislative amendment that would allow a small business enterprise to choose between paying regular taxes and paying one tax based on the single tax on imputed income (A federal law was passed requiring small businesses to pay a single tax on imputed income, however, it is activated at a regional level only if their Regional Dumas adopt the law on the regional level.) The Association could also be a good source of current information on investment projects in the region. The Small Business Association of Moscow Oblast currently seeks a partner for joint creation of a permanent exhibition complex near Sheremetevo International Airport. This project is unique in that it will operate year-around and will serve as a meeting point between regional companies featured in the exhibition complex and interested parties visiting the complex. The Association is interested in discussing the terms with potential investors. The Russian-American Chamber of Commerce® is a nonprofit, nonpartisan organization acting to promote American business interests in the Russian marketplace. The Russian-American Chamber of Commerce® Last Updated: May 25, 2001. Copyright the Russian-American Chamber of Commerce® 1995-2003. All rights reserved.