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UN Program Support Scheme for Foreign Investment Protection


 

 

Background

Encouragement of direct long-term foreign investments in development of real economy sector is one of major tasks for industrial production growth in the North-West of Russia. In particular, concrete measures of investments attraction into SMEs sector, especially Medium enterprises, are of high importance.
For the last 4 years influx of foreign investments in St. Petersburg comes in progressive rate (in 3.5 times greater) comparing to other regions of Russia. Perhaps these investments, as practice shows, are attracted by world-known corporations (Coca Cola, Pepsi, Ford, Caterpillar, Nokia) for establishing of large enterprises.

Direct investments are promoted rather slowly into SMEs sector. At the same time statistic data shows high dynamics of activity in SMEs sector.
At present time St. Petersburg possesses:

  • 90.000 companies of small and medium business
  • Euro 3,1 billion turn over capital
  • 625.000 people employed
  • Annual growth 14% - 2003 compared to 2002
  • 25% - share in gross domestic product produced in the whole North-West region of Russia

Low investment activity of medium foreign capital is explained usually by uncertainty of investors in stability of legislative working conditions in Russia. Middle-sized investor would like to see acting system of guarantees of foreign capital investment protection from political risks and expropriation of property.

At the same time openness and availability of information about conditions of enterprises interested in investments is needed. Guarantees of reliability of such information are also very important.

Legitimate guarantees and preferences created for UN organizations

How UNIDO NWICPC can downplay risks of FI into SME and what value added it may provide to partners in St. Petersburg and abroad?

To stimulate investments into St.Petersburg and North-West Russia SME, UNIDO NWICPC enjoys legislation, which is granted to UN Development Program by the Federal regulation. To enter privileges, foreign investor assumes a title of a donor and enters into contractual relations with UNDP.

Cash flow of investment project goes through UNDP accounts, which guaranties allocation of foreseen investments and eliminate risk of fraud and wrong doing. When delivery of capital goods is envisaged, the Russian Law on International Technical Assistance of 1999 provides exemption from customs duties and taxes. Exemptions on the social tax, exposed on expert's wages (35, 6% in Russia) are also applied.

Minimum risk for investors enjoying UN support

  1. International investor (named "donor" according to the UN terminology) entrusts the finance to UN system and not to Russian Banks. The financial mechanism, created for UN in Russia guarantees the protection of means from the internal inflation inside the country and expropriation.
  2. Property as well as financial means under UN jurisdiction is the subject to immunity of international organizations. Therefore the equipment supplied to Russia by an investor under UN support is protected from diverse commercial as well as political risks.
  3. Clarity of the budget. Financial accounting in the UN system is clear and authentic. Thus the investor is always informed how the finance is being utilized and how it is working in the relevant project. Moreover, as a rule, the investor is structuring the budget himself and is controlling the purpose of the utilization.
  4. Benefits provided by UN. Imported equipment, components, materials for the project are not imposed with Import Tax (5% - 15%) and VAT (18%) according to Russian Legislation. Furthermore the equipment imported and transferred to the balance is not imposed with Property Tax (2%) during the first two years after it is delivered. Exemptions on the social tax, exposed on expert's wages (35,6% in Russia) are also applied.
  5. A security greater of the property. Additional measures can be taken to minimize risks of loss of the equipment acquired and delivered by the investor in Russia. Recipient of the equipment signs the contract with UN, in accordance to which the property remains under UN legislation during the initial period of the enterprise operation (first 3 - 4 years). The present measure is justified especially during the formation period of a new enterprise.


Procedure (main stages)

  1. For implementation and work on the investment project, a working group with participation of the investor (donor), consultant and the member of UN Representation.

  2. The working group is preparing the project of the budget and is planning the work on its utilization in the interests of the company-recipient of the investment (technical support).

  3. Organization - Donor (investor) is signing the a standard agreement with UN Representation (cost-sharing agreement) and consequently is transferring the funds to the UN account outside of the territory of Russia.

  4. UN Representation is singing a contract "equipment / work implementation grant" together with the company-recipient of technical support (which is practically appointed by the investor).

  5. The working group is preparing contracts and documents for purchase and delivery of equipment (that has been identified by the investor) to Russia. Consequently it organizes equipment delivery to Russia.

  6. Representative of the company-recipient of the technical support obtains the equipment at the customs. Whereby benefits on imposed custom fees and VAT are applied.

  7. UN Representation and the company-recipient of the technical support sign the transfer and acceptance of the equipment, in order to place assign it to the balance of a new enterprise. (Otherwise an agreement on equipment preservation under the jurisdiction of UN during the initial period of business formation from 3 to 4 years).

  8. The working group under the management of investor forms the UN national expert team from the staff of the company-recipient of the technical support. Thereupon the UN benefit on the social tax (35,6%) is applied and the investor economizes the finance.

  9. In collaboration with the project working group the investor organizes the work on arranging the business, controls the utilization of the project budget, is adapting the purchased equipment for correct implementation of the duties planned and aims the enterprise to achieve the project capacity.

The activity of the investor in combination with the program support of UN Representation in Russia as well as with the assistance of an experienced consultant (North-Western International Cleaner Production Centre) allows achieving the aim. Therefore to attract investment into the necessary sector of the business, choose experienced staff, utilize existing benefits and considerably minimize risks of capital loss and expropriation of equipment.

 

We are looking forward to cooperation
For further details, please contact us: admin@nwicpc.ru

 

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Last updated: 26.08.2009
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