DIVERSIFICATION, LOWER TAXES, IPO'S &
CORPORATE GOVERNANCE |
Russia is opening up fast to foreign investments,
and is looking increasingly attractive to international
investors. The country surely benefits from the
support and investment of foreign investors who
follow the increasing confidence of local investors
in their own market: capital flight has diminished
and funds are being repatriated. And it is not
like Russian corporations have a lot of choice.
As Charles Ryan, Chairman
of the United Financial Group (UFG) that mediates
capital flows to financial investors and Russian
companies, indicates, "there are two sources
of capital today for Russian companies; one of
them is by attracting financial investors through
public and private markets; the other is through
strategic financial investors."
Of monumental importance to the future of foreign
investments in Russia has been BP's 2003 decision
to splash out an epic $6.75 billion in Russia's
oil (the biggest investment in post-perestroika
Russia). Evidently, western capital (with Germany
leading the pack) is coming to Russia.
Decisively, with natural resources (most notably
oil) primarily fuelling Russia's economic development,
the governments' plans to lower on the manufacturing,
agricultural and service sectors holds a clear
urge to diversify the economy. The government
has indicated a plan that also entails raising
taxes on natural exports. In any case, Russia's
outdated tax system has long been annoying investors
as a major impediment to doing business legally
in the country. There is a clear need creating
a rational structure of the tax system, with absence
of non-market taxes, the elimination of similar
taxes, and the abolishment of non-effective taxes.
The business community demands a reduction of
the overall tax burden. The Russian government
genuinely aims to create a stable and predictable
tax system. The government seeks to lower the
burden to 34-35% (37.5% in 2002). The Ministry
has already eliminated turnover tax and some regional
and local taxes. In addition in 2000 and 2001,
it reduced income tax and introduced the flat
tax of 13% instead of the progressive taxation
regime. Then the Ministry of Finance consolidated
the payments of the employer to the social funds,
such as the pension fund: now the higher the salary
the employer pays to the employees, the lower
the tax is. Another revolutionary step was to
remove any exemption on income tax, which allowed
Russians to decrease the tax rate from 35 to 24%.
And, the regions were entitled to further reduce
this rate up to the limit of 20%. For banks and
insurance companies the reduction went from 43
to 24% and now there is a unified rate for all
businesses. The Russian government abolished double
taxation of dividends and have set the tax rate
for dividends for Russian tax residents at 6%.
All these decisions were discussed with the business
sector. Russia is also introducing a new tax regime
for small businesses that will encourage its development.
Importantly, also is Russia's notorious corruption.
Thankfully, in 2003, the government has made a firm
commitment to lower the state institutions' infamous
red-tape, the biggest cause of corruption. Especially
in 1998, a number of the world's largest companies
abandoned the Russian market because the levels
of corruption exceed the reasonable level. But,
the flow has reversed as foreign companies are flocking
back into the country. Pilipovic-Chaffey,
Director of the European Bank for Reconstruction
and Development's (EBRD) Russia Team and chief representative
of the EBRD in Russia, sees good trends forming
oil and gas, of course, but also notices a bigger
wave of investors in consumer goods, the local market,
and food processing companies. Increasingly, Russia
finds investments from abroad in IT, consumer goods,
various appliances, furniture, cars and sees many
foreign investors moving into construction materials.
One of the objectives of the EBRD is to attract
strategic investors in Russia. Pilipovic-Chaffey
concludes that to a lot of foreign companies "the
attraction of this market and the availability of
inexpensive input material is such that they have
to move in." |
It is easy to present
cases of successful sectors in which government
intervention is small, such as Telecom, IT, metallurgy,
food and the textile industry. Beverage companies,
such as Baltika and Sun Interbrew, demonstrate a
strong stock market trend. According to Ryan of
UFG, "Arguably today there is still some upside
left in the Russian stock market, most of which
is in the natural resources sector, such as oil
and gas, power generation and telecom. Yet the most
interesting segment is in the segment of the Russian
economy that was not privatised, because it did
not exist during the Soviet Union." This reflected
today in IPOs (Initial Public Offerings) of companies
like the juice maker Wimm Bill Dann, which Ryan
predicts, is certain to be followed by other IPOs
in other companies offering some services and products
that did not exist previously, but are increasingly
in demand.
Igor Vasiliadis -
President of Level 2 Consulting
Certainly, however, western markets are not out
of reach to Russian investors. For example, Level
2 Consulting offers terminals of direct access
to work directly on the leading American exchanges
- New York Stock Exchange, NASDAQ, and AMEX -
to its corporate clients (and is planning retail
business as well). The company presents on the
Russian market the interests of top American brokers
and clearing centers, e.g. Penson Financial Services
Inc., the US Trading Corporation, and Andover
Brokerage L.L.C. Igor Vasiliadis, President of
Level 2 Consulting, is "trying to leave a
message to Russian investors that to communicate
with the American market is now much safer than
to communicate with the Russian market."
Using the latest VPN technology, which gives Level
2 Consulting a delay of just 0.3 seconds to execute
orders (and hence is faster than internet technology),
the company gained access to American markets.
Indeed, Vasiliadis points out that "it is
necessary at this particular point to adopt this
technology for foreigners interested in trading
on the Russian market."
Successful Russian IPOs in the west, such as was
done by VimpelCom,
can hereby help to improve the Russia's corporations
and stock market's blemished image abroad. Not
surprisingly, these companies also rank top of
the list of the implementation of good corporate
governance. Just due to improved levels of corporate
governance such companies as YUKOS and Norilsk
Nickel were recently included in the category
of "blue chips". A Corporate Governance
Code is now under review by the Federal Securities
and Exchange Commission. The further development
in the Russian Stock Markets is dependant upon
the creation of pillars of good corporate management
practice. Many large companies have an open and
transparent economical and financial policy, including
a regular dividend issue. It is hoped that this
trend will also continue into the private sector.
The EBRD financed the creation of new corporate
governance codes, working closely with the Federal
Securities Commission. As said by Igor Kostikov,
chairman of the Federal Securities and Exchange
Commission (FCSM), "Talk with the foreign
investors who are in Russia, they will tell you
that, over the last two years, corporate governance
has improved immensely in Russian companies already.
There have been fantastic changes and the Securities
Commission takes pride in playing a leading role
in this process. We have not finished yet; we
are continuing to work on corporate governance
issues; companies have already become much more
transparent and they have independent auditors."
Dmitry
Zelenin, President of the Russian Managers
Association, supports this point of view stressing
that the main driving force behind continued economic
growth in Russia is "the further improvement
of the management quality in Russian businesses
and improved corporate governance". Nowadays,
said Zelenin, "we see more and more companies
in which corporate governance has been improved
and functions of ownership and management separated.
The share of such businesses with improved, advanced
corporate governance structures is on the increase
at the moment".
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