1. PRECISE. PROVEN. PERFORMANCE.
Making the Russian Far East attractive -
a business perspective
Presentation for the Second International Business Congress
Gavin Stoddart
Vladivostok, 26 September 2013
www.moorestephens.ru

2. How do we make the Russian Far East more
attractive for foreign investors?

3. What does the Russian Far East have to
offer?
Size
• 6.2 m sq km
(whole of Europe
only 9.9m)
• 36% of Russian
land is the Far
East
Resources
• Hydrocarbons (oil,
gas, coal)
• Timber
• Fish
• Gold
• Diamonds
• Other metals
Location
• Close proximity to
markets of China,
Korea, Japan
(China trade to be
$200 bn by 2020)
• Nearest part of
Russia to the
United States
• Ideally placed as a
transport hub for
Asia-Europe traffic
• Higher than average productivity The average gross regional product (GRP) of regions
in Russia in 2011 was $13,700, while in the Far East it was $17,500.
• Russian Far East did not stop growing even during the crisis.

4. What are the opportunities for investors?
• Oil and gas – liquification, processing, chemicals
• Fish – canning, processing
• Timber – furniture, wood products, paper
• Metals - production
Processing
raw materials
• 90% of manufacturing capacity has been lost since 1990s
• Imports / shipment from Western Russia have replaced
local production
• Opportunities to re-establish manufacturing
Replacing
manufacturing
capacity
• Export of raw materials
• Land bridge to EuropeTransport

5. What are the opportunities for investors?
• vast territory with minimal agricultural
production
• rich marine environment
• the leading eight APEC countries by population
import over 100 million tons of grain per year –
more than Russia’s entire production
Agriculture
/ food
processing
•Nature – scenery and local wildlife both of
potential interest to tourists both Russian and
foreign
•Gambling zone
Tourism

6. Targets set by the Ministry
Natural gas production to grow from 29.7 billion cubic m 2012 to 35.9 billion cubic m in 2016
The output of commercial products in the oil and gas sector to increase from 654 billion
roubles in 2012 to 1.1788 trillion roubles in 2016.
Forecast investment in the mining sector to be 246.2 billion roubles
Timber processing volume will grow from 4,860,000 cubic metres in 2012 to 11,088,000 cubic
metres in 2016.
Construction and modernisation of fish processing enterprises in Kamchatka and the construction of
a logistical complex in Khabarovsk as well as a Far Eastern innovation and technological trade and
logistical fishery complex in the Primorye Territory.

7. What is the current level of foreign
investment in the Far East?
• Various projects in Sakhalin re oil & gas
• New liquid gas project in Vladivostok
• Talk of oil pipeline to South Korea
• Investments to Primorye gambling zone
• Mazda joint venture in Vladivostok
• POSCO planned development of Vanino Port
There are some
high profile
inward
investments
• 2012 total investment was US$ 13.6 billion
• Only 16% of this was direct investment
• 93% of investment in extractive industries
• 85 % of foreign investment is in just two
provinces, Yakutia and Sakhalin (both natural
resource centres)
But, in general
level of
investment is
low and most is
in raw materials

8. So why is the level of
foreign investment so low?

9. Russia’s Far East is in many ways its “Wild West,” where
hardened Cossacks some 350 years ago and young Soviets
with courage and ambition, fewer than a hundred ― came
to exploit Sakha diamonds and Sakhalin oil.
Quote from a recent (June 2013) article in a Korean newspaper

10. Issues that are of concern to potential
foreign investors in the Russian Far East
Geographical Infrastructure Rule of Law
Economic Informational
Business
process and
control
Human
Resources
Historical /
political

11. Historical / Political
Japanese / Russian
territorial dispute
Poor US – Russia
relations

12. Geographical
Perception that the area
is remote
Distances between
towns in the Far East

13. Infrastructure
Roads
Rail
Ports
Air
Power
Communications
Financial, including banking

14. Economic
Size of the local market: - Population 6.3 million (4.4% of Russia’s total) and has decreased by 25% since
1990s
RDP = $104 billion (5.6% of Russia’s total)
Over dependence on exports of unprocessed natural resources (hydrocarbons alone account for 90%
of exports from the Far East) mean the economy is not diverse
Size of projects tends to be large which excludes small / medium-size investors
Perception that taxes are too high
Difficulty raising bank loans locally

15. Rule of law
Unclear tax position
Customs issues
Fear of bribery / corruption

16. Informational
Hard to get reliable information about local markets
Lack of understanding of local customs / practice
Not knowing how to find a local partner
Lack of transparency in financial accounting

17. Human resources
Hard to find employees locally with the necessary skills
Hard to persuade skilled employees from Western
Russia to move to the Far East
Hard to persuade foreign employees to move to the
Russian Far East
Visa / work permit issues for foreign workers and
managers

18. Business process and control
Physical controls
Management decision making
processes
Differences in business culture

19. At what level should these issues be
addressed?
Federal
Project
Regional /
local

20. What can individual
businessmen do?

21. Before seeking investment
Decide what type of foreign investment is best for the
intended purpose / understand the requirements
Understand the cost of obtaining investment
Ensure the business has an appropriate corporate
structure
Ensure that the business’s tax affairs are in order
• Certainty is more important than the actual level of tax
• Consider asking for a tax inspection
Ensure that you have a clear financial track history
• Ideally IFRS
• Comprehensive

22. When approaching investors
Prepare a full business plan
Produce a clear business
summary / teaser
Present the case for investment
in a way that is in tune with the
way the potential investor thinks

23. Once investment has been made
Clear and workable
governance structure
• Danger of 50-50
Put appropriate systems
in place
• Financial reporting
• Control of assets etc.
• Meeting investor’s norms

24. What foreign investors need to do and not
do
• Ensure that you understand local requirements
regarding finance
• Take time to understand the business that you are
financing
• Ensure that you have an appropriate legal structure
• Be prepared to visit
Do
• Act as if Russian laws and tax rules do not apply to
you
• Think that Moscow and the Russian Far East are the
same
Do
not

25. Conclusions

26. Conclusions
• Far East has huge investment potential
• Investment is not happening as much or as fast as it should
• Many factors – variously under control of
– Federal Government,
– Regional / local government
– Individual businesses
• Main things government in the region can do to help individual businesses are
– Improve local infrastructure
– Maintain educational standards
– Provide information that promote positive perception of the region
• Much of the responsibility for whether individual investments go ahead and if they do go ahead
whether they succeed lies with individual businessmen we cannot blame others
• Individual businesses should
– Prepare properly
– Present a coherent and logical case for investment
– Understand that persuading somebody to invest is only the start of a successful
investment