Studies Eastern European Markets
Eastern European Markets
Inkeri Hirvensalo - Tero Lausala
FOREIGN DIRECT INVESTMENTS IN THE RUSSIAN TERRITORIES OF THE BARENTS REGION

Summary

Territories of the Barents Region. Both in Murmansk and Karelia the local authorities stress the significance of new legislation and local investment programs in attracting FDI. On the other hand they realise that the legislation is not fully implemented and therefore not working effectively. The same applies for Arkhangelsk Oblast, where the administration is proud of the investment legislation and emphasises the possibilities it provides for foreign companies, but at the same time it is admitted that the legislation is now working and still needs development. The progress in federal investment, tax and land ownership legislation is emphasised in all cases as a key factor to facilitate the working of regional investment legislation and incentive systems. In the Republic of Komi, the regional investment legislation was not emphasised to the same extent as in the other regions, rather a pragmatic and working relationship between the Republic's Government and foreign companies was emphasised as the key element in attracting FDI.

The authorities also realise that there are significant weaknesses in the investment climate and infrastructure. All regions suffer from a lack of financial resources and reliable banking systems. In all the RTBR there are plans to set up new banks and financial organisations to facilitate investments. In Karelia also indebtedness and low management level of the local companies is mentioned as a weakness of the investment climate.

Murmansk, Karelia and Arkhangelsk have not set up promotion or information centres to attract investments but all have plans to that effect. All three have drawn up lists of prioritised or ready-made projects for the consideration of potential investors but, particularly in Murmansk, it is pointed out that there is no interest among the investors in the prioritised projects. In Komi the approach has been different, since investment promotion activities have been delegated to the UNIDO office in Syktyvkar and in addition the Komi Government has to some extent lessened its emphasis on working with prioritised investment project lists. This is due to the fact that this approach is seen to have failed in the past.

In Murmansk there already exist some free economic zones and in Karelia the establishment of such zones are planned. However, on the topic of special economic zones, harmonisation of the regional policies with the federal policies is a key issue and it is not evident that on the federal level such policies, which include considerable tax and other privileges, are acceptable.

In addition, all four regions are members of the Association North West and, what is more important, the new North West Federal District, which is one of 7 new administrative districts of Russia created by President Putin. These organisations are presently formulating common policies on FDI, among other issues. It remains to be seen whether the regions can co-operate to attract FDI to North West Russia, or whether natural competition for FDI will be too great an obstacle.

According to the new tax legislation, which was adopted by the federal Duma in 2000, the maximum level of profit tax that the local administration can levy on foreign companies is 19 %. Local tax concessions, in case the local administration favours them, can thus play a significant role in diminishing the overall tax burden of enterprises. The federal profit tax rate is 16 %. However, there is little evidence that this instrument has been widely used in the target regions after the initial tax brakes were accorded to foreign joint venture parties at the end of 1980s. There is also hard international competition in the field of incentives aimed at attracting FDI. For example, within the Baltic Sea region, Poland and the Baltic countries offer significant tax advantages to foreign investors whereas the Nordic countries provide many kinds of financial incentives and considerable help from the local administrations.

In summary, the interviews with the regional and local officials in the RTBR showed that all these regions have more or less common views on the possibilities and barriers to FDI. All regions are developing instruments to attract FDI and welcome foreign investment into certain sectors of their economies. However, there are major limitations on the involvement of foreign companies wanted by the regional administrations, and in all cases there are conflicting views of the objective results of FDI between foreign companies and the regional administrations. For foreign companies investment in the RTBR is motivated by profit. For the regions themselves, there are much wider objectives of social and economic development and progress in infrastructure and budget revenues.


More informatuon:
Piia Heliste
Helsinki School of Economics
Venäjän ja Baltian keskus
PL 1210, 00101 HELSINKI
Puh. (09) 4313 8874
Fax (09) 408 417
heliste@hkkk.fi

http://www.hkkk.fi/cemat

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