Dr. Thomas Heidemann, Beiten Burkhardt

Economic and geographic review

The Arkhangel’sk oblast is located in the northern European part of Russia, occupying 227 thousand square miles. The region includes the Novaya Zemlya and the Franz Josef Land archipelagos, as well as the Nenets autonomy, which has the status of an independent subject of the Russian Federation.

The oblast borders the republic of Karelia, the republic of Komi, and the Vologda oblast. In the north, the oblast borders the White Sea, the Barents Sea, and the Kara Sea. The city of Arkhangel’sk is the administrative center of the Arkhangel’sk oblast, while the administrative center of the Nenets autonomy is the city of Narian-Mar.

The Arkhangel’sk oblast boasts a population of 1.32 million people, 63.9% of whom are of working age. Around 74.4% of the population live in urban areas. The population of the Nenets autonomy is 457 thousand people, 27.7 thousand of whom are urban dwellers.

The Arkhangel’sk oblast contains rich oil, gas, coal, peat, bauxite, gypsum, semi-precious stone, magnesium, and diamond deposits. Close tp39% of the territory is forested. The Nenets autonomy is rich in solid minerals, and has deposits of oil and gas.

The oblast has significant forest resources: forests cover 89 thousand square miles of land. Available reserves are estimated at 1.6 billion cubic meters.

Industry

Major local industries include woodworking, pulp and paper production, fishing and fish processing, oil production, shipbuilding, including atomic and civil shipbuilding, construction of ice-proof drilling platforms for oil, gas, and other types of exploration on the shelves of the northern seas, as well as the production of reinforced concrete, and the production of construction materials. The timber industry comprises more than 40% of the oblast’s total industrial production and employs 45% of the total labor force involved in industrial sector jobs.

Approximately three quarters of all Russian spacecrafts used for scientific, military, and commercial purposes, are assembled in the Arkhangel’sk oblast. Oil extraction and food industries constitute the main branches of industry in the Nenets autonomy.

Transportation

Road and railway networks connect all major industrial centers in the oblast. There is also a well-developed system of water transportation on both rivers and the sea. Industrial centers have well-developed infrastructures.

The Northern Sea Way is of great importance to the industrial and economic development of the Arkhangel’sk oblast. The specialized infrastructure necessary for the functioning of the Northern Sea Way has already been created in Arkhangel’sk.

Currently, the capacity of the Arkhangel’sk Trade Port is 4.5 million tons of cargo per year. With investment targeted at port infrastructure development, that capacity could be increased to 15 million tons in the near future.

Air transit is an important part of the Nenets autonomy transport system. Apart from that, there are 2 ports and 16 port points situated at the mouths of rivers running into the White, the Barents, and the Kara Seas. The network of paved roads has not been developed.

Banking system

The banking system of the Arkhangel’sk oblast is sufficiently developed. Along with five local banks that have a relatively insignificant share of capital, there are also branches of many banks from other cities and subsidiaries of foreign banks located in almost all industrial centers.

Investment and tax legislation

Both the Arkhangel’sk oblast and the Nenets autonomy are independent subjects of the Russian Federation with independent legislatures and jurisdictions. At the same time, the The Nenets autonomy is an administrative part of the Arkhangel’sk oblast, which explains legal status similarities between these regions. The Nenets autonomy is subject to the regional legislation of Arkhangel’sk oblast but can exercise further powers separately granted to it by the Arkhangel’sk oblast legislature.

The latest version of the 1999 law “On Investment Activities in the Arkhangel’sk oblast” amended in 2003 regulates investment activities, including tax concessions. This law contains definitions of basic concepts, forms, and means of state incentives, as well as investors’ rights and obligations. Conditions of financial support are also specified in the oblast law “On the Application Procedure for Investment Tax Loans” and in the Provision “On Granting Investment Tax Loans in the Arkhangel’sk oblast.” Tax rates are established by regional budget law or by special tax laws.

 Subjects of investment activities include investors, legal entities, and individuals, including nonresidents, investing in commercial property located in the Arkhangel’sk oblast. In accordance with the law “On Investment Activities in the Arkhangel’sk oblast,” investors can make investments in the Arkhangel’sk oblast in any form not prohibited by law, including establishing enterprises, leasing, and lending funds for a term not less than one year.

Investors’ rights and obligations

The law “On Investment Activities in the Arkhangel’sk oblast” mandates equal rights for investors and equality of conditions for investment activities.

The equality of conditions for investment activities is applicable, in particular, to transferring items of property, equal granting of tax concessions and state guarantees, and equal opportunities for insuring property and risks. Investors implementing projects included in the oblast Investment Program have the right to preferential treatment for receiving tax concessions. Investors are obligated to adhere to the standards and the rules established by the legislation of the Russian Federation and the Arkhangel’sk oblast and to fulfill their obligations under investment agreements.

They are prohibited from investing in projects, the development of which does not meet environmental, sanitary, and other regulatory requirements established by law.

In order to protect investors, the law “On Investment Activities in the Arkhangel’sk oblast” provides the following guarantees:

• non-application, during the term of an investment agreement, of any legislative acts of the Arkhangel’sk oblast, which would impair investment conditions set forth in the investment agreement;

• undertaking of obligations (guarantees) by the oblast administration to reimburse investors for losses incurred due to non-fulfillment of agreement conditions.

The administration of the Arkhangel’sk oblast annually organizes the oblast Investment Program of the Arkhangel’sk oblast based on the results of investment project competitions upon the approval of the Deputy Assembly of the Arkhangel’sk oblast.

Project candidates for the Investment Program primarily come from an official list of investment ventures. The program determines the amounts and sources of funds provided for implementing projects, secures guarantees, and sets the terms of implementation of various projects. The oblast Investment Program is established by the administration of the Arkhangel’sk oblast and is intended to attract attention to projects requiring investments. This program is mostly focused on social projects, whose implementation requires financial support.

An investment project is included in the program on the basis of the following documents:

• business plan prepared in accordance with international standards and Russian regulatory acts;

• feasibility study of measures for project implementation;

• documents confirming investor’s solvency;

• respective licenses and permits if there are any restrictions on business activities.

Investment agreement with the administration of the Arkhangel’sk oblast

To implement an investment project, the administration of the Arkhangel’sk oblast and an investor enter into an investment agreement. On the basis of this agreement, investors are granted tax concessions on profits gained from project implementation, and on property acquired while implementing this project.

Before the conclusion of the investment agreement, the investor should submit to the Economic Policy and the oblast Development Department an investment project (provided it is included in the oblast Investment Program). Thirty days are required to appraise the investment project and prepare an expert opinion.

The Assembly of Deputies adopts the decisions on granting requested concessions and guarantees while taking into consideration the following factors:

• economic and social value of the project for the region;

• investment volume;

• legal status, solvency, and reliability of the investor;

• types of risks and obligations of the investor, which should be secured by guarantees;

• sources of security for guarantees requested by investors;

• project payback period.

In accordance with the law “On Investment Activities in the Arkhangel’sk oblast,” state authorities of the Russian Federation and the Arkhangel’sk oblast regulate investment activities through:

• entering investment projects into the oblast Investment Program;

• establishing tax concessions;

• financial support in the form of grants, subsidies, and budget loans for the development of certain branches and productions;

• conducting campaigns for the privatization of state-owned commercial properties and unfinished construction sites.

Arkhangel’sk oblast state authorities encourage investment activities through:

• adopting measures for eliminating unfair competition;

• assistance in creating business infrastructure;

• support for foreign entrepreneurs interested in investing in the oblast economy;

• assistance in obtaining customs concessions;

• recommendations to local authorities to assume obligations in relation to investors, and to carry out measures of regulation and stimulation of investment activities in accordance with the law “On Investment Activities in the Arkhangel’sk oblast.”

Arkhangel’sk oblast regional Free Enterprise Zone

Until recently, the Arkhangel’sk oblast had the distinctive feature of having a Regional Free Enterprise Zone (also referred to as RFEZ), which was established in accordance with the 1999 oblast law “On the Regional Free Enterprise Zone in the Arkhangel’sk oblast.”

RFEZ was established with the aim of attracting investors, as well as stimulating investment and entrepreneurial activities in the region. Enterprises were granted special concessions, particularly in the field of tax concessions on profit and property taxes, as well as in the field of investment tax credits. An enterprise registered as an RFEZ member was issued a certificate, which provided the type, rate, and duration of concessions granted. Additional agreements or permits were not required.

July 2002 alterations in federal tax legislation preempted the RFEZ law. At present, state investment support, including tax concessions, can only be obtained through an investment agreement with the oblast administration.

However, with the enactment of the federal law “On Special Economic Zones,” No. 1 16-FZ dated July 22, 2005, it is probable that the Arkhangel’sk oblast will resume the practice of creating special economic zones for ensuring favorable conditions for investors in order to attract additional investments to the oblast economy.

Tax concessions in the Arkhangel’sk oblast

Tax concessions are granted to investors pursuant to provisions of the regional law “On Investment Activities in the Arkhangel’sk oblast.” Regional tax rates, parts of federal taxes due to the regional budget, and tax concessions granted thereon, are governed by special tax laws.

The law “On Investment Activities in the Arkhangel’sk oblast” establishes reduced rates of company profit tax for investors.

Also, the law established concessions for the tax on the property of legal entities and on production activities, which were effective until Chapter 30 of the Tax Code, “Organizations’ Property Tax,” went into effect. At present, there is no mention of any procedure for granting concessions on the new tax imposed on legal entities’ property in the federal law on investment activities. The oblast law “On the Introduction of the Organizations’ Property Tax in Force on the Territory of the Arkhangel’sk Oblast in Accordance with Part Two of the Russian Federation Tax Code” does not establish concessions on the organizations’ property tax for investors either.

In accordance with oblast legislation, investors who conclude investment agreements can be granted tax and investment tax loans.

Tax loans are granted in the Arkhangel’sk oblast on the basis of a tax loan agreement made with the oblast administration, provided there is no existing indebtedness to the oblast budget.

The granting of investment tax loans in the Arkhangel’sk oblast is governed by the oblast law ‘On the Procedure for Administering Investment Tax Loans,” No. 37-6-OZ dated June 5, 2001. Investment tax loans are temporary reductions in tax payments of not more than 50%, with subsequent repayment of the loan and interest in installments. Investment loans can be granted with respect to all taxes to investors, which are companies and enterprises registered as taxpayers of the oblast, implementing investment projects, provided there is no existing tax indebtedness. An investment tax loan can be granted if the investor meets at least one of the following criteria:

The company:

• performs scientific research, or research and development work, or technically re-equips its own production, aimed, at the same time, at creating new jobs for the disabled, or protecting the environment from industrial waste;

• is involved in innovation activities, creating new or updating applicable technologies, or creating new types of unfinished products or materials;

• fulfills an order of particular importance for the social and economical development of the region.

Interest accrues on investment tax loans at a rate equal to 1/2 of the refinancing rate of the Central Bank of the Russian Federation. Investment tax loans are granted for a period of one to five years.

Investment activities review

The Arkhangel’sk oblast administration pursues a targeted policy with a primary objective to create conditions for expanding and increasing industrial output, to make use of new technologies, and to modernize existing production equipment. These goals are expected to serve as the grounds for a general increase in enterprise profitability and for the restoration of internal financial resources through increases in depreciation expenses and net profits for the purpose of reinvesting. In order to attain these objectives, appropriate legislative measures, meant to stimulate investment inflows, are being enacted.

The main areas of investment activity include timber processing, the wood pulp and paper industry, the development of energy-conservation and ecological technologies, the construction of the Nyuksenits-Arkhangel’sk gas pipeline, shipbuilding and engineering, geological exploration, oil production and processing, and the mining of diamonds and other minerals. Main investment inflows come to the Arkhangel’sk oblast from the Scandinavian countries – Norway, Sweden, and Finland, as well as from Germany, Austria, and the Netherlands.

In recent years, the Nenets autonomy has acquired the status of a major energy region as a result of the discovery of considerable hydrocarbon deposits. Subsoil assets of the autonomy are rich in natural resources. There are prospects of mining diamonds and gold. Furthermore, structural changes necessary for transforming the oil and gas complex into a major industry sector are taking place.

The Nenets autonomy has established close contacts and cooperation with firms and companies of the neighboring Scandinavian countries. In particular, Norwegian companies actively cooperate with the administration of the autonomy in the fields of environmental protection and regional development planning. Finnish companies work in the sphere of reclamation of hydrocarbon raw materials and the development of the autonomy’s transportation infrastructure.

For further information, contact:

DR. THOMAS HEIDEMANN,

VON WISTINGHAUSEN

Phone: +7-095-232 96 35

Fax: +7-095-232 96 33

E-Mail: THeidemann@bblaw.de

E-Mail: CWistinghausen@bblaw.de

www.bblaw.ru