Under Article I of the Foreign Investment Law • foreign investors can be: foreign legal persons; • foreign citizens, including stateless persons; • Russian citizens permanently residing abroad who are registered in their country to engage in commerce; • foreign states; • and, international organizations.
Article 2 of the Foreign Investment Law broadly defines what property can be used as foreign investment as "all types of material assets and intellectual property invested by foreign investors into entrepreneurial and other types of activity with the aim of deriving profit".
According to Article 3 of the Law these include • Equity Participation In Joint Ventures Founded With Russian Participants; • The Establishment Of Wholly Owned Subsidiaries; • Acquisition Of Enterprises, Assets, Buildings, Structures, Equity Stakes In Enterprises, Shares, Bonds, And Other Securities And Other Property Not Prohibited From Foreign Investment By Other Russian Legislation; • Acquisition Of Rights To Use Land And Other Natural Resources; • Acquisition Of Other Property Rights; And Other Investment Activities Not Prohibited By Russian Legislation Including Making Loans, Issuing Credits And Offering Property And Property Rights
direct foreign investment • - acquisition by a foreign investor of not less than 10 percent of the share, shares (contributions) in the authorised (share) capital) of a business organisation incorporated or newly incorporated in the Russian Federation in the form of a business partnership or company in accordance with the laws of the Russian Federation; investment of capital in the main assets of the branch of a foreign legal entity established in the Russian Federation; financial lease (leasing) of equipment specified in Sections XVI and XVII of the Commodity Classification of foreign economic activity of the Commonwealth of Independent States (CC FEA CIS) with the customs value of not less than 1 million roubles made in the Russian Federation by a foreign investor as a lessor;
The legal regime for business of foreign investors and their use of the profit obtained from the investment may not be less favourable than the legal regime for the business and use of the profit obtained from the investment provided to Russian investors, except otherwise prescribed by federal acts.
Any foreign investor, or any business organisation with foreign capital established in the Russian Federation where the share of a foreign investor (foreign investors) is not less than 10 percent of the contributions in the authorised capital of the this organisation may fully use the legal protection, guarantees, exemptions provided by this Federal Act when they carry out reinvestment.
2006 • Foreign investment grew 2.7% in 2006 to $55.1 billion from 2005. Foreign investment soared 32.4% in 2005..
2007 • Foreign investment grew 120% in 2007. 2.2 times more than in 2006! The total sum of foreign investment was $120.9 billion. The accumulated foreign investment was $220.6 billion by the end of 2007.
Forms of investment • Foreign direct investment (FDI)grew 4.6% in 2006 to $13.68 billion. FDI grew 38.8% in Russia in 2005.
The structure of foreign investment in 2007 • Other investment (loans from international organizations, commercial loans) • 2007 – 50,2%, 2006 – 49.1%. • Direct foreign investment • 2007 – 46.7%, 2006 – 47.5%. • Portfolio investment • 2007 – 3.1%, 2006 – 3.4%.
First quarter of 2006Legal forms of investment • Equity investment decreased. 84.6% from 2005. But reinvestment grew 3.4 times. • loans to companies by foreign co-owners rose 80% to $3.9 billion, • investment in the form of leasing: 62.7% from 2005 level. • and other forms of direct investment rose 2.3 times to $922 million.
Russian Investment • Cumulative Russian investment abroad as of the end of 2006 was $14.3 billion. • Russian investment abroad grew 67% to $52 billion in 2006. The repayment of earlier Russian investment abroad amounted to $45.2 billion, which is 44.5% more than in 2005.
Investment from Russia abroad • $76.4 billion were invested abroad in 2007. It is 43.6% more in comparison with previous year. • Accumulated investment abroad was $32.1billion by the end 2007.
The main investors in Russian economy 2006 Cyprus 22.6% Great Britain The Netherlands 16.4% Luxembourg 16% Germany8.6% France 2.6% the British Virgin Islands 3% Switzerland 2% The USA 5.4% including for 85.8% of the stock of direct foreign investment.
Improving rating quality Investment-grade ratings AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- Speculative-grade ratings BB+ BB BB- B+ B B- CCC+ CCC CCC- CC C D Declining rating quality
Answer • The amount of investment depends on image of the country. Rating is the main characteristic of image carried out by independent specialists. • Foreign pension funds, mutual funds will invest providing the country risk is not less than the lowest investment level
"Russia’s expanded budget surplus since 2000 and high economic growth rates allowed the government to lower the overall volume of government debt to 38% of GDP by the end of 2003 (by the end of 2006 this indicator will be less than 25%), compared with over 110% at the end of 1999," the agency says in its announcement.
Directions of foreign investment • Raw material extraction $29.4 bln. • Processing industries $43.4 bln. accumulated investment • Trade and service $30.5 bln. • Transport and communication • Financial sector • Agriculture, forestry and wood working
A great change in the investment structure! • Metallurgical industry (the growth of prices on metal)
The following are obstacles to further development of the investment field: • An imperfect tax system which doesn't actively stimulate investment; • • Underdeveloped financial markets which have yet to provide investment means and capital redistribution; • • Underdeveloped economic institutes and administrative limitations; • Low-efficiency mechanisms of government investment.
Securities market is an economic institute within which take place sale and purchase transactions of securities between subjects of economy on the base of demand and supply.
Inscribed issued securities - securities information on the owners of which must be accessible to the issuer in the form of a register of security owners, and conveyance of the rights to which and exercise of the rights secured by which require mandatory identification of the owner. Issued securities to bearer -- securities conveyance of the rights to which and exercise of the rights secured by which do not require identification of the owner. Securities Documentary form of issued securities - a form of issued securities under which the owner is established on the basis of presentation of a duly formalized certificate of the security or, in the event of deposition of such, on the basis of an entry in the depo account. Non-documentary form of issued securities - a form of issued securities under which the owner is established on the basis of an entry in the system of keeping a register of security owners or, in the event of deposition of the securities, on the basis of an entry in the depo account.
Clients of the Financial System • The Household Sector • The Business Sector • The Government Sector • Federal level • Regional level • Municipal level
When firms need to raise capital they may choose to sell (or float) new securities. These new issues of stocks, bonds, or other securities typically are marketed to the public by investment bankers in what is called the primary market. Purchase and sale of already issued securities among private investors takes place in the secondary market. Markets Forward Market A commodities or securities market in which participants make an agreement about price and time of delivery in the future Spot Market A commodities or securities market in which goods are sold for cash and delivered immediately. Also called the cash market or physical market
Market Money Commodity Commodity Markets Commodity Papers Market Money in circulation Financial Market Spot Commodity Market Futures and Options Commodity Market Promissory (Commodity) notes, (Commodity) Bills of Exchange, (Commodity) Warrants Cash in Hand Money market instruments (bills, letters of credit, and other instruments) Stock Market Other Markets of Capital Primitive Securities Market (See Exh.9) Basic securities (stocks, bonds) Warrants Terminal contracts on financial assets (futures contracts, option contracts,swaps) Securities Market Derivative Securities Market (See Exh.9)
Securities In contrast, derivative securities yield returns that depend on additional factors pertaining to the prices of other assets. For example, the payoff to stock options depend on the price of the underlying stock. Much of the innovation in security design may be viewed as the continual creation of new types of derivative securities from the available set of primitive securities. A primitive security offers returns based only on the status of the issuer. For example, bonds make stipulated interest payments depending only on the solvency of the issuing firm. Dividends paid to stockholders depend as well on the board of directors’ assessment of the firm’s financial position. Stocks Bonds Bills Certificates of deposit Warrants Options Contracts Futures Contracts Forward Contract
IPO - initial public offering isthe first sale of stocks in public. For Russia it is still exotic: until recently companies issuing additional stocks tend to allocate new shares by private subscription - among present owners. This approach is effective if the main aim of a company is to save control of the company. However, situation is gradually changing: companies start to orient themselves more neatly on market expansion – and for this it is important to attract investments. • .
Advantages of IPO • Increased Capital. A public offering will allow a company to raise capital to use for various corporate purposes such as working capital, acquisitions, research and development, marketing, and expanding plant and equipment. • Liquidity. Once shares of a company are traded on a public exchange, those shares have a market value and can be resold. This allows a company to attract and retain employees by offering stock incentive packages to those employees. Moreover, it also provides investors in the company the option to trade their shares thus enhancing investor confidence. • Increased Prestige. Public companies often are better known and more visible than private companies, this enables them to obtain a larger market for their goods or services. Public companies are able to have access to larger pools of capital as well as different types of capital. • Valuation. Public trading of a company's shares sets a value for the company that is set by the public market and not through more subjective standards set by a private valuator. This is helpful for a company that is looking for a merger or acquisition. It also allows the shareholders to know the value of the shares. • Increased wealth. The founders of the company often have the sense of increased wealth as a result of the IPO. Prior to the IPO these shares were illiquid and had a more subjective price. These shares now have an ascertainable price and after any lockup period these shares may be sold to the public, subject to limitations of federal and state securities laws.
There are numerous disadvantages to going public. • Time and Expense. Conducting an IPO is time consuming and expensive. A successful IPO can take up to a year or more to complete and a company can expect to spend several hundreds of thousands of dollars on attorneys, accountants, and printers. In addition, the underwriter's fees can range from 3% to 10% of the value of the offering. Due to the time and expense of preparation of the IPO, many companies simply cannot afford the time or spare the expense of preparing the IPO. • Disclosure. The SEC disclosure rules are very extensive. Once a company is a reporting company it must provide information regarding compensation of senior management, transactions with parties related to the company, conflicts of interest, competitive positions, how the company intends to develop future products, material contracts, and lawsuits. In addition, once the offering statement is effective, a company will be required to make financial disclosures required by the Securities and Exchange Act of 1934. The 1934 Act requires public companies to file quarterly statements containing unaudited financial statements and audited financial statements annually. These statements must also contain updated information regarding nonfinancial matters similar to information provided in the initial registration statement. This usually entails retaining lawyers and auditors to prepare these quarterly and annual statements. In addition, a company must report certain material events as they arise. This information is available to investors, employees, and competitors. • Decisions based upon Stock Price. Management's decisions may be effected by the market price of the shares and the feeling that they must get market recognition for the company's stock. • Regulatory Review. The Company will be open to review by the SEC to ensure that the company is making the appropriate filings with all relevant disclosures. • Falling Stock Price. If the shares of the company's stock fall, the company may lose market confidence, decreased valuation of the company may effect lines of credits, secondary offering pricing, the company's ability to maintain employees, and the personal wealth of insiders and investors. • Vulnerablility. If a large portion of the company's shares are sold to the public, the company may become a target for a takeover, causing insiders to lose control. A takeover bid may be the result of shareholders being upset with management or corporate raiders looking for an opportunity. Defending a hostile bid can be both expensive and time consuming.
2006 • IPO in RUSSIA
"NK "Rosneft“ is one of the biggest vertically integrated company in Russia. There are 40 daughter enterprises included in its organizational structure, which place almost in all Russian regions. • Organizational structure: • 14 oil and gas extraction enterprises • 15 merchandising companies • 3 oil processing companies • 4 auxiliaries departments • Institutes of Research and development
The Biggest IPO • Oil reserves are estimated at 15 billion barrels. Approximately this reserves can be extracted for 28 years with current intensity of development. • Due to IPO company attracted $10, 4 billion. It placed 14.3% of its stocks on Russian and London stock exchanges. • Before IPO 100% of "NK "Rosneft“ belonged to state company JSC “Rosneftegas”.