ST. PETERSBURG'S INVESTMENT AND FINANCIAL STRATEGY

ECONOMY AND FINANCE

The economic situation in 2008 was marked by a continuing increase in industrial output, investment, communications services and the population's income. Due to the current economic situation this trend for high rates of economic growth of St. Petersburg may slightly change in 2009. However, according to experts' opinion, the economic growth is expected to resume in the region as early as 2010-2011. Considering that St. Petersburg is the second biggest city in Russia with a relatively highly developed economy, foreign investors do not cease showing interest in this region.

ST. PETERSBURG'S CREDIT RATING

On 10 December 2008, the Standard & Poor's international rating agency confirmed the long-term credit rating of St. Petersburg at a level of BBB.
The rating outlook is negative. According to the rating agency's experts, in the current economic conditions worsening of current budget (due to decrease in tax revenues in view of declining economic performance), loss of liquidity and/or accumulated large plain debt of St. Petersburg may aggravate the rating. However, based on the results for January-February 2009 the revenue collected was higher than that according to prudent estimates.

ACTION PLAN FOR 2008-2011 FOR IMPLEMETING THE LAW OF ST. PETERSBURG 'ON THE PROGRAM FOR SOCIAL-ECONOMIC DEVELOPMENT OF ST. PETERSBURG FOR 2008-2011'

In order to enhance competitive position and dynamic sustainable growth of the economy of St. Petersburg in 2008, the Government of St. Petersburg approved an action plan for 2008-2011 for implementing the Law of St. Petersburg 'On the Program for Social-Economic Development of St. Petersburg for 2008-2011' which among other actions envisages the following:
• developing a draft legal act on industrial policy in St.Petersburg;
• developing a new version of methodology for calculating rates for leasing land plots;
• developing a draft legal act on the procedure for establishing reduced rent for cultural heritage sites which belong to St. Petersburg;
• developing regulatory act of the Government of St. Petersburg aimed at implementing Law #627-100 'On Participating in State-Private Partnerships';
• preparing draft agreements between the Government of St. Petersburg and the supreme executive bodies of the state authority of the subjects of the Russian Federation, state authorities and municipal agencies of regions and cities of the world, Russian and foreign enterprises and companies on trade and economic, investment, research and development and cultural cooperation;
• implementing action plan on developing consumer market in St. Petersburg for 2008-2011;
• implementing the Strategy for developing transport and logistics complex of St. Petersburg;
• implementing the Program for developing terminal and warehouse infrastructure of St. Petersburg;
• preparing proposals on implementing major investment projects requiring considerable investment and agreements on constructing, modernizing or operating assets belonging to St. Petersburg on the basis of concession agreements and state-private partnership.

COUNCIL FOR ENCOURAGING INVESTMENT

A Council for Encouraging Foreign Investment (hereinafter, the Council) was set up under the patronage of the Governor of St. Petersburg on 10 February 1997. It was an advisory body intended to create a favorable investment environment and facilitate the activities of both Russian and foreign investors in St. Petersburg.
In 2002, to reflect the principle of equal opportunities for local and foreign investors, the Council was renamed as the Council for Encouraging Investment.
The Council's objectives currently include:
• reviewing and summarizing local and overseas experience with regard to attracting investment;
• ensuring co-ordination between the executive governmental bodies of St. Petersburg with regard to implementing the city investment policy;
• discussing and taking coordinated decisions with regard to draft regulations at federal and city level.
The Council consists of a Chairman (the Governor of St. Petersburg), two deputies, an Executive Secretary and eighteen Council members. Members of the Council include representatives of St. Petersburg's governmental authorities, companies, organisations and institutions engaged in investment activities in St. Petersburg.

Committee for Settling Investment Conflicts under the Council for Encouraging Investment

On 2 October 2000 a Committee for Settling Investment Conflicts was set up with a view to improving the investment climate in St. Petersburg. This is a permanent consultative and deliberative body which is intended to facilitate investment activity carried out in St. Petersburg with the involvement of foreign investors, by settling disputes arising among the parties involved in the investment process, the Administration and organisations of St. Petersburg.
The Committee reviews conflicts arising in the course of investment activity involving foreign investors. The Committee's decisions are of an advisory nature and may lead to the adoption of appropriate legal regulations by St. Petersburg's governmental bodies.

ST. PETERSBURG BUDGET FOR 2009

St. Petersburg's revenue and expenditure budget for 2009 was approved by Law of St. Petersburg #730-129 'On the 2009 budget of St. Petersburg and for the planning period 2010 and 2011' of 01 December 2008.
According to the 2009 budget, the total budgetary income of St. Petersburg amounts to RUB 377 billion, the total expenditure amounts to RUB 397,1 billion and the maximum budgetary deficit is set at RUB 20,1 billion.

INVESTMENT LAWS

A number of investment laws that encourage investment activities in the city and grant additional concessions to investors are in effect in St. Petersburg:
• Law of St. Petersburg #185-36 of 30 July 1998 'On Governmental Support of Investment Activity in St. Petersburg';
• Law of St. Petersburg #81-11 of 14 July 1995 'On Tax Concessions';
• Law of St. Petersburg #282-43 of 17 June 2004 'On the Procedure for Granting Real Estate Assets Owned by the City of St. Petersburg for Building and Reconstruction';
• Law of St. Petersburg #742-136 of 03 December 2008 'On Strategic Investment Projects, Strategic Investors and Strategic Partners of St. Petersburg'.

The Law 'On Governmental Support of Investment Activity in St. Petersburg'

The Law stipulates the ways in which governmental support is rendered to investors. Investments may be supported as follows:
• by providing investors with guarantees from the city of St. Petersburg in order to assist them in raising funds for investment purposes. These guarantees can be limited annually by city laws;
• by providing investors with tax concessions on taxes due to the budget of St. Petersburg;
• by providing investors with concessions with respect to leasing St. Petersburg real estate; and
• by providing investors with St. Petersburg budgetary support.
In accordance with the Law, budgetary funds may be used to support investors for the following purposes:
• to make compensatory settlements with investors which intend to perform investment activities aimed at realisation of investment programes considered high priority for St. Petersburg;
• to provide loans to investors;
• to pay the charter (share) capital of business entities founded with the participation of St. Petersburg and other investors; and
• to pay for governmental orders placed by St. Petersburg for goods, work and services provided by investors.

Tax Concessions in St. Petersburg

Tax Concessions to companies involved in investment activities

The legislation of St. Petersburg stipulates a number of property and profits tax concessions granted in relation to amounts payable to the budget of St. Petersburg to the companies involved in investment activities and meeting the following criteria:

a) Investment for production and / or management purposes in the amount of no less than RUB 3 billion (USD 88 million) or more.

The following tax concessions are stipulated for the companies involved in production and refining activities and investing in fixed assets in St. Petersburg (including the assets obtained in the form of a share capital contribution and excluding the assets received on a free-of-charge basis or under lease agreements) provided that investments for production and (or) management purposes amount to RUB 3 billion (USD 88 million) or more:
• reduction of profits tax rate to 13.5% (general rate is 18%) with regard to amounts remitted to the budget of St. Petersburg.
• property tax exemption with regard to fixed assets booked and put into operation (including the assets obtained in the form of a share capital contribution and excluding the assets received on a free-of-charge basis or under lease agreements) in the amount of RUB 3 billion (USD 88 million) or more.
The above concessions are granted provided that the amount of investments in fixed assets calculated in accordance with a special procedure exceeds the above threshold at the end of any three subsequent calendar years starting with 2007. The concessions are granted for the period of five calendar years.

b) Investments for production purposes in the amount of RUB 150 million (USD 4.4 million) and more

The following tax concessions are stipulated for the companies investing in fixed assets in St. Petersburg:
• profits tax is levied at a rate of 15.5% with regard to the portion due to the budget of St. Petersburg provided that the amount of investments for production purposes exceeds RUB 150 million (USD 4.4 million) and 13.5% provided that the amount of investments for production purposes exceeds RUB 300 million (USD 8.8 million)
• for the companies investing in fixed assets for production purposes in St. Petersburg in the amount of no less than RUB 150 million (USD 4.4 million), the residual value of these fixed assets is levied with a property tax at a rate of 1.1%.

c) Performing certain types of activities (including production of computers, telecommunication and medical equipment)

The following tax concession is stipulated for the companies performing certain types of activities (including production of computers, telecommunication and medical equipment):
• reduction of the profits tax rate to 13.5% with regard to the portion due to the budget of St. Petersburg provided that the proceeds from the above activities is no less than 80% of the total revenue and amount of investments totals no less than RUB 50 million (USD 1.5 million).
The concessions indicated in items b) and c) are granted if the total amount of investments in fixed assets calculated in accordance with a special procedure exceeded the investment threshold at the end of any calendar year for the period of three calendar years.
The concessions indicated in items a) , b) and c) are granted of provided that the fixed assets in which investments are made are not alienated during the period for which the concession is granted or they are only alienated to the extent that their aggregate value does not go below the above threshold.
The taxpayer loses the right to apply tax concessions indicated in items a), b), c) starting with the first date of the first month of the calendar year following the calendar year in which the total amount of taxes and duties (including advance payments) payable (accrued) to the budget of St. Petersburg is less than the relevant total amount of taxes and duties (including advance payments) payable (accrued) to the budget of St. Petersburg in the base year (the year preceding the beginning of the application of concession). Amounts of property tax (including advance payments) payable (accrued) to the budget of St. Petersburg with regard to the investments made are not taken into account in calculation of the total amount of taxes and duties (including advance payments) payable (accrued) to the budget of St. Petersburg in the base year.
Moreover, the companies performing certain activities (the companies which have production of specialised equipment for handicapped as their principal activity, residential cooperatives as well as religious organisations) are exempt from property tax.

Special Economic Zones

Based on the results of the tender for the right to create special economic zones (SEZ), St. Petersburg is establishing a technical innovation SEZ. The SEZ is located at two sites: in the first stage, it is planned to develop the Neudorf district (Strelna) with an area of 30 hectares. In the second stage, the Novo-Orlovsky forest park with an area of 130 hectares will be developed. These zones will accommodate companies engaged in the sphere of high technology, as well as research companies.
The residents of the SEZ enjoy the following benefits:

a) Stipulated by federal legislation

• The UST rate for SEZ residents is reduced (the maximum rate is 14% instead of 26%).
• Goods imported into the customs territory of the Russian Federation from abroad, goods imported into the SEZ from the rest of the customs territory of the Russian Federation, as well as goods located in the SEZ and acquired from parties who are not SEZ residents will be placed by SEZ residents under the free customs zone customs regime.
The free customs zone is a customs regime under which foreign goods are located and used within the territory of a SEZ without payment of customs duties and VAT, nor are they subject to any economic prohibitions or restrictions, whereas Russian goods shall be placed there on the conditions applicable to exporting goods in accordance with the export customs regime, with payment of excise tax and without payment of export customs duties.
• Exemption from property tax for a period of five years from the time the property is booked providing that the property is used on the SEZ's territory under the agreement on establishing a SEZ.
• Exemption from land tax for a period of five years from the time the SEZ resident receives title to the plot of land.

b) Stipulated by the legislation of St. Petersburg

• The rate of profits tax to be remitted to the St. Petersburg budget is lowered to 13-5% (compared to the normal rate of 18%).
• Exemption from transport tax for a period of five years from the time a vehicle is registered in the SEZ.

The Law 'On the Procedure for Granting Real Estate Assets Owned by the City of St. Petersburg for Construction and Reconstruction'

The present Law stipulates the terms and procedures for providing real estate assets owned by St. Petersburg for the purposes of carrying out investment activity if the result of such an activity is a newly constructed real estate asset. The Law also establishes the procedure for providing persons using real estate owned by St. Petersburg with permits for reconstruction and construction of such real estate as well as St. Petersburg's state body authorized to take the decisions on development of the built-on territories in St. Petersburg.
The Law contains a definition of investors. Investors may be individuals; legal entities and associations of legal entities, created under agreements on joint activity, which do not have the status of a legal entity; state authorities; local self-governing authorities and foreign individuals and legal entities involved in entrepreneurial activity.

The Law 'On Strategic Investment Projects, Strategic Investors and Strategic Partners of St. Petersburg'

The Law defines the profile of an investment project, strategic investor, strategic partner of St. Petersburg and establishes a procedure for recognizing persons as strategic investors, strategic partners of St. Petersburg and recognizing investment projects as strategic investment projects in St. Petersburg.
The Law stipulates the following mandatory requirements for recognizing investment project as strategic investment project:
1) improving of social-economic and cultural conditions for residents of St. Petersburg as a result of implementing the investment project;
2) enhancing investment attractiveness of St. Petersburg;
3) developing in St. Petersburg one of the most important sectors of national economy: investment market, industry, tourism, science, culture and education, information technology and innovations, finance, transport, transit and logistics and other sectors;
4) assisting in developing certain areas of St. Petersburg, St. Petersburg on the whole and (or) certain sectors of municipal service as a result of implementing of the investment project.
A strategic investment project should satisfy all of the following requirements and should be:
1) efficient from economic standpoint with regard to payback period and profitability;
2) provide the overall investment into developing of industry, transport and logistics complex of no less than RUB 3 billion, into other investment projects - of no less than RUB 15 billion;
3) using science-driven, power and resources efficient and other highly economical technologies if the investment project is related to industrial production.
The law also stipulates main provisions for implementing investment project and agreements with strategic investor and strategic partner.

PRIVATISATION

Under Federal Law #178-FZ 'On Privatisation of State and Municipal Property' that entered into force on 27 April 2002, the privatisation of state and municipal property is based on the recognition of parity of purchasers of such property and openness of the activities of state authorities and local government bodies. The Law does not establish any special restrictions for foreigners with regard to participation in privatisation.
The participation of certain categories of legal entities (both Russian and foreign) in the privatisation of state and municipal property may be restricted by federal laws, with the aim of protecting the constitutional regime, morals, health, rights and lawful interests of other persons, and ensuring the defensive capacity and security of the country.
The lawful means of payment when selling state and municipal property is the Russian rouble. Foreign currency may be used when selling state property located outside the Russian Federation.
Payment for state or municipal property acquired by privatisation may be made at the time of acquisition or by instalments. Payment by instalments may not be granted for a period of more than one year.
The institution of the 'Golden share' has been preserved. This constitutes a special right of the Russian Federation or regions of the Russian Federation to participate in the management of an open joint stock company created as a result of privatisation (including the right to veto decisions of the General Shareholders Meeting with regard to the most important issues). This special right may be used as of the date of disposal of 75 percent of the state-owned shares of an open joint stock company with regard to which a decision to use this right is taken.