A. REFORM: POLITICAL AND ECONOMIC ASPECTS
As Russia embarks on its historic course of economic reform, one of the questions of concern to U.S. businesses contemplating investment in the emerging Russian market is whether the reform process will continue and result in a commercial environment conducive to "normal" business activity, or whether it will collapse, leaving the state-controlled command system stagnating.
Initial efforts toward economic reform, however, have entailed significant hardships, and provoked increasing opposition. Prices have soared, industrial production has fallen, and many enterprises are on the verge of bankruptcy.
On August 19, 1992, President Yeltsin announced an ambitious privatization plan. The government's economic plan provides for the complete privatization of small industrial enterprises and most of the housing stock by 1994. According to former Premier Gaydar, between 50 and 60 percent of state-owned industry in Russia is slated for privatization by the end of 1995.
During the June 1992 Summit meeting, Presidents Bush and Yeltsin authorized a number of agreements aimed at alleviating and eliminating obstacles to U.S. trade and investment in Russia. These agreements--many of which have been implemented--help to create a positive climate for business opportunities. These agreements included the Joint Russian-American Declaration on Defense Conversion. Other agreements established the Charter for American-Russian Partnership and Friendship, a bilateral investment treaty, a treaty for avoidance of double taxation of income, a trade agreement, and an OPIC investment incentive agreement. These agreements and initiatives, which serve to foster a commercial environment in Russia conducive to U.S. trade and investment, are described below.
1. Joint Russian-American Declaration on Defense Conversion
In this declaration, the United States of America and the Russian Federation state their intention to make cooperation in advancing defense conversion a high priority. Both countries recognize that defense conversion is key to building a more economically viable world and assuring world peace. Although both countries are aware of the difficulties involved, they also realize that the successful conversion of resources no longer needed for defense was in the long-term economic and national security interests of both nations.
The United States of America and the Russian Federation also agreed to establish a U.S.-Russian Committee on Defense Conversion to facilitate conversion through expanded trade and investment. This committee is to:
-- facilitate the exchange of information particularly on conversion enterprises;
-- promote trade and investment;
-- encourage contacts between interested parties;
-- improve commercial conditions in both countries through the identification and removal of obstacles to trade and investment.
With the aim of promoting successful cooperation in conversion, each country committed to a number of practical steps in the near future.
The Russian Federation will:
-- establish on its territory a favorable political, economic, legal, and regulatory climate for American trade and investment;
-- institute the necessary reforms to make the ruble convertible;
-- institute the necessary reforms to support the privatization and de-monopolization of industry;
-- enact laws guaranteeing contract and property rights; and,
-- disseminate basic business and financial information on enterprises undergoing conversion.
The United States Government will:
-- place defense conversion resident advisers in Russia;
-- provide expertise to local leaders and enterprise directors;
-- establish in Russia business centers with translation, education, and training facilities for U.S. businesses operating in Russia;
-- create a business information service ("BISNIS") in Washington to match businesses in Russia with potential investors in the United States; and,
-- assure that the Trade and Development Program, the Overseas Private Investment Corporation, and the Eximbank provide incentives to American private investment in commercially viable defense conversion projects.
The United States of America and the Russian Federation agree to:
-- remove barriers to high technology trade,
-- assist in the establishment of COCOM-comparable export control regimes in Russia,
-- establish procedures to ensure the civil end-use of sensitive goods and technologies, and
-- expand bilateral defense and military contacts.
2. Charter for American-Russian Partnership and Friendship
This Charter, signed on June 17, 1992, is meant to provide a solid and enduring basis for American-Russian partnership, and describes the new agenda for U.S.-Russian relations in the areas of democracy and partnership, international peace and security, and economic freedom. In this last area, the parties agree on the following:
-- The surest path to Russia's long-term prosperity and integration into the global economy is the continuation of the present path of free market reform.
-- The U.S is determined to continue its support for reform.
-- Russia will speed up privatization and de-monopolization, the introduction of structural and sectoral reform, and the creation of policies directed at furthering competition and effective property and contract rights. Of special importance will be the introduction of land reform and reforms in the energy sector.
-- The Russian Federation will improve its laws in the fields of taxation, property, and contract law, and those relating to intellectual property rights.
-- The parties recognize the critical role of the private sector and will encourage mutually beneficial Russian-American cooperation in trade and investment.
-- The parties intend to lower constraints to trade and investment and to remove Cold War-era restrictions on business. The parties will also work to strengthen national export control systems and prevent proliferation.
3. Bilateral Investment Treaty
The United States and the Russian Federation signed a bilateral investment treaty (BIT) on June 17, 1992. This treaty creates the legal framework designed to stimulate private investment. The Treaty demonstrates the determination of the Russian government to establish a market-oriented, open investment climate. Together with other agreements, the BIT should encourage U.S. business investment in Russia and facilitate our private sector's involvement in Russia's economic reform. On August 11, 1993, the U.S. Senate ratified this treaty. Specifically, the BIT:
-- guarantees non-discriminatory treatment for U.S. investments in Russia and their operations there (i.e. assure "competitive equality");
-- guarantees the right to repatriate into hard currency, profits earned in rubles;
-- guarantees prompt, adequate and effective compensation in the event of an expropriation; and
-- provides the right to third party international arbitration in the event of a dispute between a U.S. investor and the Russian government.
The BIT still awaits ratification by the Russian Parliament.
4. Treaty for the Avoidance of Double Taxation of Income
This treaty, also signed on June 17, 1992, will help to promote a strong expansion of economic, technical and cultural ties between the two countries, and replaces the Convention on Matters of Taxation which the United States and the USSR signed in 1973. The new treaty, which went into effect on January 1, 1994, provides certainty to potential investors concerning their tax treatment on income earned from sources in the other country, and will in many cases eliminate or reduce the tax liability at source so as to encourage greater investment flows. Among other things, the treaty will provide for:
-- relief from double taxation, i.e., only income earned in Russia is taxable in Russia;
-- assurance of nondiscriminatory tax treatment;
--cooperation between the U.S. and Russian tax officials to resolve potential problems of double taxation; and
--exchange of tax information between tax authorities to help improve compliance with respective income tax laws and the provisions of the treaty.
5. U.S.- Russian Trade Agreement
This agreement provides for reciprocal Most Favored Nation (MFN) tariff treatment to the products of each country. The Trade Agreement was originally concluded with the Soviet Union in June 1990 and approved by the U.S. Congress in November 1991. The U.S. and Russia agreed on technical adjustments to that agreement to reflect the establishment of an independent Russia. U.S. Congressional re-approval is not required.
In addition to providing MFN for both parties, the Agreement:
-- provides improved market access and non-discriminatory treatment for U.S. goods and services in Russia and also calls for step-by-step provision of national treatment for U.S. products and services;
-- facilitates business by allowing free operation of commercial representations in each country and by permitting companies to engage and serve as distributors/agents and consultants and to conduct market studies; and
-- offers strong intellectual property rights protection.
6. OPIC Investment Incentive Agreement
On June 17, 1992, the Russian Federation informed the U.S. Government that it has fulfilled all the legal requirements for entry into force of the bilateral OPIC Investment Incentive Agreement signed in Washington on April 3, 1992. As the United States had already completed all its legal requirements, the Agreement entered into force on June 17. This Agreement allowed the Overseas Private Investment Corporation (OPIC) to make its investment insurance, finance and promotion programs available to U.S. businesses considering investing in Russia.
OPIC is a U.S. Government agency that promotes economic growth in developing countries by encouraging U.S. private investment in those nations. OPIC assists American investors through three principal agreements: (1) financing investment projects through direct loans and loan guaranties, (2) insuring investment projects against a broad range of political risks, and (3) providing a variety of investor services, including investment missions, conferences, and business roundtables. OPIC encourages U.S. private investment in sound business projects, thereby improving U.S. global competitiveness, creating American jobs and increasing U.S. exports.
With respect to OPIC activities in the Russian Federation and the other Newly Independent States, OPIC has three major initiatives available to the American business community. OPIC President Ruth Harkin has announced that OPIC will make available up to $500 million in support of defense conversion-related projects in the NIS. OPIC also offers the NIS Private Sector Initiative which assists U.S. companies in locating and exploring private sector investment opportunities throughout the NIS. Finally, to facilitate investment in the pharmaceutical and medical equipment and supplies manufacturing industries, OPIC has also implemented the NIS Health Sector Initiative. In support of these programs, OPIC organizes and executes investment missions to selected NIS countries and also coordinates conferences, seminars, and roundtables in the United States.
7. Eximbank Activity
In response to President Bush's initiative, the Congress repealed legislative restraints on Eximbank activity in Russia on April 1, 1992, by repealing the Stevenson and Byrd amendments that had a $300 million Eximbank financing ceiling and constraints on financing of oil and gas transactions. Through August 1994, Eximbank has approved roughly $1.5 billion worth of financing for exports to Russia.
In July 1993, Eximbank signed an Oil and Gas framework agreement under which Eximbank may provide financing assistance of up to $2 billion for purchases of equipment and services to revitalize Russia's energy sector. Eximbank has supported over a billion dollars' worth of U.S. exports under this agreement to date. Eximbank's Russian partners are the Russian Central Bank and Ministry of Fuel and Energy. Individual transactions under the framework agreement will be considered on a case-by-case basis. repayment terms will be for five years (or possibly longer if appropriate), and the minimum amount of financing for each transaction will be $25 million. Eximbank is prepared to enter into similar arrangements to assist other export sectors such as minerals and timber.
In addition, Eximbank will consider loan and guarantee applications for limited recourse project financing in any sector of the Russian economy where the project will generate hard currency revenues and Eximbank's exposure will be significant--generally at least $50 million. Eximbank is also prepared to support, under its short- and medium-term insurance, loan, and guarantee programs, transactions involving U.S. exports to the Russian Federation where the only available security would be a sovereign obligation or guatantee. In such cases, the obligor or guarantor will be the Bank for Foreign Trade of the Russian Federation (VTB), and the other with the Bank for Foreign Economic Affairs of the Russian Rederation (VEB), acting on behalf of the Russian Federation. Credit guarantee facilities, providing an Eximbank guarantee in medium-term lines of credit from commercial banks, are available to Russian private commercial banks with acceptable levels of capital that can provide satisfactory audited financial statements.