Russia Business Watch

VOL. 21 NO. 2 FALL 2013 WASHINGTON, DC THE JOURNAL OF THE U.S.-RUSSIA BUSINESS COUNCIL

Making Russia’s Global Integration Work for Business

President’s Message p. 1Successfully Structuring a Russian M&A Deal — A Lawyer’s View p. 3Eurasian Integration Project as Response to Globalization-Era Economic Challenges p. 6

USRBC Events pp. 9-23New Members Profiles p. 26

IN THIS ISSUE:

CONTENTS p. 1 PRESIDENT’S MESSAGE

OUTLOOKp. 3 Successfully Structuring a Russian M&A Deal - A Lawyer’s Viewp. 6 The Eurasian Integration Project as a Response to Globalization-Era Economic Challenges

EVENTSp. 9 Automotive & Agricultural Machinery Forump. 15 Luncheon with G20 Sherpa Dr. Ksenia Yudaevap. 16 U.S.-Russia Pacific Aviation Roundtablep. 17 Breakfast Briefing with Deputy Head of the RF Federal Tax Service Alexei Overchukp. 18 Briefing on the BPC Health Working Group p. 19 Briefing with Natalia Lavrova, Visiting Fellow at the Center for Transatlantic Relations at Johns Hopkins SAISp. 21 Debrief on Federal Highway Administrator Mendez’ Trip to Russiap. 22 USRBC Events Calendar

U.S.-RUSSIA RELATIONSp. 24 USRBC SPIEF Dinner

p. 26 NEW MEMBER PROFILES

USRBC STAFFDaniel A. RussellPresident and CEOrussell@usrbc.org / 202-739-9180

•Jeff Barnett Senior Director of Policy and Programsbarnett@usrbc.org / 202-739-9187

•William Beaver Manager of Membership and Programsbeaver@usrbc.org / 202-739-9190

•Jo Bottalico Vice President of Administration and Financebottalico@usrbc.org / 202-739-9188

•Keith Bush Research Directorbush@usrbc.org / 202-739-9186

•Maryia Dauhuliova Head of RF Representation, Moscow Officedauhuliova@usrbc.org / [7] 495-228-5896

•Julia FabensDirector of Membershipfabens@usrbc.org / 202-739-9189

•Svetlana MinjackDirector of Communications and External Affairssminjack@usrbc.org / 202-739-9182

•Alina RuzmetovaMedia/Communications Associateruzmetova@usrbc.org / 202-739-9184

Randi B. LevinasExecutive Vice Presidentlevinas@usrbc.org / 202-739-9196

RUSSIA BUSINESS WATCHThe report of the U.S.-Russia Business Council

1110 Vermont Avenue, NW, Suite 350, Washington, DC 20005Tel: (202) 739-9180 • Fax: (202) 659-5920 • www.usrbc.orgNovinskiy boulevard 8, Office 907, 121099 Moscow, Russia Tel: 7-495-228-5896 • Fax: 7-495-228-5893

Editor: Svetlana Minjack • Assistant Editor: Jeff BarnettGraphics, Design and Production: Alina RuzmetovaResearch Assistants: Katharine Clark, Glyn Cozart, Nikita Ivanov, Bree Swineford

For additional information or copies of Russia Business Watch, please contact USRBC at (202) 739-9180 or email RBW@usrbc.org.

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Klaus Kleinfeld, Chairman of the BoardDaniel A. Russell, President and CEO

BOARD OF DIRECTORS Theodore Austell, III, The Boeing CompanyStephen E. Biegun, Ford Motor CompanyJames P. Bovenzi, General Motors CompanyOlivier Brandicourt, Pfizer Inc.Laura M. Brank, Dechert LLPRandy Bregman, DentonsCarolyn L. Brehm, Procter & GambleRichard Burt, McLarty AssociatesPeter A. Charow, BP America Inc.James F. Collins, U.S. Russia Foundation for Economic Advancement and the Rule of LawMarthin DeBeer, Cisco Systems, Inc.Richard N. Dean, Baker & McKenzieNeil W. Duffin, Exxon Mobil CorporationDorothy Dwoskin, Microsoft CorporationC. Cato Ealy, International PaperTerrence J. English, Baring Vostok Capital Partners Piotr Galitzine, TMK IPSCOToby T. Gati, Akin Gump Strauss Hauer & Feld LLPRalph J. Gerson, Guardian Industries CorporationOleg Goshchansky, KPMGDavid Gray, PwCHerman O. Gref, Sberbank of RussiaDrew J. Guff, Siguler Guff & Company, LPTrevor Gunn, Medtronic, Inc.Jay M. Haft, Renova Group of CompaniesD. Jeffrey Hirschberg, Kalorama Partners, LLCKarl Johansson, EY Alexey Kim, Philip Morris Sales and Marketing Ltd.Klaus Kleinfeld, Alcoa.Ramon Laguarta, PepsiCo, Inc.William C. Lane, Caterpillar Inc.Eugene K. Lawson, Lawson International, Inc.Peter B. Necarsulmer, PBN Hill+Knowlton StrategiesDavid H. Owen, DeloitteAlexander Pertsovsky, Bank of AmericaThomas R. Pickering, The Eurasia FoundationRonald J. Pollett, General Electric CompanyJay R. Pryor, Chevron CorporationPaul Rodzianko, Hermitage Museum Foundation Charles E. Ryan, UFG Asset ManagementWilliam M. Sheedy, Visa Inc.Maurice Tempelsman, Lazare Kaplan International Inc.Peter L. Thoren, Access Industries, Inc.Clyde C. Tuggle, The Coca-Cola CompanyAlberto Verme, CitiMark von Pentz, Deere & CompanyDaniel H. Yergin, IHS CERA

HONORARY DIRECTOR Peter J. Pettibone, Pettibone International LLC

CHAIRMEN EMERITUS Robert S. Strauss E. Neville Isdell

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PRESIDENT’S MESSAGEPRESIDENT’S MESSAGE

Please let me express my appreciation for your warm welcome and support in my first months at the U.S.-Russia Business Council. I am enthusiastic about the Council’s mission, which, simply put, is to support a strong, mutually beneficial commercial relationship between Russia and the United States. The relationship has made landmark progress over the past two decades, thanks to the combined efforts of the business communities and governments. That said, much remains to be done, and there are new opportunities created by last year’s successful campaign to grant Permanent Normal Trade Relations to Russia and lift application of the Jackson-Vanik amendment. Russian-American political relations, of course, will inevitably have ups and downs, but I remain optimistic about the long-term potential of economic ties to deliver concrete benefits to both nations, particularly now that Russia has joined the United States as a member of the World Trade Organization.

The trends are clear despite the state of the global economy. Bilateral trade hit a record $40 billion in 2012 and is on track to meet that number this year. Just as importantly, trade and investment are increasingly two way. The exploration and production deal signed by ExxonMobil and Rosneft provides a clear example. ExxonMobil will partner with Rosneft to explore offshore oil and gas deposits and onshore tight oil fields, and Rosneft will take a stake in several Gulf of Mexico and Alaska exploration projects. Internationally minded Russian companies are taking a fresh look at opportunities in the U.S. market. TMK IPSCO, the U.S. subsidiary of the Russian maker of tubulars for the oil and gas sector, opened a new global R&D

facility in Houston last year and EuroChem has announced that it plans to build a $1.3 billion chemical plant in Louisiana. Several Russian technology firms are making moves into Silicon Valley and the Boston technology corridor, as American companies expand their investments in Russia’s regions beyond Moscow and St. Petersburg.

Against this backdrop, the Council is well positioned to help develop a long-term strategic vision of the economic and commercial relationship and create the conditions for greater two-way trade and investment. With your continued support, I am convinced that the Council can help our members succeed in the marketplace and make a difference in overall relations. Among my policy priorities are advocacy for enhanced dialogue between our governments and business communities, open and fair investment environments, reduced trade barriers and adherence to globally accepted trade rules. Please be assured that I am committed to providing the highest level of service to each member of the U.S.-Russia Business Council.

I look forward to charting a course for the Council with your input and collaboration, and please do not hesitate to contact me personally if there is anything I can do for you to advance our shared objectives.

Sincerely,

Dan Russell

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Key Differentiators of the USRBCStrategic Planning: USRBC works closely with our members’ global teams focused on U.S.-Russia commercial relations, providing counsel, guidance and insights to key corporate stakeholders at a company’s U.S. or Russian headquarters, Russian and European operations and Washington, DC, offices to advance their goals in the Russian and U.S. markets.

Access: With USRBC offices in Washington, D.C., and in Moscow, Russia, our excellent relationships with both the U.S. and Russian governments offer unparalleled and timely access to key policymakers.

Policy Leadership: USRBC’s U.S. and Russian policy work reflects the priorities and concerns of our membership. We not only serve as an important amplifier to members’ commercial interests, but we also lend the important support of a cross-sectoral association with a keen sensitivity to broader bilateral concerns.

Diverse, Active Membership: Our membership ranges from senior Global 500 firms to niche experts in the U.S. and Russian marketplace and a growing number of Russian companies looking to expand their global presence.

The U.S.-Russia Business Council (USRBC), a premier trade association based in Washington, D.C. with an office in Moscow, represents the trade and investment interests of its U.S. and Russian member companies on bilateral commercial issues.

The U.S.-Russia Business Council (USRBC)

The USRBC seeks to expand and enhance the U.S.-Russian commercial relationship by engaging in advocacy efforts with both the U.S. and Russian governments on behalf of its members; assisting member companies with troubleshooting and new business development; providing information and analyses to support business decisions; and facilitating access and networking opportunities, including briefings with government officials and private-sector leaders.

www.usrbc.orgwww.facebook.com/usrbc

Headquarters The U.S.-Russia Business Council 1110 Vermont Avenue, NW, Suite 350 Washington, DC 20005 +1 (202) 739-9180Julia Fabens, Director of Membershipfabens@usrbc.org

Representative Office in Moscow Американо-Российский Деловой Совет Novinskiy Boulevard 8, Office 907 121099 Moscow Office: +7 (495) 228-5896 Maryia Dauhuliova, Head of RF Representationdauhuliova@usrbc.org

Contact Us

USRBCPageAd.indd 24 10/16/2013 11:17:44 AM

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Successfully Structuring a Russian M&A Deal – A Lawyer’s View

Russia, the “R” in the BRIC group of next generation emerging economies, remains a key focus for international investors seek-ing to participate in its rapidly changing, exciting economy.

This article shares leading tips to ensure, to the extent possible, a successful Russian M&A transaction.

1. Develop a deep knowledge of the Russian market and your target industry

Knowledge is power: The more you know about the Russian market, the better the deals you will make. The more aware you are of the external and internal value drivers and the external and internal risk factors, the better able you will be to pick your tar-gets. These targets may include attractive prospects with high growth potential that rival investors, with less market insight, have overlooked. The more successful deals that you are involved in, and the better the quality of your track record, the more demonstrable your expertise will be in your chosen market.

Partners: If you are a domestic Russian investor, consider attracting international investors to enhance the target company’s long term prospects globally. If you are an international investor consider partnering with domestic players to minimize political and commercial risk. Domestic investors may also seek international financial insti-tutions (“IFIs”), such as EBRD and IFC, as partners to provide protection against political risk and to capitalize on their repu-tational “seal of quality.”

If you are an international investor, bear in mind that the majority of Russian M&A activity remains domestic and you may therefore be competing against major

domestic players who have been immersed in the market for a generation.

In a joint venture or sub-100 percent acqui-sition scenario, where there will be an ongo-ing relationship with your counterparty, they will place a value on your knowledge, and the ongoing value you will bring to the business as a result, that will increase the attraction of your proposal, even in the face of rival offers at a higher value.

2. Choose the right counsel

Choose an experienced legal counsel at an early stage before any binding document is signed. Ensure that your counsel is proac-tive and can add value to the investment over its lifespan by:

•being available and responsive, whether to advise on big or small issues, whenever needed;

•having knowledge about the industry, the Russian market generally, and issues that will arise for the target company based on its current maturity and growth expectations; and

•including them at appropriate stages without draining your resources and running over budget.

3. Understand the corporate structures used in Russian deals

The drafting and negotiation of the deal documents and the discussion of a Russian M&A deal structure will occupy the vast majority of your deal timetable and legal budget.

Typical structure: As a result of various factors outlined below, the typical structure for a Russian M&A deal is:

•a share, rather than asset, deal (except pure technology plays, distressed sales or other situations where an acquisition of shares in a corporate target is not attractive due to “historical” risks);

•the Russian target company;•an offshore (for example, Cyprus) holding

company;•offshore special purpose vehicle

companies through which interests in the offshore holding will be held;

•Russian law share transfer and security documents, where applicable; and

•English law over-arching transaction documents.

Russian target company: The two principal forms of Russian commercial entities you will encounter in M&A transactions are the limited liability company (“LLC”) and joint stock company (“JSC”).

Holding company: Cyprus remains a popu-lar choice for the jurisdiction of the holding company of a Russian target. The double tax treaty between Cyprus and Russia reduces the withholding tax rate on divi-dends in respect of qualified investments to 5 percent. In addition, Cyprus company law is based on English company law and therefore the use of a Cyprus holding com-pany is consistent with the predominant use of English law transaction documents.

Russian or English law: There are a number of complexities surrounding Russian law relevant to M&A so that, notwithstanding recent improvements and clarifications, other than in specific instances, it remains largely unworkable as the governing law for sophisticated principal documents in a Russian M&A deal.

English law is established as the most wide-

The following is an excerpted version of a Baker Botts report on structuring M&A deals for USRBC members. The full report can be read at www.usrbc.org.

Key Differentiators of the USRBCStrategic Planning: USRBC works closely with our members’ global teams focused on U.S.-Russia commercial relations, providing counsel, guidance and insights to key corporate stakeholders at a company’s U.S. or Russian headquarters, Russian and European operations and Washington, DC, offices to advance their goals in the Russian and U.S. markets.

Access: With USRBC offices in Washington, D.C., and in Moscow, Russia, our excellent relationships with both the U.S. and Russian governments offer unparalleled and timely access to key policymakers.

Policy Leadership: USRBC’s U.S. and Russian policy work reflects the priorities and concerns of our membership. We not only serve as an important amplifier to members’ commercial interests, but we also lend the important support of a cross-sectoral association with a keen sensitivity to broader bilateral concerns.

Diverse, Active Membership: Our membership ranges from senior Global 500 firms to niche experts in the U.S. and Russian marketplace and a growing number of Russian companies looking to expand their global presence.

The U.S.-Russia Business Council (USRBC), a premier trade association based in Washington, D.C. with an office in Moscow, represents the trade and investment interests of its U.S. and Russian member companies on bilateral commercial issues.

The U.S.-Russia Business Council (USRBC)

The USRBC seeks to expand and enhance the U.S.-Russian commercial relationship by engaging in advocacy efforts with both the U.S. and Russian governments on behalf of its members; assisting member companies with troubleshooting and new business development; providing information and analyses to support business decisions; and facilitating access and networking opportunities, including briefings with government officials and private-sector leaders.

www.usrbc.orgwww.facebook.com/usrbc

Headquarters The U.S.-Russia Business Council 1110 Vermont Avenue, NW, Suite 350 Washington, DC 20005 +1 (202) 739-9180Julia Fabens, Director of Membershipfabens@usrbc.org

Representative Office in Moscow Американо-Российский Деловой Совет Novinskiy Boulevard 8, Office 907 121099 Moscow Office: +7 (495) 228-5896 Maryia Dauhuliova, Head of RF Representationdauhuliova@usrbc.org

Contact Us

USRBCPageAd.indd 24 10/16/2013 11:17:44 AM

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ly used governing law in Russian interna-tional M&A due to a number of advantages:

•With English law’s principle of freedom of contract, the parties can be confident that what they have agreed in writing will be the agreement that binds them. There are hundreds of years of common law judgments and an established system of precedent (unlike the Russian court system) so there is likely to be an existing decision based on comparable circumstances but, even if the circumstances are new, the courts can respond and make new law without the need for a central codified law to be enacted.

It is also relevant that English remains the language of international business, with the result that the participants in the transac-tion are more likely to be able to follow and understand the deal as it develops.

Role of Russian law: Exceptions to the general use of English law transaction docu-ments include:

•Russian law share transfer documents, especially where, as is the case for LLCs, these must be notarized before a Russian notary; and

•Russian law pledges over participation interests in LLCs or the shares in the Russian target company.

Share Purchase Agreement: Many of the constituent parts of a typical M&A deal structure are difficult to replicate under Russian law. For example:

•warranties and indemnities and restrictive covenants (those are either not recognized under Russian law or remain untested); and

•certain conditions precedent (Russian law requires contractual conditions to be outside the control of the parties).

It is therefore common practice, even in respect of Russian-level transactions, to provide for English law share purchase agreements in respect of shares in JSCs or, in LLCs, to wrap a Russian law transfer agreement (which must be notarized) in an English law share purchase agreement that sets out the steps to take place before and on completion and the remedies for any breach.

Shareholders Agreement: Shareholders agreements were not recognized by Russian law until 2009. While such agreements had never been expressly prohibited, the approach of Russian company law to regu-lating the relationship between sharehold-

ers (participants) in a Russian company, as consistently upheld by Russian courts, was traditionally restrictive and based on the idea that such a relationship may only be governed by Russian company law and the company’s charter. The ability of share-holders to expand or modify their respective rights and obligations in the company’s charter was (and remains) rather limited by Russian company law.

The 2009 amendments to Russian law introduced the concept of a shareholder/participant agreement in respect of Russian companies. The amendments provided that an agreement between the sharehold-ers of a Russian company may regulate matters including:

•the exercise of voting rights;•the obligation of a shareholder to sell its

shares at a pre-determined price upon the occurrence of certain events;

•the obligation of a shareholder not to sell its shares until certain events occur; and

•the taking by the shareholders of other actions relating to the management, operation, reorganization and liquidation of a Russian company.

(Note that, since Russian company law defines a shareholders agreement as an agreement between shareholders, we avoid making the Russian company itself party to the agreement. Instead any cov-

enants to bind the company post-closing (see Part 9) will have to be included in a separate agreement between the company and the investor(s).) While Russian com-pany law therefore would seem to provide the Russian company with the framework required to govern their relationship, the 2009 amendments were very limited and rather ambiguously drafted and fail to pro-vide clarity as to how the shareholders agreement could operate in the context of and interact with the mandatory provi-sions of Russian company law which have historically been very rigid.

Given the uncertainties described above, most legal practitioners agree that the new regime has probably given rise to more questions than it has answered. It therefore remains common practice to regulate shareholders agreements with a law other than Russian law. The sensible course of action where using non-Russian law is to seek to ensure the shareholders agreement meets mandatory Russian law requirements where possible, for example:

•execution as a single document signed by all parties to it, and not in counterparts; and

•as to its scope and parties.As a result of all the above, English law shareholders agreements are commonly used at the foreign holding company level, rather than at the Russian operating com-pany level.

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4. First, a simple but effective term sheet

It will both simplify and speed up your trans-action if you agree the overall structure of your deal upfront with your counter-party. Your ability to renegotiate your deal structure after initial closing will be limited given that your negotiation position, having already made your initial investment, will be weak. A post-closing reorganization will be burdensome, time consuming and expensive and may impact any financing arrangements you have put in place.

The term sheet should be based on a pre-liminary tax analysis of the position of you as investor, the target company, the other shareholders and management (if they will remain involved in the company).

Do not become bogged down in negotiating extensive detail in the term sheet. It will be largely non-binding and you will waste time and expense seeking to finalize all aspects of the transaction at such an early stage. A fully fledged term sheet may also hamper your later ability to renegotiate, as new matters arise.

The provisions of the term sheet that should be binding are:

•exclusivity (if the counterparty will agree), typically with a duration of around three months (Note that under an English law term sheet, a positive obligation to negotiate will be unenforceable.);

•confidentiality and no announcements; and

•a break fee linked to the exclusivity provision (Note that under an English law term sheet, it is not possible to provide for a break fee to be a penalty payment on breach. In order to be enforceable, the break fee should be a reasonable pre-estimate of your wasted costs.).

5. Demand and do effective and full due diligence

Do not rely on the target company’s own valuation of its business or the investment bank’s sale memorandum. You need to “kick the tires” yourself to the level of your risk appetite. You will need to work closely with the target throughout the due diligence process to understand better any red flag issues.

Material due diligence issues should be addressed in the purchase agreement by:

•indemnities;

•consideration holdbacks or escrows; or•price reductions.

In critical scenarios, walk away from the deal.

At the same time, accept that most Russian businesses will not be perfect and due diligence issues will almost always arise.

6. Develop solid negotiating tactics

Russian language: Since most Russian M&A is domestic, most Russian M&A deals are negotiated face to face in the Russian language. With the involvement of an inter-national investor or an international law firm, more negotiation may be in English, but your negotiation team should include at least one person with perfect Russian language skills.

Keep perspective: As in the due diligence process, don’t concentrate excessively or for any great length of time on issues or disagreements that are immaterial. Stay nimble and focus on the issues that truly matter. Know when to compromise or concede and focus on getting the deal done. Know and agree in advance with your negotiation team what is most important and agree on your tactics.

Know your counterpart: Identify the issues that the other side really cares about, so you can spot when they are posturing. Take into account the personality of the coun-terpart lead negotiator. Be flexible: There is no single best way to handle negotia-tions. Decide on your negotiation team based on both their prior experience and personalities.

7. The importance of management

Exiting management: Will the incumbent management of the target lose their jobs if your deal closes? If so, ensuring a smooth deal process and minimizing value destruc-tion will depend on the nature of the sever-ance package being offered to outgoing management.

Ongoing management: If management is to continue, or new management is to be put in place, you will need to craft appropriate incentives to keep them in place. However, the transaction documents should ensure that, following a majority investment, you have the ability to remove and replace key management through investor veto rights.Make sure you assess the management’s capability to grow the business with you before you invest. This can be achieved

simply by getting to know them during the course of the transaction, but also by check-ing references. Are your and their interests aligned?

Your management representatives: You will need to decide how involved you wish to be in the business: do you want to be involved in operational management (more likely if you are a strategic buyer) or retain only strategic supervision (more likely if you are a financial investor)?

Nominee directors can be appointed at the operating company level and/or at the holding company level. If you place them at the Russian operating company level, your veto rights will be exercised under the shareholders agreement predominantly as Board Reserved Matters, and will have to be bolstered by appropriate provisions of the operating company’s Charter.

Rights at the operating company level will give you an ongoing operational input, but will place your nominees in a position that may make it difficult to distinguish them from the management if something goes wrong with the group.

Bear in mind that the type of Russian oper-ating company (LLC or JSC) will have a bearing in the scope of decisions that can be delegated to the holding company as shareholder.

Succession: Remember also to look ahead to the future management of your invest-ment. Many Russian companies that are ripe for acquisition or investment were launched by entrepreneurs who may now be aging.

8. Lay a good framework of compliance through the deal documents

Include in your deal documents proper controls to avoid issues arising post-closing such as:

•issues arising under the Foreign Corrupt Practices Act of 1977 (“FCPA”). If you raise FCPA at the outset, the target will know that it is an issue and, if the company is not already clean, management will likely take steps for it to become so before closing (Note that anti-bribery legislation was formally adopted into Russian law in 2011 and, with effect from 13 January 2012, the Russian Federation ratified the OECD Convention on Combating Bribery.);

•financial and tax compliance;•legal and regulatory compliance; and

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•information rights and shareholder disclosure guidelines - establish clear reporting and inspection rights in the shareholders agreement or policy agreement (see footnote 1) with access to management and inspection rights.

9. Plan your exit

If you are a financial investor you will gen-erally have different motivations than a strategic buyer. You will be looking for tar-gets that offer value that can be unlocked either through better management and/or a break-up or by leveraging the asset (in a low cost debt environment).

Decide on your ideal exit strategy at the outset and test its viability through the due diligence process. Your exit strategy and the steps required to implement it should be set out in the transaction documenta-tion. Where management and existing shareholders will have an ongoing role, encourage them to buy-in to your exit strat-egy with value added support by providing guidance and support on:

•financial accounting;•exit strategy and process; •pre-IPO assistance, including in respect

of improving corporate governance and pre-IPO restructuring; and

•investment banking relationships.With regard to the last bullet point above, be aware that an IPO of the Russian operating company will not be possible if it is an LLC or a CJSC, since participation interests in an LLC or shares in a CJSC may not be listed.

Conclusion: The British Prime Minister, Winston Churchill, famously described Russia as “a riddle wrapped in a mystery inside an enigma”. While it is true that the challenges of Russian M&A are not insignificant, with the right structure and the right advisers you can unlock the right deal and deliver value to both you and your partners.

Currently, in global trade we face multiple changes for which it is very important to find correct responses to. Economic instability and the Doha Round crisis have forced a significant number of nations to step up efforts at establishing regional integration bodies as alternative tools to export their goods to desirable markets. That could radically change the architecture of the global or multilateral trading system.

In light of those developments, Russia’s role and standing in global trade have been changing. Last year saw the completion of its lengthy WTO accession history. On a parallel basis, the regional integration project in Eurasia is under way and our trade and economic relations with next door neighbors and key partners are undergoing transformation as well.

What is the Customs Union?

As it stands now, the Customs Union between Belarus, Kazakhstan and Russia is the next stage of economic integration based on our nations’ long-standing economic, trade and manufacturing relations, established cooperation and mutually dependent markets.

Starting in the 1990s, the effort at setting up and fine-tuning cooperative tools in the Eurasian economic space has been undertaken through bilateral free trade agreements. As a result, in late 2011, Russia hosted the signing of a CIS Free Trade Agreement that replaced numerous bilateral agreements between CIS member states (Armenia, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Uzbekistan, and Ukraine).

In the meantime, Belarus, Kazakhstan and Russia continued to grow even more closely integrated. In 2010, the three nations formed a Customs Union, and, on July 1, 2010, they abolished internal customs borders and started sharing a single commodities and goods market. In January 2012, 17 international agreements went into effect, which created a Single Economic Space (SES), where four freedoms are to be implemented: freedom of movement of

goods, capital, services, and labor within a common customs territory.

The next step would be the creation, in 2015, of the Eurasian Economic Union, an even more advanced economic integration project.

Over the last few decades specifically, regional economic integration has been a response to the challenges posed by global crises and a way to encourage trade in many nations in the Asia-Pacific region, as well as in Central and Latin America. Such global players as the U.S. and the EU are now in talks to establish a Transatlantic Trade and Investment Partnership. The United States is also coordinating a process to put in place a Trans-Pacific Partnership geared to liberalizing trade among 13 nations, including Japan, which at the same time is negotiating bilaterally with the EU.

Our efforts are intended to create a more transparent and predictable environment for trade development, both between our nations and for our trade partners. The reference is to creating a market that is attractive for manufacturers, services providers and investors; a market that is vast in size yet subject to unified trade regulation.

Against the background of declining global trade growth, the growth of mutual trade among the Union’s member states significantly exceeds the growth of foreign trade. In 2010, foreign trade grew somewhat faster year-on-year: a 33 percent increase for the CU against a 29.1 percent growth of mutual trade. However, in 2011 foreign trade growth took a backseat with 32.7 percent growth versus a 33.9 percent increase in mutual trade. In 2012, mutual trade grew more than twice as fast, 7.5 percent vs. 2.6 percent.

In the meantime, where foreign trade growth primarily results from increased minerals exports and higher prices, mutual trade is a great deal more diversified as a consequence of removing administrative, technical and other non-tariff barriers and of increased cooperation in creating added value.

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The Eurasian Integration Project as a Response to Globalization-Era Economic Challenges By Andrey Slepnev, Minister of Trade, Eurasian Economic Commission

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Baker Botts has been involved in the Russia/CIS region since the mid-1970s and has extensive experience advising both Russian and international investors in a wide range of deals, from relatively simple M&A transactions to multi-jurisdictional, multi-level joint ventures. While the firm specializes in the energy and technology industries, it also has a thorough knowl-edge of the Russian financial services, real estate, aviation and transport industries.

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Decision-Making in the Customs Union

The Customs Union’s highest governing body is the Supreme Eurasian Economic Council, which is convened either at the head of state level, or at the level of heads of governments of the three nations and that makes strategic decisions to further develop the CU. For instance, its decisions concern expanding the authority of the CU regulators, drafting new treaties and agreements, and commencing trade negotiations, etc.

Most of the CU decisions are made by the Council and the Board of the Eurasian Economic Commission (EEC). The Commission creates Customs Union trade regulations. The responsibility for establishing trade regimes with other nations, tariff and non-tariff regulation, customs administration, technical regulation, sanitary and phytosanitary measures, and trade negotiations have been delegated to the Commission by the member states.

Following Kazakhstan’s future WTO accession, a consolidated Kazakhstan-Russia position is likely to be devised at the CU level regarding WTO negotiations. In addition, effort is already under way to determine the role of the supranational entity in the context of negotiations on

The bulk of the Commission’s decisions are direct action decisions. Examples include setting the import customs rates, the amount of tariff quotas, applying market protection measures, creating CU technical rules, determining the rules of customs administration, etc.

That nations have delegated authority does not mean they have removed themselves from decision-making. The Commission may make decisions while taking into consideration the opinions of relevant national agencies and business communities, but it proceeds from the interests of the entire Customs Union market. Issues are debated in specialized consultative committees comprising representatives of the three parties and also attended, on an invitation basis, by businessmen. A special consultative board has been established for interacting with the business community.

In addition, a judicial appeals authority — the EurAsEC Court — has been created with the authority to handle disputes regarding application of the Commission’s decisions.

The Customs Union, and, subsequently, the Eurasian Economic Union, is open for new membership. Clearly, whether or not to join the Customs Union is the sovereign choice of the leadership of candidate nations.

Active negotiations are in progress with the Kyrgyz Republic as part of an effort to expand the CU membership. In addition, on September 3, Republic of Armenia President S. Sargsian stated his nation’s intent to join the CU during a Moscow visit.

Customs Union and the WTO

In August 2012, Russia was the first of the CU members to accede to the WTO, having completed an almost two decades long negotiations. At that time, the obligations recorded in the accession protocol, which pertain to matters delegated to the CU level, became part and parcel of the supranational legal framework. In layman’s terms, obligations assumed by Russia in joining the WTO began to be incorporated into the CU/SES international agreements. De facto Kazakhstan and Belarus, without accessing the advantages available to WTO members, are required to pursue a trade policy that conforms to that organization’s requirements.

The legal framework for such activities is provided for by the Treaty on the Functioning of the Customs Union in the Framework of the Multilateral Trading System.

The key results of EEC’s work to honor Russia’s obligations as a WTO member concern tariff regulation and sanitary and

Background: In 2012, mutual trade broke down as follows: machines, equipment, and means of transportation accounted for 21.1 percent, while exports grew by 14.6 percent. The physical volume of deliveries grew: for railway engines, by 140 percent; railway cars and surface streetcars, by a factor of 43; computers and parts and assemblies for them, by 450 percent; agricultural harvesting and threshing machines, by 950 percent; passenger cars, by 68 percent; electric transformers, by 67 percent; vacuum cleaners, by 140 percent. Foodstuffs and raw materials to produce them (other than textiles) accounted for 10.2 percent and grew by 20.3 percent.

In addition, the Commission per-forms a number of functions in such areas as macroeconomic policies; competition policies; industrial and agricultural sub-sidies; energy policies; natural monopolies; government and municipal procurement; mutual trade in services, investments; transportation and freight traffic; monetary policies; protection of results of intellectual activities and means of goods, works, and services individualization; labor migration; financial markets (banking, insurance, currency markets, securities market).

EEC StructureThe EurAsEC Board comprises nine international ministerial level civil servants, three from each of the CU member nations. Technically, the Board needs a qualified majority (2/3) to make a decision. However, as a rule decisions are made by consensus.

The EEC Council consists of the three Parties' representatives holding deputy PM posts and makes decisions on sensitive matters exclusively via consensus.

New Basic Agreements between Russia and Kazakhstan and the EU. A significant proportion of the trade sections in those agreements is subject to the CU’s supranational jurisdiction, which requires a unified position to be formed with due account taken of the interests of the entire Single Economic Space.

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phytosanitary measures. Last year, we adopted a new version of the Common Customs Tariff of the Customs Union (CCT CU). Starting this year, the CCT is going to be annually amended in accordance with a schedule to reduce the customs tariff. Last year, approximately 1,100 items were revised, and on September 1, 2013 rates for 5,100 goods items were reduced.

We have also amended the Common Veterinary (veterinary/sanitary) Requirements applicable to goods subject to veterinary control and Common Veterinary Certificate Forms. Technical Regulations and regulatory documents in the sanitary and phytosanitary measures area are adopted in accordance with WTO standards and practices; they go through a lengthy public debate procedure.

The Commission’s Department authorized to conduct investigations into application of trade protection measures also operates in strict compliance with the provisions of the WTO’s Anti-Dumping Agreement, the Agreement on Subsidies and Countervailing Measures and the Agreement on Safeguards.

On the whole, the position of the member nations vis-à-vis the WTO is fairly transparent as both Kazakhstan and Belarus have confirmed their intent to join the organization and observe its rules.

However, participation in the WTO requires us not just to formally observe assumed obligations, but also to contribute to the development of the trade organization itself. The EurAsEC is actively involved in developing Russia’s position on a number of WTO matters.

Thus, talks on the Trade Facilitation Agreement (TFA) are nearing completion, whose objective is to devise such universally-recognized rules and provisions as to significantly accelerate goods turnover and facilitate the passage of commercial cargoes through customs and other accompanying procedures and formalities.

According to WTO estimates, the TFA’s implementation may generate an additional $1 trillion for the global economy. Reduced costs, optimized customs payments systems, improved access to regulatory and trade-regulating information, better cooperation between customs and other agencies can save roughly 5 percent of overall trade costs.

We are confident that the Agreement will be of vast importance for Russia as a WTO

member as well as for Kazakhstan and Belarus. The CU must take advantage of a chance to introduce the world’s best practices at the supranational level.

Simultaneously, we have been monitoring global trends related to the multilateral trading system, in particular expansion of the network of bilateral and multilateral preferential trade agreements (PTA). Already over 350 regional trade agreements are in effect, while the number of negotiations is constantly growing. Obviously, in a few years, most of the global trade will be governed by PTAs.

Modern PTAs do not limit themselves to the matters of liberalizing trade in goods, but also cover trade in services, investment terms, IP rights protection, preferential government procurement regimes, cooperation in technical regulation, and sanitary and phytosanitary measures.

At this point, it is extremely important to prevent imbalances and distortions caused by stagnation of unified global standards and by the development of a multitude of various bilateral regulations. The existence of numerous mutually incompatible agreements would lead to destruction of established production chains and to a new wave of regional protectionism.

In our opinion, it is exactly the WTO that must lead the structuring of that activity and maximize the impact of the parties’ interest on multilateral trade while minimizing the risks. It could result in the creation of global standards for PTAs that would make them mutually compatible. In addition, the WTO should work to systematize the experience that is being developed in regulation of these agreements and to push for such rules to be transitioned to the universal level across the organization.

Avenues of Cooperation between the Customs Union and the USA

The United States is not only a key trading partner of the Customs Union member nations but also a potentially important partner in developing the emerging insti-tutions and regulatory bodies in Eurasia.

In 2012, the U.S. accounted for 3.4 per-cent of the foreign trade of CU/SES mem-ber nations, while the U.S.-Russia trade was $40 billion. The CU’s exports to the U.S. in 2012 were dominated by mineral resources (36 percent), chemical prod-ucts (21 percent), and metals and items made out of metals (19 percent). The principal imports from the U.S. in 2012 were vehicles, equipment, and other types

of transportation (54 percent), chemical products and rubber (15 percent), as well as foodstuffs and agricultural raw materi-als (13 percent).

However, our trade and economic relations are handicapped by the remaining barriers in mutual trade.

EEC regularly monitors restrictive trade measures targeting goods from the Customs Union member nations on external markets. Regrettably, based on monitoring results in Q2 2013, the U.S. applies 19 such restrictive measures, or 19 percent of the total number of restrictive measures employed by third countries.

Out of those, nine measures are economic sanctions against the Republic of Belarus that concern primarily its petrochemical and metallurgical industries. The U.S. uses five anti-dumping measures against Russian-manufactured fertilizer and silicon metals, Belarus-manufactured rebar and Kazakhstan-produced silicon manganese. A measure against Russia’s urea and metal silicon is being revised but antidumping duties remain in effect.

An investigation is also underway into applying an antidumping measure against ammonium nitrate to a nitrogen sulfate mix imported from Russia. In addition, the United States commenced three antidumping investigations into steel and uranium products from the Russian Federation. Altogether, the United States applies 8 measures to Russian goods and commodities, 10 to Belarus’ and 1 to Kazakhstan’s.

The EEC is making progress on certain matters of trade, such as exports from the United States of beef and pork contain-ing ractopamine and tetracycline. We are confident that building up the practice of regular consultations on ways of simplify-ing trade is extremely important and such opportunities are not to be ignored.

In conclusion, it is worth noting that we pay special attention to interactions with the business community in implementing the WTO agenda. June 2012 saw the signing of a Memorandum of Cooperation between the Eurasian Economic Commission and the Belarus-Kazakhstan-Russia Business Dialogue. A key area of interactions with the business community is to monitor infor-mation on external trade barriers and the examination of and assistance in removing barriers preventing goods and services from accessing third country markets. Hopefully, the U.S. business community will soon be able to join this effort. n

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The following is an excerpt of Deputy Minister Rakhmanov’s address.

“…Everybody knows about the multipli-cation effect of the automotive industry, when every job can create from 8 to 16 jobs in other sectors. For this reason, Russia and the Russian government will continuously support the development of the automotive industry. Car sales grew by 11 percent in 2012, contrasted with a decline in the European market. This is a good sign that Russia could become the largest car market in Europe in the next year or two. However, we estimate that growth in 2013 will be modest, and I think we will be lucky if can at least remain at the 2012 level….

According to our automotive industry devel-opment strategy, we are planning to pro-duce 3 million cars annually in Russia by 2020. We believe that using a strategic approach where Russian companies work hand-in-hand with their foreign partners is how we can achieve that goal….

Russian customers like cars. They like to buy reliable cars, to buy cars that bring them joy. I don’t know how it is in the U.S., but in Russia a car purchase has become an emotional event. If you don’t catch your customer with a flashy design and with some interesting features, people won’t buy it no matter how economical it is. But we still see that the major market segment is occupied by budget cars. However, it’s no longer the format of VAZ vehicles…. Now, we are talking about a new portfolio that actually is appealing to the Russian customer.

Yes, it’s a big market, but it’s never going to be as big as China. We will never set that kind of record. But with the car pen-etration rate still at a level of 250 cars per 1,000 people, the Russian market clearly has room to grow. We believe that by 2020, this penetration rate will increase to 400 cars per 1,000 people, which basi-cally gives us confidence that the Russian automotive industry will be producing 3.5 million to 4 million cars per year.

In December 2012, the Russian gov-ernment adopted the State Program to increase the competitiveness of the Russian economy, and there is a subpro-gram devoted to the automotive industry. In order to support the automotive industry — and we are talking about original equip-ment manufacturers (OEMs) and suppliers — this program will continue to be revised toward offering a better package to all auto-motive companies operating in Russia. We truly treat all the foreign companies who operate in Russia and have their produc-tion facilities there as Russian… .

What is especially important is the develop-ment of component manufacturing…. You cannot produce quality and reliable cars using substandard components. And this is where I believe OEMs have to set the trend, because in this chicken-and-egg problem, we have to somehow make the first step. And it was absolutely clear for us that the first step is to be made by OEMs.

Do you know that approximately 300 invest-ment agreements and memorandums were signed by the Ministry of Finance last year in order to allow these component manu-facturers to come to Russia and develop their businesses? In addition to that, we have a strong emphasis on the develop-ment of special economic zones.

We are ready to create all the necessary conditions for investors and component manufacturers and follow them through the process of doing business in Russia and, if necessary, to offer our help and support in any issues that might arise. Investment support is extremely important, and there

April 3, 2013 ● Detroit, MI

USRBC Automotive & Agricultural Machinery ForumKeynote Address: Alexey Rakhmanov Deputy Minister of Industry and Trade of the Russian Federation

Deputy Minister Rakhmanov addresses Forum participants.

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tsare regions that have been competing to provide better support.

For example, the number of component manufacturers in Kaluga increased dra-matically when the local government decid-ed not only to invest in the infrastructure for that development, but also to appoint an official regional representative who would be responsible for dealing with any problems that arise throughout the entire investment process….

Turning to agricultural machinery, here we have a slightly different situation. Our WTO accession agreement didn’t allow us to offer a similar regime to what we currently have in the automotive sector….

In order to become one of the world’s lead-ing food producers, we need to have mod-ern equipment and modern technologies. The fundamental problem is that Russian agribusiness is still living in the last cen-tury…. Currently, many Russian agricultural producers barely make money and, as a consequence, don’t have enough money to buy new machines. At the same time, we have huge companies that have millions of hectares and a pretty large margin, but surprisingly enough when you read newspa-pers you see that about 50 percent of their net profit comes from federal subsidies. To deal with such an imbalance, together with the Ministry of Agriculture, we have to come to a clear understanding of whom we support.

We need to understand their demands and what they plan to build as a business…. I personally believe that competition is the only way to improve the current situation, not only for those companies that produce agricultural machinery, but also for agricul-tural companies themselves.

And this is where we have to do some-thing about establishing fair competition. Obviously, Russian companies who pro-duce agricultural machinery have a strong public image and it’s impossible not to sup-port them. But at the same time, if we can demonstrate that foreign companies will announce their projects under the slogan “For Better Competition” and come with those projects to Russia in order to get the place they deserve, I am sure we can build a reasonable system in which we will be able to build a strong partnership and develop the business of American compa-nies. We basically have less freedom for maneuver because we are now in the WTO; but at the same time, I am sure that even those terms and conditions can help us build an agribusiness sector that will not only serve the purposes of the machine-building industry but also will lead to Russia

becoming one of the top agricultural pro-ducers….”

Keynote Address:Matthew EdwardsDirector, Office of Russia, Ukraine & EurasiaU.S. Department of Commerce

The following is an excerpt of Mr. Edwards’ address.

“…I have two audiences here, but I really have just one message, which is simply this: Those of us in the U.S. government who work every day on the Russian-American relationship want you to be here, to meet one another, to explore a full range of what you will be able to do together from a commercial stand point. We want you to succeed in developing the kinds of ties that lead to mutually-rewarding, win-win business arrangements.

That message may seem very simple, but it’s not trivial in the current environment. Let me say a little bit more about why I think it’s so important. From the companies with whom I speak and from the visits I make to Russia several times a year, it’s clear to me that, although U.S. and Russian companies have increased their knowledge of one another tremendously over the last two decades, we are still at the very early stage of learning how to do business with one another. I think a big reason for this is, of course, that the Russian business environment has been changing so dramatically in terms of the country’s becoming integrated into global supply chains. The most significant development

of the last decade has been Russia’s entry into the World Trade Organization (WTO), which puts it on equal footing with all our other major trade partners, at least in terms of the principles by which we regulate and conduct trade relations.

Russia’s entry into the WTO is often talked about in terms of being an event, but really what I’d like to encourage people to do is to think about it more in terms of a process. And when one thinks of the Russia’s entry to the WTO as a process, one gets much more appreciation for all of the things that Russia, its legislators, its regulators, and its business people have accomplished during the last 18 years. That process has required a tremendous amount of change to basic legislation on everything from financial services to technical standards, trade remedy laws, intellectual property rights, and the basic requirements for transparency that we have long taken for granted here — like having public comment periods and advance notice when new rules are introduced, so companies have an opportunity to take part in the process and have time to comply.

…We are starting to see the fruits of those changes in our economic relationship. We see it in a growth of our trade in recent years. American exports to Russia, as well as Russian exports to the United States, are each 4.5 times higher than they were 10 years ago…. In 2012, U.S. exports to Russia were up 29 percent, which was 6 times more than the growth of our overall exports to the world as a whole.

In fact, in the three years since 2009, the only major market where we have seen our exports grow faster has been Turkey.

Matthew Edwards discusses efforts to increase bilateral commercial ties.

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eventsI don’t expect those huge percentage jumps to be sustained at that level, but I do think they speak favorably to the changes that Russia has already put into place that even allowed this growth. We have also seen growth in investment over this time, whether it’s investment by Russian companies in the U.S. steel industry or many investments by American companies in Russia.

…Overall growth in Russia’s market presents tremendous opportunities for both American exporters and for American investors. We’d like to encourage U.S. companies to explore whatever works for you. This is not to suggest, by any means, that Russia’s entry into the WTO solved all of the difficulties that Russia and America have doing business with one another, and it doesn’t indicate that our governments won’t continue to have different views or different disagreements on certain trade issues and certain trade rules. But one reason why we pushed very hard to get Russia into the WTO and why Russia pushed hard to join was because both sides recognized the benefits of having a common framework in which to discuss our disagreements and in which to discuss the ways to resolve them.

The U.S. government sees many opportunities for continuing an open dialogue with Russia about aspects of its business environment as more Russian companies become capable of taking their presence internationally…. Russia’s global competitiveness has tended to be concentrated in industrial inputs. These products are very important, for example, to steel finishers here, who buy Russian inputs; farmers, who buy Russian fertilizer; aircraft manufacturers, who rely on Russia-made titanium components. But the in products that result are not associated in the public mind with Russia’s very important role in producing it. I am confident that this will change. And I appreciate that the challenge of figuring out better trade policies, better investment strategies and better business plans gets a lot more complicated when there is uncertainty about the attitudes on the parts of both governments toward one another.

And so that brings me back to my central message: we want our Russian guests and our American business managers to continue hold discussions and to launch new conversations. We think there is a lot more that can be done to take our economic relationship to a level more commensurate with the size of our respective economies and with the talent, creativity and expertise that we have in both Russia and the United States….”

James Bovenzi started his presentation by noting the tremendous need for supply investments in Russia, as many manufac-turers have obligations to fill their supply needs with localized content. He agreed with Mr. King that Russians, as elsewhere in the world, consider their cars a source of emotion and passion, and those in the industry should remember that their busi-ness is all about satisfying that passion with an excellent product.

Mr. Bovenzi noted several reasons why the Russian market is a promising invest-ment opportunity. Only about 25 percent of Russians own a car, versus about 90 percent of Americans, which indicates high potential for growth. At the same time, the average age of a vehicle on the road in Russia is at least five years older than its American and European coun-terparts, which suggests there is likely to be increased demand in the near future. There is also an established relationship between average income and car owner-ship, and as Russia’s middle class grows, more consumers will have the means to purchase cars. Finally, the Russian govern-ment has chosen the automobile industry as one of its priorities in an attempt to diversify away from natural resources and plans to invest heavily in the development

PANEL: Supply Chains, Manufacturing Localization and WTO ComplianceModerator: William Andrew King, CIS Automotive Leader, Partner, EY

Participants:James Bovenzi, President & Managing Director, General Motors Russia and CISGivi Nadareyshvili, General Director, NTC MSP Dmitry Osipov, Head, International Cooperation Committee, National Association of Automotive Component Manufacturers (NAPAK)

William Andrew King introduced the panel by sharing his impressions of the Russian government’s support for and interest in protecting investments and urged attendees not to underestimate the Russian consumers’ passion for their vehicles. All of these factors, he said, make Russia an opportunity for investment, espe-cially from the perspective of component suppliers.

Mr. King outlined the panel’s four objec-tives: to share perspectives on the develop-ment of the Russian automobile industry; to address the challenges facing the industry; to outline objectives for the Russian supply chain and its execution; and to discuss the positive and negative implications of Russia’s entry into the World Trade Organization (WTO).

The Forum’s first panel addresses issues related to supply chains and WTO compliance.

William Andrew King, EY

USRBC Automotive & Agricultural Machinery Forum

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tsof engineering savvy and manufacturing processes.

Russia is already a major global market, Mr. Bovenzi said, ranking 4th-largest for General Motors (behind China, the U.S. and Brazil) and 12th industry-wide. GM has done well in Russia, with Chevrolet ranking as the top foreign brand for six con-secutive years. GM has also entered the market with German brand Opel and with Cadillac. Mr. Bovenzi noted that compa-nies have many choices for their operations in Russia in terms of type and location. For example, GM has a wholly-owned facility in St. Petersburg; contract assembly arrange-ments in Kaliningrad and Nizhny Novgorod; and a 50/50 joint venture in Tolyatti.

Mr. Bovenzi suggested that the interest in investing in suppliers has come from the presence of many original equipment man-ufacturers (OEMs) in Russia, who all have a local content requirement. He argued that localization, regardless of any official obligation, is economically sensible for companies as it allows them to respond quickly to the market, control quality and minimize logistics costs. The biggest chal-lenge moving forward, he said, is properly training local workers to use those sup-plies to produce world-class automobiles. Russian consumers expect no less than their peers elsewhere in the world, and companies should invest time in reaching out to local universities and existing team members to involve them in growing an industry that meets high expectations.

Mr. Bovenzi concluded by stressing that automobile investment in Russia must be a partnership between industry rep-resentatives, parts suppliers, OEMs, and the government. These groups must all work together to meet consumer demand while simultaneously giving investors good returns.

Dmitry Osipov addressed the future of the Russian components market after WTO accession. Mr. Osipov pointed out some synergies between Russian and U.S. auto-mobile markets that would create similar areas of overlap in the component parts market. For example, both countries have many long, straight roads, especially in comparison to those in the EU, and have a preference for durable, comfortable sus-pensions.

Today in Russia, the strategies and status of component parts suppliers are depen-dent on the strategies and status of OEMs, Mr. Osipov said. There are three major automotive clusters — Samara (the location of AvtoVAZ), Moscow and St. Petersburg, each with existing component supply bases. Traditionally, these suppliers were 80-90 percent vertically-integrated and tended not to think long-term because of a lack of relationships with OEMs. Today, though, the component parts market is much closer to the international market as these relationships have developed. Nonetheless, problems persist, such as an average industrial productivity 8-10 times lower than in the U.S. and a continued resistance to thinking in terms of long-term strategies.

By 2020, manufacturing is likely to stay domestic, and many international brands will have their full range of production in Russia, Mr. Osipov predicted. He suggest-ed that international OEMs will play a lead-ing role in R&D, while domestic engineering centers will be responsible for adapting existing international platforms to the Russian market. Mr. Osipov suggested that Russia would benefit from the presence of foreign supplies, as these would create new relationships with Russian customers and introduce new technologies, quality and ecological and safety standards.

Mr. Osipov noted that Russia offers high growth potential and competition is cur-rently low, making it a first-come, first-served market. The Russian model range is fairly similar to those in other international markets, and links with local automotive manufacturers are already well-estab-lished. Nevertheless, low-priced Russian components make it difficult to compete with existing Russian models such as the Lada, and buses and trucks are often of low quality. There are also quality assurance problems in addition to problems in organi-zation of marketing and sales. Mr. Osipov suggested that customers should play a role in shaping the market by pressuring manufacturers to bring their products up to certain standards.

Mr. Osipov urged new market entrants to

pursue incremental business development and to take advantage of the local com-ponent supply base, materials and labor. They should also capitalize on the local aftermarket potential and create a pool of talented engineers that will help adapt existing products to Russian markets and create new ones. Finally, they should seek to integrate fully into Russian business procedures and supply chains.

Mr. Osipov next addressed the future of Russia’s automotive industry under WTO membership. From the manufacturer’s perspective, the effects are mixed, he said. There could be an overall increase in imports of complete vehicles from abroad, but an increasingly level playing field between Russian production sites and those in other countries could cut into the profits of firms that have already started production in Russia. Reduced import duties for components could hurt domestic manufacturing of components, he added, as this is governed by economies of scale and Russia produces smaller volumes than the European Union and the United States. On the other hand, reduced bar-riers to exporting Russian goods could be advantageous for domestic suppliers of raw materials in reaching international markets.

Mr. Osipov argued that the worst-case sce-nario under the WTO would be an increase in imports of secondhand cars. The govern-ment has invested significant resources in producing locally and would like to keep that capacity instead of allowing second-hand imports, he said. He expected that there would, in fact, be an overall decrease in the market share of locally-produced vehicles and components. This could lead to the failure of industrial assembly agreements with the Russian govern-ment, as shrinking local content supplies

James Bovenzi, General Motors

Dmitry Osipov, NAPAK

USRBC Automotive & Agricultural Machinery Forum

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eventsNadareyshvili said, are low productiv-ity, problems with quality systems, lack of research units, and an overall lack of structure. He noted that foreign partners could play an important role as organizers and catalysts of a solution, which would improve integration and boost specializa-tion. He suggested the Russian govern-ment should facilitate wider acceptance of the concept of industrial assembly and reduce customs and tax rates in order to make the sector more attractive to foreign investors and advised foreign companies to make use of Special Economic Zones and to find a strong domestic partner in Russia to reduce market entry risk.

Questions & Answer Session

Q: What are the main challenges in achiev-ing localization?

Mr. Bovenzi cited, first, the availability of suppliers, whether local or global. This is why increasing knowledge about the supply opportunities present in Russia is so important. Second, low unemploy-ment rates in Moscow and St. Petersburg mean it is important to train people there specifically to join the automotive industry upon entering the workforce. Third, raw materials need further development to meet international standards. Mr. Bovenzi expressed confidence that the industry in Russia could address these challenges effectively.

Mr. Osipov added that there is a rela-tive cost disadvantage to the first step of localization. Oftentimes, therefore, a more economically prudent strategy is to import components first and then gradually shift to increasing localization of content.

Q: What are the most important capabilities in the automotive supply chain that need to be addressed?

Mr. Bovenzi noted that transportation infrastructure is still developing. Although it is now possible to transport anything anywhere in Russia, doing so often comes with considerable complications and costs. Therefore, Russia needs to develop its road and rail infrastructure further. Additionally, although Mr. Bovenzi acknowledged that customs processing has improved since his arrival in Russia, bureaucracy could be further minimized and Russia needs to speed up the clearance of imports.

Mr. Osipov stressed the important role local engineering plays in assisting com-panies to adapt their products to Russian needs and market conditions. Production technology needs local competence, as in many cases the appropriate technology

increases the risk that companies will be unable to meet localization requirements, and decreased demand for local products makes it difficult for them to reach required production volumes.

Overall, Mr. Osipov said, investors should remember that Russia is not a low-cost country, with a 13 percent cost disadvan-tage compared to more mature markets. However, any improvements in Russian productivity could offset the disadvantages and increase the appeal of investment in its automotive sector. Moreover, as Russia harmonizes its import and export rules with other WTO members and eliminates some complications, it could improve the ease of integrating into the international automotive market. Mr. Osipov noted that he and his peers are working together with the Ministry of Industry and Trade to reap the benefits of integration.

Givi Nadareyshvili presented on the exhaust systems market and relationships between its participants. He noted that, in a broader sense, the development of automotive companies in Russia depends greatly on their relationships with global economic brands. However, there are sig-nificant differences between segments of the automotive market, particularly in the state of their facilities.

With respect to exhaust systems specifical-ly, Mr. Nadareyshvili stated that about 50 companies are engaged in their production, 37 of which are large and medium- sized. They produce a limited range of medium-quality products and are still in the process of developing a certified system of quality assessment. Overall, Russian companies are predominantly production units, out-sourcing testing and car assembly, and often lacking real research units.

The main challenges of the market, Mr.

cannot be assessed from the outside.

Q: What should the Russian government do differently or more of to be able to support the continued development of the Russian automotive industry?

Mr. Bovenzi observed that credit avail-ability has tightened in recent years and suggested that the government take steps to ensure that credit is reasonably acces-sible. He stressed again the importance of conducting training to develop the skill sets necessary for manufacturing processes and use of technologies, which could be an area for industry-government partner-ship. Finally, he noted that the government should ensure that investors are able to get a good return.

Mr. Osipov first noted that overall, dia-logues between government and industry have been smooth and productive. Moving forward, he suggested that the government focus on the areas where it has the biggest impact — setting rules and ensuring com-pliance — and then allowing the “invisible hand” of the free market to take care of the rest.

Q: Why would a company try to localize even if there is a cost disadvantage to doing so?

Mr. Bovenzi stressed that in order to respond to the ups and downs of the mar-ketplace, it is essential for companies to maintain a local supply base — he sug-gested that approximately 50 percent local content is ideal. Additionally, he noted, GM is very meticulous about the quality of its products, and a longer supply chain introduces more risk in terms of potential damage to products during delivery.

Mr. Osipov pointed out the importance of following customers with supply bases, suggesting that local materials could pro-vide a competitive advantage even in the face of cost disadvantages because they minimize the time costs associated with waiting for delivery.

Q: To what extent are complete knock down (CKD) kit operations conducted in Russia and how are they viewed?

Mr. Bovenzi explained that CKD is viewed as a step along the natural development of manufacturing processes. First, compa-nies will generally use components shipped in CKD kits, and as businesses evolve, gradually shift toward ordering individual supplies. For example, he noted that GM’s facilities in St. Petersburg no longer use CKD kits and order individual supplies exclusively.

Givi Nadareyshvili, NTC MSP

USRBC Automotive & Agricultural Machinery Forum

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The afternoon panel focused on Russia’s Special Economic Zones and the opportu-nities they present for international busi-ness cooperation. Stephen Beigun opened the session by discussing Ford’s role in Alabuga, a Special Economic Zone located in Tatarstan. Ford’s current business plan in Alabuga has helped it expand to over 300,000 units per year, utilizing the fully integrated manufacturing presence it has developed using the Zone’s infrastructure.

Mr. Beigun stressed that Ford has been successful in Russia despite the challeng-ing business environment. He highlighted human talent, tactical skills and access to inexpensive natural resources as critical to Ford’s growth. Ford increased its presence in Russia because of its potential for growth in auto sales, and because government policies are encouraging local develop-ment. The Russian government’s policy on Special Economic Zones has lowered the costs of entry and has helped create the scale needed for profitable production. For those exploring investment opportunities in Russia today, these regions should be the primary focus.

Igor Egorov focused on the govern-ment’s broad plans to develop the Special Economic Zones and their impact on attracting foreign investment. These zones, with their special legal status and economic benefits, have successfully attracted more than 300 residents from 24 countries. Russia’s 27 SEZs are divided into five categories: industrial and produc-tion, technology and innovation, tourist and recreational, and port zones. The Lipetsk and Kaluga regions in Central Russia focus on industrial and production, and neces-sary infrastructure has been created there to support manufacturing in the automo-tive, chemical, aerospace, and machinery production spheres.

Mr. Egorov explained that resident com-panies receive special tax preferences, including lower income taxes and a 10-year property and transport tax exception. They

also have access to a special customs regime, where investors do not have to pay a customs duty when they sell goods within the SEZ. Companies can file application paperwork in one step, speeding up the process of beginning each project. They also have a simplified migration regime for qualified foreign staff, helping companies bring over their best talent to work in the region.

The residency application process now takes about one month and offers efficient access to developing Russian regions.

Igor Marchev noted that his office is responsible for construction, reconstruc-tion, infrastructure maintenance, and project promotion for the SEZs. He out-lined the development of the industrial parks in Pskov, Tolyatti, Kaluga, Lipetsk, the Republic of Tatarstan, and Sverdlovsk, indicating that several of these offer a com-petitive advantage for automotive compo-nents producers due to their infrastructure advantages and geographic proximity to ports and other means of transport. He encouraged investors to view Russia broad-ly, and not limit their investments solely to Moscow or St. Petersburg.

Ivan Koshelev offered his perspective on Lipetsk’s development and potential for further growth, highlighting the importance of collaboration between foreign technol-ogy and local human capital in the area. The SEZ is only six years old, but takes its reputation seriously and is proud of the success of its local engineers fulfilling the needs of international firms in their factories. The region also produces 25 percent of Russian sugar, 14 percent of Russian steel and several million tons of grain per year.

So far, the Lipetsk SEZ has 23 residents, with 9 working in industrial production. The region is expanding, with three more international companies moving forward with business plans and development. Mr. Koshelev is optimistic for the future development of the region, and believes that Lipetsk offers a good place for busi-nesses to develop while also supporting the Russian economy.

Aleksei Pakhomenko discussed Samara’s role in integrating global automotive pro-duction. The home of the Togliatti SEZ, Samara is one of the most economically developed regions in Russia, and plays

PANEL: Russian Special Economic Zones – Invitation for Business Cooperation Moderator: Stephen E. Biegun, Vice President, International Government Affairs, Ford Motor Company

Participants:Igor Egorov, Head of Section, Department for Regional Development, Ministry of Economic Development of the Russian Federation Ivan Koshelev, General Director, Special Economic Zone Lipetsk JSC Igor Marchev, Head of Investor Relations Department, JSC Special Economic Zones Aleksei Pakhomenko, Head, Special Economic Zone Togliatti JSCIgor Ryabikov, Deputy Director, Ulyanovsk Region Development Corporation Rustem Zaripov, Head of Investor Relations Department, Industrial Special Economic Zone Alabuga JSC

Aleksei Pakhomenko (l.) outlines the work of the Togliatti SEZ in Samara.

USRBC Automotive & Agricultural Machinery Forum

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eventsa leading role in the aerospace, energy, chemicals, and automotive industries.

The auto cluster in Togliatti produces over 60 percent of Russian auto output volume, and is strategically located near major population centers. There is easy access to international transport corridors, a highly qualified labor force and strong logistics infrastructure. Within the region, GM, Nissan, Renault, and AvtoVAZ have localized production and act as strong cor-nerstones of the local automotive industry.

Igor Ryabikov discussed opportunities in the Ulyanovsk region and specifically in the Volga District Cluster, where there is substantial development in the automotive industry. Last year, Ulyanovsk was the top-ranked Russian region in the World Bank’s “Doing Business in Russia” report. The reasons for this success were tied to the incentives built into the region. The state and regional governments have been com-mitted to building industrial infrastructure, building relationships with large interna-tional companies operating in the region, guaranteeing that they respond to local concerns efficiently, and that tax incentives and subsidies keep the region economically accessible.

Rustem Zaripov closed the session with information about the Alabuga SEZ as a site for investment. He considers his region a success story because of the size of the developments that have been completed as well as the strong subsidies that have encouraged investment. Its customs pro-cedures are efficient, with clearance time taking only three hours on average. The region was listed in The Financial Times’ fDi Magazine as one of the top 40 global special economic zones.

The Alabuga SEZ is well-situated for fur-ther investment. Eight of Russia’s 14 biggest cities are within 1,000 km, has a skilled workforce with lower salaries than in Moscow and St. Petersburg and has already developed a strong network of utili-ties and basic infrastructure. It currently has 37 residents planning to invest $3 billion, with almost $1 billion of that invest-ment coming from American companies.

The SEZ has future plans to build an indus-trial park for companies hesitant to start with big investments, as well as interna-tional schools for families to make the adjustment to Russian life more comfort-able. Mr. Zaripov encouraged investors to strongly consider investing in the Alabuga SEZ. n

On April 17, the USRBC held a luncheon with Dr. Ksenia Yudaeva, Russia’s G20 Sherpa, on the eve of a series of G20 meet-ings in Washington. Dr. Yudaeva outlined Russia’s priorities for the G20 meeting in St. Petersburg in September and elicited feedback from the private sector.

Beginning with an overview of Russia’s macro economic outlook, Dr. Yudaeva noted that amidst the Euro crisis and eco-nomic slowdowns in the U.S. and China, Russia has observed its own declining growth rate over the past three quarters. She stressed that what Russia is experienc-ing is a cyclical decline driven by largely external factors and is not primarily driven by internal factors.

Russia is currently experiencing its lowest post-Soviet unemployment rate, which has been hovering around 6 percent for most of the previous year. This indicates Russia needs to change its growth model, putting a greater emphasis on improving infrastruc-ture and the investment climate, rather than relying on consumer demand. Russia should also continue with a conservative budget policy and avoid large deficits.

Even though Russia is facing an inflation rate of 7 percent, Dr. Yudaeva noted that this was driven largely by non-monetary factors and an increase in food prices stem-ming from a poor grain harvest. Base level inflation remains relatively stable, and the Central Bank has been implementing con-servative polices to bring down inflation expectations.

Dr. Yudaeva stated that 7 percent annual real GDP growth rates are now a thing of the past. She put Russia’s potential growth rate between 3 and 4 percent, and pos-sibly 4 to 5 percent if structural reforms are implemented.

Turning to the G20, Dr. Yudaeva stated that Russia has chosen economic growth as the main topic of its presidency. Within this, the three principle focus areas will be: supporting investment, increasing trans-parency and increasing efficiency.

Question & Answer Session

Responding to a question about the impact of WTO accession, Dr. Yudaeva answered

that Russia had begun to feel the benefits of membership during the accession process, as Moscow had implemented a number of reforms before officially joining. She noted that domestic discussion of the WTO tends to revolve around the potential for negative effects, but that only a handful of industries have actually been adversely impacted.

When asked about B20 engagement, Dr. Yudaeva said that Russia’s G20 delegation works closely with the head of its B20 delegation, Alexander Shokhin, President of the Russian Union of Industrialists and Entrepreneurs (RSPP). [RSPP coordinated the B20 agenda for 2013 and held a series of meetings with businesses from across the B20 in order to develop recommendations for the G20 meeting in September. A finalized list of recommendations for the G20 were presented at the B20 Summit in June, on the sidelines of the St. Petersburg International Economic Forum.]

In answer to a question about the decline of Russia’s “legacy” oil fields, Dr. Yudaeva noted that BP America’s chief economist, Christof Ruhl, suggested that hydraulic fracturing technology used in American shale and tight oil formations could be easily adapted for use in Russia’s brown fields. This could slow of the decline of West Siberian fields and delay the need to invest in more costly offshore and Arctic reserves. n

April 17, 2013 ● Washington, DC

USRBC Luncheon with G20 Sherpa Dr. Ksenia Yudaeva

Ksenia Yudaeva discusses Russia’s role in the G20.

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ts On May 13, the USRBC, in cooperation with the Embassy of the Russian Federation in the United States, organized the U.S.-Russia Pacific Aviation Roundtable, an effort to initiate a dialogue toward creating year-round commercial air service between Russia’s Far East and the U.S. West Coast. Roundtable participants included U.S. and Russian government officials as well as representatives from U.S. and Russian air-lines and tourist groups. The event offered stakeholders in the region an opportunity to discuss the potential for collaboration, as well as barriers to investment and devel-opment.

Ambassador Sergei I. Kislyak, Ambassador of the Russian Federation to the United States, opened the roundtable discus-sion by offering his hopes for a future of increased engagement between the Russian Far East and the U.S. West Coast. He spoke of the immense opportunity in the region and stressed the importance of dialogues such as this to the Russian government. Russia is one of the United States’ closest neighbors, with just three kilometers separating Alaska and Russia. Despite this proximity, commercial rela-tions are woefully underdeveloped. There are no regular direct flights between the U.S. West Coast and Russian Far East, and the flights that do exist require stops in other countries and are prohibitively expensive.

If both regions work together, they could strengthen the trans-Pacific partnership to bring about more interaction, and encour-age tourism and investment. Amb. Kislyak noted that some airlines have already started looking for partners to operate these routes. Yakutia Airlines, the only airline right now to offer direct flights from Petropavlovsk-Kamchatskiy to Anchorage, wants American air carriers to develop more regular flights to Alaska to connect with their international flight offerings. Without more flights, economic growth in the Russian Far East will be limited by the difficulty of access. Currently, there is only $36 billion of trade between both coun-tries per year. That figure comprises only one percent of foreign trade in the United States, and only 2.5 percent of Russia’s foreign trade. Amb. Kislyak called this situation unacceptable, given the size and proximity of both countries and the poten-tial for substantially increased trade and investment.

With both Russia and the United States placing a higher priority on the Asian mar-ket, investment, infrastructure develop-ment and physical connection are going to become even more important. The Russian government has already begun increas-ing investment in the region, and hopes that opportunities in the region grow and expand quickly as a result.

Roundtable Discussion

Deputy Assistant Secretary of the Department of Transportation Robert Letteney discussed the value of strength-ening U.S.-Russian bilateral aviation. Expanding access to these markets cre-ates new jobs and economic growth in mul-tiple industries and builds upon pragmatic working relationships already established in the region. Deputy Assistant Secretary Letteney noted that the regulatory frame-work for expanding aviation links in the region already exists. He concluded that the only limiting factor is the development of demand for the service.

Mikhail Kalugin, Head of the Russian Embassy’s Economic Section, explained that flights in the region must be driven by consumer demand, and that the cur-rent status of air travel between the U.S. West Coast and Russia’s Far East is poor-ly developed. There are no year-round direct flights, despite the vast potential for exchanges in the tourism, business, health technology, and energy spheres.

Mr. Kalugin gave a brief overview of the commercial potential of the Russian Far

East, and noted that a significant number of American companies operate there. He stressed that the Russian government is focused on investing the infrastructure and commercial opportunities in the region and has as a goal creating closer linkages with the Asia-Pacific region.

Members of the aviation community, includ-ing Pavel Udod, Deputy General Director of Air Company Yakutia; Mark Dudley, Regional Director of InterPacific Aviation; Zakhar Khudenko, Deputy Director General of Vladivostok Avia; Ginny Carruthers, Head of Government Affairs Division for Alaska Airlines; and Igor Chernyshov, Head of Licensing and International Affairs for S7 Airlines, all discussed their companies’ experiences flying in the region, with many citing poor infrastructure, low consumer demand, and logistical concerns as impedi-ments to their success.

Despite these concerns, several speak-ers also presented examples of efforts to make the region more profitable and accessible. Points of collaboration already exist, including educational exchanges, tourism and business ventures. Changes in the composition of the region, as well as the Russian government’s investment in large-scale infrastructure projects over the next several years, could expand consumer

demand by making tourism and business investment easier. Many expressed opti-mism that if short-term service could be maintained, then consumers would prove in the near-term that there is high enough demand for year-round flights and connec-tions to more cities.

The open discussion session focused pri-marily on the need for further infrastruc-ture and the limitations of the current visa policy in encouraging more flights. Several participants explained that the tourism

Roundtable participants discuss the possibilities for expanding linkages between the U.S. and Russia.

May 13, 2013 ● Washington, DC

Joint RF Embassy/USRBC Air Transportation Conference

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eventsinfrastructure in Kamchatka would need to be greatly improved to increase oppor-tunities to attract tourists. Currently the costs of operating in and traveling around the region are restrictively high. Many also offered examples of problems with visa applications making logistics more difficult, citing difficulty reaching Vladivostok for in-person interviews, selective visa enforce-ment at the border, and long wait times to receive special permission from the Federal Security Service (FSB) to enter protected areas of the Far East (such as Chukotka).

Looking forward, those participating in the discussion agreed that improvements to infrastructure, simplifying visa policies, and encouraging multilateral regional projects were all feasible and critical ways to aid in development. All of these efforts could expand the number of passengers and offer clear demand for direct flights, as well as make access to the region more affordable.

Amb. Kislyak wrapped up the roundtable by noting that he understood the skepti-cism of the airlines, given the complicated economic history of the region and the variable levels of demand for flights in the past decade. In his view, this panel was a good first step in understanding the issues and beginning a long-term strategy for connecting both regions. Both Alaskans and Russians want to increase trade, so the governments should begin to address this objective in a proactive way.

Amb. Kislyak emphasized that the solutions to many of the problems raised would have to be handled bilaterally. Concerns over visa policies, infrastructure and demand are best answered by changing the mental-ity of regional actors and working as part-ners rather than competitors. The market is still small, but the future for this region is strong and diverse. Air carriers, as well as small- and medium-sized businesses, should think critically about the potential for this region’s growth and connectivity. The current way of cooperation without direct flights limits access to an important and growing region of Russia.

Amb. Kislyak concluded that the meet-ing was useful for demonstrating areas on which both governments can concen-trate to facilitate regional development. It also proved that there is room for dia-logue about collaboration among airlines to create more routes while still focusing on safer, lower risk opportunities. It is in the best interest of private companies, and the Russian and U.S. governments, to begin collaborating and discussing long-term solutions to this gap in the bilateral relationship.

On June 5, the USRBC hosted a break-fast briefing with Alexei Overchuk, Head of the Federal Tax Service of the Russian Federation and Dmitry Volvach, Head of the RF Federal Tax Service’s Transfer Pricing and International Cooperation Directorate. The speakers discussed rel-evant tax reforms intended to advance Russia’s efforts to improve its ranking in the World Bank’s Doing Business index.

Mr. Overchuk opened the briefing with a discussion of the many changes that were implemented at Russia’s Federal Tax Service (FTS). The agency has introduced a user-friendly online portal for citizens to pay taxes, is implementing a new corporate, client-oriented style in its regional offices, and is focused on providing a modern and convenient process for taxpayers. The new website and office structure, meant to offer as much assistance to taxpayers with as little physical contact as possible, now offers 35 services and comprehensive tax policy information for Russian citizens.

One of the most recent additions to the website that aims to increase efficiency at FTS is the creation of the Personal Taxpayer Office, an online system that allows individ-uals to view their property records, review what taxes they owe and pay them online. The system went live in May 2012 and has 2.7 million people registered so far, with 60,000 new registrations per week. One of the goals of this service is to increase transparency between government offi-cials and citizens; viewing their property records allows citizens to make sure that the government has accurate, updated information and that their property rights are protected.

While the Personal Taxpayer Office is cur-rently available only for individuals, the FTS is beginning a pilot project with Russian companies that it expects to be functional this year. Mr. Overchuk reported that this increased information transparency and online data collection has lowered the num-ber of field tax audits to one company per 1,000. The FTS has been able to reallocate its resources to focus on the companies that provide the most revenue, away from targeting small- and medium-sized enter-prises. A list of all of the risk factors that could lead to an audit are available online, with the goal of building a transparent ser-vice that helps keep companies compliant

rather than devoting resources to searching for noncompliance.

The FTS has also begun a pilot horizon-tal monitoring program with four Russian companies and one international firm. This effort involves developing transpar-ent working relationships between each company and the FTS to monitor indirect tax reporting and fair operation within the tax control framework. The goal is to have full compliance with tax policy reported in advance of tax payments, instead of the current vertical monitoring system that requires more audits after taxes have been filed.

One of the biggest changes in Russia’s tax legislation is the implementation of the Organization for Economic Cooperation and Development (OECD) guidelines on transfer pricing. As of January 2012, Russia’s tax code is compliant with OECD standards and meets one of the legislative conditions of Russia’s accession to that organization. So far, around 30 companies have been approached to enter into an advanced pricing agreement relationship with the FTS to begin implementing this legislation. These advanced pricing agreements are used to let companies and the FTS set mutually-agreed upon prices for charges within their corporate structure, either to other subsidiaries of the corporation out of the country or for services rendered to the parent corporation. Setting a clear transfer pricing policy helps to guarantee that companies are paying a fair amount of taxes to governments in the countries in which they operate, without paying taxes on income twice or shifting their profits to countries with lower tax rates.n

June 5, 2013 ● Washington, DC

Breakfast Briefing with Deputy Head of the RF Federal Tax Service Alexei Overchuk

Mr. Overchuk (l.) explains reform efforts at the Federal Tax Service, with his colleague Mr. Volvach (r.) to USRBC members.

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tsMr. Overchuk acknowledged that imple-menting clear policies on transfer pricing is not an exact science and requires good management and healthy, transparent rela-tionships with the corporations involved. If they are successful, though, the FTS should see increased compliance with their poli-cies, a decrease in audit risks to companies and increased competition in the market due to stable economic policies that make investment easier.

Mr. Overchuk confirmed that Russia has begun negotiations with the United States on the Foreign Account Tax Compliance Act, which would require individuals to report their earnings and accounts held abroad to the domestic tax service. He also indicated Russia’s support for the OECD’s initiative to address Base Erosion and Profit Shifting, an issue he said Russia shares with other integrated economies. Discussions on how to address this issue are in their initial stages, but progress is being made and will continue after the FTS can determine the effectiveness of its implementation of new transfer pricing policies at the end 2013.

Mr. Volvach clarified that transfer pricing arrangements and audits are handled on

a case by case basis, and that the FTS has a staff dedicated to establishing fair standards for each industry. His office works with industry members to consider and measure issues surrounding the liquid value of materials, especially in raw goods where value has limited predictability. He acknowledged that it was difficult to imple-ment successful transfer pricing policies for each company because calculating indi-vidual expenses within a company does not always come with a clear invoice or documentation. However, he said that his office is monitoring implementation very closely and is working with companies to produce the right documents and justifica-tion for internal costs.

Mr. Volvach stressed that transparent communication and collaboration should produce results that are economically rea-sonable, serving both the corporation and the Russian government. Since these poli-cies are being implemented by all OECD countries, he believes that corporations are also changing their internal structure to address the changes as well.

Mr. Overchuk and Mr. Volvach also dis-cussed the goals of these policy changes.

They are most concerned with improving the overall tax environment, and see these reforms as part of the larger process to create a safe investment environment for international companies. To be success-ful, they believe that tax intermediaries, companies and the government must all work collaboratively to create transparent and clear policies.

Mr. Overchuk also discussed the impor-tance of putting data online and what the government has done to protect user data. First, allowing citizens to see their official government records lets them confirm that their property ownership and documenta-tion has been correctly registered with dif-ferent government agencies. They can cor-rect any errors they find and pay the correct amount of taxes. Second, the government tax code prohibits the government from releasing private taxpayer information to the public and violations can be punished with a criminal sentence. So far, there have not been any information leaks, and the registration process includes several safeguards, including the requirement that each citizen first visit a regional office to confirm their identity before setting up an account. n

June 25, 2013 ● Washington, DC

USRBC Member Briefing on the BPC Health Working Group • Samuel J. Watson, Director for Europe and Northern Eurasia, Office of

Global Affairs, U.S. Department of Health and Human Services• Yelena Shnayder, International Health Analyst, Office of Global Affairs,

U.S. Department of Health and Human Services

On June 25, 2013, the USRBC held a Member Briefing with Samuel J. Watson, Director for Europe and Northern Eurasia in the U.S. Department of Health and Human Services (HHS) Office of Global Affairs, and Yelena Shnayder, International Health Analyst in the HHS Office of Global Affairs, to provide a readout of the bilat-eral meeting between HHS Secretary Kathleen Sebelius and RF Minister of Health Veronika Skvortsova on the mar-gins of the World Health Organization’s (WHO) World Health Assembly in Geneva in May. The meeting took place under the rubric of the Bilateral Presidential Commission’s Health Working Group and served to advance bilateral cooperation on a range of health-related issues.

Prior to the Working Group meeting, Mr. Watson briefed USRBC members in Washington and via conference call in Moscow on the meeting agenda and solic-ited input regarding private sector priorities in the healthcare sphere.

At the meeting in Geneva, the main topics of discussion were healthy lifestyles, non-communicable diseases, maternal and child health, and scientific collaboration, but also included global health, a topic that Mr. Watson noted has been actively discussed between the two countries for decades and reflects a strong partnership.

The two sides addressed Arctic health as an emerging issue of importance, specifically

with respect to flooding and its contribu-tion to the spread of disease, tuberculosis, and substance abuse and family violence. The two sides also discussed the impor-tance of collaborating on anti-microbial resistance. This resistance could lead to the next global pandemic, as reported by the World Health Organization’s Director General Dr. Margaret Chan. The Working Group plans to discuss these issues in greater detail at the working level before the Health Working Group meets in 2014.

Ms. Shnayder noted that the two sides agreed to further collaboration on tobacco control as well as sharing best practices and programs to address obesity, diabetes and cardiovascular disease. Both HHS and the Ministry of Health will undertake more work on substance and alcohol abuse, as well as multilateral work with the WHO on its global adult tobacco survey.

Secretary Sebelius and Minister Skvortsova signed a protocol on the meeting and the group’s agenda for the next meeting of the Working Group in 2014. Mr. Watson noted that the protocol is a diplomatic document and was not available to the public at the time of the meeting.

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According to Ms. Shnayder, Minster Skvortsova suggested adding health issues to the G8 agenda, and Secretary Sebelius tentatively agreed to this proposal pending further review.

Mr. Watson expressed his interest in receiv-ing suggestions from the private sector for the Working Group agenda, and he noted that his office had undertaken new outreach efforts with the Russian Embassy in Washington, DC. Briefing participants asked about collaboration between the U.S. and Russia on clinical trials and how the Working Group might address problems facing the medical technology industry.

Mr. Watson noted that the FDA is not cur-rently in discussions with Roszdravnadzor regarding licensure, certification or clinical trials. Russia, the United States and the EU are all facing similar problems in sharing data. In the United States, privately-funded data is proprietary and is only shared with the FDA. Because these proprietary issues are so specific within each industry, Mr. Watson asked for guidance from industry experts as to how to proceed.

Mr. Watson acknowledged that one chal-lenge moving forward is funding for world health initiatives. The loss of USAID funding in Russia and sequestration within the U.S. government have limited the funds avail-able for NGOs addressing health issues abroad. For example, the Red Cross will be ending its tuberculosis programs in Russia soon because of funding cuts. Despite this difficulty, the World Health Organization, a relatively neutral party, is working suc-cessfully in Russia and will be expanding its Moscow office. It is focusing much of its current work on non-communicable dis-eases and sexually-transmitted diseases.

Mr. Watson provides an overview of U.S.-Russia cooperation in healthcare.

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July 2, 2013 ● Washington, DC

USRBC Briefing with Natalia Lavrova, Visiting Fellow at the Center for Transatlantic Relations at Johns Hopkins SAIS

On July 2, 2013, the USRBC hosted a briefing by Natalia Lavrova, Visiting Fellow at the Center for Transatlantic Relations at Johns Hopkins SAIS. Her presentation, entitled “Sources of Growth, Innovation, and Productivity in the Euro Area, Russia, and the United States” touched upon various means of stimulating economic growth, including the untapped potential of in Russia’s burgeoning innovation sector.

Ms. Lavrova started her briefing with an overview of the significant challenges posed by the 2008 financial crisis to the euro zone countries, Russia and the United States. She noted that across all three markets slow economic growth and general uncertainty continued to threaten a sustained recovery. Concerning Russia, Lavrova pointed out that despite signs of recovery, such as a strong real wage and growth in consumption, the Russian economy still faced challenges. She asserted that identifying fundamental causes of economic growth and prioritizing issues for policy makers were key steps to ensuring long-term stability.

One of the policy measures Ms. Lavrova cautioned against was sharp fiscal consolidations, citing their negative impact on the U.S. economy and in the euro area. Turning her attention to Russian labor productivity, Lavrova noted that sharp drops tend to occur during periods of extreme downward wage flexibility and reductions in working hours. The implementation of protectionist measures

also play a part. She also briefly discussed the positive role of total factor productivty (TFP) in the European recovery. TFP fuelled Russia’s pre-crisis growth. According to some estimates, it accounted for more than 50 percent of GDP growth in 2007.

Next, Ms. Lavrova turned to a familiar topic: the important role of commodity prices in the rapid expansion of Russia’s economy. Referencing recent analyses of oil and gas price dependency, she underscored the significance of the positive impact of rising oil prices on Russia’s pre-crisis GDP growth. (The World Bank estimates that the effect of oil and gas prices on GDP growth is about 14 percent.) In contrast, in the current climate of declining oil and gas prices, economic growth is more prudent.

Although crises can spur opportunities to foster long-term productivity, at the present time, advanced and emerging economies continue to experience low levels of investment. According to Ms. Lavrova, policy priorities should be oriented toward improving productivity and focusing resources on profitable companies. In addition, companies must focus their attention on increasing the value of outputs to improve the quality of goods and services, rather than reducing inputs.

Ms. Lavrova cited the results of a study comparing industry productivity in Russia and the United States, which demonstrated that in 2009 the largest productivity gains came from sectors that experienced

USRBC Executive VP Randi Levinas (l.) with Natalia Lavrova.

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tssubstantial employment reductions. Certain sectors (finance, mining, and construction) contributed to about 40 percent of overall productivity growth, despite decreasing employment by almost 1.5 million people. With the exception of the federal government, sectors that added employees during that period experienced negative productivity. Perhaps a declining employment rate (more than 4 percent) in Russia’s agricultural sector explains that area’s growth.

In 2011, the leading contributors to U.S. economic growth included services (professional, scientific, technical,

and information) and manufacturing. By comparison, in Russia, declining employment fueled growth in the areas of real estate and government (Figure 1).

In 2009, in the Euro area’s social services market, productivity growth was positive but relatively low. In 2011, when the impact of the crisis on productivity had partially subsided, the mining, manufacturing, and trade sectors experienced employment growth (Figure 2).

Turning to the topic of innovation, Ms. Lavrova highlighted the United States’ “islands of excellence,” and their high contributions to productivity growth. The most successful model of this type is, of course, Silicon Valley. According to her research, in the United States a company in the top 10 percent, in terms of productivity, produces almost twice as much as a company in the bottom 10 percent. This partly explains why the level of R&D expenditures serves as an important indicator of a country’s innovative capacity and a harbinger of future growth and productivity. Stressing that long-term productivity must come from highly-skilled workers and from better technology, Lavrova praised innovation as the primary source of long-term increases in production.

Ms. Lavrova continued to emphasize the importance of R&D, noting that on the micro level, the most productive companies invest heavily in up-to-date leading technologies. An analysis of more than 900 top R&D investors showed that high-performance companies are concentrated in the IT and health (pharmaceuticals, biotech) sectors.1 Volkswagen is the largest EU firm in terms of R&D investment. The United States’ top three performers — Microsoft, Pfizer and General Motors — operate in high and medium-high R&D intensity sectors.

The potential for R&D in the Russian IT sector is considerable in Ms. Lavrova’s

opinion. According to the OECD list of top emerging-country R&D investors, Gazprom is the most efficient. While agreeing that the commodity industry may possess some innovation potential, Natalia Lavrova emphasized that it is limited in relation to the electronic equipment and IT sectors. She pointed out that the latest data on

overall business enterprise expenditures on R&D and government spending are substantially higher in the United States than in the Euro zone and Russia. Expenditures are now about 1.2 percent of GDP, the highest in the OECD.

1 The 2012 EU Industrial R&D Scoreboard

Ms. Lavrova concluded her presentation by underscoring that in formulating and implementing policies to induce greater productivity improvements, policy makers should strengthen international openness. Greater transparancy is a powerful resource for getting access to foreign know-how, technologies, and financial assets. One of the benefits of innovative development in the Euro zone and the United States is intensive bilateral flows of R&D. To underscore her point, Ms. Lavrova noted that “[in] 2010, American affiliates invested $24.4 billion in research and development in Europe, or roughly 62 percent of total global R&D expenditures by U.S. foreign affiliates of $39.5 billion. R&D spending by European affiliates totaled roughly $31.3 billion, up from $30 billion the prior year”.2

Ending on an optimistic note, Ms. Lavrova emphasized that the circulation of foreign and national researchers, trade openness and liberalization are all-important to enhancing productivity growth. She recommended that governments focus on encouraging harmonious economic relations, based on the facilitation of knowledge transfers. She also suggested setting up new R&D centers with specialists from different countries and developing joint projects. These innovation-related reforms can boost productivity by advancing technologies, speeding up the adoption of existing ones, and creating frameworks and incentives for fostering business expenditures on innovation.

2 The Transatlantic Economy 2013. Available from: www.transatlantic.sais-jhu.edu (accessed on August 7, 2013)

Figure 1. U.S. and Russia: Industry productivity comparisons (2009 and 2011)

Source: Rosstat, Bureau of Economic Analysis, author estimations

Figure 2. U.S. and Euro Area: Industry productivity comparisons (2009 and 2011)

Source: Bureau of Economic Analysis, Eurostat, author estimations

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eventsJuly 25, 2013 ● Washington, DC

USRBC Debrief on Federal Highway Administrator Mendez’ Trip to Russia

On July 25, the USRBC held a debriefing with Ian Saunders, the Federal Highway Administration’s (FHWA) Director of the Office of International Programs. In late June, Mr. Saunders accompanied Administrator Victor Mendez and an FHWA team to Russia to discuss information sharing, technology and best practices with their counterparts at Russia’s federal highway agency, RosAvtodor.

The purpose of the trip was in part to commemorate the 20th anniversary of Russia’s association of regional highway authorities, RADOR, which FHWA was instrumental in helping to establish in 1993. FHWA also hoped during the trip to formalize its relationship with RosAvtodor through a memorandum of cooperation (MOC) while also gaining insights from private sector companies active in the Russian road construction market.

Mr. Saunders noted that in the meeting with the private sector, the companies present were optimistic about the market for road construction services. However, the realities of the large, upfront investments they must make in order to effectively project themselves in the large Russian market made doing business difficult. Companies and contractors operating in Russia also face challenges related to transparency and predictability in public procurement, as well as efficiency in business practices. Parking and traffic congestion in Moscow were identified as areas of major concern, as was freight efficiency and the cost of moving goods across the country. Mr. Saunders related that one company the team met with found it more cost effective to ship a container from Vladivostok to the European side of Russia via the Arctic than to send it via the highway system during the spring and summer months.

Mr. Saunders noted that RosAvtodor has an ambitious goal of improving and expanding Russia’s road network by 2019. This has been made all the more pressing as the number of cars on Russia’s roads has doubled over the past 10 years and continues to grow. In the meeting, Roman Starovoit, Head of RosAvtodor, expressed optimism that this goal could be met as RosAvtodor recently had its dedicated road funding restored after being forced to rely

on the general fund for the last several years. The new system will function in a way similar to the U.S. Highway Trust Fund.

RosAvtodor also hopes to increase road safety through the improvement of the road infrastructure. Raising awareness about distracted driving, a U.S. priority, was of less interest to the Russian side. Mr. Starovoit also expressed interest in improving Russia’s emergency response coordination, particularly to prevent large traffic jams on Moscow’s main arteries.

Mr. Saunders noted that Mr. Mendez personally invited Mr. Starovoit to the USRBC Annual Meeting in October, where FHWA and RosAvtodor hope to sign their MOC on the Meeting’s sidelines.

Question & Answer Session

In answer to a question about the degree of cooperation between U.S. states and Russia’s regions on highway issues, Mr. Saunders identified three active partnerships: Maine is working with Arkhangelsk, Minnesota with the Republic of Mari El and Tennessee with Karelia. These partners share information and coordinate travel for briefings and site visits. Despite budget constraints, Mr. Saunders noted that the willingness for cooperation among these partners has not diminished.

When asked if there was any discussion of seasonal road use issues, Mr. Saunders said that RosAvtodor was studying the current limitations on some highways during the spring thaw. Truck weight and future expectations of demands on the highways were discussed along with the best road designs to overcome these issues.

In response to a question about the harmonization of standards, Mr. Saunders said that, generally, FHWA shares U.S. standards but allows its partners to decide how best to adapt those to their particular situation. The FHWA has not historically engaged in the harmonization of standards. Mr. Saunders also noted that Administrator Mendez discussed his “Every Day Counts” initiative with Mr. Starovoit, which focuses on best practices and technological innovation to accelerate the completion of infrastructure projects. Mr. Starovoit took a keen interest in this program as a way to help RosAvtodor meet its road building goal by 2019.

The number of cars on Russia’s roads has doubled over the last 10 years and continues to grow.

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April 3, 2013USRBC Automotive & Agricultural Machinery Forum with RF Deputy Minister of Industry and Trade Alexei Rakhmanov and representatives of Russian special economic zones to discuss the Russian government’s investment policies. (Detroit)

April 10, 2013USRBC-hosted meeting of the Innovation Working Group of the U.S.-Russia Bilateral Presidential Commission to discuss a proposed legal framework for innovation cooperation. (Washington, D.C.)

April 17, 2013USRBC Luncheon with Dr. Ksenia Yudaeva, Russia’s Sherpa for the G20. (Washington, D.C.)

April 17, 2013USRBC Intellectual Property Rights Roundtables/Debrief on the March U.S.-Russia IPR Working Group Meeting with Donald Townsend, Intellectual Property Rights Attache, US Embassy in Moscow. (Moscow)

April 18, 2013USRBC Breakfast Seminar on WTO Compliance: Localization, Investment and Competition Policy with FAS’ Vladimir Kachalin and Squire Sanders’ Shanker Singham. (Moscow)

April 19, 2013Members Briefing with Samuel Watson, Director for Europe and Northern Eurasia at the U.S. Department of Health and Human Services Office of Global Affairs, to discuss the activities of the Health Working Group of the U.S.-Russia Bilateral Presidential Commission. (Moscow/Washington, D.C.)

April 24, 2013Spring 2013 Board of Directors Meeting. (Moscow)

May 28, 2013USRBC/Marriott forum in Moscow organized to introduce Marriott’s Global Sales Team to the Russian market. (Moscow)

May 13, 2013Joint RF Embassy/ USRBC Air Transportation Conference on creating year-round commercial air service between Russia’s Far East and the United States. (Washington, D.C.)

April 24, 2013USRBC Members Cocktail Reception with the Innovation Working Group of the U.S.-Russia Bilateral Presidential Commission. (Washington, D.C.)

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eventsUSRBC VIP dinner on the margins of the U.S.-Russia Standards & Conformity Assessment Forum, a U.S.-Russia government seminar on best practices in industry standards in the aftermath of Russia’s WTO accession. (Moscow)

May 30, 2013USRBC Executive Vice President Randi Levinas speaks at the U.S.-Russia Standards & Conformity Assessment Forum, a U.S.-Russia government seminar on best prac-tices in product standards and technical regulations in the aftermath of Russia’s WTO accession. (Moscow)

June 5, 2013USRBC Breakfast Briefing with Deputy Head of the RF Federal Tax Service Alexei Overchuk. (Washington, D.C.)

June 20, 2013USRBC SPIEF Dinner (St. Petersburg)

June 25, 2013USRBC Debrief with Samuel Watson, Director for Europe and Northern Eurasia at the U.S. Department of Health and Human Services Office of Global Affairs, to discuss the recent meeting in Geneva of the U.S.-Russia Bilateral Presidential Commission’s Health Working Group. (Moscow/Washington, D.C.)

June 25, 2013USRBC-supported meeting of the U.S.-Russia Bilateral Presidential Commission’s Environmental Working Group to discuss cooperation in waste disposal and environmental remediation projects. (Washington, D.C.)

June 27, 2013USRBC-supported webinar discussion with U.S. Ambassador to Russia Michael McFaul, organized as part of the State Department’s Direct Line Program, which connects businesses with ambassadors around the world to discuss investment opportunities in specific countries. (Moscow/Washington, D.C.)

July 2, 2013USRBC Briefing on Sources of Growth, Innovation, and Productivity in the Euro area, Russia and the United States, by Natalia Lavrova, Visiting Fellow at Johns Hopkins SAIS. (Washington, D.C.)

July 25, 2013USRBC Debrief with FHWA’s Ian Sanders on Federal Highway Administrator Mendez’ Trip to Russia. (Moscow/Washington, D.C.)

August 6, 2013USRBC-supported Information and Communication Technology Roundtable with U.S. and Russian government representatives, including RF Minister of Communications and Mass Media Nikolai Nikiforov. (Washington, D.C.)

May 29, 2013

August 14, 2013USRBC-supported Webinar on Opportunities for Website Optimization and Acceleration in Russia. (Webinar)

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u.s.-russia relationsJune 20, 2013 ● St. Petersburg, Russian Federation

USRBC SPIEF Dinner

At this year’s St. Petersburg International Economic Forum (SPIEF), USRBC held a high-level dinner with candid discussions between U.S. and Russian representatives of the private sector and government. The dinner, moderated by USRBC Chairman and Chairman and CEO of Alcoa Klaus Kleinfeld, opened with comments from U.S. and Russian government officials reaffirming the importance of commercial ties in U.S.-Russia relations.

Russia’s First Deputy Prime Minister Igor Shuvalov, a proponent of strengthening commercial ties and a key figure in Russian economic and fiscal issues, then moved on to discuss Russian economic policy. Shuvalov noted that to spark economic growth, Russia intends to expand and modernize its infrastructure, especially roads, widen the tax base, and develop and utilize its highly-educated population. Representatives of USRBC member

companies at the dinner were glad to hear that infrastructure and human resources are priorities, because better infrastructure will help the agricultural sector and a highly-skilled workforce is attractive for innovative companies. Other topics broached include issues with Russian government investment and the unconventional energy sector, which, according to First Deputy Prime Minister Shuvalov, will not receive tax breaks in the near future.

In addition to First Deputy Prime Minister Shuvalov, Deputy Ministers of Economic Development of the Russian Federation Sergei Belyakov and Aleksei Likhachev, U.S. Under Secretary of Commerce for International Trade Francisco J. Sánchez, U.S. Deputy Assistant Secretary of Commerce for Europe and Eurasia Matthew Murray, and CEOs of some of the largest companies in Russia attended the dinner.

U.S. Under Secretary of Commerce Francisco Sanchez offers a toast to dinner participants.

RF First Deputy Prime Minister Igor Shuvalov (3rd from left) discusses the future of Russian economic policy.

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For more information, please contact us:Email: alfa@culturalvistas.org | Tel: 212 497 3510

Alfa-Bank and Cultural Vistas are pleased to announce a call for applications for the Alfa Fellowship Program. Now celebrating its tenth year, the program is an 11-MONTH PROFESSIONAL-LEVEL initiative designed to create a new generation of American and British leaders with meaningful professional experience in Russia.

The program begins with LANGUAGE TRAINING in the U.S. or the U.K., followed by a language course in Moscow starting in mid-June. Throughout the summer, Alfa Fellows attend a SEMINAR PROGRAM with key public and private sector o� cials to discuss current issues facing Russia. Fellows then WORK AT PROMINENT ORGANIZATIONS IN RUSSIA including private companies, media outlets, think tanks, and foundations.

Eligible candidates must have a graduate degree and professional experience in business, economics, journalism, law, public policy, or a related � eld. Russian language pro� ciency is preferred, though not required, at the time of application. The Fellowship includes a GENEROUS MONTHLY STIPEND, LANGUAGE TRAINING, PROGRAM-RELATED TRAVEL COSTS, HOUSING, AND INSURANCE.

Deadline to apply for the 2014-2015 program year: December 1

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Promoting Understanding of Russia

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USRBC new members

AbbViewww.abbvie.com

AbbVie is a global, research-based biopharmaceutical company formed in 2013 following separation from Abbott. The company's mission is to use its expertise, dedicated people and unique approach to innovation to develop and market advanced therapies that address some of the world's most complex

and serious diseases. In 2013, AbbVie employs approximately 21,000 people worldwide and markets medicines in more than 170 countries.

American Superconductor Corpwww.amsc.com

AMSC (American Superconductor) generates the ideas, technologies and solutions that meet the world’s demand for smarter, cleaner, better energy. Through its Windtec Solutions, AMSC provides wind turbine electronic controls and systems, designs and engineering services that reduce the cost of wind energy. Through its Gridtec Solutions, AMSC provides the engineering planning services and advanced grid systems that optimize network reliability, efficiency and performance. The company’s solutions are now powering gigawatts of renewable energy globally and enhancing the performance and reliability of power networks in more than a dozen countries. Founded in 1987, AMSC is headquartered near Boston, Massachusetts with operations in Asia, Australia, Europe, and North America.

Edelmanwww.edelman.com

Edelman is the world’s largest independent public relations firm, with over 3,200 employees in 51 offices worldwide. The firm was named PRWeek’s Agency of the Year in 2009, Large Agency of the Year for three of the past four years, and the 2009 Best Large Agency to Work For by Holme’s Report. Advertising Age named Edelman as one of its “A-List” agencies for the past three years. With fully-owned offices in Moscow, Russia, and in major markets around the world, Edelman offers clients a full array of PR and investor relations services both in Russia and worldwide.

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Avon Products, Inc.www.avoncompany.com

Avon, the company for women, is a leading global beauty company with nearly $11 billion in annual revenue. As one of the world's largest direct sellers, Avon is sold through more than 6 million active inde-pendent Avon Sales Representatives. Avon products are available in more than 100 countries, and the product line includes color cosmetics, skincare, fragrance, fashion, and home products, featuring such well-recognized brand names as Avon Color, ANEW, Skin-So-Soft, Advance Techniques, and mark.

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bersEMC Corporation

www.emc.com

EMC is a global leader in enabling businesses and service providers to transform their operations and deliver information technology as a service (ITaaS). Fundamental to this transformation is cloud computing. Through innovative products and services, EMC accelerates the journey to cloud computing, helping IT departments to store, manage, protect and analyze their most valuable asset — information — in a more agile, trusted and cost-efficient way. EMC works with organizations around the world, in every industry, in the public and private sectors, and of every size, from startups to the Fortune Global 500.

Hill+Knowlton Strategieswww.hkstrategies.com

H+K Strategies offers senior counsel, insightful research and strategic communications planning from 90 offices in 52 countries. H+K clients represent 46 of Interbrand's Top 100 Global Brands and 50 percent of global Fortune 500 companies. The firm's relationship with WPP, one of the world's largest communications groups, gives H+K Strategies an unmatched global presence. H+K

Strategies has been in the wisdom business for more than 80 years, with world-class teams of trusted advisors and creative experts and a wealth of experience collaborating across time zones, languages and cultures to strengthen brands, reputations and bottom lines. H+K Strategies was formed by the 2011 merger of Hill+Knowlton and Public Strategies, and the firm strengthened its com-munications and advisory offering with the 2012 acquisitions of The PBN Company and Dewey Square Group.

Integrum World Widewww.integrumworld.com

Integrum, one of the largest database services focused on Russia, has three primary products: Integrum Profi boasts a Russian electronic archive with more than 500 million documents in more than 8000 databases, including thousands of Moscow and regional publications, news wires, TV and radio monitoring, information from Moscow and regional governments, and 2 million blogs. Integrum Companies offers official information on more than 8 million Russian and foreign companies and private entrepreneurs. Company profiles, contact information, investments, and even government contracts are just a sample of the resources available. My Integrum automatically monitors people and companies relevant to customers’ interest in mass-media and social networks. There is individual customization, including personal news and RSS feeds and also analytical reports and a media analysis tool.

Kimberly-Clark Corporationwww.kimberly-clark.com

Kimberly-Clark and its well-known global brands are an indispensable part of life for people in more than 175 countries. Every day, nearly a quarter of the world's population trust K-C brands and the solutions they provide to enhance their health, hygiene and well-being. With brands such as Kleenex, Scott, Huggies, Pull-Ups, Kotex and Depend, Kimberly-Clark holds the No.1 or No. 2 share position in more than 80 countries.

King & Spalding LLPwww.kslaw.com

Celebrating more than 128 years of service, King & Spalding is an international law firm that represents a broad array of clients, including half of the Fortune Global 100, with more than 800 lawyers in 17 offices in the United States, Europe, the Middle East and Asia. The firm has handled matters in over 160 countries on six continents and is consistently recognized for the results it obtains, uncompromising commitment to quality and dedication to understanding the business and culture of its clients.

Mid-Atlantic - Russia Business Councilwww.ma-rbc.org

Since 1994, Mid-Atlantic - Russia Business Council (MARBC) has worked to foster business relations between Russia and the U.S. Mid-Atlantic region. The goal of MARBC is to enable companies based in the U.S. Mid-Atlantic region to enhance their positions in Russia and to attract Russian businesses to the U.S. Mid-Atlantic region. MARBC organizes nearly 30 events annually in the United States and in Russia. The most prominent of the events organized by the MARBC are the annual Russian-American Innovation Technology Week and Days of Russian-American Innovation Entrepreneurship Cooperation. A major focus of MARBC’s efforts in recent years has been the establishment of the Mid-Atlantic region as a leading partner for Russian-American innovative technology and entrepreneurial cooperation.

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Progresstech Group of Companieswww.progresstech.ru

Progresstech Group of Companies is the leading provider in Eastern Europe of intellectual services to the aerospace and aviation transport industries. The company provides engineering services for aerospace; airports and infrastructures design; research, certification and consulting in the airport technology sphere; and business consulting. Progresstech’s engineering team of highly experienced

professionals from various cities in Russia and CIS countries successfully support multiple large-scale international engineering projects. Progresstech companies include: Progresstech (Moscow), Progresstech-Dubna (Moscow Region, Russia), Ukr-Progresstech (Kiev, Ukraine), Spirit-Progresstech (Wichita, Kansas, U.S.), MIKA-Progresstech (Yerevan, Armenia) and Center of Technical Publication (Moscow, Russia), Progresstech RC (Moscow, Skolkovo), and PT-Americas (Houston, Texas, U.S.).

Law Office of Daniel J. Rothstein, P.C.www.danielrothstein.com

The Law Office of Daniel J. Rothstein, P.C., focuses on international commercial litigation and transactions, in particular matters related to Russia.The firm's principal, Daniel Rothstein, graduated from Cornell Law School in 1985, was a law clerk in the U.S. federal courts (trial and appellate), and practiced law in Moscow from 1990 to 2000, including with Coudert Brothers and in-house at the Russian Privatization Agency (GKI). Mr. Rothstein has been based in New York since 2000.

Saint-Petersburg Electrotechnical Companywww.spbec.ru

Saint-Petersburg Electrotechnical Company (SPbEC) is a leading, dynamically developing engineering enterprise, which specializes in solving problems in the area of industrial automation, energy-saving technologies, and heat engineering, including elaboration of projects, introduction of integrated solutions, and services in metals & mining, oil & gas, refinery, energy and machinery construction,

chemicals, cement & glass, water & utility, and food & beverage industries. The company has been operating successfully in the industrial automation market since 1995.

Trident Group, LLCwww.tridentgroup-global.com

Trident Group, L.L.C. is a highly-specialized, well-established corporate risk management company with offices in Arlington, Virginia; Moscow, Russia; and Kiev, Ukraine. The firm has provided high-quality business intelligence consulting services for American, European and multi-national businesses since its inception in 1996, concentrating on Russia and the Former Soviet Union (FSU). To support its global outreach in today’s interdependent world, Trident relies on a widespread network of strategic partners in Europe, the United States, Latin America, Asia, and Africa.

Moscow State Mining University www.msmu.ru

Founded in 1918, Moscow State Mining University (MSMU) is one of Russia’s leading universities in mining educa-tion and research and has ranked among the top ten technical and technological universities in Russia for several years. MSMU is home to 7,000 undergraduates and more than 500 doctoral candidates.

The university trains students for a range of specializations in the mining, metals and energy sectors, including Physical Processes of Mining and Oil and Gas Production, Mine Surveying, Open Pit Mining, Underground Mining, Rock Blasting, Electrical Engineering, Environmental Protection, Informatics and Computer Engineering (Cam/Cad), Information Systems, and many more. MSMU has agreements with more than 30 leading educational and scientific institu-tions in the U.S., Europe, Asia, and Africa. The Honorary Doctors of MSMU are distinguished scientists, academicians, directors, and presidents of well-known global mining companies.

Special Room Rates for USRBC Membersat Marriott Hotels in Moscow

Marriott is pleased to provide members of the U.S.-Russia BusinessCouncil with favourable room rates at Marriott Moscow Royal Aurora,Marriott Moscow Grand and Marriott Moscow Tverskaya hotels.

With questions regarding this special room rates offer formembers of the U.S.-Russia Business Council, please contactMarriott Moscow Cluster Reservations Departmentat reservation@marriott-moscow.ruor via phone +7 495 937 00 55.

MARRIOTT MOSCOWROYAL AURORA11 Petrovka str.Moscow, 107031, RussiaTel.: +7 (495) 937 1000Fax: +7 (495) 937 1001

MARRIOTT MOSCOWGRAND HOTEL26/1 Tverskaya str.Moscow, 125009, RussiaTel.: +7 (495) 937 0000Fax: +7 (495) 937 0001

MARRIOTT MOSCOWTVERSKAYA HOTEL34 1-st Tverskaya-Yamskaya str.Moscow, 125047, RussiaTel.: +7 (495) 258 3000Fax: +7 (495) 258 3099

Marriott2:Marriott 07.12.2010 17:17 Страница 1

Special Room Rates for USRBC Membersat Marriott Hotels in Moscow

Marriott is pleased to provide members of the U.S.-Russia BusinessCouncil with favourable room rates at Marriott Moscow Royal Aurora,Marriott Moscow Grand and Marriott Moscow Tverskaya hotels.

With questions regarding this special room rates offer formembers of the U.S.-Russia Business Council, please contactMarriott Moscow Cluster Reservations Departmentat reservation@marriott-moscow.ruor via phone +7 495 937 00 55.

MARRIOTT MOSCOWROYAL AURORA11 Petrovka str.Moscow, 107031, RussiaTel.: +7 (495) 937 1000Fax: +7 (495) 937 1001

MARRIOTT MOSCOWGRAND HOTEL26/1 Tverskaya str.Moscow, 125009, RussiaTel.: +7 (495) 937 0000Fax: +7 (495) 937 0001

MARRIOTT MOSCOWTVERSKAYA HOTEL34 1-st Tverskaya-Yamskaya str.Moscow, 125047, RussiaTel.: +7 (495) 258 3000Fax: +7 (495) 258 3099

Marriott2:Marriott 07.12.2010 17:17 Страница 1

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