1989 Cbr 1000 For Sale

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The Honda Hurricane 1000 came along in 1987, replacing the Interceptor 1000. One has to admire old Soichiro, a brilliant and forceful businessman. He would have been a heckuva poker player because, among his many virtues, he knew when to fold a hand. Like the V-4 Interceptor models. Yes, the name and V-4 still exist in the VFR800 Interceptor, but not like they were touted 20 years ago.

1989 cbr 1000 for sale

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Mr. Honda had put the motorcycling world on its ear when he introduced the CB750 in 1969, an in-line four that was powerful, reliable and inexpensive. Then he decided to trump his own ace, so to speak, when he rolled his 750cc V-4 Sabre and Magna models onto the stage at Marysville, Ohio, late in 1981, followed by the Interceptor 750 a year later. These had twin overhead camshafts, four valves per and, lo and behold, liquid cooling. Soon 500 and 1000 Interceptors joined the fleet, and Honda was waiting for everybody else to copy him.

I bought a grey Hurricane 1000 in 1987. My Honda dealer practically forced me to test drive his. I rode it once and bought the one on the showroom floor immediately, trading in my 1986 VFR750 Interceptor. While the VFR was technically cooler (aluminum frame, V-4 engine, gear-driven cams, etc.,) the Hurricane had an absolutely plush ride (even though it handled beautifully.) It would soak up bumps even when leaned way over in curves. It also had phenominal acceleration. Way better bike than the Interceptor, in my opinion. I then put the Metzler Comp K tires on it, and it was even better.

The Honda CBR1000F Hurricane is a sport touring motorcycle, part of the CBR series manufactured by Honda from 1987 to 1996 in the United States and from 1987 to 1999 in the rest of the world. It is powered by a liquid-cooled, DOHC, 998 cc (60.9 cu in), 16-valve inline-four engine. The CBR1000F, along with the CBR750F and CBR600F, was Honda's first inline four-cylinder, fully-faired sport bike.

Manufactured from 1987 to 1996 in the U.S. to late 1999 in the rest of the world, the Hurricane went through only three major revisions. In 1989, the bike received a cosmetic makeover with a complete redesign of the front fairing, improvements to the bike's front suspension, larger tires were added to help cope with the bike's heavy weight and to accommodate radial tires, improvements were also added to the bike's cam chain tensioner in an attempt to remove the annoying cam chain rattle some riders had reported. The 1989 model also had its power slightly increased, and it gained weight.

INTRODUCTION Russia's economy continued to expand in 2005, with the pace of growth picking up considerably in the second half of the year. Russia's Ministry of Economic Development and Trade (MEDT) forecasts GDP to grow by 6.5 percent for the year, although this is considered a conservative estimate by many. Fixed capital investment from foreign and domestic investors increased by 12.4 percent year-on-year in January-November 2005, compared with an 11.1 percent increase during the same period in 2004, with higher than expected growth in investment taking root in the latter part of the year thanks to a widely perceived improvement in the business climate. Direct foreign investment in Russia is still quite low by comparison with other transition economies in Europe and by international standards generally. Russia's Federal State Statistics Service estimates that FDI inflows reached $14.2 billion by the end of the third quarter of 2005. Applying Central Bank of Russia methodology, this amounts to approximately 2-2.5% of GDP in FDI inflows in 2005. While this marks a substantial increase over last year's $9.4 billion, the energy sector continues to dominate the investment climate, comprising 40% of net FDI inflows in light of several multi- billion dollar projects ongoing during 2005. Royal Dutch/Shell and Exxon Mobil expect to spend USD 20 billion and 12 billion respectively on their offshore oil and gas projects in Sakhalin, while ConocoPhillips increased its stake in LUKoil from 7.6 percent (for which it paid USD 2 billion in 2004) to 16.4 percent. According to the Russian Ministry of Finance, net capital outflows for 2005 are estimated to reach $5.4 billion, marking a sharp decline from the $9.3 billion outflow in 2004. In contrast to capital flight during the 1990s, the majority of current outflows involve legitimate movement of money to more secure and profitable investments abroad, reflecting the maturing of the Russian business sector. As evidence of this trend, by third quarter 2005 the U.S. was the number one destination for Russian investment abroad, knocking Cyprus from its long-term lead to fourth place. Investment inflow statistics also illustrate that repatriated Russian money is no longer as significant a source of foreign investment as it was during the mid/late 1990s. In 2005, the United Kingdom and the Netherlands were the top two source countries for foreign investment in Russia, a reflection of these countries' heavy investments in Russia's energy sector. Although these figures indicate that the Russian investment climate has strengthened in recent years, pending necessary improvements still include: establishment of a truly independent, competent and effective judicial system; reform of so-called natural monopolies in power, gas and community services; banking reform to improve the effectiveness and capacity of the financial sector; accounting reform to promote greater transparency and facilitate integration with the international business community; and further improvements in corporate governance. Furthermore, a thorough overhaul of government bureaucracy aimed at streamlining functions and reducing corruption has long been high on the agenda of businesses, large and small, Russian and foreign, which operate in this country. Although the government has also embraced this cause, as evidenced by the ambitious spring 2004 Administrative Reform agenda, it has made only limited progress to date. OPENNESS TO FOREIGN INVESTMENT President Putin has repeatedly foreign investment as a critical element of Russia's economic development, though in some cases the Government of Russia (GOR) is less willing to permit investment strategies that keep project control in foreign hands. In practice, the GOR has favored joint ventures with local entities or direct cash injections. At times, however, Russia's commitment to foreign investment has been called into question -- most obviously in the energy sector. Over the past year, the GOR has tightened its grip on the sector and has shown little inclination to allow foreign companies anything more than minority stakes (and often only 20 to 25 percent) in larger projects. Nevertheless, because of the absolute size of these projects, even these small stakes add up to hundreds of millions, if not billions, of dollars. ExxonMobil and ChevronTexaco continue to press their case with the GOR that they remain the rightful license holders of the Sakhalin-3 field. [Background: On January 29, 2004 the GOR's Commission on Production Sharing Agreements failed to confirm the validity of a 1993 tender for the Sakhalin-3 oil and gas fields granted to Exxon, Mobil and Texaco. Since that time, the successor firms ExxonMobil and ChevronTexaco have invested more than $60 million in exploration of these fields. The GOR has indicated that they may re-tender this property in the future. End background.] In 2005, the government debated a new Law on Natural Resources that represents an improvement over the current law (as amended). In the current draft of the new law, the government has included several of the key provisions sought by industry, including a guarantee that licenses will carry over from the exploration to the development stage, a provision that licenses will be based on civil rather than administrative law, and a limitation on the number of reasons for license revocation. However, the draft includes language that would restrict foreign companies from taking a majority stake in so-called "strategic fields." The GOR has yet to define "strategic," but has indicated that the list of such fields will be short. As a practical matter, commentators report that the demand for investment in agriculture outstrips the ability of domestic banks to provide the necessary project financing, forcing project developers to use a consortium of financial institutions or request assistance from input suppliers. In addition, despite supportive statements by government officials on investment in agricultural processing facilities, some projects have not taken off due to entrenched interests, lack of clarity, or attempts to turn into an advantage legal ambiguity regarding land procurement and control issues. The GOR's stated interest in substituting domestic production for imported agricultural products provides some encouragement for domestic investment in agriculture. Additionally, though some agricultural sectors are struggling, the food processing industry is more profitable, and is expected to continue to grow as Russia's retail sector continues its rapid expansion. Newly announced programs supporting agriculture as a national priority may help strengthen the grain, oilseed, dairy, and poultry industries in the short term. A new Forest Code, expected to be adopted in spring 2006, should stimulate foreign investment in the sector by providing tax breaks. In 2004, total investments in the forest industry were estimated at $1 billion, up from $825 million in 2003. These investments included an estimated $280 million in foreign investment, of which 70 to 80 percent was channeled into downstream wood processing. According to the Federal Agency for Forestry, $2 billion of total annual investment is needed to modernize the Russian forest sector. Insufficient investment by both the federal government and the private sector hinder further development of the fisheries sector in Russia. Russia's vigorous GDP growth and rising incomes have attracted increasing interest from foreign investors, despite the difficulties of doing business here. In addition, many regions have developed laws and programs to attract FDI (including plans to establish techno-parks near universities and export zones near ports and borders). Although tax reforms at the federal level aim to create a level playing field for all investors and limit the scope of incentives regions can offer, in practice, large foreign investors continue to receive such incentives (though a completed investment project is often later expected to provide social services and other benefits to the local population). Although these positive factors increase Russia's ability to attract FDI, chronic shortcomings in the investment climate continue to dampen potential. The lack of clarity in Russian tax law and administration, inconsistent government regulation, unreliability of the legal system, and crime and corruption all dissuade investors. In addition, recent economic reports have all concluded that corruption is getting worse in Russia. The 1991 investment code guarantees foreign investors rights equal to those of Russian investors (although some industries do have limits on foreign ownership - see below). The July 1999 law on foreign investment confirmed the principle of national treatment. This 1999 law includes a grandfather clause that protects certain large investments (over approximately USD 33 million) from unfavorable changes in tax or other legislation until the project's breakeven point, but for a period of not more than seven years. However, in practice, these protections have not been provided due to the lack of implementing regulations. The Russian government is developing legislation to oversee, and possibly limit, foreign investment in "strategic sectors." What exactly constitutes a strategic sector is still undefined. However, it seems clear that the defense industry and national security sectors will fall into this category. While officials had expected to have a draft law ready by late this year, the timeline has slipped into early or mid-2006. For now, government experts are still locked in debate about whether to review individual investment deals on a case-by-case basis or to set across-the-board limits to foreign ownership in key sectors. Both positions have high-level backing and it remains unclear which approach will ultimately prevail. Explicit restrictions on foreign direct investment are in effect for certain sectors. A 1998 law on the aerospace industry limits foreign ownership to 25 percent of an enterprise, although some existing joint ventures were "grandfathered." In late 2005, legislation was passed eliminating foreign ownership limits in the natural gas monopoly Gazprom. This action followed the GOR's assumption of a direct majority stake in the company. In 2003, Russia enacted several amendments to the insurance law that effectively liberalized the market, allowing majority- owned Russian subsidiaries of insurers from the European Union to sell life and mandatory forms of insurance in Russia. Although the law only permits those companies with offices in the European Union to open subsidiaries offering life and mandatory forms of insurance, the regulator has interpreted the legislation as allowing any foreign insurer to set up life insurance operations in Russia provided that the company has an office in the EU via which the investment is made. Russian law does not permit foreign insurance companies to establish branch offices in Russia. A 1998 law limits foreign investment in the electric power giant Unified Energy Systems (UES) to 25 percent or less, although it has not been enforced to date. UES Chairman Anatoliy Chubays is pushing to attract foreign investors into the divested electricity generating companies that will emerge from the restructuring of UES. Prior approval by the relevant government authority (e.g., State Property Committee, Ministry of Industry and Energy, Ministry of Natural Resources) is required for foreign investment in: new enterprises using assets of existing Russian enterprises; defense industries (which may be prohibited in some cases); and the exploitation of natural resources. Approval is also required for all investments over 50 million rubles, investment ventures in which the foreign share exceeds 50 percent, or investment to take over incomplete housing and construction projects. Additional registration requirements exist for investments exceeding 100 million rubles. Projects involving large-scale construction or modernization may also be subject to expert examination for environmental considerations. In sectors that require licensing (e.g. banking, mining and telecommunications), procedures often can be lengthy and non-transparent. While new business registration procedures go through a so-called "one-stop shop" approach run by the Ministry of Economic Development and Trade in effect since July 2002, the new law does not modify any of the requirements for foreign direct investments noted above. The 1998 bill "On Additional Measures to Attract Investments into Russian Automotive Industry Development" includes a clause that exempts foreign investors from customs duties on raw materials used for car assembly or production of spare parts -- provided that their investments into such enterprises exceed USD 49 million during a five-year period. In July 2003, the Ministry of Industry, Science and Technology requested that the Russian Government lower the investment threshold entitling investors to duty-free import of raw materials for car assembly to USD 4.9 million. A new land code allowing ownership (including by foreigners) of non-agricultural land was adopted in October 2001, although some implementing regulations are still in development. In addition, the GOR signed into law July 24, 2002 a land code for agricultural land that permits long-term leases of agricultural land (up to 49 years) to foreigners, but prohibits direct sales of agricultural land to them. Sales of Federal land must be approved by the Prime Minister. This requirement resulted in several investment failures in agricultural processing in 2004 and 2005. In the privatization of the mid-1990s, irregularities and lack of transparency, as well as the perception of great political risk at that time, limited foreign participation in many of these transactions. This meant that the sale of enterprises in oil, gas, and precious metals was de facto not open to foreign investors. Subsequently, some foreign investors purchased shares of privatized enterprises in secondary transactions, including in oil and gas. For example, U.S. oil firm ConocoPhillips bought the GOR's remaining stake of 7.6 percent in Russian oil major Lukoil in 2004 and has the right to increase its ownership in the company to 20 percent. Foreign investors participating in Russian privatization sales often are confined to limited positions and face problems with minority shareholder rights and corporate governance. The treatment of foreign investment in new privatizations is likely to remain inconsistent. Roughly three-quarters of the Russian economy has been privatized, although many privatized enterprises continue to have significant state-held blocks of shares. Some privatization of remaining state holdings is scheduled to continue, both as part of overall government policy, and at local, regional and federal levels as governments seek additional cash. Some of these offerings may be considered good buys by some investors. Potential foreign investors are advised to work directly and closely with appropriate local, regional and federal officials that exercise ownership and other authority over companies whose shares they may want to acquire. According to a draft privatization plan prepared by the State Property Committee, the government intends to sell most of its minority stakes in companies during 2004-2006, and plans to raise USD 1.1 billion a year from the sale of state assets. In 2004, the GOR attempted to sell all holdings of less than 25 percent. However, because minority positions in very small companies may not attract interested buyers, the GOR likely did not manage to sell all such holdings. Despite continued growth in 2004, the slow pace of structural reforms and the increasing role of the state in the energy sector have most likely been the main causes for the continued disappointing results for foreign investment. Rule of law, corporate governance and respect for property rights, although improved over the years, remain key concerns for foreign investors. Although there is some increased interest, many large U.S. companies remain cautious about pursuing a strategy of growth through acquisition in Russia, because of fears of liabilities associated with existing operations (especially environmental cleanup), inadequate bankruptcy procedures, and weak property rights protection. Growth in Russia's retail and consumer sector continues to be a significant driving force behind overall economic growth, propelled largely by the rapid growth in real disposable incomes in recent years. Russia's Federal State Statistics Service estimates that real disposable incomes grew 12.4% in 2005, thus continuing to outpace GDP growth considerably. Many U.S. companies here report recovery in their earnings, with some now back to or above pre-1998 levels. Russia's macroeconomic recovery has revived the attention of outside investors, especially given troubles in other developing country markets and sluggish growth in some developed country economies, although only a few new major projects have materialized. In recognition of widespread corporate governance problems, the Federal Commission for the Securities Market (now called the Federal Service for Financial Markets) adopted a new corporate governance code in April 2002 and endorsed an OECD White Paper on corporate governance that recommends further improvements in corporate governance in coming years. Some large Russian companies have developed their own corporate governance policies, although implementation is not always robust. As Russia's oil and gas sector accounts for more than 40 percent of its export revenues and comprises a major share of the world's undeveloped energy resources, it holds tremendous potential for foreign as well as domestic investment. Whether this potential is realized depends on the receptivity to such investment by private Russian oil companies and the Russian government. One area of particular interest is Production Sharing Agreements, which are designed to facilitate projects that require high upfront capital investment, but a long payback period for the investor. Production Sharing Agreement (PSA) legislation was adopted at the beginning of 1999, but PSA amendments to the tax code passed in mid-2003 sent a very mixed message. The amendments provided a firmer foundation for three operating projects and a few new projects supported by domestic companies, but greatly restricted the possibility of future PSA projects. The re- emergence of PSAs as a tool for attracting investment looks doubtful, even though the efficacy of this regime is shown by the fact that U.S. and other foreign companies have poured several billion dollars into two of the three existing PSA projects, Sakhalin-1 and Sakhalin-2. Elsewhere in the energy sector, shareholders in the Caspian Pipeline Consortium (CPC) have still not agreed - even after years of negotiations -- on the terms of a deal that would allow for an expansion of the consortium's pipeline. The oil producing companies in the consortium have agreed to virtually every demand from the Russian Government. However, the GOR still refuses to agree to the package and, without this agreement, both the long- term profitability of the pipeline is in jeopardy and access to world markets of an additional 750,000 barrels per day of oil from Kazakhstan and Russia will be delayed. Up until the attack on Yukos, changes in the ownership structure of the Russian oil industry had resulted in new, more market-oriented partners for U.S. firms seeking to invest in Russia. Now, with the forced sale of Yukos's assets, Sibneft's de-merger with Yukos, Gazprom's subsequent purchase of Sibneft, and ConocoPhillips' purchase of the remaining government stake in Lukoil, the oil and gas landscape has changed substantially compared to only a year ago. The industry no longer exerts extensive influence on the government but, on the contrary, it is the government that appears to have regained control over oil and gas firms. Clearly this will, at least in the short run, reduce the number of competitors in the industry. The investment climate for agriculture looked brighter in 2005, and better than in many other sectors of Russian economy, due to several factors. Domestic demand for food products is increasing as a result of an upward trend in per capita income. This change is stimulating investments in the food processing industry, and in food wholesale and retail infrastructure. Food processing is expected to continue expanding at 15 percent annually. Profits generated from these enterprises stimulated investments and modernization of Russian agricultural production as well as rural infrastructure. Structural changes in farm ownership and financing have created a more favorable climate for investment. By the beginning of 2002, many former state and collective farms had completed privatization and bankruptcy procedures, and it became easier to acquire property as property ownership rights became clearer. Agricultural financing has improved, though investment mechanisms for agriculture, such as banks, are still not strong enough (keeping agriculture undercapitalized), and the practical inability to use land as collateral further reduces investment in agriculture. Vertically-integrated companies do continue to support the development of agriculture, but large non-agriculture- based holding companies have begun to turn toward other sectors. The development of new rural credit cooperatives has been declared a national priority, and nearly $70 million will be funneled through them over the next two years. Experience has shown that one of the most important factors determining success or failure of a foreign investment project in agriculture is the degree to which the local administration supports the project. Almost all administrations invite investment into their regions, but few are prepared to allow business to operate in a relatively open market without interference in matters such as pricing inputs and contracting for services. Many local administrations still view foreign investors as sources of cash for the support of local government and favored businesses. They will also sometimes expect the foreign firm either to pay outright a significant bribe or undertake social or public works projects for the betterment of the region. CONVERSION AND TRANSFER POLICIES Russia implemented a series of amendments to its laws on currency controls in 2004. While the ruble is the only currency that is legal tender in Russia, in general companies and individuals face no significant difficulty in obtaining foreign exchange. Authorized banks are not difficult to find as most have licenses to conduct currency transactions. While the following discussion represents a "snapshot" of current requirements, investors would be well advised to seek expert advice on the controls in effect at the time. Generally, any payment obligation that lasts longer than 180 days is a "capital" transaction. "Current" forex transactions include contracts in which settlements take place within 180 days and loans not exceeding 180 days. Currency controls exist on all transactions that require Customs clearance, meaning that in Russia they apply to both import and export transactions. Greatly simplified, the structure is the same: the importer or exporter presents the "passport of deal" documents to an authorized bank, which controls the flow of funds in and out of Russia according to CBR regulations. A "passport of deal" is a set of documents that importers and exporters provide to authorized banks to review whether the transaction meets currency control regulations. Once an authorized bank signs the passport of a deal, it monitors the entire transaction for compliance with currency regulations, and the importer/exporter must use that bank for all parts of the transaction. The importer/exporter must present the passport signed by the authorized bank to clear shipments through Customs. The Customs Committee notifies the bank once the shipment has been cleared. The authorized bank then monitors compliance with payment regulations. In June 2004, the Central Bank put a number of regulations into effect that were designed to implement amendments to Federal Law No. 173-FZ "On Currency Regulation and Currency Control," dated December 10, 2003. According to the most recent regulations, foreign currency transactions between residents and non-residents involving non-cash settlements must be carried out using special bank accounts. Authorized banks are permitted to open special bank accounts for resident individuals ("F" Accounts) and resident entrepreneurs and legal entities ("R1" and "R2" accounts). Non-residents in Russia open the following special accounts: "S" accounts to trade sovereign ruble bonds, "A" accounts to trade shares in unit investment funds, "O" accounts to trade non-sovereign ruble bonds, "V1" accounts to receive ruble loans from residents, and "V2" accounts to give loans to residents as well as to buy certain types of securities from residents. In addition to establishing these new accounts, the amendments declare that all currency controls will be lifted on January 1, 2007. Only authorized banks may carry out the sale or purchase of foreign currency transactions. According to currency control laws, the Central Bank retains the right to impose restrictions on the purchase of foreign currency, including requirements that a) the transaction be completed through a special account and b) a security deposit be established (up to 20 percent and one year for non-residents, and up to 100 percent and 60 days for residents purchasing foreign exchange). Special controls on current transactions proceeds from the sale of exported goods for foreign currency must be credited back to the exporter's account in an authorized bank. The latest amendments to the Law on Currency Regulation And Currency Control that took effect in June 2004 stipulate a ceiling for mandatory surrender requirement at 30 percent of foreign currency proceeds. The actual norm is to be set by the CBR, but in any event the percentage may not exceed this ceiling. Effective December 27, 2004, the CBR set the surrender norm at 10 percent. Forex proceeds must be sold for rubles within seven days of credit to the exporter's account. If there are delays or discrepancies in the receipt of export earnings (due, e.g., to price fluctuations), or delays or non-shipment of prepaid goods, the importer/exporter is liable to Customs sanctions. They can submit documents to the Ministry of Economic Development and Trade to explain or justify the delay or non-receipt. EXPROPRIATION AND COMPENSATION The 1991 investment code prohibits the nationalization of foreign investments except following legislative action and where deemed to be in the national interest. Such nationalizations may be appealed to the courts of the Russian Federation, and are to be paid with prompt, adequate and effective compensation. At the sub-federal level, expropriation has been a problem, as has local government interference or lack of enforcement of court rulings protecting investors. The embassy is tracking a small number of cases in which foreign companies are seeking compensation for the loss of their investment or property due to regional government action or inaction. DISPUTE SETTLEMENT Russia has a body of conflicting, overlapping and rapidly changing laws, decrees and regulations, which has resulted in an ad hoc and unpredictable approach to doing business. Independent dispute resolution in Russia can be difficult to obtain since the judicial system is still developing. Regional and local courts are often subject to political pressure. In addition, court decisions are at times not executed and the bailiffs, who are charged with enforcing court judgments, are administratively not part of the court system and sometimes opt not to enforce those judgments. Many Western attorneys refer their Western clients who have investment or trade disputes in Russia to international arbitration in Stockholm or to courts abroad. A 1997 law allows foreign arbitration awards to be enforced in Russia, even if there is no reciprocal treaty between Russia and the country where the order was made. Russia is a member of the International Center for the Settlement of Investment Disputes and accepts binding international arbitration. Russia is also a signatory to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. However, the enforcement of international arbitral awards still ultimately requires action from Russian courts and follow-up by court officers through a new system of bailiffs that, due to legal restrictions and limited trained personnel, has yet to become a consistently effective enforcer of court judgments. As for legal avenues available in Russia through Russian arbitration, one choice is the Arbitration Court of the Russian Federation, which is part of the court system. It has special procedures for seizure of property before trial, so property cannot be disposed of before the court has heard the claim, as well as for the enforcement of financial awards through the banks. Additionally, the International Commercial Arbitration Court at the Russian Chamber of Commerce and Industry will hear claims if both parties agree to refer disputes there. Parties to foreign trade agreements and companies with foreign investments can make applications. A similar arbitration court has been established in St. Petersburg. The Russian Union of Industrialists and Entrepreneurs, an organization representing some of the largest Russian companies, is also developing an alternate dispute resolution (ADR) system. As with international arbitral procedures, the weakness in the system is in Russian enforcement of decisions. Bailiffs report to the Ministry of Justice, rather than the courts, and the courts can do little to ensure that decisions, once passed down, are executed. The Embassy is currently aware of several cases where despite repeated favorable court decisions for financial restitutions, foreign investors have not been able to get a judgment enforced against another private party or a local government. PERFORMANCE REQUIREMENTS AND INCENTIVES While performance requirements are not generally imposed by Russian law, and are not widely included as part of private contracts, they have appeared in the agreements of large multinational companies investing in natural resources, and in production sharing legislation. There are no formal requirements for offsets in foreign investments. However, as approval for investments in Russia frequently depends on relationships with government officials and on a firm's demonstration of commitment to the Russian market, in practice this may result in offsets. The provision of investment incentives has been problematic in Russia, as the Russian government's interest in attracting investment has been tempered by its tight financial situation, concern about special privileges given to foreign investors, and interest in complying with the rules of the World Trade Organization and other international economic institutions. Those investment incentives set out in the 1991 investment law, including certain tax benefits, have never been implemented, or have been largely eliminated or superseded by subsequent laws and decrees. Changes to the corporate profits tax code adopted in 2001 reduced overall corporate profits tax rates from 35 to 24 percent, but limit regional government incentives to reducing corporate tax rates by up to 4 percentage points. The PSA Chapter of the Tax Code enacted in June 2003 stipulates that 70 percent of purchased goods in each calendar year must be of Russian origin. Purchased goods are considered to be Russian by origin if they in turn have at least 50 percent Russian origin. The PSA Chapter itself specifies that investors will be refused cost recovery if they do not meet Russian origin rules. However, the amended PSA Law acknowledges that changes will need to be made to the Russian origin rules in case Russia joins the WTO. The Russian auto decree, signed in early 1998, allows tariff breaks for large investments in the auto industry (where investment projects reach 50 percent domestic content levels within five years). However, the Russian government has stated that it does not intend in the future to enter into such arrangements with investors. As mentioned above, the 1999 foreign investment law theoretically provides protection from unfavorable changes in taxes or customs duties for certain foreign investments exceeding USD 41 million. Implementing legislation to enact such protections is still outstanding. The GOR requires visas and residence permits for investors. Work and residence permits must be renewed annually, which can sometimes be a cumbersome process, as applicants may be required to reapply at a Russian embassy overseas. Investors in some sectors also may face restrictions requiring that a certain percentage of staff be Russian citizens. RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT Both foreign and domestic legal entities may establish, purchase and dispose of businesses in Russia. Investment in some sectors, which are regarded as affecting national security (insurance, banking, natural resources, communication, transportation, and defense-related industries), may be limited. The Land Code approved in 2001 allows foreigners to buy non- agricultural land made available for private ownership and not located near international borders. The Agricultural Land Code allows foreigners to lease agricultural land for 49 years. In 2004, the Constitutional Court upheld the constitutionality of the provisions of the Land Code permitting land sales to foreigners, ruling that selling land does not affect sovereignty. PROTECTION OF PROPERTY RIGHTS The Constitution, and a presidential decree issued in 1993, give Russian citizens general rights to own, inherit, lease, mortgage, and sell real property (usually not including the land on which it stands). Mortgage legislation enacted in 2004 should make it easier for lenders to evict homeowners who do not stay current in their mortgage payments. This should in theory make mortgage lending (and the housing market) more attractive to lenders and developers. Nevertheless, mortgage lending is only in its initial stages. Land ownership is now regulated by the October 2001 land code for non-agricultural land, although development of implementing measures is still in progress. This law permits foreign land ownership for non-agricultural land. A land code for agricultural land was signed into law on July 24, 2002. This law does not permit direct foreign ownership of agricultural land, but does permit leases of up to 49 years. The rights of Russian citizens to own and sell residential, recreational, and garden plots are now clearly established, with over 40 million properties of this type under private ownership. Intellectual Property Rights (IPR) violations continue to be a serious problem in Russia. While Russia has made significant advances in its efforts to improve its IPR protection regime, many challenges remain. The U.S. is reviewing Russia's status as a beneficiary country under the U.S. Generalized System of Preferences (GSP) Program. Russia has also been on the Special 301 Priority Watch List since 1997, and will undergo an Out-of- Cycle Review in early 2006. U.S. copyright industries estimate they lose in excess of $1.5 billion annually due to copyright piracy (films, videos, sound recordings, books and computer software). Although five of the six major U.S. film studios and several music producers now produce and sell DVDs and CVDs in Russia at lower prices in order to compete with pirates, this has not led to a noticeable decline in the market share for pirate products, which U.S. industry estimates at over 80 percent of for films and approximately 66 percent for music. The local business and entertainment software industries, however, report declining levels of piracy. Internet piracy has become a growing concern with the growth of internet access, although the Russian government is beginning to make efforts to combat both music downloading services as well as websites that sell pirated music and software. Russian law enforcement has recently taken a more aggressive approach toward pirate optical disk producers. Since the start of 2004, law enforcement agencies have conducted raids on at least half of the licensed optical disk plants in Russia. However, cases often fail at the prosecution stage and few convictions for IPR violations ever lead to prison sentences; judges are prosecutors frequently lack expertise in the handling of IPR violations or do not always regard them as serious crimes. Corruption continues to be a problem; enforcement actions and prosecutions are often undermined and products seized during enforcement actions frequently return to the stream of commerce even if they are found to be illegal. U.S. investors also consider the Russian court system ill- prepared to handle sophisticated patent cases. However, a specialized higher patent chamber has been established at Rospatent, which has brought greater expertise and efficiency to resolution of patent and trademark disputes. Despite concerted efforts, several other deficiencies remain in Russia's IPR regime, including: a lack of explicit protection for test data for pharmaceutical products and agricultural chemicals; denial of national treatment for protection of geographical indications; and problems with enforcement. As of late 2005, the Russian government has proposed legislative changes to address these concerns; however, these changes have not yet made it through the Duma. U.S. and multinational companies continue to report counterfeiting of patented and trademarked goods as a serious problem, especially for consumer goods, wine, distilled spirits, pharmaceuticals and other products. Several U.S. firms have also experienced problems with trademark piracy, with Russian enterprises attempting to take over well-known foreign trademarks not currently active in Russia, although rightsholders have been moderately successful in countering these schemes through the Russian court system or with Rospatent. U.S. firms need to take steps to protect their intellectual property, including registering their trademarks with the Russian Federal Service for Intellectual Property, Patents and Trademarks (Rospatent). The September 1992 law on topology of integrated microcircuits, which also protects computer programs, protects semiconductor topologies for 10 years from the date of registration. Amendments to this law on topologies to bring provisions into full WTO TRIPs compliance were passed in June 2002 and signed into law in July 2002. Russia has acceded to the Universal Copyright Convention, the Paris convention, the Berne convention, the Patent Cooperation Treaty, the Geneva Phonogram Convention, and the Madrid Agreement. The U.S.-Russia bilateral trade agreement mandates protection of the normal range of literary, scientific and artistic works through legislation and enforcement. TRANSPARENCY OF THE REGULATORY SYSTEM The legal system in Russia is still in a state of flux, with various parts of government struggling to create new laws on a broad array of topics. In this environment, negotiations and contracts for commercial transactions are complex and protracted. Russia has implemented only part of its new commercial code (contained within the civil code) and investors must carefully research all aspects of Russian law to ensure that each contract conforms to Russian law and embodies the basic provisions of the new, and where still valid, old codes. Contracts must likewise seek to protect the foreign partner against contingencies that often arise. Keeping up with legislative changes, presidential decrees and government resolutions is a challenging task. Uneven implementation of laws creates further complications; various officials, branches of government and jurisdictions interpret and apply regulations with little consistency and the decisions of one may be overruled or contested by another. President Putin has stressed the need for consistent application of national law, and his seven regional Presidential Representatives have begun to review regional legislation and regulations to ensure their consistency with national law. Legal requirements may be less burdensome than reaching final agreement with local political and economic authorities; registration of businesses can be a lengthy, bureaucratic process, particularly where natural resources or defense production are involved. Corruption is widespread and the fears of some Russian officials that foreigners will purchase Russian assets at below- market rates can impede bureaucratic approval for foreign investments. Environmental concerns are being raised more frequently now by Russian officials at federal and local levels as considerations in the approval process for investments. A law on government procurement, adopted in May 1999, contains a provision allowing foreign firms to participate in public tenders if the product is not produced in Russia or if Russian production is considered to be economically unprofitable. The last major revision to the Russian Tax Code took effect in 2001. It substantially amended chapters 21 (Value Added Tax), 22 (Excise Taxes), 23 (Personal Income Tax) and 24 (Unified Social Tax). The effect of these reforms is to reduce the nominal tax burden from 41 percent of GDP (only 37 percent actually collected) to 31.5 percent in 2004. Six taxes were abolished entirely: the 1.5 percent social and housing turnover tax; the Employment Fund tax; the state border clearance fee; vehicle tax; vehicle acquisition tax; and oil and lubricant product sales tax. Further, the road users turnover tax was reduced from 2.5 percent to 1 percent of turnover, and in June 2002 was abolished entirely, effective January 2003. With the abolition of the road tax, no turnover (revenue) taxes remain in Russia. The GOR plans to cut the total number of taxes to 15 (from the current number of 54), effective January 1, 2006. Value-added tax (VAT) rates are generally 18 percent, but a range of goods is taxed at 10 percent (largely foods, medicines, and some items for children). Both domestic and foreign companies exporting goods regularly complain that they are unable in practice to receive refunds of VAT for exported goods. Notable VAT tax changes include VAT tax relief for small businesses, considerable clarification to deductibility rules, reduction of import VAT exemptions, and an attempt to provide a zero VAT tax on exports, although the VAT refund system still does not function well. Effective 2006, the VAT rate will be reduced to 16 percent. In 2001, Russia moved to a flat individual income tax rate of only 13 percent for residents and 30 percent for non- residents, one of the lowest rates in the world. Deductions are allowed for, inter alia, home purchase or construction and exclusion of earnings on the sale of real property held for more than five years. The GOR's strategy is to substantially expand the current narrow tax base. In 2001, that strategy proved successful as both compliance rates and revenues increased substantially. Excise duties are levied only on alcoholic beverages, tobacco products, cars, motor fuel, and oil. Excise duties on oil and natural gas increased considerably in 2005 -- oil and gas duties rose from R5 to R66 per ton, and gasoline duties rose from R585 to R1850 per ton. Excise taxes on natural gas exported to CIS countries will fall from the current 30 percent to 15 percent. The new law expands the list of dutiable activities and objects, but several additional transactions became exempt, including exports performed by the producer of the goods (except oil). In August 2004, the GOR introduced a new system of mineral extraction taxes for oil and export duties on oil and oil products solely dependent on the level of Urals export prices. The two changes together mean the marginal tax rate on a barrel of exported oil is 90 percent when the oil price is above $25/bbl. However, the Russian government is considering a revision of the tax structure following complaints from Russian oil companies. There will likely be some easing of the tax burden in 2006. These new rules heighten the sensitivity of federal budget revenues to oil prices: the mineral extraction tax and export duties (98 percent of which are oil and gas tariffs) make up 33 percent of total budget revenues. Amendments to the Corporate Profits Tax were signed into law in 2001, effective January 2002. The amendment lowered corporate profit taxes to 24 percent, and allowed many more deductions than under the old law, but eliminated partial and full tax exemptions (including the capital investment exemption). Regions are allowed, at their discretion, to grant a 4 percent tax reduction, effectively lowering the profits tax rate to 20 percent. Many regions have, in fact, done this. For dividends/interest earned by non-residents, the profit tax rate is 15 percent. Several tax reductions came into effect starting in 2004. The sales tax and the natural gas excise tax were both abolished. To compensate for losses in federal revenue, the bill included a gas extraction tax of 107 rubles (USD 3.52) per 1,000 cubic meters, a five percent increase in the crude oil extraction tax, and increases in various excise taxes. Lost local sales tax collections were covered by increased federal government transfers of revenues from taxes on small and medium enterprises, excise taxes on motor fuel, land taxes, and 50 percent of the alcohol excise tax. The export tariff on gas rose from 5 to 28 percent. Effective January 1, 2005 the Unified Social Tax, which is paid by employers and covers pensions, healthcare and social security, dropped from an effective rate of about 30 percent to a top rate of 26 percent on salaries up to 280,000 rubles (about $10,000) per year. Since the Yukos affair, major taxpayers have been less likely to engage in aggressive tax optimization schemes than in years past. Nevertheless, the "fear" factor associated with the Yukos case is not the only motivation behind most firms' decision to review their accounting procedures and improve their tax behavior. Straightforward market forces are driving businesses toward more transparent accounting practices. For example, firms with clean books have an easier time accessing foreign capital and drawing foreign investors than their shadier competitors. In addition, more companies, both foreign and domestic, are taking their tax disputes to the courts, which are reportedly becoming more competent at adjudicating tax cases fairly. As a result, tax compliance levels are gradually increasing, as evidenced by record high tax revenues in 2005. Nonetheless, problems in the tax environment remain. Companies often have little recourse other than the courts during tax disputes. While firms have successfully appealed to the courts, tax authorities are often slow to implement judicial decisions. Penalties for non-compliance include confiscation and a company's accounts can be frozen relatively quickly. In early 2005, President Putin acknowledged the negative impact of the tax environment on the business climate when he called for an end to "tax terrorism." In response to the President's order, the Government submitted a substantial package of amendments to the Duma designed to increase transparency and consistency in the tax environment. Russian legislators are currently reviewing the amendments, which are scheduled to be put into effect in early 2006. EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT The Russian banking system remains relatively small, with $14.2 billion in aggregate registered capital as of August 1, 2005. Recent data indicates that only 39 of Russia's 1,228 banks are wholly foreign-owned. In April 2005, the GOR and the Central Bank of Russia adopted the Banking Sector Development Strategy through 2008. According to official sources, the strategy seeks to enhance the stability and efficiency of the banking sector by: increasing the protection offered to depositors and creditors; enhancing the banking sector's role as a primary intermediary for household and commercial credit operations; improving the Russian banking sector's competitiveness; protecting the financial sector from illicit activity such as money laundering and the financing of terrorism; improving transparency in the sector; and building up investor, creditor, and depositor confidence in the banking sector. In September 2005, the CBR completed its review of all banks that sought admission to the recently established Deposit Insurance System (DIS). To gain admission to the DIS, a bank had to verifiably demonstrate to the CBR that it complies with Russian identification and transparency requirements. Currently, 927 of Russia's estimated 1200 banks have been admitted to the DIS, effectively weeding out over 200 banks from Russia's banking system. Twelve stock exchanges operate in Russia. The dominant exchanges are in Moscow, and include the Russia Trading System (RTS) and the equity trading floor on the MICEX (Moscow Interbank Currency Exchange). The RTS rebounded in 2005 with net profits increasing by 100% over 2004. Turnover exceeded $57.7 billion in 2005, showing an increase of 50% over 2004. Over the year, average daily volume on the RTS increased 44% to $31 million, with greater average daily volumes of $44 million recorded in the second half. Although the RTS is more diversified, average trade volumes on the MICEX stock exchange are much higher than on RTS. In 2005 (through November) average daily trade volume was $556 million, up from $448 million in 2004. MICEX was still dominated by RAO UES shares in 2005, though the UES share fell from about 50 percent in 2004 to 37 percent in 2005. Other leading stocks in 2005 were Lukoil (25 percent, up from 15 percent in 2004), Norilsk Nickel (12 percent, up from 6.5 percent), Rostelecom (6.8 percent, up from five percent), Surgutneftegaz (6.5 percent, slightly down from 6.7 percent in 2004) and Sberbank (avg 3.2 percent in 2005). After not operating during 2004, the Moscow Stock Exchange began a restructuring process in April 2005 and resumed trading activity in August 2005, though the level of trading activity has been low. Gazprom shares accounted for up to 95 percent of trades on the MSE from 1997 to 2003, and the new managers are attempting to diversify the trading activity. Several Russian regional centers have their own stock exchanges, but trade volumes outside Moscow tend to be low. Regional exchanges are still dependent on Moscow-based participants. Amendments to the law "On the Securities Market," which entered into force in 2003, included definitions of corporate bonds, mutual funds, options, futures and forwards -- all of which provide a sounder legal basis for these markets. Companies offering public shares are required to disclose more information during the placement process as well as in quarterly reports. In addition, the responsibilities of financial consultants helping companies with their stock offerings are now clearly defined, and they will be held liable for accuracy of the data presented to shareholders. Also, the amendments define "price manipulation," giving the FSFM authority to investigate and punish violators of this practice. However, the amendments did not cover insider trading, which is the subject of another bill that is currently stalled in the Duma, as there is strong lobbying against it. In December 2004, the Duma also approved a number of amendments to the law "On Mortgage Securities" as part of the housing reform package in an effort to facilitate the issuance of mortgage- backed securities while protecting individual investors. The corporate bond market is currently the most rapidly and dynamically developing sector in Russia's capital markets. High and increasing demand from enterprises for funds in the absence of an effective system of bank lending is the main driver of growth. It is also boosted by weaknesses in other current characteristics of the market: the absence of more attractive ruble-denominated alternative asset classes, low and even negative real interest rates on the secondary OFZ/GKO market, the absence of speculative opportunities on the currency market, and a large and increasing volume of rubles caused by dollar oil export earnings flowing into Russia. 2005 saw a record high amount of RUB 270 billion raised in the corporate bond market, compared to RUB 145 billion in 2004. Even though the corporate bond market is rapidly developing, it suffers several problems. The market is still quite narrow. It is very difficult to provide the necessary level of liquidity for relatively small issues, even if the issuer is a blue-chip company. Another problem is the expense of preparations, including development of each issue's parameters, prospectus registration, underwriting services, etc. Also, a 0.8 percent issuance tax adds to the expenses of the issuer. Another barrier to the growth of the market is a provision of the federal law "On Joint Stock Companies", which requires the volume of a bond issue not to exceed a company's authorized (charter) capital. The banking sector remains one of the weakest legs in the Russian reform program. Despite measured progress in several areas, the Russian banking system is not yet efficiently performing its basic role of financial intermediary (i.e. taking deposits and lending to business and individuals). As illustrated by the summer of 2004's mini-banking crisis, the public still lacks confidence in the banking sector. Approximately one third of the population still prefer to keep their personal savings "under the mattress" rather than trust their savings to banks. Yet, this year's successful implementation of the Deposit Insurance System proved a critical psychological boon to the sector, evidenced by this year's growth in overall deposits. Although Sberbank remains the largest bank in Russia by a large margin, the sector has made some progress toward diversification. Sberbank faces increasing competition from the second largest state bank, Vneshtorgbank, as well as from several other significant contenders (including Gazprombank, Alfa Bank, and MDM Bank). As evidence of this increasing diversification of the banking sector, Sberbank's share of retail deposits has dropped to less than 40 percent in 2005, compared to the 60 percent it held less than two years ago. POLITICAL VIOLENCE Although the use of strong-arm tactics is not unknown in Russian commercial disputes, post is not aware of any cases where foreign investments have been attacked or damaged for political reasons. Russia continues to struggle with an ongoing insurgency in Chechnya, and the Chechen Republic and neighboring regions in the northern Caucasus have a high risk of violence and kidnapping. CORRUPTION Corruption remains a serious problem in Russia, with the country ranking 126th on Transparency International's (TI's) 2005 Index (with a score of 2.4). TI's report noted that Russia's drop from 2004 (from 90th place and a score of 2.8) was so severe that it likely reflects a statistically significant drop in the perceptions of corruption here. U.S. firms have identified corruption as a pervasive problem, both in number of instances and in the size of bribes sought. Under the Russian Criminal Code (Articles 290 and 291) giving and receiving bribes are criminal acts carrying prison sentences of up to 12 years. However, Russia has not criminalized bribery of foreign officials. While there are regular prosecutions related to bribery, there have been few high- profile, apolitical prosecutions that would send a clear deterrent message. In addition, bribery and other corruption issues are handled by the police, who are seen by the public as one of the most corrupt government institutions. Strict documentary requirements applied to tax deductions for business expenses make it very unlikely Russians would be able to take tax deductions for bribes. Corruption in commercial and bureaucratic transactions and problems with the implementation of customs regulations also inhibit investment. Customs officials are extremely inconsistent in how they apply the law. Investment would benefit from improved dispute resolution mechanisms, the systematic protection of minority stockholders rights, conversion to international accounting standards, and the adoption and adherence by companies to business codes of conduct. Successive Russian governments have designated the fight against corruption as a priority task of government due to its economic costs (particularly the deterring of foreign and domestic investment and encouragement of capital flight). President Putin has repeatedly stressed that enforcement of laws is a high priority of his administration, and has periodically focused attention on corrupt practices. However, initiatives to address these shortcomings, either through regulation, administrative reform or government-sponsored voluntary codes of conduct, have made little headway in countering endemic corruption. More transparent implementation of customs, taxation, licensing and other administrative regulations is necessary. Russia signed the UN Convention against Corruption in December 2003. The OECD Convention is currently on President Putin's desk awaiting signature. Transparency International and other NGOs are interested to see if he will sign it before the G8 Summit in St. Petersburg in July. BILATERAL INVESTMENT AGREEMENTS In 2005 the Russian Duma did not actively consider signing the Bilateral Investment Treaty (BIT) between the United States and Russia that was signed in 1992 and ratified by the U.S Senate that same year. Despite the passage of a new law regulating foreign investment in June 1999, Russian foreign investment regulations and notification requirements can be confusing and contradictory. The law on foreign investment provides that a single agency (still undesignated) will register foreign investments and that all branches of foreign firms must be registered. Russia inherited from the Soviet Union 14 bilateral investment treaties (BITs) with Austria, Belgium and Luxembourg, Great Britain, Germany, Italy, Spain, Canada, China, Korea, the Netherlands, Finland, France, and Switzerland. They were ratified in 1989-90 and came into force in 1991. Russia has since negotiated another 34 agreements, of which 20 have been ratified - with Greece, Cuba, Romania, Denmark, Slovakia, Czech Republic, Vietnam, Kuwait, India, Hungary, Albania, Norway, Yugoslavia, Lebanon, Macedonia, the Philippines, Egypt, South Africa, Japan, and Moldova. However, in 2002 Russia requested that all treaty partners re-negotiate BITs, professing concerns that existing BITs may not be compatible with future WTO obligations. OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS In an agreement ratified in 1992, the U.S. Overseas Private Investment Corporation (OPIC) was authorized to provide loans, loan guarantees and investment insurance against political risks to U.S. companies investing in Russia. OPIC generally insures against three political risks: expropriation; political violence; and currency inconvertibility. In 1994, to meet the demands of larger projects in Russia (and worldwide), OPIC doubled the amount of insurance and quadrupled the amount of finance support - to USD 200 million in each case - it can commit to an individual project (a total of USD 400 million). OPIC also makes equity capital available for investments in Russia by guaranteeing long-term loans to private equity investment funds. Russia is a member of the Multilateral Investment Guarantee Agency (MIGA). In December 2000, OPIC resumed coverage in Russia for currency inconvertibility, coverage that OPIC had suspended in September 1998 after the financial crisis. During this period, OPIC remained on cover in Russia for its other services. In FY 2005, OPIC provided $119 million in guarantees and insurance for 29 projects, compared to $99 million for 22 projects in FY 2004. In the event OPIC would need to pay a currency inconvertibility claim, it would use the exchange rate in effect on the date the claim is submitted. LABOR The Russian labor market remains fragmented, characterized by limited labor mobility across regions, and consequent wage and employment differentials. Although statistics are often unreliable and many forms of unemployment are not counted, unemployment, using International Labor Organization (ILO) standards, was 7.6 percent of the workforce in October 2005. Estimates reach over 40 percent in parts of the north Caucasus. However, unemployment in Moscow is about one percent, and average monthly incomes are approximately three times higher than the national average, which was about USD 290 per month. The rate of increase for official real salaries was 7.9 percent in 1H05, exceeding GDP growth for the period of 5.7 percent. Labor mobility continues to be restricted by an under- developed housing and mortgage market, affordable housing shortages in many cities, and the continued existence of residency permits and registration. The availability of subsidized housing and cultural ties often make workers reluctant to move, and a lack of information about employment or housing opportunities in other regions exacerbates the situation. This lack of labor mobility across regions significantly affects wage rates and employment. Nonetheless, labor mobility across professions and within regions is improving, as workers attempt to adapt to the needs of a market economy. The labor force is generally well educated, though skilled labor has been in increasingly short supply. Total wage arrears were USD 340 million as of October 2005. Strikes in the private sector are less frequent than they were in the mid-1990s. Workers have increasingly pursued their demands through the court system or used methods such as rallies and days of action to call attention to their plight. Enterprises that pay wages in full and on time generally have smooth labor- management relations. The trade union movement is still largely dominated by the Federation of Independent Trade Unions of Russia (FNPR), which inherited the bulk of the property of its Soviet predecessors and consists of formerly governmental unions. Many new free trade unions outside this confederation have begun to make significant strides in defending their members' interests. In an effort to wield more influence on national legislation and government decisions, several national and regional free trade union structures formed in 1995 the Russian Confederation of Labor (KTR) and the All- Russian Confederation of Labor (VKT). In November 2000, the International Confederation of Free Trade Unions (ICFTU) accepted as members the KTR, VKT, and the FNPR. The Russian government generally adheres on paper to International Labor Organization (ILO) conventions protecting worker rights, though enforcement is often lacking. In December 2001, President Putin signed into law a new Labor Code that came into force in February 2002. The new Code seeks to diminish the role of government in setting and enforcing labor standards and to move toward more flexible labor markets. In the conceptual scheme of the new Code, trade unions are expected to play a balancing role in representing workers' interests. However, there are significant gaps in the proposed scheme, including no clear enforcement mechanisms for failure or refusal by an employer to engage in good faith collective bargaining or other obligations and provisions that favor designation of a majority union as the exclusive bargaining agent. Worker safety is a major unresolved issue, as enterprises are often unable or unwilling to invest in safer equipment or to enforce safety. FOREIGN TRADE ZONES/FREE PORTS In 2005, the Russian government passed the Law on Special Economic Zones (SEZs), which proposed the establishment of industrial-production zones and progressive-technical zones (focused on R&D) for twenty-year periods. In November 2005, the government announced the results of a tender and the establishment of six SEZs. Enterprises operating in industrial- production zones (20 square kilometers) will pay lower unified social taxes (with the highest rate reduced from 26% to 24%) and those within progressive-technical zones (2 square kilometers) are allowed to write-off all R&D expenses. Both types of zones will benefit from reduced land and property taxes and a waiver of customs duties on imports and finished exports. The tender process will continue in 2006, with more SEZs to be designated. The SEZ in Kaliningrad, which allows goods to be imported duty-free as long as they are not re-exported to the rest of Russia, has been able to attract some moderate investments. An SEZ in Magadan has attracted minor amounts of investment and the SEZ in Nakhodka has reportedly never been implemented. Many larger foreign investors see little advantage to establishing within one of the proposed SEZs, as investment incentives offered by local administrations are often more attractive than the SEZ benefits. FOREIGN DIRECT INVESTMENT STATISTICS Table 1 shows flows of foreign investment by country for the first nine months of 2005, compared to the same period in 2004. Contrary to recent years, the first nine months of 2005 showed a decrease in foreign investment flows over the same period in the prior 2004. Note that Russian statistical practice counts total investment as including direct investment, portfolio investment, and "other" investment (largely trade credits). Cyprus consistently figures high as an investor because most investment coming from Cyprus is actually returning Russian capital. Table 1: Top Ten Investors - By Year (in USD million) Country Jan-Sept. 2004 Jan-Sept. 2005 UK 4,856 5,003 Netherlands 3,587 4,055 Luxembourg 6,757 3,630 Cyprus 2,850 3,255 Switzerland 1,048 1,546 Germany 1,168 1,388 USA 1,624 1,167 Virgin Islands (UK) 553 833 Bahamas N/A 559 France 1,925 540 Japan N/A N/A Austria 568 N/A All Others 4,767 4,853 Total 29,135 26,829 (Note: As of 2001, the Federal Service for State Statistics stopped providing breakdowns of direct and portfolio investment in its yearly statistics, and started instead providing this for accumulated investment (table 2).) The numbers in Table 2 can only be taken as a general indication of the stock of investment activity identified with a given country. This does not represent an accumulated stock of direct investment because these figures include portfolio and "other" investment and do not reflect any withdrawal of funds or decreases in value of assets. Although the U.S. fell behind the Netherlands and Cyprus in terms of direct investment in 2004 and 2005, this is largely due to Royal Dutch/Shell's USD 11 billion investment in Sakhalin and returning Russian capital from Cyprus. Note that although Germany continues to show a larger stock of total investment than the U.S., a large proportion of German investment consists of "other" investment, primarily trade credits. Table 2: Top Investors - Accumulated Basis (Amounts in USD Million) Country Jan.-Sept. 2004 Jan.-Sept. 2005 Total FDI Total FDI Cyprus 9,580 5,545 17,576 12,682 Luxembourg 10,560 280 16,101 399 Netherlands 10,678 7,858 15,586 12,085 UK 7,422 1,460 9,642 1,802 Germany 9,378 2,410 9,321 2,587 USA 6,670 4,207 7,157 4,361 France 4,206 364 3,483 424 Switzerland 1,608 738 2,179 1,015 Virginia Islands (UK) 1,611 873 2,151 1,382 The Bahamas N/A N/A 1,801 639 Japan N/A N/A N/A N/A Austria 1,140 262 N/A N/A All Others 10,576 5,772 11,477 5,954 Total 73,429 29,769 96,474 43,330 Source: Federal Service for State Statistics (FSSS) Table 3 shows foreign investment by region over the first nine months of 2005, compared to the same period in 2004. Moscow city attracted the largest volume of investments, mainly due to concentration of companies' headquarters that guarantees attraction of investments. Moscow also has the largest concentration of consumers with high purchasing power. Table 3 - Foreign Investment - Top Regions Jan-Sep 2004 Jan-Sep 2005 Amount % Rank Amount % Rank Moscow (city) 11,796 40.5% 1 11,438 42.6% 1 Sakhalin 2,774 9.5% 3 3,743 14.0% 2 Moscow Region 1,292 4.4% 4 1,772 6.6% 3 Omsk Region 811 2.8% 7 1,620 6.0% 4 Sverdlovsk Region 427 1.5% 11 967 3.6% 5 St. Petersburg 651 2.2% 8 899 3.4% 6 Chelyabinsk Region 210 0.7% 12 647 2.4% 7 Republic of Sakha (Yakutiya) 520 1.8% 10 596 2.2% 8 Samara Region 592 2.0% 9 483 1.8% 9 Arkhangelsk Region - - - 577 1.8% 10 Vologda Region 1,054 3.6% 5 419 1.6% 11 Kemerovo Region - - - 416 1.6% 12 Krasnoyarsk Region 921 3.2% 6 376 1.4% 13 Khanty-Mansiisk region-Ugra 3,899 13.4% 2 66 0.2% - Others 4,187 14.4% 3,354 12.5% Total 29,135 100.0% 26,829 100.0% Source: Federal Service for State Statistics (FSSS) (Note: Includes direct, portfolio and other investment.) Tables 4a and 4b show investment by sector over the first nine months of 2005. Investment in trade and catering continued to lead all sectors as of September 2005. As of January 1, 2005, Goskomstat has changed its methodology for calculating industry-related statistics. It no longer breaks the data down by sector; rather it groups it into three categories: (1) extraction of raw materials, (2) manufacturing, and (3) production and distribution of electricity, gas and water. While the new standard conforms to EU methodology and makes cross- country comparisons more relevant, it makes comparisons to the prior year more difficult. Table 4a: Foreign Investment: Top Sectors - 2004 (Amounts in USD Millions) Jan-Sep 2004 % Amount Trade/Catering 32.8% 9,557 Fuel Industry 24.2% 7,055 Non-Ferrous Metallurgy 6.9% 2,003 Ferrous Metallurgy 5.1% 1,478 CASM 3.9% 1,133 Food Industry 3.5% 1,019 Communications 3.4% 1,003 Machine Building 2.6% 771 Lumber Industry 2.4% 705 Finance 2.4% 691 Chemical and Petrochemical 2.1% 605 Transport 1.7% 486 All Others 9.0% 2,629 Total 100.0% 29,135 Table 4b: Foreign Investment: Top Sectors - 2005 (in USD) Jan-Sep 2005 % Amount Trade/Catering 32.2% 8,634 Extraction of Fuel 14.4% 3,856 Metallurgy 9.2% 2,471 Communications 7.1% 1,892 Real Estate and Related Services 6.8% 1,823 Finance 5.1% 1,376 Chemical Industry 3.0% 804 Food Industry 3.0% 801 Lumber Industry 1.9% 517 Equipment and Finished Metal Goods 1.9% 509 Transport 1.3% 361 All Others 46.3% 12,419 Total 100.0% 26,829 2ff7e9595c