SOVETSK. INVESTMENT CLIMATE.

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Investment Climate
Analysis of Legislative System
Major Rayon Enterprises
Sites

Investment Climate

It is recommended to analyze the investment climate in Sovetsk with due consideration of both positive and negative factors influencing it.

Position of Sovetsk has its advantages and disadvantages. On the one hand, the city is very close to European countries and borders Lithuania. Therefore, Sivetsk is an attractive place for the companies willing to invest in export-oriented production as SEZ (special economic zone) status provides certain privileges for them. On the other hand, the city is practically isolated from Russia's mainland (markets and natural resources). As a result, companies located in the city incur high transaction costs.

The city has high production potential to develop industry, transport system and tourism. In spite of being the small city Sovetsk managed to keep multiple structure of industry unlike other small cities that have only one-two major enterprises.

This potential can give a rise to small and medium profitable enterprises working in agricultural and other sectors.

Along with this it is necessary to use the central function of the city for economic base development (in fact Sovetsk serves as an interregional center for Slavsky, Nemansky and Krasnoznamensky regions).

Transport can also play an important role for city's development as it is situated on the major crossroads connecting Russia and Western Europe and has a railway, port and highway infrastructure. Thus activation of the railway cargo, river transports and highway service centers bears high potential for the city.

The city has high potential for tourism development, which needs appropriate infrastructure. Transit of tourists from Baltic countries to western Europe and backwards provides the city with good possibilities. Development of the tourist potential demands in particular modern and convenient hotels (with good service and reasonable prices), good cafes, restaurants, etc.

Both local authorities and businessmen point out the problem of human resources. Indeed, the city lacks highly skilled professionals. At the same time all necessary prerequisites are created to improve the situation, several higher educational institutions are working in the city and hopefully the educational system will change for better.

Proactive attitude of the local authorities is also an important advantage of the city. Municipal government is busily engaged in creating a positive and investor-friendly environment.

Currently there are several unoccupied sites available in the city, thoroughly prepared for any enterprises interested to start new productions. Investors are also provided support in interaction with local infrastructure (banks, custom office, fiscal bodies, construction companies, municipal agencies, etc). Sovetsk being a member of two European Territorial Associations provides additional possibilities to promote products in domestic and foreign markets. Through Association of the municipal administrative units of Kaliningrad oblast the city of Sovetsk is invited to participate at the program of cooperation between countries-members of the European Territorial Association "Baltics". Since July 1999 Sovetsk is a member of another European Association "Sauly" along with Shyiulyiski and Tauragski uyezds of Lithuania, city Elgava and Elgava oblast in Latvia, and province Skone in Sweden.

Municipal government is actively working with Invest In Group of Companies carrying out different projects aimed at improvement of the city investment climate.

In whole local government policy is positive for Russian and foreign entrepreneurs and keeping on creating a favorable business environment.

Thus Sovetsk has a number of advantageous and high potential for business development and investment attraction.

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Analysis of Legislative System

Sovetsk legal system of the investment activity is based on three traditional components; these are federal laws, laws and legal acts of the Kaliningrad oblast, and municipal legislation.

The fundamental document here is Federal Law No. 13-FZ of January 22, 1996 (in wording of 27.12.2000) "On the Special Economic Zone in Kaliningrad Region," establishing a framework for economic development, trade and investment in the region. In accordance with the law and the region's status as a "special economic zone (SEZ)" investors and entrepreneurs have significant tax holidays, namely, privileges in custom, and currency.

On the regional level investment issues are regulated by laws of Kaliningrad oblast "On investment stimulation in Kaliningrad oblast" No. 10 of May 11, 1995 (in wording of 13.06.2000) and "On tax holidays for companies and organizations starting up investment projects" No. 127 of May 21, 1999. These legislative acts establish a framework for investment in the region and provide tax holidays to investors (investors are exempt from the oblast taxes for the full payback period).

Investment activity on the municipal level is regulated by the municipal legislation. The fundamental document here is Regulation "On regulating investment activity in Sovetsk of Kaliningrad Region, implemented in the form of capital investments" confirmed by the Resolution of the City Council of Deputies №459 on 16th of June 1999. It is worth mentioning also the following documents: Regulation "On procedure of providing investment tax credit" confirmed by the Resolution of the City Council of Deputies № 460 on 16th of June1999; Regulation "On procedure of providing investment tax credit" confirmed by the Resolution of the City Council of Deputies № 461 on 16th of June1999; Order of City Administration of Sovetsk "On organization of the standing bidding committee on consideration of investment projects, realized on the territory of the city Sovetsk" № 481-р 01.12.2000.

In accordance with the above mentioned Regulations investors have the right for obtaining a number of tax incentives:

·        for the payback period (but not more than 3 years) investors are exempt from the following taxes in amount, paid to the city budget:

property tax, imposed on the property created or purchased for the investment project realization;

rent for using municipal property (land).

·        within two years after payback period investor's payments are decreased in the part paid to the city budget:

property tax - up to 100% (in the part of the property, created or purchased during investment project realization)

Incentives are provided on the ground of the Investment Agreement signed between the Investor and the Administration. Additionally the investor must submit to the Sovetsk Administration one of the following guarantee documents:

·        Guarantee (bank or insurance company);
·        Agreement on Estate Mortgage;
·        Contract of Guarantee.

To sign the Investment Agreements investors should also submit to the city administration a pack of required documents. Additionally the project is subject to the appraisal of an independent expert.

In addition to the tax holidays investors can also obtain investment tax credit (in accordance with the Regulation "On procedure of providing investment tax credit"). Investment tax credit may be provided for the period from 1 to 5 years. The organization, having obtained the investment tax credit, has the right to decrease tax payments.

Thus the investment legislation of Sovetsk can be characterized as favorable for investors in the part of tax holidays. The only negative factor here is the excessively complicated character of obtaining tax incentives. It is necessary to take into account the fact that tax incentives are applied only to the investment projects with the investment amount exceeding $75,000.

Invest In Group of Companies prepared and provided local government with pack of suggested modifications which are currently finalized and supposedly would be accepted in the nearest future.

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List of Major Enterprises

At present there are more than 500 enterprises, companies and institutions working in the city. More than a half of them (295 companies) are privatized. Additionally there are 13 foreign companies and 17 joint ventures in Sovetsk.

The primary sectors are trade, food, and construction industries. The city also has several specialized industries such as pulp and paper, food processing and light industries.

The following are primary enterprises of the city:

1. Industry

A) Pulp and paper companies:
·        JSC Sovetsky pulp and paper factory. Produces more than a half of the city gross output (paper, cellulose, pasteboard, wallpaper).

B) Food processing companies:
·        OJSC Sovetsky Meat-packing factory;
·        JSC Yeast factory;
·        OJSC Sovetsky KMP;
·        JSC Flour mill factory;
·        JSC Tsitron;
·        JSC Fruit processing factory;
·        LLC Tipek;
·        Pischekombinat;
·        LLC Sovlit

C) Light industry companies:
·        OJSC Druzhba-2;
·        CJSC Shveji.

D) Printing companies:
·        CJSC Polygraph -1.

E) Furniture companies:
·        OJSC Baltmebel-Sovetsk

F) Shipbuilding companies:
·        "Nemansky" branch of CJSC Baltgazstroykomplekt.

2. Transportation companies
·        CJSC Sovetsky Port;
·        OJSC Avtokolonna.

3. Construction companies
·        SME "MONG";
·        UNR - 390.

The following enterprises with foreign investment domain: New Ruta LLC (confectionery), Shvitis LLC (fabric), Retorta LLC, etc.

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Sites

A full digital description of two industrial sites had been prepared by Invest In and provided to Sovetsk. Please see this description here.

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