Tomsk Regional Business Review -- May - October, 2000
Copyright © 2000, Terry E. Hallman. All rights reserved.
11 November, 2000
This is a business review of the six month period between May-October, 2000. I received a one-year invitation from Dr. Yuri Andreev at the Institute for Optical Monitoring (IOM) in April, 2000 for the purpose of developing common business between US interests and the IOM.
In accordance with the stated interests of both the US and Russian governments, my business focus has been singular: the development of business enterprises that will contribute to sustainable economic development in Tomsk oblast. This includes but is not limited to the various institutes in Akademgorodok where IOM is located.
Numerous possibilities were considered. Among those, the four most promising project proposals have been included here for reference. The description section provides a review and discussion of each of these. The discussion section provides some discussion and perspective on the various proposals in the broader context on international finance in general and funding available to properly planned businesses in Tomsk oblast in particular. The conclusions section provides comments and suggestions to further assist IOM and similar organizations in their efforts to attract investment capital and establish solid, long-term business activities in Tomsk oblast.
Project 1-Manufacture and Distribution of Construction Materials
The first project under consideration was the purchase of a machine to manufacture metal studs for building construction. Studs are long metal bars that are assembled to create walls inside of buildings. This method of construction appears to be faster and less expensive than construction of concrete walls that have normally been built in the past. Based on those two factors-faster construction and lower cost-it is easy to predict the product will do well in the market.
I was told that the machine could be purchased in Novosibirsk for US$30,000, set up in Tomsk, and the investment would be recovered in less than six months due to market demands for metal studs in Tomsk. After six months, the new enterprise would become profitable. I contacted a US investor who expressed a strong interest in funding the business. I then asked my Russian colleague to make arrangements to travel with me to Novosibirsk for the purpose of preparing a business plan and a market report. This was a matter of confirming the information that I had been told about regarding the market potential for metal stud production. This is required procedure for any American investor. It was necessary to:
Based on that information, it would be possible to make an estimate of the market demand for the product in Tomsk. At that point I would be able to decide if I could make a final recommendation of the project to the US investor. The money was available as soon as the necessary plans -- market research and business plan -- were completed.
It was also necessary to create a business entity--partnership, joint-stock company, etc.--for the new company. I stated that I wanted the most efficient legal structure, whatever that might be. I was told that the fastest and most common way of doing business in Tomsk is "not legal" business. The procedure is to set up business operations without formal registrations with the government and tax police, keep operations quiet-and of course keep all money and profits from the business. There was also reluctance to travel to Novosibirsk to do the necessary research about the business. The idea was to get the money into Tomsk, go to Novosibirsk and purchase the machine, and set up manufacturing operations in Tomsk.
The only clear interest appeared to be in getting US$30,000 from the investor. Following that, it was necessary to trust that the outcome would be positive. Further, even if the business was formed on that basis, it would not be legal. At most it would be producing profits and revenue for the investor in the US and for the Russian partner in Tomsk. It would not benefit the Tomsk community by way of tax revenues, nor would it benefit the community by way of increased circulation of cash. Because the project would be off the record and not legal, profits gained in Tomsk would need to be hidden. Only a very small portion of the money could be spent into the local economy without getting the attention of the tax police.
Overall, the business would produce little economic benefit to the Tomsk community on those terms. I insisted on the necessity of business research in Novosibirsk, and on having only a legal business structure with proper registrations with the government. At that point, interest in the project on the Russian side disappeared.
Project 2-Real Estate Development
The next proposal was the purchase of a government-owned building on Irkutsky Tract in Tomsk. The building is structurally complete without exterior or interior finish and fittings. The idea was to purchase the building and turn it into a restaurant. This area of Irkutsky Tract has numerous commercial enterprises and businesses with no restaurants in the area. The location and the business idea seemed promising. I was told that the government owned the building which couldn't be finished due to lack of money. The government was interested in selling it to anyone that might convert it to a money-making operation. I contacted American investors with extensive restaurant experience in Russia who were interested in opening a restaurant in Tomsk.
The procedure to purchase the building was then explained. Other people were also interested in purchasing the building, but our group would have first option for a few weeks. To make the purchase, it would be necessary to first pay out several hundred dollars, at which time we would be allowed to make the purchase. Additionally, the cost of the building to our group would be a small fraction of it's real market value. I roughly estimated the value of the building at around US$75,000 with a minimum of another $50,000 needed to open it for business. With a payment of only a few hundred dollars, the purchase price of the building would be greatly reduced. I estimated that this procedure was going to cost the government approximately $50,000 in lost revenue on the purchase of the building.
There are hundreds of similar buildings throughout Tomsk sitting unfinished due to lack of funds. Finding investors for them and making good use of them so that revenues are created is a good financial strategy. However, if the above procedure is followed for each of them, the result would be the loss of millions of dollars for the local government and loss of benefit of those funds for the local community. On the other hand, openly selling these buildings at a reduced price might be a very good strategy if the buildings were then put to use to generate revenue that would not exist otherwise. The appropriate procedure would be to hold an honest public auction of each building, with the property going to the highest bidder. Additionally, the purchaser of the building would have a limited amount of time to make use of the building for business and therefore revenues for the Tomsk community. Payment of money into gray areas of the market to persons unknown, for the purpose of being able to purchase the building, prevents the government from receiving maximum payment for the sale of the property. This procedure also places investors in a gray area legally and opens them to unknown risks in the future. Without being able to identify risks, it is difficult to make profit projections, and therefore difficult to satisfy potential investors. This was the case here, and the business did not go forward.
Project 3-Production Machinery for Plastic and Aluminum Profile Extrusion Processes
The next proposal was simply to locate a plastic extrusion machine and an aluminum extrusion machine for two separate companies. Both insisted they needed only to find a machine and that they needed no money to make the purchase.
The plastic extrusion machine looked like a very good idea because Tomsk has a large plastics manufacturing plant. The plant could provide raw materials in the form of plastic pellets. Construction in Tomsk is increasing and there is a growing demand for plastic siding used for the exteriors of thousands of kiosks and shops. In this case, the market demand is easy to see. This business would also create a strong local market for the existing plastics manufacturing plant and so represented a good possibility for economic development in Tomsk..
Additionally, there was some discussion of the durability of plastic building materials used on the roofs and exterior walls of buildings. Plastic materials on newer buildings were deteriorating quickly due to cold winter weather and ultraviolet degradation. I was asked to try and locate some type of additive that could be mixed with raw plastic during the manufacturing process that would inhibit UV degradation. Again, this was a very good idea because it would give the plastics plant in Tomsk a product that would be in high demand not only in this region but also throughout Siberia.
I located several machines from companies in the US, Korea, and Taiwan:
I also located a source in Taiwan, China Scientific Fine Chemicals Co., LTD., for chemical additives that would resist UV degradation:
Brand Name: CSFC 326
Chemical name: 2-(2'-Hydroxy-5'-methylphenyl)-benzotriazole
Applications: It is a highly efficient UV-absorber for styrenic polymers, PVC, unsaturated polyesters, PU, acrylic polymers, polycarbonates, adhesives and coatings.
Brand Name: CSFC 770
Chemical name: Bis-(2,2,6,6-tetramethyl-4-piperidyl)-Sebacate
Applications: It is recommended for various applications which require high stabilization of polymers including PP, HDPE, ABS, PS, PMMA, SAN, PVC, Nylon, Polyesters, Polyacetal etc.
Brand Name:CSFC 321
Chemical name: 2-Hydroxy-4-n-octoxybenzophenone
Applications: Used as UV absorber for PP, PE, PVC, polycarbonate, EVA and polyester etc.
I returned the information to my contact for both projects. I was then told that both companies needed for me to get the machines to them and not simply locate them. I asked about financial arrangements to make the purchases and arrange for shipment and was told that money was not available for the purchase of the machines. Because this information was very different than what I had been told in the beginning, I decided not to pursue the project. The companies in question proceeded to use the information I provided and were able to benefit from it as was their original intention.
Project 4-Ultrafine Powder Technology (UPT) for Use in Commercial Lubrication Applications
The next project was ultrafine powder used as an additive to oil for the purpose of machine lubrication. This additive reportedly extends the operating life of a machine by up to four hundred percent. It is similar to Teflon® and Zonyl® fluoroadditives developed by DuPont Corporation in the US. Similar additives have in fact proved to be beneficial in extending machine life by reducing friction between moving parts protected by conventional petrochemical lubrication. Because of the considerable differential between the strength of Western currencies and the Russian ruble, it would seem that UPT developed in Russian and marketed in the US should be a very strong and viable long-term export activity from Tomsk to the US. Further, anecdotal reports regarding UPT available in Tomsk appears to exceed the technology available in the US.
On this basis, I contacted the American director (eighty percent shareholder) of an oil company in Tomsk oblast to request that he consider trying the UPT additive for lubrication of oil-drilling equipment. He agreed on the condition that routine statistical data from previous field tests of the additive would be provided to his chief engineer. This data was promised and shown to me privately. It was agreed that a copy of the data would be made available as requested by the oil company. However, such copy has not been made available at this time. At such time as it is made available, this project may continue.
Substantial US investment capital is available for business development in Tomsk. I had no difficulty in locating a potential US partner for each proposal that was presented to me. This money is available under the normal rules and procedures to which US and Western investors are accustomed. At a minimum, these rules include market research and a business plan for each business proposal. Without these, it is not possible for Western investors to make an assessment of the probability that an investment will result in recovery of the investment plus profit over time. Without an estimate of such probability, they will very simply turn to other possibilities where such assessments can be made. It is not necessary for Western investors to put money into Tomsk given the global competition for their investment capital. Conversely, it is absolutely necessary for business interests in Tomsk to understand how international finance works and what the requirements are for attracting investment capital. Based on what I have learned through my attempts on IOM's behalf, my first conclusion is that basic education in business and finance is necessary before IOM can expect consistent business investment outside the limited sphere of foreign military interests. Even though such interests represent a significant potential for revenues to some individuals at IOM and other scientific institutes, they do not provide sufficient basis for a solid, sustainable economy for the larger community of Tomsk oblast.
Following is a partial list of funds backed by US government and multilateral institutions for investment opportunities in Russia and the Newly Independent States. The list is limited to appropriate funding sources for Tomsk oblast.
INVESTMENT FUNDS OPERATING IN THE NIS
(Condensed from BISNIS publication: Sources of Finance for Trade and Investment in the NIS, August 1995 and later, and other sources.)
Investment funds operating in the Newly Independent States (NIS) vary widely. A key difference is that between funds supported by the U.S. Government and multilateral institutions, versus those managed by private firms without government support. U.S. Government and multilateral funds work as venture capital funds in the NIS, where they can provide start-up financing and are receptive to strategic partners, including the U.S. partners. Private funds, often having entered the market solely because of new opportunities in portfolio investment, are not interested in providing venture capital. All funds are expected to be self-financing and choose investments based on the prospect of their long-term success. (Note: assessment of prospects of long-term success require business plans and market research reports, as indicated previously. Without these, no such assessments can be made. In that case, investment cannot be expected.)
This list is not comprehensive and will change as more information becomes available. Privately-managed funds are listed alphabetically and are included here for informational purposes only. Inclusion in this list does not constitute U.S. government endorsement of any private fund.
FUNDS BACKED BY U.S. GOVERNMENT AND MULTILATERAL INSTITUTIONS
AGRIBUSINESS PARTNERS INTERNATIONAL
Manager: America First Companies
Capitalization: OPIC (Overseas Private Investment Corporation) guarantee: $100 million. Still raising capital.
Investment objective: Equity and debt. Interested in start-ups and joint ventures.
Average investment size: $3 to $7 million (up to $15 million.) Equity investments in firms sponsored by qualifying U.S. small businesses.
Industries: Agriculture, broadly defined. Includes food firms, infra-structure projects, privatization, food storage and distribution facilities
Summary Comments: Agribusiness Partners International L.P. is an investment fund formed to make equity investment in the food and agribusiness industries in Russia and other countries of the former Soviet Union. The fund expects to invest in businesses engaged in food processing, manufacturing, packaging, marketing and the distribution of finished food products. The fund also may invest in businesses involved in manufacturing and distribution of agricultural and food processing equipment, the transportation and storage of food products and related businesses. The fund does not intend to invest in businesses involved in raising crops and livestock. The fund may invest on a joint venture basis with American and Western European firms that have experience in Russia.
DEFENSE ENTERPRISE FUND
Region: Russia, Ukraine, Kazakhstan and Belarus.
Manager: Defense Enterprise Fund, Inc..
Capitalization: Department of Defense: $40 million.
Investment Objective: Equity and debt. The fund will make investments only in joint ventures involving privatized enterprises or enterprises that commit in writing to privatization. An enterprise will be considered privatized when greater than 50% of the ownership and controls is in the private sector. At least one of the partners in any joint venture should be from a country outside the NIS, with preference given to joint ventures with U.S. involvement. Investments will be diversified among smaller enterprises or spin-off enterprises that have converted or are in the process of converting, and start-ups formed by former defense or military personnel. Investments range from $1 to $3 million.
Industries: Enterprises that include personnel and/or facilities currently or formerly involved in research, development, production or operation and support of the defense sector of four Republics of the former Soviet Union. Particular emphasis given to facilities which helped to produce weapons of mass destruction, as well as firms associated with the production of command, control and communications equipment for military forces associated with these weapons.
1527 New Hampshire Avenue, NW
Washington, DC 20036
The Eurasia Foundation is a privately managed grant-making organization established with financing from the U.S. Agency for International Development (AID). The Eurasia Foundation supports technical assistance, training, educational and policy programs in the New Independent States (NIS) of the former Soviet Union (excluding the Baltic States) covering a wide range of activities in economic and democratic reform. Eurasia Foundation grants will be made to American organizations with partners in the NIS and directly to NIS organizations. The Eurasia Foundation's initial programmatic focus will include the areas of private sector development, public sector reform, and media and communications.
The Foundation is structured to respond rapidly to grant requests from both NIS and U.S. institutions. Its field offices may make grants up to $35,000. Most grants fall below this level, with the average around $15,000. Grants over $35,000 must receive approval from the Washington office. As a matter of policy, the Foundation actively seeks participation in its programs from both U.S. and NIS private sector organizations through cooperative funding and direct contributions.
In its seven years of existence, the Foundation has authorized several outside evaluations of the programs it has supported. All have offered strong endorsements of the Foundation's direction. Through these evaluations and its own regularly scheduled monitoring and evaluations, the Foundation ensures that grantees use funds efficiently. This review process also permits the Foundation to assess the changing needs of grantees.
Capitalization: The Eurasia Foundation began making grants in June 1993 and, with an initial grant of $75 million from the Agency for International Development (USAID), has maintained a core program of roughly $20 million a year ever since.
Investment Objective: Grants to business projects throughout the former Soviet Union.
EUROPEAN BANK FOR RECONSTRUCTION AND DEVELOPMENT (EBRD)
One Exchange Square
London EC2A 2EH
EBRD, the newest of the world s five multilateral development banks, began operation in April of 1991. It is the first international institution to provide financing exclusively in Eastern and Central Europe and the former Soviet Union. Based in London, the EBRD is capitalized at ECU
10 billion (about 13 billion U.S. dollars). Fifty-three member countries, the European Economic Community and the European Investment Bank are represented on its board of directors. The United States, which holds 10 percent of the shares, is the largest single member country shareholder, while the European Community nations have 51 percent.
The U.S. Executive Director supports the U.S. business community, assuring that U.S. companies directly benefit and participate in the Bank's procurement activities and financing. Companies are encouraged to bring potential projects to the Office of the U.S. Executive Director. Information regarding Bank policies and procedures is available from a number of sources, including the Office of Multilateral Development Banks, USDOC, and the National Trade Data Bank.
Capitalization: At the end of September 2000, the European Bank for Reconstruction and Development (EBRD) had 110 Board-approved projects in Russia for a total of £3.9 billion (US$3.3 billion) of loan and equity financing with a total project value of about £12.4 billion (US$10.6 million.) A total of 94 of these projects had been signed, with EBRD financing of £3.3 billion US$2.8 billion, including sub-projects) and with a total value of £10.9 billion (US$9.3 million.)
Regional Venture Funds The RVFs are designed to support medium-sized enterprises (those with under 5,000 employees) that have been privatized under the Russian Government's Mass Privatization Programme. The Funds have as an important objective investing in privatized companies at least 50 per cent of the capital of each RVF will be invested in privatized enterprises or in businesses that have been spun off from a privatized enterprise. Each RVF focuses on a particular region and is required to invest at least 75 per cent of its capital in that region. Investment targets do not necessarily have a foreign partner or hard currency earnings; the RVFs focus on enterprises that have a strong position in the domestic market. Russia Small Business Fund- micro and small enterprises, which often find it difficult to get loans. Average loan is US$13,000. Loans have ranged from US$35 to US$125,000. (See more information on RSGF in separate section below.)
Enterprise Support Project-restructuring investments within medium-sized and large private sector Russian enterprises. ESP capitalization is $300 million.
FIRST NIS REGIONAL FUND
Region: NIS (60% Russia), Baltics.
Manager: Baring International Investment Management limited
Sovlink-American Corporation, Investment Advisor
Tokobank, Local Advisor
Capitalization: $160 million.
Investment objective: Equity, possibly convertible debt or warrants. The fund seeks whenever possible to invest in companies with foreign currency revenues or substantial export earnings potential. Investments may take the form of corporate partnerships with leading foreign partners, later stage equity financing or investment in newly privatized entities. Investments range in size from $3 million to $5 million.
Industries: About 60% targeted toward natural resource-related companies and infrastructure, including telecommunications. Also light manufacturing, consumer products and services, real estate.
FRAMLINGTON RUSSIAN INVESTMENT FUND
Manager: Framlington Investments.
Capitalization: Approximately $100 million. EBRD: $16 million, IFC: $8 million.
Funds Invested: Approximately two-thirds.
Investment Objective: Equity position of anywhere from 10-40% is possible, though 20% is preferred. 80% of the funds invested in the first year will go to companies with largely western control, however, projects will also include those with western minority shareholders. Investments will be between $500,000 - $4 million, with projected average of around $2 million. Projects requiring less than $500,000 can be considered if anticipated future financing requirements will raise the Fund's total contribution above $500,000.
Industries: Open to any new economically sound proposal.
Additional Notes: No hard liquor, tobacco or firearms, must have a western partner.
GLOBAL ENVIRONMENT EMERGING MARKETS FUND
Region: NIS as well as emerging markets in Asia, Latin America, Europe, the Middle East and Africa.
Managers: Global Environment Management Corp.
Capitalization: $70 million. OPIC guarantee: $50 million.
Funds Invested: Approximately $20 million.
Investment Objective: Equity or equity related investments. The fund seeks significant minority positions in operating companies or projects with demonstrated cash flows, significant long-term revenue growth potential and high anticipated margins of profits from operations. Projected rates of return to the investor should substantially exceed the current risk-free return available in individual markets, with additional consideration for risks related to the volatility and convertibility of currency and the degree of liquidity for the investor. Investments of $1 million to $10 million.
Industries: Environment-oriented industries, especially those engaged in developing, financing, operating or supplying infrastructure projects related to the delivery of clean energy (natural gas and renewable sources) and potable water; also wastewater treatment.
Additional Notes: Portfolio companies can arrange for OPIC investment insurance against certain political risks and debt financing for projects that involve significant U.S. ownership.
NEW RUSSIA SMALL BUSINESS INVESTMENT FUND
Region: Russia: Moscow, additional cities anticipated.
Managers: New Russia Small Business Investment Fund, Inc., a wholly owned subsidiary of the non-profit Fund for Democracy and Development Corporation "NRSBIF", a wholly owned Russian operating subsidiary of NRSBIF.
Capitalization: U.S. Department of Agriculture approximately $3.5 million
Investment Objective: The NRSBIF extends financing to small Russian businesses and Russian-U.S. joint ventures through Russian commercial banks. Businesses normally eligible for NRSBIF support will employ less than 200 employees, have no more than 25% state ownership and have an asset value of less than the U.S. dollar equivalent of $2,500,000. Initially financing will be in the rubles, but the Fund hopes to eventually offer dollar financing. Investments currently range from $50,000 to $200,000, in rubles.
Additional Notes: This program was created to promote sound commercial lending in Russia. Lending is provided through selected Russian commercial banks.
NEW EUROPE EAST INVESTMENT FUND
Region: NIS, Central and Eastern Europe
Manager: Capital Research International (London)
Capitalization: $130 million. ERBD:$25 million. IFC: $8 million.
Investment Objective: Equity, up to 20% stake. Interested in privatized companies or newly established ventures that have some Western management. Investments range from $5 - $15 million.
Additional Notes: No hard liquor, tobacco or firearms, must have a western partner.
RUSSIA SMALL BUSINESS FUND
Facility to provide credits for micro and small enterprises in Russia, provided by European Bank for Reconstruction and Development (EBRD)
The EBRD has established links with various financial intermediaries to provide financing for projects that are too small to be funded directly. The EBRD also assists small- and medium-sized companies in ways not directly related to project finance, but include trade facilitation and
guarantee facilities extended to local financial institutions. These programs include:
1. Equity Participation in Investment or Venture Capital Funds
2. Equity Participation in Investment or Commercial Banks
3. Bank to Bank Loans
4. Co-financing Projects Together with Local Investment of Commercial Banks
5. Co-financing Projects Together with Foreign Banks (CEAL)
The EBRD has established a line of co-financing with the International Moscow Bank. This financing is available only for private sector enterprises. Loans range from $500,000 to $8 million.
The Russia Small Business Fund provides loans for financing small enterprises (fewer than 50 employees). Finance is available in U.S. dollars and rubles indexed to dollars. It offers loans up to $50,000 and, in exceptional circumstances, up to $75,000. An additional component of this fund is the micro credit facility providing loans from $100 to $30,000 for a period of 1-24 months. The Small Business Fund is currently operating in Nizhny Novgorod, Novosibirsk, Tomsk, Tula, Togliatti, Samara, and St. Petersburg.
RUSSIAN TECHNOLOGY FUND (RTF)
The Russian Technology Fund invests in small Russian companies which are focussed primarily in the commercial exploitation of technology products in the domestic markets, although transfer of technology abroad may also be financed. RTF investments are primarily in equity and range from $200,000 to $600,000. RTF is a State of Delaware limited partnership based in New Jersey. The principal investors are the EBRD and the IFC which account for 50 percent of the fund's total commitment. Other investors are the Finish National Fund for Research and Development (SITRA), Top Technology Limited and Nauka Service, a St. Petersburg-based association.
Region: NIS, Central and Eastern Europe
Manager: Top Technology Limited (TTL) and SITRA
Capitalization: $12.9 million.
Investment Objective: Equity, debt financing. RTF will initially invest in small Russian companies which are focused primarily on the commercial exploitation of technology products in the domestic markets, although the transfer of technology to external markets may also be financed.
Industries: Technology-related industries
U.S. CIVILIAN RESEARCH AND DEVELOPMENT FOUNDATION (CRDF)
Region: For the Independent States of the Former Soviet Union (FSU)
Manager: U.S. National Science Foundation (NSF)
Capitalization: $5 million gift from Mr. George Soros and a $5 million allocation from the U.S. Department of Defense's "Nunn-Lugar" program
Funds invested: n/a
Investment Objective: To advance defense conversion by funding collaborative R&D/commercialization projects between scientists and engineers in the U.S. and in the independent states of the FSU. Level of funding $10,000 to 80,000 over a two-year period. Average grant $40,000 ($20,000 per year over two years)
Scientific disciplines: Priority given to FSU engineers and scientists formerly engaged in work on weapons of mass destruction.
Additional notes: No proposal to exceed 20 pages in length. Send 10 copies.
U.S. RUSSIA INVESTMENT FUND
Manager: The U.S. Russia Investment Fund, Inc.
Capitalization: U.S. AID grants: $440 million
Investment Objective: The Fund will consider investment proposals from enterprises as long as they are commercially viable and exhibit the potential for growth and profit generation. The business should have a committed and progressive management team a coherent business plan or thoughtful vision for development. The Fund is chartered to offer financing and management assistance to privatized Russian enterprises of all sizes. Investments have ranged from $20,000 to approximately $11 million.
Additional Notes: This fund was formed through consolidation of the Fund for Large Enterprises in Russia and the Russian-American Enterprise Fund. TUSIRF also has a small business lending program through Russian banks and lending institutions to make small loans to small enterprises.
Privately-managed funds are listed alphabetically and are included here for informational purposes only. Inclusion in this list does not constitute U.S. government endorsement of any private fund.
Manager: Brunswick B.C.
Capitalization: $40 million.
Investment Objective: Equity. Maintains active management in its holdings. Loans from $200,000 to $600,000.
Industries: Oil and gas (oil extraction), utilities such as electrical energy and telecommunications, mineral extraction and processing, and fishing fleets.
Manager: Firebird Advisors, Ldc.
Capitalization: $40 million.
Funds Invested: $37 million.
Investment Objective: Equity. Fund takes small passive positions in largest, most liquid Russian companies. Investments range from $500,000 to $2 million.
Industries: Oil, gas, utilities, forest products, metal and mining.
FIRST INVESTMENT VOUCHER FUND
This Fund was purchased by U.S. mutual fund manager Pioneer Group, Inc. in April, 1995.
FLEMING INVESTMENT FUND FOR RUSSIA
Manager: Fleming Investment Management, Ltd., London Brunswick B.C., advisors.
Capitalization: $57.1 million.
Investment Objective: Equity.
Industries: Oil and gas, telecommunications, utilities, mining, automotive.
Additional Notes: Trades on Dublin exchange.
JUNCTION INVESTORS LTD.
Region: NIS, as well as Eastern Europe and China.
Manager: Junction Investors, Ltd. (JIL)
Capitalization: $50 million.
Investment Objective: Equity and Debt. Preferred investments are small to medium-sized businesses with long-term growth potential. From $1 million to $5 million.
Industries: Infrastructure-related industry, in particular real estate and telecommunication.
Additional Notes: JIL is a privately-owned investment and venture capital company based in Boston, Massachusetts. JIL concentrates on small to medium-sized investments in businesses with long-term growth and profit potential that can contribute to the infrastructure development of the respective country. JIL provides management assistance for restructuring and financing, makes equity investments and arranges for additional debt and equity funding via its association with the EBRD, ExIm Bank and other international financial institutions. Ms. Rhetts indicated that written inquiries are preferred and that proposals must include a business plan. JIL provides management assistance when necessary, as well a arranges for additional debt and equity funding if needed.
NEW EUROPE EAST INVESTMENT FUND
Manager: Capital International, Inc.
Capitalization: $130 million.
Investment Objective: Equity, all private placement. Invests with western industrial partners. Average investment $1 million to $5 million.
Manager: Newstar, Inc.
Capitalization: $20 million.
Funds Invested: n/a
Investment Objective: Equity. Preferred candidates are private, small to mid-size manufacturing enterprises that include a western partner. Newstar plans to be a long-term player. $2 to $5 million.
Industries: Construction and related industries, food processing and distribution, warehousing, light manufacturing and telecommunications.
RUSSIA AND THE REPUBLICS EQUITY PARTNERS LP. (RARE)
Region: NIS, with concentration in Russia.
Funds invested: n/a
Investment objective: Equity in small to mid-sized businesses with both strong short-term profit potential and long-term growth potential. $1 to $5 million.
Additional Notes: Seeks active role on board of directors.
RUSSIA VALUE FUND, LP.
Region: Russia, NIS.
Manager: San Antonio Capital Management
Capitalization: $48 million
Funds Invested; Approximately $40 million
Investment Objective: Equity and debt. Primarily interested in investments in publicly traded shares.
Industries: Oil and gas, power generation and transmission, telecommunications, shipping and transportation, construction materials, and industry.
TRUST COMPANY OF THE WEST
Manager: Trust Company of the West
Capitalization: $550 million
Investment Objective: Equity and debt. TCW is primarily interested in Russian debt (representing 70% of its Russian portfolio to date), however, it is also interested in privatizing firms. TCW primarily invests along with strategic investors, and views Russian investments as long-term.
Industries: 50% of investment is now in the telecommunications industry.
TEMPLETON RUSSIA FUND
Manager: Templeton Investment Management, Inc.
Capitalization: $60 million
Funds Invested: n/a
Investment objective: Equity and debt (debt limited to 20% of total assets). Long-term capital appreciation. Templeton is only interested in companies either about to go public or that are already listed. No start-ups, some interest in joint ventures.
Additional Funding Sources for Tomsk Oblast
On the recommendation of myself and others to the US government in 1999, Tomsk oblast was selected for a regional initiative financed by the US government through the United States Agency for International Development (USAID.) Following is an overview from USAID of the fiscal year 2000-2001 program description:
"Consolidating the strategy developed as a result of the 1998 economic crisis, USAID will continue to move away from programs with the central government. In FY 2001, assistance will continue to promote the development of democracy and private enterprise in Russia. In addition, assistance will be directed to mitigating the social costs of the transition. Overall in FY 2001, USAID will direct funding toward reform-minded regions under the USAID Regional Initiative, which includes the Russian Far East, Samara and Novgorod, and a fourth Regional Initiative site in Tomsk. USAID-supported activities in these regions will assist economic, democratic, and health and social sector reforms. Economic reform activities will include the development of micro-credit acilities; small- and medium-enterprise support by Russian-run business development centers; assistance to local and regional governments interested in building an investor-friendly business climate; and the expansion of environmental activities with Russian partners. Activities will also include provision of assistance to targeted banks, the possible continuation of work on tax reform (mostly in the regions); and funding Russian policy think tanks to develop and disseminate applied policy advice on Russia's most critical economic issues.
"In addition, USAID will continue to promote adoption of international accounting standards that are necessary to attract foreign investment. In the area of democratic reform, USAID will support civil society development through assistance that targets non-governmental organizations, independent media, rule of law, and political processes. Human rights, anti-corruption, and violence against women are additional areas of focus. In health and social sector reform, USAID programs support Russian orphans, provide assistance to slow the spread of HIV/AIDS and tuberculosis, and enhance women's reproductive health, with a focus on maternal and child health. USAID projects will also include evaluations, socio-economic studies, and the provision of targeted training to Russians in technical fields both in the United States and in Russia. The broad economic and democracy small-grants program of the Eurasia Foundation will continue.
"A significant share of the FREEDOM Support Act (FSA) funds allocated for Russia in FY 2000 and 2001 will be provided for programs designed to enhance Russian export control capabilities, and contribute to the nonproliferation of weapons of mass destruction and associated delivery systems, materials, technologies, and expertise. Special emphasis will be placed on redirection of former biological warfare scientists and facilities to peaceful research and development activities that address global, public health concerns. Additional funds also will be made available to support the relocation of military forces in Transdniestr and the disposal of ammunition stockpiles located there. Other U.S. Government agencies providing technical assistance to Russia through inter-agency transfers from the FSA account include: the U.S. Environmental Protection Agency, the National Research Council, the National Science Foundation, the U.S. Departments of Health and Human Services (Center for Disease Control tuberculosis activities), the U.S. Treasury (banking, tax and budget reform), State (USIA exchanges, law enforcement and humanitarian transport), and the Departments of Commerce (private sector initiatives), and Justice (anti-corruption initiatives.)"
A significant portion of the Tomsk regional initiative is the Tomsk Microfinance Initiative. This initiative is scheduled to provide US$6,000,000 over four years to small business interests in Tomsk oblast. Following is a brief description of this initiative from USAID.
"The United States Agency for International Development (USAID) is seeking applications from qualified U.S. non-governmental organizations (NGOs) with the capacity to establish sustainable microfinance programs in the Russian Federation.
"USAID is seeking proposals which will clearly and convincingly delineate an approach for establishing a sustainable Regional Microfinance Program in Tomsk Oblast, a focal point of the U.S. and Russian program of economic cooperation. The microfinance program proposed must provide wide outreach in serving microenterprises throughout the Oblast, including but not limited to, the city of Tomsk. The program will contribute to achievement of the key USAID Russia Strategic Objective -- Strategic Objective 1.3. Accelerated Development and Growth of Private Enterprises, specifically 1.3.2. Successful Models of Private Ownership and Modern Management Widely Replicated, and 1.3.4 Sustainable Network of Business Support Institutions (BSIs) Rendering Services to Entrepreneurs and Enterprises.
"The Regional Microfinance Program is designed as a four-year activity. Subject to availability of funds, USAID may award up to $6.0 million for this activity over a four-year period."
With all of the above funding sources, considerable planning and paperwork are required in order to obtain financing. This includes but is not limited to business plans, market research, and marketing plans. These activities are usually time-consuming and require a minimum of several months to complete.
This brings up another factor which impedes assisting IOM in creating new business activities. IOM requires new business to be created within three months arrival of any foreigner invited by the institute for the purpose of creating common business. Further, this rule is practically unknown. In this case, it was mentioned only after three months had expired, at which time I was pressured to bring in money and start new businesses or else my invitation and visa would be terminated. These two factors -- unreasonable time limitations and belated mention of these time limitations -- represent a near impossible situation for the institute. It is highly unlikely that anyone can come in, assemble all the necessary paperwork for financing, get proper government and tax registrations, and open for business in a three month time frame.
For example, the Russian Foreign Investment Promotion, an official government body which comes under the auspices of the Ministry of Economy, publishes the following information regarding Russian business interests seeking foreign capital investment:
"If you are hoping to attract foreign capital for a project in Russia, you are beginning a long and complex process. Even investors who are convinced that your project will be profitable will perform extensive research (referred to as "due diligence") on every aspect of your business.
"Although many funds included in this guide provide specific guidelines for making proposals, at a minimum your initial presentation should include the following:
1. A short history of the company.
2. An explanation of the company's present and past ownership structure.
3. A description of the company's current facilities and scope of operations.
4. An explanation of the proposed use of new capital.
5. A summary of the economics of the project, including annual sales, profit margins and net income.
6. Data on joint venture partners or other participants.
7. The predicted time frame of the project and its break-even date.
8. The type of financing being sought and the mechanism proposed for the investor's "exit" in the future.
9. The names and contact information for the person who prepared the proposal.
"As soon as an investor has expressed interest in your project, expect requests for current and historical financial statements, including balance sheets and income statements, and projections of annual sales, profit margins, and net income for at least five years. In addition, the investor will want all available data to support sales projections and expense estimates. As the investor continues to examine your project, expect these important questions:
1. How good is the product? Investors will not put money into a poor quality product or a product that can easily be produced elsewhere. Is your product of high quality? Is it unique?
2. Can you prove that your product will be in demand in the coming years? Has it already been tested in the marketplace? If it is a new product, does it fill an obvious need? Investors will also be interested in your plans for export. Do not be too optimistic. A product that meets the needs of the NIS market may be more credible than one that relies on sales abroad where the competition is more intense.
3. Do you have a detailed marketing plan? Because the former command economy did not require marketing, this is often the weakest area of investment proposals from Russia. Do you know what type of person is most likely to buy your product and what motivates him? How many competing products are available? Your marketing plan should address pricing, advertising, sales, delivery, and the use of outside distributors, and it should provide specific costs for each of these functions.
4. How good is the management? Investors want a management team with a good track record, a reputation for honesty and an understanding of Western business practices. Investors do not like managers who keep secrets. They know that every business has problems. They want to know what your problems are and how well you handle them.
5. Is the Mafia involved? No business is entirely in control of its own fate, but Western investors are particularly sensitive to the involvement of criminal elements with Russian companies. Do payments for protection reduce your profits? Are your raw materials freely available without payoffs? Do not be surprised or offended by these questions.
6. What is the physical appearance of your business? Investors will want to tour your facilities. This is a good time to remove the rubbish, paint the walls, and make sure your workplace is safe and well lit. What about your employees? Investors will notice whether they look busy and comfortable, and whether they appear to take pride in their work.
7. Can your accounting system be relied upon? Investors require prompt and accurate information. Does your accounting system meet local and international standards? Are you willing to have an independent auditor or accountant review your records?
8. Are you flexible about investment terms? Investment can take a variety of forms, so try not to have a fixed idea about what is acceptable to you. If an investor makes a proposal that is not acceptable, do not be offended. Make a counterproposal.
9. Does your company have a potential earnings growth of at least 20% to 30% per year? Since there are many risks with Russian investments, investors must be adequately compensated. If your company cannot deliver a high rate of return, foreign investors will prefer to look elsewhere or keep money safely close to home."
Clearly, gaining the benefit of foreign capital investment is not a fast and simple process. With the time limitations imposed by the rules of scientific institutes such as IOM, the possibility of helping obtain foreign investment capital is almost non-existent. Western investors simply are not going to come and give money away and hope for the best.
With this in mind, it is obvious that working through scientific institutes for the purpose of economic development assistance is almost impossible. Requests to set up illegal businesses are not likely to be accepted by Western investors. Time limitations of only a few months to create new business activities are not realistic and will also not be acceptable.
It is therefore necessary to work with other organizations if the goal of sustainable economic development in Tomsk oblast is to be realized. These might include local government and/or private enterprises who already have some understanding the complex process of attracting foreign investment capital. Plenty of money is available to Tomsk. All of it requires following specific rules and procedures. The most effective means of working to attract foreign investment appears to be consultancy directly with Tomsk local government. This will allow me to work freely to represent the interests of hundreds of businesses in Tomsk and matching them to the interests of foreign investors. In many cases, preference is given to businesses which have an American on staff. For example, one of the questions asked of businesses interested in listing with BISNIS Search for Partners is if there is a member of firm with Western education or training. It should be possible to assist the staff of numerous non-competing businesses. Working only with one company would necessarily limit my focus to the needs of that company. If a company has very diversified interests, my efforts with them would be beneficial.