RBW: Spring 2011

Russia Business Watch Vol. 19, No. 1

Spring 2011

Washington, DC

The Report of the U.S.-Russia Business Council

MOSCOW AND BEYOND:

Exploring Russia’s Global Plans and Regional Opportunities

PRESIDENT’S MESSAGE: p. 1

OUTLOOK: p. 3

NEW USRBC MEMBERS: p. 25

ACTIVITIES: pp. 6-11

ACTIVITIES: pp. 6-11

REGIONAL PROFILE: pp. 14-18

U.S. GOVERNMENT: p. 20

LEGAL UPDATE: p. 22

• Russia’s Place in Washington’s Trade Agenda • Roundtable with an OPORA Delegation of Healthcare Professionals • Briefing with Ambassador Richard Morningstar and Edward Chow • Managing Risk in Russia: From Start-Ups to Mega Stores • CEO Meeting with Vice President Joseph Biden

• Moscow as an International Financial Center • Meeting with Moscow State University Students • Briefing for SABIT Program Participants • Briefing with Ilya Ponomarev • Roundtable with Elena Panfilova • Luncheon with Lorraine Hariton • Meeting with a Delegation of Russian Universities

• Chelyabinsk Region • Krasnoyarsk Territory and the VIII Krasnoyarsk Economic Forum • Meeting with Governor of Irkutsk Region Dmitry Mezentsev • Unexplored Opportunities in the Russian Regions

• Copyright, Patent and Trademark Developments in the Russian Federation: 2010 Year in Review

Contents

PRESIDENT’S MESSAGE p. 1. Russia’s Place in Washington’s Trade Agenda OUTLOOK p. 3. Moscow as an International Financial Center

Klaus Kleinfeld, Chairman of the Board Edward S. Verona, President and Chief Executive Officer

Russia Business Watch • Spring 2011

Chairmen Emeritus Robert S. Strauss E. Neville Isdell Theodore Austell, III, The Boeing Company Stephen E. Biegun, Ford Motor Company James P. Bovenzi, General Motors Corporation Laura M. Brank, Dechert LLP Carolyn L. Brehm, Procter & Gamble Peter A. Charow, BP America Inc. James F. Collins, The U.S. Russia Foundation for Economic Advancement and the Rule of Law Jeffrey R. Costello, JPMorgan Chase Bank Andrew Cranston, KPMG Marthin De Beer, Cisco Systems, Inc. Richard N. Dean, Baker & McKenzie Neil W. Duffin, Exxon Mobil Corporation Dorothy Dwoskin, Microsoft Corporation C. Cato Ealy, International Paper Terrence J. English, Baring Vostok Capital Partners Mark B. Fuller, Monitor Group Edward Allan Gabor, Pfizer Inc. Piotr Galitzine, TMK IPSCO Toby T. Gati, Akin Gump Strauss Hauer & Feld LLP David Gray, PricewaterhouseCoopers LLP Herman Gref, Sberbank of Russia Drew J. Guff, Siguler Guff & Company, LLC Trevor Gunn, Medtronic, Inc. Jay M. Haft, Renova Group of Companies Greg Hill, Hess Corporation D. Jeffrey Hirschberg, Kalorama Partners, LLC Kamil S. Isaev, Intel Corporation Karl Johansson, Ernst & Young, LLP Alexey Kim, Philip Morris Sales and Marketing Ltd. Klaus Kleinfeld, Alcoa Sergei A. Kuznetsov, OAO Severstal / Severstal North America Ramon Laguarta, PepsiCo, Inc. William C. Lane, Caterpillar Inc. Eugene K. Lawson, Lawson International, Inc. James J. Mulva, ConocoPhillips Peter B. Necarsulmer, The PBN Company Thomas R. Pickering, Eurasia Foundation Jay R. Pryor, Chevron Corporation Daniel W. Riordan, Zurich-American Insurance Company Paul Rodzianko, Hermitage Museum Foundation Charles E. Ryan, UFG Asset Management Claudi Santiago, General Electric Company William M. Sheedy, Visa Inc. Maurice Tempelsman, Lazare Kaplan International Inc. Peter L. Thoren, Access Industries, Inc. Clyde C. Tuggle, The Coca-Cola Company Alberto Verme, Citi Mark von Pentz, Deere & Company Daniel H. Yergin, Cambridge Energy Research Associates (IHS CERA) Honorary Director Peter J. Pettibone, Hogan Lovells

ACTIVITIES p. 6. Member Roundtable with an OPORA Delegation of Healthcare Professionals p. 7. Briefing with Ambassador Richard Morningstar and Edward Chow p. 8. Managing Risk in Russia: From Start-Ups to Mega Stores p. 8. USRBC Hosts Students from Moscow State University p. 9. USRBC Briefing for SABIT Program Participants p. 10. Briefing with State Duma Member Ilya Ponomarev p. 10. Roundtable with Elena Panfilova, Transparency International Russia p. 11. Luncheon with Lorraine Hariton p. 11. USRBC Hosts a Delegation of Russian Universities REGIONAL PROFILE p. 14. Chelyabinsk Region p. 16. Krasnoyarsk Territory and the VIII Krasnoyarsk Economic Forum p. 17. Meeting with Governor of Irkutsk Region Dmitry Mezentsev p. 18. Unexplored Opportunities in the Russian Regions U.S. GOVERNMENT p. 20. USRBC Co-Hosts CEO Meeting with Vice President Joseph Biden LEGAL UPDATE p. 22. Copyright, Patent and Trademark Developments in the Russian Federation: 2010 Year in Review p. 25. NEW USRBC MEMBERS

USRBC STAFF Edward S. Verona President and Chief Executive Officer verona@usrbc.org / 202-739-9181 • Julia Bacon Manager of Membership Affairs and Programs bacon@usrbc.org / 202-739-9189 • Jeff Barnett Senior Director of Policy and Programs barnett@usrbc.org / 202-739-9187 • Jo Bottalico Vice President of Administration and Finance bottalico@usrbc.org / 202-739-9188 • Keith Bush Research Director bush@usrbc.org / 202-739-9186

Randi B. Levinas Executive Vice President levinas@usrbc.org / 202-739-9196 • Maryia Dauhuliova Media and Creative Product Manager dauhuliova@usrbc.org / 202-739-9184 • Julia Kulagina Head of RF Representation, Moscow Office kulagina@usrbc.org / [7] 495-228-5896 • Svetlana Minjack Director of Communications and External Affairs sminjack@usrbc.org / 202-739-9182 • Candice Pareshnev Administrative Assistant pareshnev@usrbc.org / 202-739-9180 • Anna Arkhangelskaya (On maternity leave)

Russia Business Watch The report of the U.S.-Russia Business Council

1110 Vermont Avenue, NW, Suite 350, Washington, DC 20005 Tel: (202) 739-9180 • Fax: (202) 659-5920 • www.usrbc.org • www.usrbc.org/ru Novinskiy boulevard 8, Office 907, 121099 Moscow, Russia Tel: 7-495-228-5896 • Fax: 7-495-228-5893 ditor: Svetlana Minjack • Assistant Editor: Jeff Barnett • Design and Production: Maryia Dauhuliova E Research Assistants: Tatiana Nikiforova, Mark Simeone and Stephen Smith For additional information or copies of Russia Business Watch, please contact USRBC at (202) 739-9180 or email RBW@usrbc.org.

PRESIDENT’S president’sMESSAGE message

Russia’s Place in Washington’s Trade Agenda

Dear Council Members and Friends:

What

to reach that point in the coming months.

In the case of Russia, three successive U.S. administrations — including the current one — have gone on record as supporting the permanent lifting of the Jackson-Vanik Amendment as it pertains to Russia. This provision in U.S. trade law, which was enacted in 1974, prevents the U.S. from extending permanent normal trade relations (PNTR) to any non-market economy which restricts emigration. At the time of enactment Jews were prevented from leaving the Soviet Union unless they paid large indemnities for the cost of their education. Thankfully, that situation no longer obtains. The Soviet Union is history, and Russia — far from restricting Jewish emigration — has a visa-free travel regime with Israel.

This is where U.S. exporters stand to lose. All other WTO members have unconditional free trade with Russia, and those countries would immediately benefit from the lowering of Russian tariffs and other market liberalizing measures Russia adopts as part of its accession. Ironically, these liberalizing measures were secured in many cases as a result of tough negotiations led by American trade diplomats.

While a bill lifting Jackson-Vanik has not yet been formally introduced in Congress, the Obama Administration has publicly called for Congressional action to that effect. This was the message Vice President Biden delivered to the Russian government earlier this month when he visited Moscow (where the USRBC was honored to host him at a CEO Roundtable). Moreover, Biden unequivocally stated U.S. support for Russia’s WTO accession once the few remaining issues are resolved, and declared that he would lead the administration’s efforts in Congress to lift Jackson-Vanik.

That brings us back to Colombia, Panama and Korea. In our frequent

Spring 2011

Acknowledging this reality, the U.S. has granted Russia annual waivers from Jackson-Vanik since 1994.

Notwithstanding the irritation that this ritual causes, it could continue indefinitely with little material impact on bilateral trade and investment for as long as Russia remained outside the World Trade Organization. However, when a new member that is subject to the Jackson-Vanik Amendment joins the WTO, the United States must either extend permanent normal trade relations or issue formal notification of its intent not to do so. Since JacksonVanik is incompatible with PNTR, the U.S. would be forced to issue such notification if the amendment were to remain in effect once a final agreement on Russia’s membership is achieved; and we expect negotiations in Geneva

Our competitors would be quick to exploit that window of opportunity and, as a result, American companies could lose significant opportunities and competitive advantage. Our European and Asian competitors will move quickly to sign contracts with Russian buyers, possibly shutting out U.S. manufacturers and farmers for a good time to come.

Russia Business Watch

do Colombia, Panama, South Korea, and Russia have in common?

For starters, all four countries have Pacific Ocean coastlines. More importantly for us, all four are fast growing markets for American goods and services and are also the subjects of pending trade-related legislation likely to come before the U.S. Congress this year. The United States concluded negotiations for free trade agreements (FTAs) with Colombia, Panama and Korea in, respectively, 2006, 2007 and 2010 (Korea’s was originally inked in 2007, but was modified by mutual agreement after President Obama’s visit to Seoul in December 2010). Congress is now awaiting the Administration’s submission of implementing legislation for the three FTAs, which will have to be approved by both

the House and the Senate in order for the agreements to enter into force.

>>

1

PRESIDENT’S MESSAGE

Russia Business Watch Spring 2011

>

2

visits to staffers and members on Capitol Hill over the past three months we have often been reminded that the pending FTAs are the top three trade priorities of the new House leadership, as well as of many other free trade advocates in both parties. According to those in the know, Jackson-Vanik and PNTR for Russia will not be considered until after the pending FTAs are approved. Nobody we have talked with on the Hill is willing to predict when that might happen, so while negotiations on Russia’s WTO accession proceed apace we’ll just have to hope that Jackson-Vanik is lifted before a final agreement is reached.

This is to say nothing about the fact that when a vote on Jackson-Vanik is eventually held it will be seen by many in Congress not as a trade vote, but as a referendum on Russia itself.

More’s the pity. The facts pertinent to Jackson-Vanik clearly indicate that the law has served its purpose so admirably that it is no longer relevant to Russia. The logic of future legislation aimed at effecting policy change in other countries is seriously undermined when the fulfillment of the stipulated conditions is not duly acknowledged. The U. S. and the West in general have legitimate issues to raise with Russia, but these should be addressed directly, not by keeping a law on the books that is hopelessly out of date and that hampers U.S. business opportunities in that growing market.

With warm regards,

Edward S. Verona

n

THE COUNTDOWN TO RUSSIA’S WTO ACCESSION HAS BEGUN… GET INVOLVED NOW!

Please join us in a historic campaign on Capitol Hill to support stronger U.S.-Russian economic ties.

Sign up now to get involved in shaping the debate on the future of U.S. companies’ access to the Russian market!

For more information, please visit us at www.usrussiatrade.org or call or email today.

Randi Levinas Executive Director Phone: (202) 739-9196 Email: levinas@usrbc.org

Kellen Moriarty Program Coordinator Phone: (202) 222-0670 Email: kmoriarty@usrussiatrade.org

The Coalition for U.S.-Russia Trade, headquartered at the USRBC, is the U.S. business community’s engine for ensuring that U.S. firms and farmers will be able to compete on equal footing in the Russian market once Russia becomes a WTO member.

outlook

outlook Moscow as an International Financial Center I

By Maxim Lubomudrov Maxim Lubomudrov is a Partner and CIS Financial Services Industry Leader at Deloitte Russia is one of the ten largest economies in the world.

But despite its considerably large financial services industry in terms of financial development, it lags far behind both its global and emerging regional competitors. In order to become an international financial center, a consistent and effective commitment to reform is vital. Improvement of the regulatory and supervisory systems is the first step.

n recent years, President Dmitry Medvedev has been spearheading a plan to transform Russia into an international financial center to mimic the success of cities like Tokyo, Hong Kong, Singapore, Frankfurt, and Geneva.

Efforts by the Russian government to create an international financial center in Moscow began before the crisis hit in 2008. The following year, the Russian government issued Resolution No. 911, which defined the steps for developing an international financial center in Russia. The following were the key points: • Development of financial infrastructure; • Expanding the range of available financial market instruments;

• Regulating of the financial market and improving corporate governance;

• Improving the system of transaction taxation in the financial market; • Boosting the overall competitiveness of the Russian economy.

• Creation of a monetary environment capable of taming inflation; • Creation of an environment conducive to the mobilization of capital to finance investment projects and the development of a defined-contribution pension system;

Spring 2011

• Development of social and business infrastructure;

Russia has the reach, resources, skills, location, and commitment to develop a world-class international financial center. However, it may take considerably longer than is currently envisaged. In this regard, it will be crucial for Russia to make difficult decisions, commit significant resources to the project and be willing to wait for returns on investments.

• Implementation of a Moscow International Financial Center Strategy over several decades;

Russia Business Watch

• Increasing participation in the financial market;

With regard to the CIS region, Russia is already the leading provider of financial services. While the international media have expressed skepticism regarding Moscow’s planned transformation into a financial center to rival London and New York, it undoubtedly has the economic potential to significantly raise its profile as a financial center for a new multipolar world.

Policies are critical — a stable political and economic environment needs to be created in Russia, as this will make it easier for the country to do business. This means making the following interrelated reforms:

• Alignment of the regulatory system with the G-20; • Strengthening the independence and improving the efficiency of the court system.

>>

3

outlook

• Moscow as an International Financial Center • continued >

In order to become an international financial center, any country needs to demonstrate a record of low and stable inflation, and, more generally, macroeconomic stability.

When investors talk about Moscow as a financial center, they are usually referring to direct investments into Russia. But the status of an international financial center relates first of all to portfolio investments and the banking system. CIS countries including Russia should be able to attract financing required for development from Russia with more favorable conditions than from major international financial centers.

This is difficult to achieve, but it is the right goal for improving the conditions for conducting business.

Russia has a large and growing domestic economy, and is a serious rival for the economic dominance of the EMEA region. At the same time, Moscow is already an established financial center for other CIS countries, and provides access to these growing markets.

Russia Business Watch

Spring 2011

What else needs to be done to turn it into a true international financial center?

4

Moscow needs to be able to attract long-term direct foreign investments, rather than to place short or mid-term loans and bonds. Russia does not intend to copy a specific model of an established international financial center, such as London or Hong Kong, as this would be unrealistic given the specifics of each market. At the same time, the government does not plan to or want to develop an entirely new model without first taking global experiences into account. The best route for Russia to take in this respect would be, therefore, to develop its own model based on global best practices.

Does Moscow have the infrastructure, the regulatory bodies, the legal

framework, an independent judiciary, and even the cultural attractions that are normally associated with major international financial centers? What needs to be done to implement this ambitious project?

The most important factor is political and economical stability. Good project management is also highly significant.

However, it can take years to achieve good results in these areas. Once the importance of these factors has been acknowledged, the government must set clear goals and steps for moving forward with the project.

Some of the most attractive aspects of Moscow as a potential international financial center are the size of the market and available workforce, along with the low penetration rates by foreign investors.

At the same time, the legal environment is seen as the primary threat to Russia’s ambitions.

For instance, the apparently politically motivated case against Yukos was perceived by the global business community as a threat to private business interests in Russia.

The only way to develop an environment conducive to financial services is to establish trust and confidence in the system. In Moscow, this system

is still at the development stage, and may take decades to build. Ensuring stability and a consistent approach to resolving business disputes will prevent the project from becoming mired in taxation and regulatory issues.

The government has introduced a number of laws in the wake of the resolution on creating an international financial center. This includes a new law on clearing that should attract investments in the Russian stock market by easing procedural constraints.

While legislation like this constitutes a step in the right direction, Russia must complete a number of other steps for the creation of an international financial center, including modernizing its infrastructure, telecommunications, transportation, and educational institutions.

Moscow’s Strengths and Weaknesses The economy is expected to grow strongly in the long term, but is sure to experience setbacks along the way. Moscow boasts a significant skilled workforce that in some sectors is approaching the level of established international financial centers. These are real strengths, based on which Moscow can compete with other international financial centers, and which competitors in the CIS would find extremely difficult to match.

Factors working against it include the country’s image, the legal, fiscal and regulatory environments, and issues surrounding political and economic stability. Meanwhile, infrastructure and the ease of doing business need to significantly improve. Although, this is clearly a significant challenge, the obstacles faced are not insurmountable, provided that appropriate resources are committed to the project.

The scale of the challenges Moscow faces mean that its development is likely to be much slower and more difficult

>>

>

than planned. Russia must therefore act quickly to secure its dominant position in the region.

• Exemption for gains on substantial equity investments (above a defined limit).

Does Moscow need to implement an attractive tax regime?

• Taxation of a consolidated group, offering relief for losses in the current year against the profits of other group companies; a draft law on consolidated groups of taxpayers is currently being considered by the Russian State Duma and should be adopted in the near future along with the new transfer pricing law; both laws have been drafted in accordance with OECD guidelines.

There is a growing feeling that the relatively unattractive tax regimes applied by some of the largest international financial centers may pose a threat to their continued dominance in the future. This leads to the question of whether Moscow should implement an attractive tax regime for financial institutions or concentrate on development in other areas in order to become a recognized international financial center.

Russia already has a relatively low corporate profits tax rate of 20 percent and a low personal income tax rate of 13 percent for Russian residents. As a result, a reduction in the current corporate tax rate is not a priority at this point.

Indeed, in comparison with other factors, use of an attractive tax regime does not seem to be the deciding factor behind an international financial center’s success. Certainly, this should not be the main goal for Russia, as there are many other obstacles impeding the creation of an international financial center here at present. Nevertheless, since removing all of these obstacles at once is unlikely, the development of an attractive tax regime as an interim measure might be something for Russia to consider.

• Development of detailed tax avoidance laws, such as those that exist in established international financial centers; currently, the concept of an unjustified tax benefit, developed by the Russian Supreme Arbitration Court, is applied by the tax authorities in Russia. In order to become an international financial center, Russia should provide clear corporate tax rules and a tax administration that operates in a professional and business-friendly manner. The lack of consistent tax treatment is a concern for businesses in Russia and taxpayers rightly feel that they should be able to rely on tax laws being upheld by the courts and tax authorities.

• Introduction of a comprehensive system for taxing debt, derivative contracts, intangible assets, and management expenses.

Russia is a party to a wide range of double taxation treaties, having so far concluded agreements with more than 80 other jurisdictions. These treaties often exempt interest, royalties and licensing payments from Russian and foreign withholding taxes.

Russian tax legislation is actually fairly straightforward if compared with the tax laws of other jurisdictions. The UK, for example, has extremely complex (about 9,000 pages of legislation) and extensive rules. As a result, certain

New legislation such as the recent introduction of the Highly Qualified Specialist (HQS) visa regime should prove important in attracting foreign expertise. Migration and employment regimes also require significant liberalization.

Any changes in tax law should involve consultation with leading market players, and should be carried out in a probusiness fashion, taking the following points into account: • The Russian professional services market is widely developed and internationally recognized.

• Moscow’s office rental costs are among the highest in the world.

• Russia should be looking to construct a full service international financial center, operating within an established regulatory environment.

• The government should engage in dialogue with the marketplace and investors before introducing any new regulations, thereby reducing the risk of ineffective regulation. The success of developing Moscow into an international financial center will depend on the ability of the government to follow through on its promises to reform.

• Russia should be looking to construct a full service international financial center, operating within an established regulatory environment.

The government should engage in dialogue with the marketplace and investors before introducing any new regulations, thereby reducing the risk of ineffective regulation. The success of developing Moscow into an international financial center will depend on the ability of the government to follow through on its promises to reform. n

Spring 2011

In comparison with Moscow, the UK performs well on most fiscal elements, but the regime is complex. Moscow can use this experience and build a better system of taxation. Some of the following measures would be beneficial with regard to developing a tax system appropriate for an international financial center:

• A decrease in the administrative burden on companies, e.g., by permitting small- and medium- size companies to file tax returns on an annual basis, with large companies continuing to pay tax on a quarterly/ monthly basis.

Ease of use and openness will be difficult to achieve, but steps should be made towards this end. At the same time, Russia needs to strike a balance between moving toward OECD guidelines on fiscal issues and avoiding overcomplicating existing tax laws.

Russia Business Watch

However, even if the government were to offer multinationals the opportunity to save hundreds of thousands of dollars a year by moving their headquarters from London or New York, few would be likely to do so for reasons stated above, i.e. inadequate legal and regulatory systems; air, road and rail transport links; and telecommunications infrastructure.

• A zero percent withholding tax on dividends, as is currently available in the UK.

taxpayers may be left at a disadvantage, unless they obtain appropriate advice.

This factor should also be taken into account when considering the introduction of further changes in Russian tax legislation.

outlook

• Moscow as an International Financial Center • continued

5

activities

activities USRBC Member Roundtable with an OPORA Delegation of Russian Healthcare Professionals January 21, 2011 Washington, DC

The

Council hosted a briefing for members with a delegation of Russian insurance industry, medical and continuous medical education, and telemedicine representatives led by OPORA Russia, a non-governmental organization of small and medium businesses, on January 21, 2011.

Russia Business Watch

Spring 2011

Natalia Ushakova, Vice President for Social Policy at OPORA, began by stat-

6

ing that the United States and Russia need to do more to modernize and address issues in their respective healthcare systems, such as applying new technologies and combating epidemics of infectious disease. She noted that Russia’s life expectancy is forecast to increase, creating new types of challenges, including for the pension system.

These new issues also bring potential for cooperation with the U.S., specifically in the creation of a global healthcare system. A global agency or bureau would handle healthcare information, resulting in an open system where the mobility of online information would lead to the best practices being applied throughout the world.

Vasiliy Balog of the All-Russian Insurance Association (ARIA) asserted

that there is much room for greater U.S.Russian cooperation. Despite the differences in legal systems and methodologies, both countries can learn from each other regarding best practices in the market. He noted that U.S. businesses are part of ARIA, including 40 major insurance corporations such as MetLife.

ARIA has members in Italy, Germany, France, China, and elsewhere, but it is particularly focused on Europe.

USRBC members discuss healthcare sector cooperation with the OPORA delegation.

Mikhail Natenzon of the National Telemedicine Agency argued that

Russia and the United States are facing many of the same global health issues. Outdated healthcare systems cannot meet current requirements and need a complete overhaul. Specifically, he outlined three important objectives: medical services must be made accessible to everyone; medical assistance must be equally high in quality; and medical assistance must be maximized given current restraints, providing for

economic efficiency in healthcare. One of the most important aspects of this is the use of modern medical technology.

The National Telemedicine Agency is creating a modern telemedical system in Russia that adheres to international standards, is comprised of best practices, and is supported by the World Health Organization.

The telemedicine system consists of two parts: two global constants and mobile clinics. Half of primary diagnoses are

>>

new members activities

Briefing and Discussion with Ambassador Richard Morningstar January 12, 2011 Washington, DC >

O

n January 12, 2011, the USRBC hosted an off-the-record, member-only briefing and discussion with Ambassador Richard Morningstar, U.S. Special Envoy for Eurasian Energy; and Edward Chow, Senior Fellow at the Center for Strategic and International Studies.

the Energy Security Subgroup, while Mr. Chow presented a draft of a new report on the Russian energy sector that was commissioned by the Energy Security Subgroup of the Bilateral Presidential Commission.

Ambassador Morningstar provided a debrief on his recent trip to Moscow and meetings with his counterpart on

Both Ambassador Morningstar and Mr. Chow engaged with members in a discussion of the opportunities and challenges of the Russian energy market.

Mr. Natenzon described the system as a multi-tier one that takes into account organizational structure, economic costs, and feasibility. It provides good returns, and the investments are paid back in two to three years. He added that there are over 25 variations of these mobile clinics that can provide real services: preventive treatment to the vulnerable, aid to the military, support for tourists, emergency response, drug distribution, etc. These systems are completely autonomous and can operate in any climate or geographic area. They are also powerful hubs for communication, being equipped with the best satellite and digital medical equipment. While this project uses international standards, it can be adapted to specific circumstances; one model can be used to battle breast cancer by providing digital mammograms, functional diagnostics and lab tests. It can be used in many instances where the government does not have the real instruments to assist, such as in Haiti or New Orleans.

Ms. Ushakova commented that there were still some problems being worked out with the new system. Monitoring and vending of illegal counterfeit drugs is a key issue, but there is also an ethical issue — information on the internet cannot be protected on the international level since there is no liability for a doctor who puts private information or advice online. She proposed there be a register of international doctors to provide advice and a channel of information to be protected. There are also other questions regarding insurance, payment, prescriptions, and logistics, among others. In addition, U.S. and Russian companies and organizations must work together to optimize pharmaceutical production.

Mr. Natenzon stated that this system

was demonstrated at the World Summit on the Information Society in Geneva in 2003, where it received good reviews.

Both President Medvedev and Prime Minister Putin have given their support, and all CIS countries have signed an agreement to create a competitive telemedical system. He concluded by noting that NATO countries have shown their support as well, offering to help finance the project and including it in the alliance’s 2011-2012 Action Plan.

Regarding medical training, Ms. Ushakova proposed the establishment of new medical centers to train doctors in new technologies and methods. She noted that OPORA would be meeting

with the Russian government to set standards for training and compliance, including through the organization of a conference in Moscow where representatives from education, social organizations, doctors, health ministers, etc., will meet to discuss the relevant issues.

Gusal Ulumbekova of the Association of Medical Societies for Quality (AsMOK)

outlined her organization’s online medical library for students, the only product of this kind on the market. The main feature of the library is an online medical journal that was founded by all of the Russian medical schools. It features free access to online reports, conferences and other documents.

Mr. Balog emphasized the growing

importance of insurance in Russia. Not only has there been a new law on medical insurance, but ARIA is also interested in making insurance databases accessible and available. The idea of malpractice insurance is very interesting for Russia, and Russia is prepared to look and learn from the U.S. experience. The Russian government is paying more attention to insurance and making more attempts to meet goals that have been set.

Ms. Ushakova stated that OPORA’s

role in the development of new medical technologies in Russia is in the creation of a new set of rules and technical standards for the health industry.

Under the Ministry of Health and Social Development, OPORA created a standing committee for small and medium enterprises (SMEs) to try to address the issues. n

Spring 2011

Cooperation with U.S. companies can provide the latest and best technologies.

Russia Business Watch

wrong, leading to serious health-related consequences in addition to wasting resources. Doctors who understand this turn to more qualified doctors for consultations — a business with enormous potential.

The telemedicine system would create a transnational network of medical centers that provide consultations to doctors in far-off areas, such as between Siberia and Washington or Texas and Moscow. The second component is a system of mobile telemedical clinics that can provide service to people in remote areas, an estimated 40-50 million people in both Russia and the United States.

7

new members activities

USRBC Hosts Students from Moscow State University February 2, 2011 Washington, DC

O

n February 2, 2011, the Council hosted a group of students from Moscow State University who were in the Washington, DC area attending a ten-day program at George Mason University. USRBC President and CEO Ed Verona briefed the Russian students on the differences and similarities in business in Russia and the United States.

Managing Risk in Russia: From Start-Ups to Mega Stores February 10, 2011 New York City

T

he Council hosted a luncheon meeting in New York City on February 10, 2011 to brief members on risk management strategies in the Russian market, featuring a discussion with Lennart Dahlgren, former General Manager of IKEA Russia, and Frederick Andresen, Chairman of Prioritel Holdings and founder of Directnet Telecommunications (Moscow).

The luncheon, hosted by Chartis International and sponsored by the law firm Salans, included a look at general risk management strategies by Randy Bregman, a Partner at Salans.

Mr. Bregman began his presentation by noting that the state’s active role in the Russian economy increases risks for investors as well as increases the incidences of corruption. He advised USRBC members to develop a risk management policy that focuses on three key areas: choosing a local partner, the right corporate structure and effective anticorruption measures.

Russia Business Watch

Spring 2011

Mr. Bregman emphasized that per-

8

forming the proper due diligence on a prospective local partner is a critical first step when doing business in any country, but has increased importance in Russia. A local partner is important in helping to manage relations with the state, as well as the complex web of relationships between the private and public sectors. A good local partner can help a company with how to work through the system legally.

At the same time, failure to perform due diligence checks on a potential partner could sink a company’s investment plans in Russia if that partner turns out to be, for example, operating outside the law. Mr. Bregman added that a miscommunication of goals and corporate

Matthew Murray (c.) moderates the luncheon discussion with Lennart Dahlgren (l.) and Frederick Andresen (r.).

strategies could also have a debilitating effect on the partnership.

The corporate structure of the Russian partnership is another crucial step, as the investor will have to determine how best to structure the venture to ensure control, including whether it is governed

by Russian or international law. Mr. Bregman advised against entering into 50/50 joint ventures, where neither side is in clear control.

Finally, Mr. Bregman noted that companies must increase their anti-corruption and compliance activities when investing in Russia. In the U.S. government, there is a heightened focus on enforcement of the Foreign Corrupt Practices Act (FCPA), which has led to greater attention on investments in Russia, among other countries. The proposed Anti-Bribery Act in the United Kingdom would also be more sweeping than FCPA as it deals with bribes between private companies

rather than just bribes to government officials, which could cause additional compliance difficulties for investors.

The discussion was then turned over to a panel session with Lennart Dahlgren and Frederick Andresen, moderated

by Matthew Murray, Chairman of the Center for Business Ethics and Corporate Governance.

Mr. Dahlgren started the discussion

with an overview of IKEA’s entrance into the Russian market, noting that the company made several attempts to establish a presence there. The third attempt came in 1998 just before the default and ruble crash, but the company decided to remain in the market as others were leaving. Mr. Dahlgren noted that a crisis can be a positive event for a strong company as it opens up more opportunities. Prior to the 1998 crisis, IKEA had a difficult time getting land and other permits, but after August 1998,

>>

new members activities

USRBC Briefing for SABIT Program Participants February 8, 2011 Washington, DC

O

n February 8, 2011, the USRBC hosted a briefing for a delegation from the Special American Business Internship Training (SABIT) program, composed of 18 non-profit leaders from six Eurasian countries visiting the U.S. to learn about best practices in developing and managing successful small business associations.

>

government officials came to the company seeking their investment because most other Western companies left the country.

that much more difficult and is a risk factor that must be taken into account.

IKEA initially entered Russia as a means of gaining access to resources such as timber and petroleum to supply the global demand for IKEA products. At the time, IKEA was doubling in size every five years and faced tremendous demand for its products. Mr. Dahlgren noted that, in the end, the retail side of the business was a success, while the raw materials supply side was not.

Q. How did you deal with the day-to-day corruption in Russia?

He emphasized that, from the beginning, company policy was against paying bribes. While this strategy might cause some short-term frustration, it pays off in the long-run; if you do not pay bribes, people eventually stop asking.

Mr. Andresen’s experience as a small-

business entrepreneur differed in many respects from that of Mr. Dahlgren, but in terms of risk management was actually similar. He entered the Russian market in 1991 with the founding of the DirectNet Telecommunications company, which became the first private company to create a satellite system for communications between the U.S. and Russia.

Q. How do you say no in those complex situations?

Mr. Dahlgren noted that it was essential

to convince everyone that IKEA was a “white company.” Over time, government officials wanted to work with IKEA in part as an effort to show the outside world that they were also working within legal bounds.

Q. Trust is an important aspect of business, from contracts to partnerships. How do you build trust in Russia and make it a universal principal?

Mr. Andresen answered that, on the most basic level, if you demonstrate trust in your Russian partners and interlocutors, it will help to begin to build their trust in you. He noted that he looks at Russians as two distinct groups: those above the age of 46 and those below it.

As the younger generation of Russians matures and begins to take positions of responsibility and leadership, those notions that are central Western-style business practices will take root more deeply and make doing business in Russia much easier.

Q. As you hired more and more Russian nationals and your business grew, how did ensure that your zero-tolerance policy on bribery was maintained, including not “outsourcing” bribery?

Mr. Andresen added that his company

was always cautious in its hiring practices, and would only interview candidates who had been recommended by a current employee. The hiring process was a thorough, three-stage progression that fully vetted a candidate to ensure the right fit with the company culture.

Q. What was your relationship with senior managers at the headquarters office regarding Russia, particularly when local officials blocked the opening of a store?

How did you convince them that Russia was worth it?

Mr. Dahlgren answered that he did not

have to work to convince the management of IKEA that Russia was worth the investment because the company’s founder, Ingvar Kamprad, was the driving force behind IKEA entering the market. He noted that Mr. Kamprad realized from the early stages that the Russia business must be controlled from inside Russia, and not from Sweden, and so gave the Russia management the latitude to accomplish their goals.

Mr. Dahlgren concluded by noting that many companies do not have the luxury of having a founder who is so supportive of investing in Russia. In those cases where this high-level enthusiasm is missing, it is important that the Russia management fight for the Russia investment from inside the company. n

Spring 2011

Mr. Andresen also advised that contract sanctity is of paramount importance, but noted that in Russia, the contract is often the beginning of negotiations rather than the end. He concluded by noting that personal responsibility was lacking among many people that he dealt with in Russia, which made getting things done

Mr. Dahlgren answered that IKEA was not smarter than other companies in Russia, it just worked harder. He related that, on many occasions, he and his colleagues would wait outside of a mayor or governor’s office for hours in order to get a certain permit signed. The tactic nearly always paid off as the official would sign the documents in order to get them to leave.

Russia Business Watch

Mr. Andresen advised that the most important aspect to doing business in Russia is to learn who the Russians are as a people — to be curious about Russian history, music, literature, and language. Regarding setting up a business in Russia, he agreed with Mr. Bregman’s assertion that 50/50 ventures do not work as it is unclear who holds the authority in these deals.

Question & Answer Session

Mr. Dahlgren noted that IKEA’s policy strictly forbid any “outsourcing” of bribery to subcontractors and that the company did its utmost to train new staff and imbue in them the notion that corruption was unacceptable. IKEA hired mostly young people and put more money into training its staff in Russia than in any other country in the world.

He added, though, that on large construction projects it was impossible to guarantee that some subcontractor did not engage in a corrupt practice on their own.

9

new members activities

USRBC Round Table with Elena Panfilova February 11, 2011 Washington, DC

O

n Friday, February 11, 2011, the USRBC hosted a members-only, off-the-record luncheon round table luncheon on “Addressing Corruption Challenges in Russia” with Elena Panfilova, General Director of Transparency International-Russia, and a delegation of her colleagues.

The Transparency International delegation was in Washington at the invitation of the U.S. State Department to discuss ways to implement the anticorruption recommendations that their organization put forward through the Bilateral Presidential Commission's Civil Society Working Group.

Ms. Panfilova and her delegation discussed their recommendations with Council members, which included: Russia’s accession to the OECD Anti-Bribery Convention; reducing the “demand” or solicitation of bribes through U.S. government denial of visas to public officials named in FCPA cases and promotion of Russia's investigations of those officials; and including anti-bribery and extortion as well as transparency provisions in bilateral investment and trade agreements.

USRBC Briefing with State Duma Member Ilya Ponomarev March 17, 2011 Washington, DC

Ilya

Russia Business Watch

Spring 2011

Ponomarev, Chairman of the Hi-Tech Development Subcommittee of the State Duma and Deputy CEO for Commercialization at the Skolkovo Foundation, speaking on the topic of

10

high-tech development in Russia, highlighted the Skolkovo Foundation as the latest in a series of Russian innovation initiatives. Previous initiatives, including the RUSNANO Investment Fund, Russian Venture Corporation, technoparks, and special economic zones, were launched during Vladimir Putin’s presidency, but Mr. Ponomarev argued that President Dmitry Medvedev had transformed Russia’s approach to innovation, drawing greater public attention to the importance of hightech development by making innovation a cornerstone of his political agenda. As the basis for this agenda, Medvedev had delineated four key areas, dubbed the “Four I’s,” which Mr. Ponomarev listed in order of importance, with “investment” and “innovation” tied as being the most essen-

tial elements of Medvedev’s policy, followed by “institutions,” and finally “infrastructure.”

While many of Russia’s industries were technologically advanced and efficient during the Soviet period, Mr. Ponomarev said, the failure of the Russian government to formulate a technology agenda after the Soviet collapse had a negative effect on science and research in Russia, and the Russian economy, particularly in the area of industrial production, has been in a state of collapse over the course of the past two decades, with only the energy sector experiencing development and modernization. Although oil and gas companies have given rise to new companies and technologies, Mr. Ponomarev argued that this development is not enough to sustain Russia’s economy and employment. He suggested that all major areas of production, including the military, agriculture, manufacturing, and other areas, were in a state of total collapse, leading to social unrest.

Therefore, Mr. Ponomarev said, even with huge reserves of natural resources, Russia must focus on high technology to ensure long term sustainability.

Mr. Ponomarev said that President Medvedev and Prime Minister Putin were working together to address Russia’s science and research shortcomings, with President Medvedev taking charge of long-term international relations and strategic matters, and Prime Minister Putin focusing on short-term, day-to-day management of the economy. According to Mr. Ponomarev, the Skolkovo project was created to address innovation in the economy as a whole, with a concentration on developing human resources and business networks.

Mr. Ponomarev noted that, during the 1990s, the government failed to support entrepreneurship and instead supported the creation of large businesses through privatization. Currently, entrepreneurship is on the rise again,

>>

new members activities

USRBC Luncheon Round Table with Lorraine Hariton February 14, 2011 Washington, DC

The USRBC hosted a members-only luncheon

round table with Lorraine Hariton, the State Department's Special Representative for Business Affairs, who also serves as the U.S. chair of the U.S.-Russia Innovation Council on High Technology.

USRBC Hosts a Delegation of Russian Universities February 15, 2011 Washington, DC

On February 15, 2011, the USRBC hosted a State Department-organized delegation of Russian universities under the Bilateral Presidential Commission’s Working Group on Education, Culture, Sports and Media Exchanges to discuss university-private sector partnerships for the promotion of innovation.

The physical construction of the innograd has been more to showcase to the rest of the country that the government is serious about the innovative agenda.

and more young people want to start their own businesses.

Skolkovo’s mission is to inspire people to start doing those things, and it is being designed to facilitate the exchange of

both foreigners scouting for new technologies and enterprises in Russia, and Russians looking to start global businesses. Part of Skolkovo’s mission is to create networks to try to link people.

Mr. Ponomarev explained that Skolkovo is currently governed by an international body consisting of equal representation of foreigners and Russians.

All members of the body are representatives of businesses, either from

Spring 2011

>

Russia Business Watch

Mr. Ponomarev explained that there are already 28 start-up companies as participants in Skolkovo — none of which are from Moscow — and 49 more will receive that status in the next month.

They are eligible for tax and other incentives, such as zero profit tax, zero property tax, a social income tax of 14 percent, zero customs duty, special police, special construction permits, special immigration law, and more. He described Skolkovo as a piece of territory where the rest of Russian laws are not applicable.

All companies, regardless of physical location, can become members of the Skolkovo project and receive the same benefits during the construction of the innograd.

He added that he and other members of the government are studying the possibility of extending the benefits of Skolkovo to non-resident participants of the city indefinitely.

11

>>

new members activities

USRBC Briefing with State Duma Member Ilya Ponomarev • continued >

high-tech companies or affiliated with high-tech development in some form.

Half of the foreign participants are American, while the remaining half consists of foreigners from around the world. Skolkovo is co-chaired by Viktor Vekselberg, Chairman, Renova Group; and Craig Barrett, former CEO and Chairman of the Board of Intel Corporation. Mr. Ponomarev called this framework the “policy of two keys,” which is incorporated in all the components of Skolkovo.

Another component, Mr. Ponomarev continued, is a scientific council of experts, which also has two chairmen — Nobel Prize laureates Dr. Zhores I. Alferov (Russia) and Dr. Roger David Kornberg (United States).

Mr. Ponomarev moved on to discuss current efforts in Skolkovo. He stated that Skolkovo is actively recruiting large corporations to participate and encouraging companies to open their R&D offices there. A number of big companies, including Microsoft, Cisco, Blink, Nokia, and Siemens, have announced that they will open R&D centers in Skolkovo and are committed to the development of the Skolkovo project. Mr. Ponomarev noted that Russia is also aiming to bring managerial and technological expertise to Skolkovo as well. The end goal is to support the creation of spinoffs and Russian startups that might be of interest to international investors.

Russia Business Watch

Spring 2011

However, Mr. Ponomarev revealed that Russia is struggling to attract international investors, particularly venture capital firms. Despite Russia’s efforts to build a personnel-driven initiative catered to the venture capital community, investors remain cautious.

Attracting international investors will be challenging, Mr. Ponomarev speculated, because Skolkovo is the first project of its kind in Russia.

12

Asked how the initiatives were linked to politics, Mr. Ponomarev emphasized his belief that economic modernization and innovation are totally irrelevant from the political system, although they are relevant to the fight against corruption. Mr. Ponomarev referred to the Yaroslavl Economic Forum, where research was presented regarding how countries from around the world were building their economic and innovative systems. A number of experts, including several Nobel Prize laureates and prominent university leaders, concluded that there was “zero correlation” between the development of

the political system and innovation.

In addition, each country studied had a unique approach toward economic development.

Mr. Ponomarev then suggested that authoritarian rule is a simpler political model to develop certain institutions. However, the authoritarian government must be sincere in its desire to develop the national economy.

Mr. Ponomarev stated his opinion that the parliamentary and presidential elections in 2011 and 2012 will leave the status quo with Medvedev as President, Putin as Prime Minister, and United Russia as the ruling party, though with slightly less votes in the Duma. The system would be somewhat more democratic, but far from Western standards. He estimated that, regardless of who runs the country, the innovation policies will remain the same. Human rights are still abused in the country, but, in terms of long-term effects, it is more productive to create common values through innovation policies and creating new businesses and economic ties. Unfortunately, large businesses are usually more supportive of undemocratic policies inspired by Putin or pro-government political activists. Small businesses, on the other hand, are not vulnerable to any physical assets or lobbying, and therefore, Russian policy should focus on small start-up companies.

Asked about Medvedev’s anti-corruption efforts, Mr. Ponomarev responded that Russia is a country governed by corruption rather than executive orders and free elections, and it is impossible to completely eliminate it. Corruption is a universal rule that applies to all municipalities, governors and even the cabinet. President Medvedev is perhaps one of the cleanest officials, but he has friends with many commercial interests, and that is why Skolkovo was created as a special regime. So far, there is no corruption in Skolkovo, but there are inefficiencies due to a lack of experience. Mr. Ponomarev explained that, when it comes to the issue of high tech innovation and modernizing the economy, corruption is not relevant.

He argued that, if not for corruption, it would be impossible for small businesses to compete for certain government procurement contracts.

Responding to an inquiry about Russia’s bankruptcy law, Mr. Ponomarev expressed his view that there is no stigma coming from the law, that it is designed to match the needs of the

large corporations, and that it is not relevant for small start-ups. The public perception of failure is more important because tolerance of failure in Russia is lower than in the U.S. He estimated that if a company defaulted on a government loan, it would be the institution that provided the loan and not the company itself that would be liable.

Discussing the goals of the Skolkovo project, Mr. Ponomarev stated that there are no official markers, though the Skolkovo Foundation has set certain benchmarks like number of jobs created, companies created, taxes paid by high-tech companies, and revenue generated. The primary goal is to develop a national innovation ecosystem, avoid competition with existing development institutes and finance a new international university to foster high tech development.

Asked whether a company with the status of a Skolkovo resident may operate anywhere in Russia or is restricted to the Skolkovo region, Mr. Ponomarev responded that currently a company can operate anywhere in Russia, but it is required to move critical elements of its activity to Skolkovo. What that critical element is, however, can be determined by the company, and that restriction will hopefully be lifted.

Construction of the innograd will probably be completed in 2016 at the earliest since legal issues with the land have not yet been settled. Skolkovo should have its first building by the end of next year.

Describing the work being done to train teachers and children in the use of new technology, Mr. Ponomarev stated that the Ministry of Science and Education is working to develop high tech education in schools. Before Medvedev was elected, he chaired a national program connecting all schools by broadband to the internet, and currently 100 percent of Russian schools are computer equipped and broadband connected.

On the other hand, he noted that public education in Russia is suffering due to a reform in school funding that threatens to close all small schools, especially in rural areas. As a result, the quality of education is dropping significantly in remote locations. In addition, standardized tests are poorly implemented and the system is corrupt, further reducing the quality of education. n

Thursday, June 9, 2011 - One Great George Street - Westminster, London SW1P 3AA

USRBC’s 3rd Annual Russia Legal Forum Organized in cooperation with the International Business Leaders Forum

Register today www.usrbc.org or 202-739-9180

Overview:

Confirmed speakers include:

The third annual USRBC legal seminar will focus on the broader issues that companies face in the legal and regulatory environment in Russia, featuring a host of key experts from the public and private sectors as well as international institutions.

• KEYNOTE ADDRESS: Richard Thornburgh, former U.S. Attorney General; Of Counsel, K&L Gates • KEYNOTE ADDRESS: Richard Alderman, Director, UK Serious Fraud Office • William Bowring, Professor of Law, Birkbeck College-University of London • Laura Brank, Partner, Dechert LLP • Richard Dean, Partner, Baker & McKenzie LLP • Thomas Firestone, Resident Legal Advisor, U.S. Embassy - Moscow • Brook Horowitz, Executive Director, International Business Leaders Forum (IBLF) • Denis Morozov, Representative of the Russian Federation, European Bank for Reconstruction and Development • Valery Musin, Chair, Civil Procedure Law Faculty, St. Petersburg State University • Alexey Navalny, Coordinator, Minority Shareholders Union

The seminar will provide practical insights into creating effective risk management strategies to meet the various challenges of the Russian market, as well as give key insights into the development of the Russian legal system under President Medvedev.

Sponsors

regional profile

regional profile USRBC Leadership Visits the Southern Urals Chelyabinsk Region February 15-16, 2011

Russia Business Watch

Spring 2011

I

14

n February 2011, USRBC President & CEO Ed Verona and Head of the USRBC Representative Office in the Russian Federation, Julia Kulagina, visited the Chelyabinsk Region at the invitation of Governor Mikhail Yurevich.

The visit was initially conceived in October 2010 during the USRBC Annual Meeting in San Francisco through discussions with Andrey Nekipelov, Chairman of the Foundation for Social Development “Southern Ural,” who was a member of a delegation of young Russian entrepreneurs led by The All Russia Public Organization Delovaya Rossiya (“Business Russia”).

On February 15, Ed

Verona met with Governor Yurevich and discussed trade and investment opportunities for U.S. companies in the region. Noting that cooperation with the U.S.-Russia Business Council is very important for the South Urals region, the Governor commented, “Our region is very interested in the opportunities presented by the USRBC in terms of information in support of the region’s

investment projects and in terms of building ties with the U.S. business community.”

USRBC Annual Meeting in Chicago, which will take place on October 3-4, 2011.

The Governor asked for the USRBC’s support in planning a showcase in a major U.S. city to highlight the Chelyabinsk Region’s investment potential, and Mr. Verona was delighted to invite Governor Yurevich to the upcoming

Mr. Verona recalled that his last trip to Chelyabinsk was 14 years ago, and commented that the region had changed dramatically for the better since then.

He emphasized that, “Your region is rich in both qualified labor and mineral

>>

>

resources. In addition to that, it is located at the crossroads of the central part of the country and Siberia. All this contributes to the region’s development and its foreign investment attractiveness.

Furthermore, the openness of the local authorities is a crucial factor for further development of the region.”

Governor Yurevich said that the regional authorities would continue their efforts to build and maintain the Chelyabinsk Region’s reputation as an attractive and secure place for foreign investments.

During their trip to the region, Mr. Verona and Ms. Kulagina visited the Chelyabinsk Pipe-Rolling Factory, a facility owned by the U.S.-based company CARBO Ceramics and Chelyabinsk State University. At the Chelyabinsk PipeRolling Plant, Mr. Verona and Ms. Kulagina visited its single-seam pipe-rolling

department, named “Height 239,” as it is located at an altitude of 239 meters above sea level. All of the workers in the department wear white uniforms, and therefore call their production process “white metallurgy.” This unique facility, opened in 2010 in a ribbon-cutting ceremony presided over by Prime Minister Vladimir Putin, represents a total investment of some $700 million. In the first half of 2010, the department made more than $100 million in net profit.

Mr. Verona and Ms. Kulagina were next accompanied by Elena Murtazina, Minister of Economic Development of the Chelyabinsk Region, for a visit to a plant owned by the U.S.-based company CARBO Ceramics, a world leader in the production and supply of ceramic proppants, located in the town of Kopeisk.

The director of the Kopeisk Plant, Valery Subbotin, spoke about the favorable cli-

mate for business development in the Chelyabinsk Region, highlighting in particular the assistance and support that CARBO Ceramics had received from the regional authorities during the construction of the plant. CARBO Ceramics has invested $32 million in the project to date.

regional profile

Chelyabinsk Region • continued

On February 16, Ed Verona visited the Chelyabinsk State University and delivered a lecture “U.S.-Russia Economic and Commercial Relations: Is the ‘Reset’ for Real?” Mr. Verona also met with the University’s Dean, Andrey Shatin, and faculty, who described the university’s latest scientific research.

Additionally, Mr. Verona and Ms. Kulagina held meetings with Deputy Governors Vadim Evdokimov, Alexander Ufimtsev and Yury Klepov, and Vice President of the Southern Ural Trade and Industry Chamber Igor Aristov. n

Chelyabinsk Region • GOVERNOR: Mikhail Valerievich Yurevich • POPULATION: 3.5 million • AREA: 33 940 sq miles • ECONOMY: The output of all sectors of the Chelyabinsk economy combined equaled $38.2 billion in 2009.

• KEY INDUSTRIES: Ferrous metals, machine engineering and metal processing, energy, non-ferrous metals.

• INVESTMENT CLIMATE: The economy of Chelyabinsk is growing. In 2009, 202 investment projects were completed and 5,600 new jobs were created.

• FOREIGN INVESTMENT: According to the Chelyabinsk Region Administration’s official website, in 2009, $2.5 billion in foreign investment flowed into the Chelyabinsk region, making it the 5th most popular destination for foreign investment out of the 83 Russian regions. Foreign investors receive national treatment in investment activity realization, including access to tenders, auctions and consultations with authorities.

• MAJOR FOREIGN INVESTORS: Carbo Ceramics (United States), Fortum (Finland), Henkel-Boutechnik (Germany), Metro Cash and Carry (Germany), Omia (Switzerland), Rexam (Great Britain).

• USRBC MEMBER COMPANIES OPERATING IN CHELYABINSK: Ford, General Electric, General Motors, Manheim Export, Phillip Morris, RB International.

Russia Business Watch

Source: The Official Website of the Chelyabinsk Region Administration

Spring 2011

15

regional profile

USRBC Leadership Visits the Southern Urals Krasnoyarsk Territory The VIII Krasnoyarsk Economic Forum February 18-19, 2011

Russia Business Watch

Spring 2011

O

16

n February 18-19, Mr. Verona participated in the VIII Krasnoyarsk Economic Forum at the invitation of Deputy Prime Minister and Minister of Finance of the RF Alexey Kudrin. Mr. Verona spoke at the first plenary session, entitled “Management System Configuration: Lessons from the Crisis,” and participated in a panel discussion organized by Ernst & Young on Russia’s investment climate and the role of foreign companies in the modernization of the Russian economy alongside Minister Kudrin.

In his remarks, Mr. Verona discussed the significant opportunities for foreign investors in Russia as well as the many challenges that present a drag on the country’s economic potential. He noted that Russia’s rich natural resources, growing consumer class and significant scientific and engineering talent make it attractive to companies across a range of sectors. He cautioned, though, that a lack of adherence to the rule of law, corruption, bureaucracy, and corporate governance issues greatly increase the risk for foreign investors. n

Krasnoyarsk Territory • GOVERNOR: Lev Vladimirovich Kuznetsov • POPULATION: 2.9 million • AREA: 913,788 sq miles • ECONOMY: In 2008, the Gross Regional Product of Krasnoyarsk Territory was about $25.5 billion.

• KEY INDUSTRIES: Non-ferrous metals, energy, machine engineering, metals processing, mining.

• FOREIGN TRADE AND INVESTMENT: In 2010, foreign trade turnover of the Krasnoyarsk Territory amounted to $6.4 billion. Its top six trade partners (Switzerland: 32%, China: 14%, France: 9%, United States: 8%, Netherlands: 8%, and Germany: 4.2%) form over 75% of the region’s total international trade.

Exports from the Krasnoyarsk Territory in 2010 totaled $5.4 billion, and over 95 % of the region’s exports were non-ferrous metals, petrochemicals and timber.

Krasnoyarsk Territory received $12.3 billion in foreign investment in 2007.

• INVESTMENT CLIMATE: The regional government supports foreign investment through subsidized investment credit rates and leasing expenditures.

Source: The Official Website of the Krasnoyarsk Region Administration

February 18-19, 2011

During the Krasnoyarsk Economic Forum, Mr. Verona met with Dmitry Mezentsev, Governor of the Irkutsk Region, to discuss

regional profile

USRBC Leadership Visits the Southern Urals Meeting with Governor of the Irkutsk Region Dmitry Mezentsev potential economic cooperation between the region and members of the Council.

“We are going to enhance the cooperation between regional companies and American business in order to set an example for development of bilateral relations. Each investor in the Angara Area is welcomed with an affirmative approach and the creation of a favorable environment,” said Governor Mezentsev.

The Governor invited Ed Verona and a delegation of USRBC members to take part in the VII Baikal Economic Forum, which will be held in Irkutsk in September. 2011 n

Irkutsk Region • GOVERNOR: Dmitry Fedorovich Mezentsev • POPULATION: 2.5 million • Area: 299,152 sq miles • ECONOMY: Irkutsk Region is rich in natural recourses, accounting for 11% of all Russian forests, 10% of Russian gold resources, 7% of oil and gas reserves, and 7% of coal. It is one of the largest and fastest growing industrial centers of the Russia Federation with a well-developed telecommunications and transport infrastructure. In 2010, the output of all sectors of the Irkutsk economy was approximately $19 billion, up from $15 billion in 2009.

• KEY INDUSTRIES: energy, petro-chemical, mining, timber, mechanical engineering, aluminum, tourism • INVESTMENT CLIMATE: The region offers cheap energy resources as well as a number of fiscal incentives for investors.

Investment in the Irkutsk Region totaled $3.2 billion in 2010.

• FOREIGN INVESTMENT: By 2009, the total amount of foreign investment in the region was $1.1 billion, including $536 million of foreign direct investment.

• FOREIGN TRADE: In 2010, foreign trade turnover of the Irkutsk Region amounted to $8.6 billion, up 16.3% year-on-year.

Imports into the region amounted to $1.2 billion in 2010. The main imports are alumina and pitch coke, widely used in the aluminum industry.

Source: The Official Website of the Irkutsk Region Administration

Spring 2011

The region exported $7.4 billion in goods (85.6% of total foreign trade turnover) in 2010. The region’s main exports are timber (29%), raw aluminum (27.9%), machinery and equipment (17.9%), fuel and energy products (13.3%), chemicals (4.8%) and iron ore (3%).

Russia Business Watch

In March 2011, Standard & Poor’s Ratings Services raised its issuer credit ratings on the Irkutsk Region to ‘BB–’ from ‘B+’ and its national scale rating on the region to ‘ruAA–’ from ‘ruA+’.

17

regional profile

Unexplored Opportunities in the Russian Regions

By Stefan Dierks Stefan Dierks is a Partner, Strategy Group, Transactions & Restructuring at KPMG

When

looking at Russia, most international companies focus purely on Moscow, St. Petersburg and the resource-rich regions. As a consequence, international competition in these regions is already high. This has an immediate impact on the availability and cost of labor and land. Inflation rates for these costs are often higher than average inflation — i.e. they increase faster than your sales prices can.

Further evidence is likely to be announced in spring 2011. The government seems to be relatively advanced with plans to establish a $10 billion fund to be invested jointly with international private equity houses. This should improve Russia’s private equity and SME markets significantly — areas that are important for economic health but where Russia’s performance is below its BRIC colleagues.

Is there an alternative to entering Russia into such a competitive environment?

Research that KPMG has undertaken recently with the Russian Association of Industrialists and Entrepreneurs indicates that there is. Due to their narrow geographical focus, international players leave significant business opportunities in the Russian regions unexplored.

The second question relates to whether there are sufficient opportunities in the Russian regions. Having taken an in-depth look at the value creation potential and entry barriers of 12 Russian regions (excluding Moscow, St. Petersburg and the resource-rich regions) it was found that there is significant value creation potential to be unlocked in the regions. Four regions offered a high level that is already easily accessible; four other regions offered a high level that would require active exploration work on the investor side to overcome the existing investment barriers.

Russia Business Watch

Spring 2011

Surely, the first question to be answered is “are we welcome”? Yes, you are welcome. Russia’s strategy for economic development has been stable since the beginning of the 21st century.

Until recently, the exploration of natural resources and the restructuring of domestic industry was clearly the strategic paradigm of the government. But more of the same will not be sufficient to keep Russia’s GDP growth on a level above five percent. There are clear indications that the Russian government is leading its economic strategy into a new cycle.

18

Decreasing dependency on natural resources and on food / pharmaceutical imports, encouraging innovation and increasing added value are growing in importance for the Russian economy.

All of this requires significant upgrading of infrastructure.

Successfully implementing this strategy demands a significant increase in foreign capital — both tangible and intangible. As a consequence the economy is opening up for international capital and expertise.

A strong indicator for this opening-up is the privatization program announced by the government. In an attempt to generate cash-flow and to bolster the economy, the government has launched a privatization program worth $30 billion from 2011 to 2013 and more than $50 billion in subsequent years.

The authors of the study conclude that the hit rate when looking for business opportunities in Russia’s regions is relatively high. But this upside needs to be balanced against the higher search and exploration cost compared with other regions more popular with investors.

What should investors be prepared for when attempting this balancing act?

Don’t be deterred by the current state of infrastructure. That the infrastructure

(transportation, energy supply, professional education) in the Russian regions is not setting any benchmarks is clear.

However, the need for improvement is clearly recognized and the relevant programs have been established in many cases. As the soccer World Cup in 2018 approaches, the overall quality of infrastructure is likely to improve significantly. In addition, investors have a lot of room to influence the infrastructure plans of the regions. Therefore, rather than being disappointed by poor infrastructure, we encourage investors to suggest development programs and requirements to regional governments.

There are a number of examples where investor requests have led to significant improvements and infrastructure investment programs. The joint efforts

"Surely, the first question to be answered is “are we welcome”?

Yes, you are welcome.... There are clear indications that the Russian government is leading its economic strategy into a new cycle. " of different investors and local governments should lead to significant improvements.

Keep the long-term benefits in focus.

Generally, the senior representatives of Russian regions are highly aware of the needs of international investors. They also understand that only the alignment of the region’s interests with those of investors will increase the wealth of the region. However, the further a company penetrates into the regional administration’s middle layers, the more important short-term benefits become.

This can result in investment contracts being proposed with conditions that limit the flexibility of your business to an unacceptable extent (minimum wages, minimum number of employees, social contributions). Avoid this trap by keeping senior officials involved and by constantly communicating the longterm goals.

Communicate issues early on. Do not

hesitate to complain if you are not happy with the support of lower-level governmental bodies. Feedback within the government is very limited and it often needs senior involvement to get things done. Ask for it. The same is true for the issue of bribes. Everybody is aware that corruption is a key barrier for the Russian economy, in particular in relation to the attraction of foreign capital. The government is clearly trying to tackle this, although a large scale change is unlikely to come over night.

However, many successful businesses operate without any involvement in corruption. There are also examples of senior government officials actively fighting the problem as soon as they become aware of specific instances.

The third question is primarily related to your business model for the Russian regions. Is doing business in Russia

>>

Levels of FDI in the Russian regions

regional profile

Unexplored Opportunities in the Russian Regions • continued

St. Petersburg

Moscow

Key:

-

Ultra-high (total FDI for-2006-2009 > 1 USDbn) High (300 USDmn < total FDI for 2006-2009 < 1 USDbn) Medium (100 USDmn < total FDI for 2006-2009 < 300 USDmn) Low (total FDI for 2006 2009 < 100 USDmn)

Note: Source:

(a)

The level of FDI was estimated as total inward FDI in a region (excluding FDI from Cyprus and BVI) for 2006 2009 Rosstat, 2010, KPMG analysis

© 2011 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a subsidiary of KPMG Europe LLP, and a memb er firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

>

fundamentally different from in other countries? The results of the research demonstrate that it is not — strategically, companies need to consider the same areas as everywhere: stakeholders, demand, value chain, and implementation. What does differ is the relative importance of these areas.

ments are not really close to saturation, but are very volatile in term of price positioning and brand importance. It is difficult to assess market sizes accurately, which is often a time-consuming

ue chain for your success in the Russian regions should not be underestimated.

Despite years of changes, value chains remain highly integrated. As a result, there is a large upside for productivity across all sectors. However, the availability and reliability of the value chain is a key area of concern.

• The number of professional partners remains limited. For example, in financial services there is only limited access to supporting industries (i.e. in relation to credit histories).

• In particular when selling to foreigners, the creation of a monopoly situation is a strategy that may be implemented by the seller.

• Specific industries need to create infrastructure themselves to be

• A high number of businesses still do not operate fully in compliance with laws and regulations. Transforming these businesses can have a significant impact on cost and impact the ability to compete profitably.

• Implementation: There is definitely no lack of good ideas in Russia.

There is, however, a lack of strong managers. In addition, the operating model in Russia is still different from those in more ‘Western’ markets. This tends to include more centralization, a more top-down approach to making management decisions and more focus on activities rather than on results.

What remains as a conclusion after scratching the surface of some of the important issues when making a decision on expanding into Russia? The outlook is strong and Russia is an attractive market. Most players investing in Russia have created high growth and high margins. However, being successful in Russia depends on investing the time of your best people. Russia is not a “me too” environment. n

Spring 2011

Demand: Most regions and market seg-

Value chain: The importance of the val-

competitive, which has a big impact on cost efficiency.

Russia Business Watch

Stakeholders: Whereas one can assume transparency about stakeholders in mature markets, this is not true for Russia. Firstly, there is much more interaction with the authorities. Secondly, the number of individuals controlling supply chains can be limited. Thirdly, the final beneficiary is often not clear.

Therefore, you need to ensure that you have a sufficient understanding of the stakeholders, their interests and ability to impact your business. The stakeholder assessment is actually the first breaking-point: if you do not feel comfortable with the environment, it is better to postpone your entry.

area for discussion, but is not as essential for success as in other countries. However, you need to ensure that you are able to react quickly to rapid changes in customer preferences and upgrade or downgrade your offering accordingly. Consumer goods companies, in particular, will find it a challenge to hedge against a narrow portfolio.

19

20

Russia Business Watch

Spring 2011

u.s. government

u.s. government

March 9, 2011 Moscow, Russia

O

n March 9, 2011, the USRBC and the Skolkovo Foundation co-hosted a meeting of U.S. and Russian CEOs with U.S. Vice President Joseph Biden and First Deputy Prime Minister of Russia Igor Shuvalov at the Skolkovo School of Management.

USRBC Chairman and Chairman and CEO of Alcoa Klaus Kleinfeld chaired the meeting, which focused on issues related to Russia's WTO accession as well as ways to increase bilateral commercial cooperation. Prior to the CEO dialogue, the USRBC and U.S. Ambassador to Russia John Beyrle co-hosted a luncheon for Vice President Biden with American CEOs, at which USRBC President and CEO Ed Verona discussed the business community perspective on Russiaâ&#x20AC;&#x2122;s WTO accession, among other topics. n

u.s. government

The U.S.-Russia Business Council Co-Hosts CEO Meeting with Vice President Joseph Biden

Russia Business Watch Spring 2011

21

legal update

legal update Copyright, Patent and Trademark Developments in the Russian Federation: 2010 Year in Review 1

By Bruce McDonald Bruce McDonald is a Shareholder at Buchanan Ingersoll & Rooney PC

I

Russia Business Watch

Spring 2011

n September and October 2010, Russia began the final advance in its 17-year quest for WTO accession with the enactment of amendments to Part IV of the Civil Code governing intellectual property.2 These amendments were required by the November 2006 Bilateral Agreement on Protection and Enforcement of Intellectual Property Rights concluded by Russia and the United States.

22

Copyright Law So far as they relate to the copyright law, the principal effect of the October 2010 amendments is to preserve the right of copyright owners to remuneration for the reproduction of phonograms and audio-visual works that is freely allowed for personal use pursuant to ยง 1273 of the Civil Code. Under ยง 1245

of the Code, such remuneration is to be paid from fees charged to manufacturers and importers of equipment and physical media used for such reproduction. On paper, the right to such remuneration was established

in the 1993 Copyright Law,3 but the means of implementation were never effected. The mechanism for the collection of such fees was established by resolution on October 22, 2010.4 This resolution contains a list of equipment

>>

>

and physical media on which production/import fees are to be assessed and a procedure for the collection and distribution of such payments to copyright owners.

In furtherance of the push to WTO accession, amendments to the law on the circulation of medicines were enacted in September 2010 to provide for the protection of data submitted by pharmaceutical companies in clinical trials. The inadequacy of such protection had been the most serious concern of U.S. negotiators regarding Russian IP legislation since Part IV of the Civil Code was enacted in 2008. The new law forbids producers of generic drugs from using data from pre-clinical, clinical and pharmacological trials, submitted by companies registering new drugs in Russia, for a period of six years.

Despite the 2010 copyright and pharmaceutical data amendments, Russian accession to the WTO remains controversial due to vocal concern among copyright owners over the lack of adequate IP enforcement.5 In its Special 301 Report issued on April 30, 2010, the U.S. Trade Representative responded by retaining Russia on the Priority Watch list, faulting the country, among other things, for its continued failure to fight optical disc and Internet piracy, deter piracy and counterfeiting through enhanced criminal penalties, and strengthen border enforcement.6 The report cites copyright industry reports documenting significant losses due to copyright infringement, especially through online piracy, which has continued to grow in Russia. Despite the closing of some illegal websites offering pirated music, many more have sprung up in their place, the USTR concluded.

Patent Law A single substantive amendment was enacted in the Russian patent law during 2010, introducing a six-year period of exclusive protection to owners of patented pharmaceuticals over data submitted to the government in support of clinical trials.10 This development removed the final obstacle to Russia’s WTO accession in terms of the country’s intellectual property legislation, according to U.S. and Russian negotiators who heralded the development in October 2010 as the final breakthrough in those negotiations.

Of wider importance to the international patent community, a bill was introduced in the Duma on October 27, 2010, that would dramatically reform the procedure for protection and enforcement of patents by creating a special court with exclusive jurisdiction over all intellectual property disputes at both the trial and appellate levels.11 The bill, which would amend the federal constitutional laws “On the Judicial System of the Russian Federation” and “On Arbitration Courts in the Russian Federation,” was authored by the Supreme Arbitration Court. In addition to serving as a court of “first instance” in intellectual property infringement disputes, the court would hear appeals from decisions on patent registration issued by the Russian Federal Service for Intellectual Property, Patents and Trademarks (Rospatent).

Meanwhile, cooperation between the U.S. and Russian government expanded at the administrative level. On September 22, 2010, the U.S. Patent and Trademark Office signed an agreement with Rospatent designating the latter as an International Searching Authority (ISA) and International Preliminary Examining Authority (IPEA) under the Patent Cooperation Treaty for international applications received by the PTO.13 The agreement benefits U.S. applicants by reducing the cost of search and examination that, when performed by Rospatent, will cost around $450. Applicants selecting Rospatent as the IPEA will also pay a preliminary examination fee of $180 and a handling fee of $175.00.14 Regarding the protection of patent rights, the principal attention of the Russian government and public in 2010 was focused on attempts by industrial concerns in other countries, mainly China, to copy Russian weapons.15 Finally, 2010 was noteworthy for the commencement of an initiative by a coalition of major Russian and international companies and business leaders called “Skolkovo,” named after a village near Moscow where the complex will be based.16 Skolkovo is projected to become Russia’s answer to Silicon Valley, a high-tech research and production hub focusing on energy, information technologies, communication, biomedical research, and nuclear technologies.

Trademark Law The principal development involving Russian trademarks in 2010 occurred not in Russia but in a New York courtroom, where the U.S. Court of Appeals for the Second Circuit reinstated the claim of the Russian government to ownership of the famous STOLICHNAYA vodka trademark in the United States. See Federal Treasury Enterprise “Sojuzplodoimport” v.

Spirits International N.V., F.3d, 2010 WL 3928910 (2d Cir. Oct. 8, 2010) (the “Stolichnaya case”) (reversing and remanding district court’s dismissal of trademark infringement claim, holding that incontestability of U.S. trademark registration did not preclude examination into validity of assignment). >>

Spring 2011

Currently, IP infringement suits are heard in the regular commercial courts.

The majority of such suits are brought in Moscow, where the commercial courts are equipped to handle them, but problems arise when regional courts are confronted by complex and time-consuming IP disputes. In setting up the new system, the Supreme Arbitration Court drew upon models

in Germany, where a patent court has existed for 50 years, and Japan, where the intellectual property rights court was created 10 years ago.12

Russia Business Watch

In 2010, Russian law enforcement agencies conducted fewer raids on optical disc production facilities suspected of engaging in pirate activities than in 2009.7 Moreover, such raids are minimally effective because the date and time of the pending raids is characteristically leaked to the optical disc plant in advance.8 While the level of cooperation among Russian agencies in optical disc raids is increasing, the quality of raids and the level of police expertise is inconsistent nationwide. A number of factors limit the effectiveness of raids, including the monetary damages threshold required to initiate

criminal actions, and the general reluctance of prosecutors to initiate criminal cases even when there is evidence of a violation of criminal code provisions.9 Notwithstanding, there has been significant progress in the struggle against software piracy as a result of the 2008 decision by the Russian Ministry of Education to legalize software in Russian schools, including the government-funded purchase and distribution of licensed copies of both Russian and non-Russian software products throughout the country.

legal update

Copyright, Patent and Trademark Developments in the Russian Federation: 2010 Year in Review1• continued

23

legal update

Copyright, Patent and Trademark Developments in the Russian Federation: 2010 Year in Review1• continued >

The Stolichnaya case is the latest development in an epic struggle by the plaintiffs, an agency of the Russian government and its exclusive licensee, to reclaim rights to the STOLICHNAYA trademark that were assigned to the defendants and their predecessors in the chaos and confusion of Russian privatization in the 1990’s. In 2006, the trial court granted a motion to dismiss filed by the defendants, who claimed they had acquired the STOLICHNAYA registration in good faith by reason of an assignment from a group of entities and individuals including a fugitive tycoon who fled Moscow to escape a charge of attempted homicide.

Russia Business Watch

Spring 2011

Prior to the alleged assignment, the U.S. registration for STOLICHANAYA was owned by PepsiCo pursuant to an agreement under which the Soviet Union had assigned the registration to PepsiCo in return for exclusive rights to the Pepsi trademark in the USSR. The agreement called for the future assignment of the U.S. trademark registration back to the Soviet Union upon termination of the agreement. Upon the collapse of the Soviet Union, however, it was unclear who had standing to assert the agreement on behalf of the Soviet Union. In the midst of this confusion, the defendants and their predecessors engaged in various forms of thievery, according to plaintiffs, including but not limited to their creation of a legal entity with a corporate trade name that differed by only one letter from that of the registered owner, the similarity of which can be appreciated from a sideby-side comparison:

24

considering the plaintiffs’ allegations.

By holding that the incontestability of the STOLICHNAYA trademark precluded an examination of the client’s allegations, the district court was able to avoid what may have appeared to be an impenetrable maze.

In suing for a declaration of ownership and infringement, the plaintiffs also got off to a bad start by contending that the U.S. court was obligated to give force and effect to previous decisions of the Russian courts holding that registrations for the STOLICHNAYA trademark in Russia had been fraudulently procured. The introductory paragraph of the complaint stated, “By this action, Plaintiffs seek to have the duly issued orders of the Russian courts recognized and applied…” This assertion of Russian court decisions in the opening paragraph of the plaintiffs’ complaint may have provoked the district court into viewing the their action as an overreaching assertion of state power by the Russian Government.

It is black letter trademark law in the U.S. that trademark rights are peculiarly geographic in nature and that foreign court decisions regarding validity and scope of marks abroad are irrelevant and inadmissible in a dispute regarding trademark rights in the United States. In the introductory paragraph of its memorandum and order dismissing the action, the district court signaled its view of the case as such, stating, “In 2000, the Russian Government decided to renationalize the rights to STOLICHNAYA trademarks and copyrights in Russia Registered Owner: and abroad.” It is arguable, therefore, Defendants’ Predecessor that the plaintiffs could have avoided the dismissal of their complaint Sojuzplodoimport: by characterizing the Russian court Sojuzplodimport decisions recognizing their rights in the STOLICHNAYA trademark not as The sum result of such conduct, binding adjudications regarding the according to the plaintiffs, was to validity of U.S. trademark rights, but fraudulently procure an assignment as authoritative findings on (1) issues of the U.S. trademark registration of corporate legal succession between for STOLICHNAYA from PepsiCo. Russian companies and legal entities; However, the complicated history of and (2) the validity of the assignment skullduggery behind this assignment between Russian companies, executed set forth in the plaintiffs’ complaint, in Russia, under Russian law. going back to 1990, may have appeared to the district court so complex and In any event, the court of appeals remote in time and geography, and reversed and remanded the district so difficult of proof, that the court court’s dismissal of the trademark was left searching for a way to avoid infringement complaint and sent the

complaint back for further proceedings, holding that the district court improperly conflated incontestability with the analytically distinct issue of whether a subsequent transfer of the marks was valid. In so holding, the court of appeals resurrected the Russian government’s claim to ownership of the STOLICHNAYA brand, which, to most Americans during the Cold War and after, symbolized the Russian government and its people as the origin and source of vodka produced and distributed under the STOLICHNAYA trademark. n 1. © 2010 Buchanan Ingersoll & Rooney PC 2. Federal Law No.259-FZ (Oct. 4, 2010).

3. Federal Law No. 5351-1, On Copyright (July 9, 1993).

4. Government Resolution No. 829 (Oct. 22, 2010).

5. See International Intellectual Property Alliance (IIPA), 2010 Special 301 Report on Copyright Enforcement and Protection in the Russian Federation (Feb. 18, 2010), currently posted at www.iipa.com/rbc/2010/2010spec301russia.pdf (“IIPA Report”).

6. U.S. Trade Representative, 2010 Special 301 Report (April 30, 2010), currently posted at www. ustr.gov/webfm_send/1906 (“USTR Report”).

7. See IIPA Report, at p. 121.

8. USTR Report, at p. 23.

9. Id. 10. See generally “State Duma Adopts civil Code Amendments,” Russia & CIS Business Law Weekly (Sept. 28, 2010). The legislation also restricts the range of situations in which compulsory non-exclusive licenses to use inventions linked to semiconductor production technologies can be issued. Id. 11. See generally “Russia to Create a Court for Intellectual Property Rights,” Russia-briefing.com (June 9, 2010).

12. Id. 13. Janovic, “Rospatent to Serve as ISA, IPEA under PCT for US,” Mondaq (Nov. 12, 2010).

14. Id. 15. See Semenov, “Chinese ‘Copying’ of Russian Developments May Harm Russia’s Position on the Armament Market,” Russian Defense Industry Digest (Feb. 1, 2010).

16. See “Russia to build Its Own ‘Silicon Valley’ Near Moscow,” RIA Novosti (March 18, 2010).

new members

new USRBC members CLAAS NORTH AMERICA HOLDINGS CLAAS began conducting business in North America in the 1960s with early efforts focused in Canada. In 1979, CLAAS of America was formed to bring CLAAS harvesting equipment to all farmers in North America. CLAAS North American Holding, Inc. represents the CLAAS North American agribusiness activities. Currently, CLAAS operates in two main divisions in North America — CLAAS Omaha, Inc. and CLAAS of America, Inc. CLAAS Omaha is responsible for manufacturing LEXION products sold in the U.S. and Canada, while CLAAS of America is responsible for sales and support of all LEXION products as well as self-propelled forage harvesters, hay tools and balers to provide farmers an optimum performance in the field.

ENERGY MAGAZINE Energy Magazine™ is a news source and contemporary journal that is distributed at all major energy and chemical conferences and trade shows around the world. Corporations and organizations that specialize in energy and chemicals as well as national and state regulators and other interested individuals receive subscriptions. Article topics are chosen by the authors and provide a forum for energy leaders, NOC’s, business, academia, and consumers to share their opinions on developments in the industry. Contributors include those involved directly in the energy and chemical industry as well as industry pioneers and experts around the world.

INSTITUTE FOR HEALTH POLICY ANALYSIS The Eurasian Medical Education Program of the American College of Physicians was established in 1997 to contribute to programs of continuing or postgraduate medical education for the benefit of Russian Physicians in order to enhance their capacity to prevent and manage serious disease. American physicians, on a voluntary basis, engage in lectures, seminars and clinical rounds with colleagues in cooperation with Russian regional academic medical centers throughout the Russian Federation. Concentration is on those diseases that are the principal contributors to excess or premature mortality in Russia. The program has interacted with 10,000 Russian practitioners in Russia since its inception.

Russia Business Watch

ORACLE CORPORATION Oracle is the gold standard for database technology and applications in enterprises throughout the world — the company is the world's leading supplier of information management software and the world's second-largest independent software company.

The acquisition of Sun gives Oracle a leadership role in the hardware arena as well. Now more than ever before, Oracle technology can be found in nearly every industry, and in the data centers of the Fortune Global 100 companies. Oracle is the first software company to develop and deploy 100 percent internet-enabled enterprise software across its entire product line: database, business applications, application development, and decision support tools. >>

Spring 2011

25

new members

• New USRBC Members • continued >

RAM CONSULTING INTERNATIONAL RAM Consulting International provides clients with a full range of services: management services, including advice on strategic and general management objectives and procedures; finance, accounting and payroll services including budgeting, forecasting, financial analysis and planning; marketing services including direct marketing, customer relationship management, market research, and advertising; information technology services including offering routine software solutions, consulting services and network infrastructure maintenance; product sales promotion; and services for human resources including personnel policies, compensation planning, salary and bonus determination, and development of benefits plans including health insurance, life insurance and employee assistance programs.

STS LOGISTICS STS Logistics is a logistics company offering a broad range of services, including motor, railway, marine, air, and multimodal transportation of cargoes of any type both within and outside Russia and other CIS member states. The scope of such services comprises projectrelated carriage of outsized cargoes, customs clearance of cargoes, warehousing services (including terminal handling of goods of any kind), customs and logistics consulting, insurance, and audit. STS Logistics has built the relationships and expertise that enable the company to plan effectively and solve problems before they arise.

WHITE & CASE As one of the largest international law firms in Moscow, White & Case works on some of the most complex multinational deals in Russia. The firm’s size allows its lawyers to specialize in a broad range of industry sectors and practice areas, including mergers & acquisitions, corporate, capital markets, banking and finance, energy and natural resources, real estate, regulatory and disputes, tax, and pro bono. Since the opening of its Moscow office in 1991, White & Case has established itself as one of the leading international law firms in Russia; with systems and people integrated across offices and jurisdictions, ensuring high-quality service that continually wins praise from both clients and independent observers of the market. n

Russia Business Watch

Spring 2011

USRBC’s Annual Meeting 2011

26

October 3-4, 2011 Chicago, IL

The U.S-Russia Business Council is pleased to announce that its 19th Annual Meeting will take place on Monday and Tuesday, October 3-4, 2011 in Chicago, IL, with the Conference Program on Tuesday, October 4, at the Swissotel, and the Gala Dinner kicking off the prior night, on Monday, October 3, at the Art Institute of Chicago.

Chicago, the third-largest city in the United States and a sister city to Moscow since 1997, is a leader in international business and is regarded as one of the top global financial centers. The development of Chicago as a commodities trading hub and then international commercial center provides useful parallels for Russia as it continues its efforts to integrate into international institutions and create a global financial center in Moscow.

These and other themes will be discussed throughout the agenda of the 2011 USRBC Annual Meeting.

Further information and registration is available on our Annual Meeting page : https://www.usrbc.org/activities/am/

端berthinky NationalInterest.org

Jacob Heilbrunn Benny Morris Cato Skeptics Paul Pillar David Kay Bruce Riedel Conrad Black Anatol Lieven Ryan Crocker & More!

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

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

www.usrbc.org

Services

Business Development/Access

Government Relations

Dispute Resolution

Market Intelligence

• The USRBC offers its members frequent opportunities to relay concerns directly to the highest levels of the U.S. and Russian governments.

• We facilitate member input on government policies that directly affect business.

• Our powerful relationships benefit members facing market access, tax policy and property rights challenges.

Members caught in commercial disputes with private or government entities benefit from the USRBC’s ability to educate the appropriate decision makers about the issue and effectively communicate its effect on the member, as well as on the overall investment climate.

Membership Questions?

Contact Julia Bacon Manager of Membership Affairs and Programs 202-739-9189/ bacon@usrbc.org

The USRBC engages regularly with the U.S. Executive Branch and Capitol Hill to promote a balanced discussion on U.S. policy toward Russia, advance the bilateral commercial agenda, and voice member concerns. We currently lead the broad business community effort associated with Russia’s WTO accession, the Coalition for U.S.-Russia Trade (www.usrussiatrade.org).

• Regular member briefings providing outside expert o pinion and experience on industry- specific topics and broader commercial relations.

• Regular e-mail alerts on significant political and eco nomic developments in Russia.

• Russia Business Watch — a leading quarterly publi cation on bilateral trade and investment.

Special Room Rates for USRBC Members at Marriott Hotels in Moscow Marriott is pleased to provide members of the U.S.-Russia Business Council with favourable room rates at Marriott Moscow Royal Aurora, Marriott Moscow Grand and Marriott Moscow Tverskaya hotels.

With questions regarding this special room rates offer for members of the U.S.-Russia Business Council, please contact Marriott Moscow Cluster Reservations Department at reservation@marriott-moscow.ru or via phone +7 495 937 00 55.

MARRIOTT MOSCOW ROYAL AURORA 11 Petrovka str.

Moscow, 107031, Russia Tel.: +7 (495) 937 1000 Fax: +7 (495) 937 1001

MARRIOTT MOSCOW GRAND HOTEL 26/1 Tverskaya str.

Moscow, 125009, Russia Tel.: +7 (495) 937 0000 Fax: +7 (495) 937 0001

MARRIOTT MOSCOW TVERSKAYA HOTEL 34 1-st Tverskaya-Yamskaya str.

Moscow, 125047, Russia Tel.: +7 (495) 258 3000 Fax: +7 (495) 258 3099

WE WERE CROSSING OCEANS WHEN OTHER SHIPPING COMPANIES STILL HADN’T CROSSED TOWN. Experience counts when you’re shipping a world away – and no one has more experience shipping to more international destinations than DHL. With 120,000 destinations in more than 220 countries and territories, we are the world’s largest express delivery provider. If your needs are international, no one knows the world like we do. We are your specialists in international. www.international-DHL.com

All services may not be available in all areas and are subject to DHL Terms and Conditions as published at www.dhl-usa.com © 2011 DHL Express (USA), Inc. All rights reserved. Aircraft not operated by DHL Express (USA), Inc. PT 03536