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"Letter of the Law": Ministry of Economy - Belarus has never refused to fulfill its obligations upon investment agreements

2 Aug 2011

How to conclude an investment agreement with the Republic of Belarus? Who won’t be chosen as the investor? What residents of which countries invest to our economy more often? What is the assessment of the investors already working in the Republic of Belarus in regard to our investment climate? These and some other questions have been answered on air of “Letter of the Law”, the author program of Denis Aleinikov, Senior Partner of Law Group “Argument”, by the Deputy Head of the State Policy Department for attracting foreign investors at the Ministry of Economy, Tatiana Mantsevich.

After Decree No.4 has been published, which introduced some amendments to Decree of the President No.10, there were some opinions in the Net that the newly established two-level system for conclusion of the investment agreements would be inefficient, i.e. actually each of the investment agreements would be subject to the President’s approval. What is your opinion about that?

That’s not quite correct, probably. A today’s investment agreement shall be concluded at two levels. The first level refers to the investors entitled to be granted the privileges stipulated by the Decree as well as some other privileges, and the second level refers to the investor asking for some additional privileges which have not been covered by the laws. If an investor comes and says: “I would like to have some additional privileges in excess of those already existing in FEZ, rural settlements, small towns, etc.”, then this level shall be subject to signing upon the agreement with the president. The same procedure existed prior to amendments to Decree No.10. So, it would be not quite correct if we say that exclusion in Decree No.4 of the level of the Council of Ministers any minor nuances shall be agreed with the president. Just additional privileges which have not been covered by the laws shall be subject to agreement with the president.

You just want to say that the Council of Ministers as the level of decision making on conclusion of investment agreement is not needed in the scheme?

It has failed to become naturalized. Actually, we suggested adopting a three-level system in Decree No.10, but the middle level which had been represented by the Council of Ministers, has failed to fit in practice. In effect, the Council of Minsters has always delegated its powers and the agreements were signed by the republican state administration authorities, or by the executive committees.

Where shall an ordinary investor go to and what steps shall be made in order to conclude an investment agreement?

If an investor has any idea and he sees the application of this idea in any specific branch related for instance to industry, he shall clearly understand the competence of the ministry this segment of industry belongs to. He shall submit an application in accordance with the today’s procedure stipulated in resolution of the government No. 1449, and address it in the name of the minister or in the name of the ministry. The application shall be accompanied by the draft agreement specifying all terms and conditions of the agreement which the investor is willing to see. The Ministry shall then consider the application within 15 day period subject to the opinion of the interested authorities, examine the package of documents, and study whether there are any investor’s demands related to the privileges not covered by the laws. If there are no any such privileges the ministry shall agree the draft with the interested authorities.

How often the decision to refuse conclusion of the agreement will be made?

We have such decisions. There are various cases and various reasons for refusal. I would name some of the reasons upon which conclusion of agreements with the investor shall be refused. The first reason is insufficient examination by the investor himself of the investment suggestions he is coming with. He is just coming with an idea which is to be specified about the subject-matter, the resources available, the concept of the project, the place of its implementation, the goals and so on and so forth. One of the most spread mistakes is that the investor comes with just an idea.

The second not the least of the reasons for refusal is inefficient elaboration of the issue on visibility of the land plot allotment to the investor. Indeed. The Decree shall grant the right to the investor to get a land plot without holding an auction, but the investor may just come and say: “I would like to have a land plot near the Red Church”. Naturally we understand that it is impossible to get a land plot near the Red Church, and this failure of the investor to fully understand the regulations of the Decree about the right of getting a land plot triggers questions.

Is there any normatively outlined procedure allowing the investor to preliminary elaborate the issue on possibility of allotment of a specific land plot for the project?

Resolution No.1449 has not stipulated such a procedure yet. Still I will reveal a little secret: the new draft resolution we are working at now contains such a regulation in order to make an agreement about the land plot on a preliminary basis. Indeed, the agreement about the land plot issue starts just after the investor’s application has been received, which often results in refusal.

Don’t you think we need today to fix a minimal threshold amount of investments for those who claim to conclude an investment agreement with the country? What we have now is that the entrepreneur investing a thousand dollars may be deemed investor to make an investment agreement with.

The practical experience shows that each region and each branch considers the offers individually. If the city executive committee considered the example about the boating station and the house as non-priority offers due to the reason that 300 thousand dollars for Minsk is not quite a big deal, because there are some investors with more attractive offers, for Vitebsk region such an amount might be of interest. So, setting any property qualification would be quite wrong. There should be no any single amount for the whole republic. Investors prefer Minsk today: there are plenty of them there, and the offers are various, so it’s hard to say whether it should be a million or any other amount. For Vitebsk it may be 300 thousand dollars. It would be unreasonable today to set any amount limits for investors today.

Is it national or foreign investors who conclude investment agreements with the Republic of Belarus more often?

According to our statistics, there have been 683 investment agreements concluded within the duration of Decree No.10, there are also national investors such as JV and FE (Foreign Enterprises) among them which have concluded 622 agreements, and the remaining 61 agreements belong to the foreign entities.

As to the number of the agreements concluded, foreign entities of what countries take the lead?

Cyprus sets the pace – 13 agreements, Russia – 13, Iran - 4, Switzerland – 4, Germany – 3, Czech Republic – 3 agreements.

What do you think, is it possible to enter into the investment agreement in Belarus with several investors, e.g. with the foreign investor and its subsidiary enterprise in Belarus?

Sure. The norms and regulations effective in 2010 and those adopted as Decree No.4 suggest that it might be a co-investment.

I have asked you due to the reason that there has already been such an opinion expressed by some state authorities that there can be just one investor as the party to the investment agreement.

There have been such points of view, since Decree No.10 has prescribed that the investment agreement is an agreement to be concluded between the investor and Belarus. This is the start of the story – if it is “the investor”, there is no place for the second one, isn’t it? We excluded this misunderstanding now and adjusted the regulation, so this provision has also been updated in Decree No.4.

Decree No.10 had previously a regulation stipulating the legal possibility for the Republic of Belarus to unilaterally withdraw from its obligations upon the agreement with the investor in case of default or improper execution of its obligations. This regulation has given rise to some concerns of the investors: someone considered that any investment agreement could be terminated by the Republic of Belarus in such a way, due to the reason that any investment agreement, as a rule, is be prepared upon a compound project, and any compound project is rarely run smoothly. In the essence, this provision has remained in Decree No.4. How shall it be interpreted in practice? In case of default (improper execution) by the investor Belarus is actually entitled to withdraw from the agreement, isn’t it?

The wording in the Decree is indeed of general nature, but the agreement shall by no means be terminated or renounced if the investor, say, failed to submit some references or violated the term for submission of the document for a couple of days. We are talking about the material breach of obligations. By means of Decree No.4 we have updated the essential terms and conditions of the investment agreement, so when these essential terms and conditions are violated, e.g. the amount of investments and the terms of investing, delaying the construction for several years, which unfortunately exist in practice, then we may talk about the unilateral refusal.

There is no sense for Belarus to terminate the agreement due to any minor breach, because the project itself is important for us, as well as the investor’s investments, the result to be reached, all that is also our pleasure.

The investors often pay attention to this regulation on possibility of unilateral refusal of the party from its obligations. Has this regulation ever been applied in practice?

11 agreements have been terminated upon mutual agreement of the parties. No agreement has ever been terminated by the Republic of Belarus on unilateral basis. The state authorities make efforts to perform rather a serious preliminary work. I’ll give you an example, we are having now an application of an investor with the request to show understanding for its position, to wait and not to undertake any actions towards terminating, so we make concessions. We are talking about the Iran Company Azarab, quite a serious investor with the declared investment amount of USD 236 mil. They have some inner problems with reorganization, merger of ministries which supervise this field of activities. Any state body facing with such an issue, first studies the problem, arranges a meeting with the investor, holds negotiations, clears the situation up, its reasons, and only then some actions shall be initiated towards termination or refusal. By today there have never been any unilateral withdrawals in Belarus.

I believe, the investors are worth being informed about the message that there have never been any unilateral withdrawals from the agreements yet, and everything shall be done not just automatically, but upon the agreement of the parties, after long-term mutual negotiations, in order to avoid the situation with the “golden share” which was available for just a very small number of enterprises and scared all foreign investors and hampered investment processes.

I am absolutely with you. I think, it is necessary to give more information. The issue of loading is so topical for us that it’s not enough time for such meetings and publications, so let’s find time to meet more often. Certainly, such issues shall come to light; we need to tell more about the position of the Ministry of Economy in consideration of such disputable issues.

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The investment agreement which has been concluded by agreement with the head of the state, allows the possibility of granting to the investor of additional privileges which have not been covered by Decree No.10 and some other legal acts, for example, additional tax privileges. It also happens that the tax authorities ask the investor the question: “How can you certify the right to apply additional tax privileges?” specifying that the text of the agreement shall not be deemed the reason for application of additional tax privileges, and that another additional act of the president is needed in order to duly declare the basis for granting any additional privileges. What can you say about that?

Such questions have arisen with the state bodies in connection with the necessity of additional regulation of granting these privileges. We believe, the problem has been solved by today by means of introducing amendments to Decree No.10. Decree No.4 contains the regulation that the conformation procedure for such privileges will be determined by the Council of Ministers. Again we talk about the necessity to reveal that a little in the draft On introducing amendments to Resolution No.1449. We established and introduced this institute in 2009, simplified the procedure of conclusion of investment agreements and allowed I such a way in a simplified order without any edict of the president to get privileges, and certainly, there is no need for any additional normative acts. The privileges to be granted upon the agreement shall be applied by the tax and customs authorities. The other problem lies in the practical application: the customs and tax authorities don’t see the privileges. That is why we have decided to stipulate this issue in the draft resolution being prepared now. We are not yet ready to declare now the way it will work.

I know that you have held an opinion poll recently with the foreign enterprises, joint ventures acting in the territory of our country on topic of the investment climate in our country. What are the results? What are the pros and the cons of the investment climate the investors noted?

Our internal comparative analysis reveals that there are some impeding factors which existed earlier. Comparing to 2010 one more negative factor was added, that is currency regulation. The negative side noted by the investors working in our country is high degree of bureaucratization in the country, but the problem, probably, lies in the inefficient information we provide: may be the time for agreeing with different authorities is seen as red tape. Instability of legal normative environment has been a topical issue for a long time: the foreigners mean the frequent change of the laws. The factor “penalty application system for violation of the terms and procedure of conducting business” has remained as the negative side, according to the opinion of the foreign investors.
aleinikov

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Have there been any positive notes made by the foreign investors?

The pricing regulation system and business registration were added as positive factors this year. Highly qualified working force, possibility for development of the new goods and services, the market dimensions, state of art of telecommunications and informatization, quality of infrastructure, transport and logistics have been also referred to the positive factors. The licensing conditions have also been noted. As we may see, the investors have taken notice of the positive improvements, along with that there are also areas to be worked at.





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