ECONOMIC BACKGROUND, NEWS & DEVELOPMENTS
The Russian Economic and Investment Climate
Following the economic restructuring that Russia underwent in 1998, the economy has rebounded strongly, registering real average economic growth of 6.8 percent per year since 1999 as the natural resources-rich giant navigated its way to become a full-fledged market economy. In the 21st Century, Russia’s macroeconomic performance has been stellar. Budget and current account surpluses have skyrocketed (greatly assisted by high world energy prices) and capital investment has grown at a rate of about 10 percent per year. Significant structural reforms were undertaken from 2000 to 2002, notably tax reforms and the adoption of the Civil Code. Russia’s GDP in current dollars has increased almost five-fold over the past seven years, to some $960 billion in 2006 from barely $200 billion in 1999. Russia is now the 10th-largest economy in the world, measured by GDP in current dollars, and is generally expected to move up the ranks quickly over the next 10-20 years. These advances have resulted in an upgrading of Russia’s sovereign credit ratings to investment grade. Anders Aslund, a senior fellow at the Peterson Institute for International Economics, wrote in a December, 2006 article in The St. Petersburg Times that the country’s “leadership has learned the importance of macroeconomic stability and is focused on growth.” Russia continues to rapidly integrate into the global economy, having been formally granted market economy status in 2002 by both the United States and the European Union. A strong influx of investment capital portends a strong and healthy economy as Russia becomes an increasingly important factor in global economics.
Russian Business Opportunities The potential for private business in Russia is enormous, and multinational companies, as well as entrepreneurial led companies with a global view are becoming increasingly involved in capitalizing on the extraordinary opportunities available in the “new” Russia. Private enterprise now dominates Russian economic growth and activity. Russia is a fully diversified economy with a highly educated work force, and can provide a wide range of sophisticated products. No other country is able to offer the world as broad a range of partnerships and opportunities for cooperation in the scientific and technical spheres. However, recent growth has derived in large part from natural resources for export to hungry world markets for Oil & Gas, Base Metals, and Forest Products. In its latest Country Commercial Guide, the United States Department of Commerce concluded “Russia continues to be a major, fast-moving and growing economy offering opportunity and challenge in equal measure. While the economy is producing increasingly positive results, the country remains a complex place to do business. The best opportunities for experienced U.S. companies lie in developing exports …” The report goes on to say “Most major corporations, especially those from Europe, have concluded that the vast potential of the country demands they have a presence in Russia, with its incredible natural resources, impressive human capital and 140 million consumers. A significant number are finding that presence to be profitable, and the majority express growing optimism for continuing profitable business opportunities in the future.” Significantly, natural resources-rich Russia, and in particular Siberia, are located in close proximity to China, which country has recently altered global commodities markets dramatically as a result of its insatiable hunger for all manner of natural resource commodities. In short, the world’s biggest market for Sakha’s Enterprises output lies practically on the Company’s doorstep. Savings on shipping costs alone will provide Sakha Enterprises with a distinct competitive edge over most global forest product competitors.
The Dynamic Global Forest Products Industry Dramatic change is reshaping the world’s forest products industry and markets and, as the ages-old adage goes – “Where there is change, there is opportunity”. Nowhere is the opportunity for private industry more enticing than in major, rapidly developing countries with huge forest resources such as Russia. One example of dramatic change in the industry is the United States’ transition in recent years from a large exporter of lumber and other forest products, to a net importer. The underlying engine of change for the industry in recent years, and for the foreseeable future, is the extraordinarily high rates of economic growth and development in China, India, and many other regions of Asia, as well as Latin America. These nations have burgeoning demand for quality lumber imports, much of which is expected to be satisfied by Russia’s enormous forest-products resources, the bulk of which remains untapped. Russia has increasingly been looking for ways to attract more investment into sawmills and pulp mills. It is in this positive environment that Sakha Enterprises Corporation is pursuing excellent growth potential through its entry into the lucrative timber industry in Russia’s Sakha Province, one of the world’s truly great regions of quality forests. Russia’s impact on the dynamic global lumber market is beginning to be felt, and it is expected to become a dominant player in several sectors of the forest products industry in the years ahead. In addition to being a growing supplier of sawn wood into Europe, Russia is a nearby and dependable source of raw wood into China and the Nordic countries of Finland and Sweden, and volumes are growing rapidly. It has also been sending increasing quantities of logs into China. Some observers predict that exports of Russian wood will even be able to compete in the U.S. market, which is a huge and growing market that now depends upon imports to meet rising demand.
The Russian Gold Mining Industry
Russia has the world’s second largest gold deposits (after South Africa) and it is the fifth largest gold producer after South Africa, the United States, Australia and China. However, in terms of gold production, Russia is one of the fastest growing. There are several compelling opportunities within the Russian gold mining environment
· The devaluation in 1998 made Russian mining companies more competitive although recent years’ inflation has tempered that advantage
· Low acquisition costs for gold deposits by global standards
- The licensing in 1998 for Russian commercial banks to export gold
- The reduction in corporate tax rates from 35% to 24%
- Cost of production per ounce which is still around $350/ounce, lower than other major gold producing nations
- The recent investment by several western gold companies in Russia including Barrick Gold, Kinross Gold, High River Gold, Highland Gold Mining and Peter Hambro Mining
- The continued high price of gold