Supporting U'S' Direct Investment in the Countries of the Former Soviet Union

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Supporting U.S. Direct Investmentin the
Countries of the Former Soviet Union

• Steven L. Johnston
• Investment Insurance Officer
• Overseas Private Investment Corporation
• November 2, 2003

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Sawyer Research Products - Privatization

• Cleveland based producer of electronic-grade
  quartz
• 1994 invested in bankrupt Gus-Khrustalny plant
  (100 miles from Moscow)
• 1997 plant was declared bankrupt Sawyer sought
  to restructure
• Sawyer invested a total 8 million

Source USA Today April 10, 2002
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Sawyer Research Products

• Sawyer paid off 1.5 million in debts
• Took out 25 year lease on one of the plants
• 3 million in plant upgrades/equipment
• Employed 130 people

Source USA Today April 10, 2002
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Sawyers Problems Began

• ...once the factory was fully operational.
• Local prosecutor invalidated Sawyers lease
  (claim was that the plant was a strategic asset)
• Local authorities have improperly influenced the
  courts
• In Spring 2002, Sawyer won control over 1
  million in assets, however, local authorities
  refused to enforce the decrees

Source USA Today April 10, 2002
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Sawyers Problems (continued)

• In March 2002, the Federal Arbitrage Court
  reversed lower court rulings and held that Sawyer
  owes the current plant operators 265,000 in
  damages.
• Moscow authorities agree that the case was
  mishandled, but refused to act

Source USA Today April 10, 2002
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Sawyers Problems (continued)

• What the Sawyer company was doing here, I dont
  think can be referred to as investment.All they
  did is they leased some production capacities,
  they carried out some maintenance repairs, they
  put some equipment in and this was aimed
  strictly at getting profits.
• Mikhail Goumennye, Commercial Director
  for Very Pure Quartz

Source USA Today April 10, 2002
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OPICs Mission

• To mobilize and facilitate the participation of
  U.S. private capital and skills in the economic
  and social development of less developed
  countries and areas, and countries in transition
  from non-market to market economies
• U.S. Foreign Assistance Act of 1961

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OPIC WorldwideOne of the most experienced
political risk insurers in the world

• A wholly-owned, self-sustaining U.S. Government
  Corporation
• 4 billion in reserves
• Facilitation of U.S. FDI in over 145 countries
• 30 years of experience

• 145 billion in U.S. investment supported to date
• OPIC Insurance has supported 2,657 projects
• Present portfolio of 6.5 billion in PRI
• 3.3 billion in Finance and 2.7 in Investment
  Funds exposure

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OPICs Principal Activities

• Investment Funds
• Project Finance
• Small and Medium Sized Enterprise Finance
• Political Risk Insurance

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OPIC Investment Funds

• 28 funds with 4.5 billion committed
• Geographic and sector specific funds
• 14 funds focused on the countries of the former
  Soviet Union and Eastern Europe, with one new one
  soon to be launched (Emerging Europe Fund)

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OPIC Finance

• Limited recourse
• U.S. sponsor has minimum 25 equity interest
• Private sector majority ownership of foreign
  enterprise
• 60/40 debt-to-equity ratio (75 for expansions)
• OPIC can generally support 50 - 75 of the
  project costs.

• Two Financing Facilities
• Direct Loans
• Loan Guaranties
• Minimum size of 100,000
• Maximum size of 250 million (350 for oil and
  gas)

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Political Risk InsuranceOPIC in the CIS and EE

• Since 1992, OPIC has supported more than 324
  projects with political risk insurance for an
  aggregate exposure exceeding 7.3 billion.
• Portfolio of projects includes oil gas,
  communication, financial services, manufacturing,
  services, transportation, agriculture,
  tourism/hotels, and construction.

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Need for Insurance

• To cover possible damage or loss (assessed by
  Investor/Sponsor)
• To obtain financing in the face of risk
• Deterrence / privation of loss

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Benefits

• Discourages arbitrary actions by host government
• Advocacy
• Provides comfort to banks, suppliers,
  shareholders
• Full faith and credit of the United States

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Political Risk Insurance

• Insurance Claims
• Unequalled Claims Record
• 262 claims paid, totaling nearly 800 Million
• 94 recovery rate
• Unparalleled advocacy

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OPIC Types of Coverage

• Inconvertibility
• Expropriation
• Political Violence

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Inconvertibility

• Insures against the deterioration in the
  investor's ability to convert profits, debt
  service, and other investment returns from local
  currency into U.S. dollars and to transfer U.S.
  dollars out of the host country.
• Does not protect against currency devaluation and
  commercial risk

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Expropriation

• Insures against loss of an investment due to
  expropriation, nationalization, or confiscation
  by the host government.
• Covers outright and creeping expropriation
• Expropriation of funds coverage
• Coverage excludes
• Government actions provoked by the investor
• Government acting in a commercial capacity

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Political Violence

• Loss of assets or income due to war, revolution,
  insurrection, or politically motivated civil
  strife, terrorism, or sabotage.
• Assets Coverage
• Insures against loss of or damage to tangible
  assets
• No waiting period
• Business Income Coverage
• Insures against loss of income due to damage to
  assets
• off-site rider available

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Terms

• Amounts up to 250 million (300 million on oil
  and gas projects with export revenues)
• 400 million on an investment grade rated project
• Tenors of up to 20 years on equity and matching
  tenors on loans and leases
• Premium rates are locked in
• Up to 90 coverage on equity, 100 on debt and
  other third party financing arrangements.

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Insurance Programs

• Equity (capital, in-kind contributions, parent
  company debt, loan guaranty)
• Leasing (capital and operating leases)
• Technical Assistance (investment of technology
  and know how)
• Financial Institutions (bank loans, cross border
  leases, debt for equity investments, commodity
  price or interest rate swaps)

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Insurance Programs

• Contractors and Exporters
• Protects against the wrongful calling of bid,
  performance, or advance payment guaranties,
  custom bonds, and other guaranties
• Loss of physical assets and bank accounts due to
  confiscation or political violence and
  inconvertibility of proceeds from the sale of
  equipment used at a site.
• Losses due to certain breaches by foreign buyers
  of contractual disputes resolution procedures

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Insurance Programs

• Capital Markets (private placements, Rule 144A
  bond issuance, expropriation for the capital
  markets)
• Oil and Gas (production agreements, concessionary
  agreements, service contracts, risk contracts)
• Natural Resources (traditional PR breach of
  mineral exploration rights agreements)

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Small Business CenterSmall businesses -- those
entities which earn less than 35 million in
revenues per year

• Investments up to 15 million
• 60 day turnaround from completed application
• Specific mandate to support Small Business
  development
• No minimum investment amount (for OPIC Insurance)
• Specialized insurance contract designed for small
  business investors
• Discounted pricing for political risk insurance
• Hotline available only to small business (202)
  336-8610

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Eligibility for OPIC Support

• Investor
• Citizens of the United States
• Corporations, partnerships or other associations
  created under the laws of the United States, its
  states or territories, and beneficially owned
  (51) by U.S. citizens
• Foreign corporations more than 95 owned by
  investors eligible under the above criteria
• Other foreign entities that are 100 U.S. owned.
• Project
• New investments, privatizations, and expansions
  and modernizations of existing businesses
• Country

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OPICs Role in Your Investment
OPIC Insurance
OPIC Finance
U.S. Banks
U.S. Sponsor
OPIC Supported Investment Fund
Project Company
Non-U.S. Banks
Project
Local Sponsor
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How does a U.S. investor begin the process of
obtaining political risk insurance from OPIC?

• Register the project with OPIC (Form 50 available
  on website at www.opic.gov)

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Obtain Financing in the Face of Risk Commitment
Letter

• Because it is often challenging to obtain
  financing in the face of specific risks, OPIC has
  developed the commitment letter product. The
  commitment letter (CL) is a tool, which can be
  used to attract equity investors or lenders for
  participation in your project.

• Allows project to be evaluated on its financial
  basis because OPIC takes political risk
• Binding commitment from OPIC to provide political
  risk coverage on the investment named in the
  Commitment Letter
• Reserves capacity for the project at OPIC

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Insurance Contact Information

• Steven L. Johnston
• Investment Insurance Officer
• Phone [phone]
• Fax [phone]
• sjohn_at_opic.gov

• OPIC InfoLine
• [phone]
• www.opic.gov