The Russian government has approved the construction of a bridge that will connect the island of Sakhalin to the Russian mainland.

Plans for the terms and implementation of the project will not be finalised until February 2002. Russian economic and trade minister German Gref believes the project has many advantages for investors. In particular, it will strengthen ties with Japan and facilitate access to far eastern markets.

FDI in Russia is low compared with other emerging markets, at only 10% of GDP. The Sakhalin region ranks number one in terms of FDI per head and represents almost 6% of all foreign investment in Russia. The region has reserves of 700 million tons of oil, attracting the likes of ExxonMobil, Shell and Texaco to invest heavily.

But the pace of Sakhalin’s development is hampered, say observers, by the general FDI barriers in Russia, that is, bureaucracy and an overly complex tax system. So far only one offshore project, the Sakhalin Energy Investment Company’s Sakhalin 2, under the control of Shell and Japan’s Mitsui and Mitsubishi, is actually producing.

Rob Sherwin, a consultant at Shell, admits that although Sakhalin is considered one of Shell’s most important projects, “it is an extremely hard place to do business”. Bureaucratic barriers include the Product Sharing Agreement law (PSA), a legal framework offering tax breaks for investment in natural resources but which investors say is unclear.

A spokesman for Trade Partners UK, a government agency that promotes British oil and gas investment and exports, said the problem with PSA is that it is not clear where the boundaries of the legislation are.

Tom Adshead of Troika Dialog, a Russian investment bank, said: “It is not a particularly stable environment to invest in due to constantly changing bureaucracy.” Research by Dialog suggests that every time an investment project is successful, laws are introduced to take advantage of the profits.

In Sakhalin, the local government grants 100% relief on all regional taxes for the payback period of the investment project. However, during the first part of 2001, the Russian finance ministry had imposed a further 18 taxes on PSA projects.

In September, the Russian government recommended that Shell’s licence to develop the Upper Salym field be revoked, unless the project gets under way this year. Shell is reluctant to start development in the area without a PSA to avoid tax problems; the government does not think it necessary to negotiate one before development.

While conditions remain difficult, the possibility of a bridge linking the island to the mainland does indicate the federal government is showing more interest in encouraging foreign investment in the region.