Companies regularly consider their plans for growth of their business and one of the main possibilities for growth is expansion to new markets. Interviews of management of different foreign companies and recent global surveys show that the overwhelming majority of such companies are considering entering the Russian market as one of their top priorities. In general, Russia is an attractive market for foreign investors.
However, the high profit expectations which Russia offers are often coupled with suspicious attitudes towards the Russian partners and Russian legal system, which, together with political factors, often outweigh the perceived benefits of investing in Russia’s rapidly developing economy. This article is intended to briefly address some of the concerns related to Russian business partners and the Russian legal system. We will attempt to take inside knowledge and experience of Russian legal and business reality and analyze it from the standpoint of a foreign businessman, providing you a myth-free picture of the legal perspectives of doing business in Russia.
The Legal System
The current Russian legal system still in its infancy. For over 70 years, until the collapse of the Soviet Union in 1991, Russia had a command economy, state controlled commerce and recognized no private ownership. What did business look like at that time? The State prepared a plan, which was obligatory and which already prescribed what goods could be produced, whom they could be sold to and at what price. There was actually no place for negotiations and, consequently, no established market practice and space for development of the legal system although, even in those days, civil relations were regulated by the Civil Code of the USSR.
In 1994 the current Civil Code of the Russian Federation was adopted. It is the main source of civil and corporate law in Russia. There are also a number of other normative acts (Federal Laws are the main part of them) which regulate different business issues. There are many articles on the internet on the differences between the Russian legal system and common law (hence no need to name them in this short article) and probably the main one is that Russian law does not recognize precedent when interpreting provisions of the Civil Code and other Federal Laws. However, recent developments in the Russian legal system show that more and more features of common law are being adopted. Moreover, within the last few years Russian law has taken a big, but as yet informal, step in the direction of common law – the significance of previous court decisions and especially decisions of the higher courts has increased, so that such decisions are usually treated as binding for other Russian courts dealing with similar disputes. We believe that if this tendency continues (and we do not see any obstacles for it to happen), it will help to build confidence in the Russian system among foreign investors and Russian businessmen.
Entering the Market
The other source of problems faced by foreign investors and a lot of Russian business people which often causes misunderstandings is miscommunication. Even today a number of Russian companies are managed by people who started their professional career in Soviet times. Lack of background experience, education in the command economy, suspicion of their partners are some of the characteristics which make some Russian partners behave in an unpredictable manner. Thus, if a foreign investor is planning to enter the Russian market, it can be a good idea to have someone (a manager, lawyer, whoever) who is capable of building a bridge of mutual understanding between the Russian partner and the foreign investor. And once this bridge is built, you can have confidence in your partner.
We also believe it may be useful to focus on some legal aspects of doing business in Russia: establishment of a legal presence, regulatory framework, taxation, repatriation of profits (exchange controls) and consideration of potential dispute.
Establishing a Legal Presence in Russia
Your legal presence in Russia can be established in the form of an entity - LLC (limited liability company) or JSC (joint stock company) or in the form of the branch or representative office. Each form has its own advantages and disadvantages, but around 90% of foreign companies working in Russia are set up as an LLC (in some cases only an LLC or JSC will allow you to conduct business operations and get a licence if this is needed for your activities).
To register an LLC you will need to prepare a set of documents which has to be submitted to the tax office which serves the location chosen for your business. You will also need to open a bank account and find premises for your office and verify some documents before a notary. Registration of an LLC usually takes no more than 5-7 business days and you will then get a set of documentation confirming state registration of your business. In general, this process is not too complicated, but, as in any country, there are some peculiarities and we recommend that you engage local lawyers to guide you through the process.
Repatriation of Profits and Exchange Controls
One important topic for a foreign investor is the possibility of repatriation of profits and the related exchange control laws. Usually, repatriation of profits is made in a variety of ways: payments of intercompany invoices, royalties, dividends or interest under a loan agreement – for your particular business needs tax you should contact your tax advisor. If certain conditions are met (usually, this involves the total amount of money to be transferred) you may be required to open a special file with your bank and attach a contract between the concerned companies which serves as the justification for such money transfer. This is quite a simple procedure and usually companies do not experience any difficulties.
If your business requires a licence (e.g. if you sell alcohol) or any other authorization (e.g. if you conduct construction activities), you will be able to apply once your legal presence is registered. Russia has quite detailed procedures for obtaining a licence/authorization and, so long as you follow it carefully, it should usually be granted within 1-2 months. If your licence/authorization is for some reasons declined, there is a possibility to challenge this in court – the state Arbitration court.
Having mentioned the possibility of a dispute in the courts, we will very briefly focus on the Russian court system insofar as it affects commercial disputes. This consists of state courts – known as the arbitrazhniy courts – which consider commercial disputes, an IP court for intellectual property cases established in 2013, mediation and commercial arbitration.
Usually parties to a dispute will choose between a state court (e.g. Arbitrazhniy Court of Moscow) and commercial arbitration (e.g. the International Commercial Arbitration Court at the RF Chamber of Commerce and Industry). In our view, both options are fine as decision of both courts can be enforced in Russia, at the same time it is more likely that only decisions of the ICAC can be enforced overseas in countries that are signatories to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958) (the “New York Convention”). However, proceedings in a commercial arbitration court (e.g. ICAC) in general are far more expensive than in the state court. Thus, in our view, a decision on which to choose needs to be taken on a case-by-case basis depending on the particular circumstances of each case.
Mediation, a way of resolving disputes without recourse to a judge or arbitrator, is also possible in Russia, which enacted a federal law of mediation in 2011.
Current International Sanctions
While reading this you may wonder whether these processes are affected by the current political situation, with tension and sanctions between Russia and a number of foreign states. In general, this has of course brought some obstacles, especially in oil & gas, financing and the food industry (prohibition of import of certain food products to Russia), but even in these industries some of the obstacles can be mitigated. And if your business is small or medium and is not connected with these spheres of activity, we do not believe that it will be affected by the current political situation.
To conclude this short introduction to business in Russia, we would like to say that the worries described above as well as others that you may read in the media, while sometimes based on real evidence, are exaggerated and business in Russia is still worth doing. This is especially true if a foreign investor in a Russian business undertakes intensive preparatory work so as to protect itself from the unique Russian problems and risks described above. The thousands of foreign companies that come to Russia every year and the numbers of newly opened Russian businesses are quickly realizing that most of the problems are manageable.
Nikolay is a Russian in-house lawyer living in Moscow. He has been dealing with foreign business since 2005 and has participated in a number of projects which have included the full-scale legal support and management of start-up projects in Russia. Nikolay has experience in the organization and management of businesses in Russia and believes that his core goal as a lawyer is to bridge the gap between the reality in Russia and foreign perceptions, by providing high quality legal services and business consulting. Nikolay is responsible for the Russian section of the ContractStore - see them at contractstore.com/russiancontracts