Andrey Goltsblat: "After the Crisis. A Change of Priorities and the Need to Build Investor Confidence"


AmCham News. Volume 16, Number 90.

Andrey Goltsblat, Managing Partner, Goltsblat BLP.

The acute phase of the financial crisis seems to be over. Even so, the consequences of the deep recession in virtually all spheres of the economy have yet to be surmounted, and doing so will not be a fast process. This new, current situation necessitates a change of priorities in the state’s economic strategy. Extreme measures, such as financial injections into banks and major corporations, have run their course and now exhausted their effectiveness. It is also time to abandon protectionism.  Long-term measures are now on the agenda, and above all, there is the need to restore investor confidence. The most important thing today is to revive a favourable investment climate.  

It is important to first realize that a return to the pre-crisis boom is still beyond our dreams: several years will certainly pass before we get back to that level.  Yet gradual shifts in investor behavior can be achieved by acting prudently and purposefully, step by step. New legislation is also needed, as well as new organisational measures to outline and support the change of priorities.

Some steps have been taken or are now being taken by the authorities. Which of these do I consider worthy of attention? Below are several I think that are important to acknowledge as moves in the right direction – ones that give positive initial signals to investors – but that ultimately need to go further in order to fulfill their actual purposes and to promote actual investment.

Below, I provide a legal checklist of issues to watch in the month and year ahead to determine the concrete steps Russia is taking to promote investment.

A Council to Promote Investment.

In December 2009, the government approved a new regulation on an advisory council for foreign investments. Let us note that the council’s primary aim is to “improve the investment appeal of the Russian economy in priority spheres.” Since that time, the council’s functions have been extended and its significance increased.  This is a good sign. Recently, in early 2010, the Commission for Economic Development was set up, headed by the Senior Deputy Prime Minister.  The priority tasks of the Commission include anti-crisis plans for 2010 and drafting of basic agreements for the Common Economic Space (CES) of Russia, Belarus, and Kazakhstan.  We should hope, however, that this is not all.  It is extremely important for the Commission to maintain its focus on reforming the institutions of bankruptcy and privatisation and further improving corporate legislation. These are today’s priorities.

The Law Governing Investment in Strategic Sectors.

What other directions should the work take? I would underline, in particular, further work on the law governing foreign investment in strategically significant commercial entities. It passed into law in 2008 and is, in my opinion, still far from perfect. Certain restrictions on foreign investors operating in strategic spheres are, of course, inevitable, but they should not hold back the country’s economic development. Discovered minerals deposits should be developed. Economic growth is itself a strategic goal.

Work on new amendments to the law is now under way, particularly for facilitating natural-resource use by foreign investors. Moreover, at the end of last year, the government said that it will send amendments to major potential investors, and I hope this promise will be kept.  The new draft needs to answer many complex and sensitive questions that are still unclear in the current legislation. For instance, will the list of strategic industries be extended after all?  How much information will an investor be required to disclose if he seeks to develop new mineral deposits? Will such investors enjoy any tax benefits at all? 

Interestingly, for determining the status of an investor, the draft law introduces the concept of “accreditation,” a term widely used in legislation on mass media.  I would like to understand the specific legal sense of this.  The draft law prescribes the procedure for obtaining accreditation, but we need to know: how easy will it be to revoke it from an investor?

Like many lawyers, I have followed attentively what senior officials have been saying on this topic and it is important that, going forward, the discussion remains transparent and open.  Igor Artemiev, Head of the Russian Federal Antimonopoly Service, for instance, has said that all the government’s proposals, including the new amendments to the law in question, will be open for broad discussion. Yet conversely, Sergey Donskoy, Deputy Head of the Ministry for Natural Resources, has explained that his department’s proposals for the draft were still confidential. In fact, quite a lot depends on the position taken by the Ministry for Natural Resources and, in my opinion, if secrecy is maintained in this sphere, no common approach with major investors can be established.

Laws Governing Acquisition, Land Use, and Construction.

The rules governing acquisition and use of land plots, as well as construction, are in need of further improvement. Many of the rules in this sphere are still contradictory, ambiguous, or outdated.

Economic Zones.

Recent years have seen a certain improvement in the legislation on special economic zones, though the same cannot be said about these zones themselves. Therefore the purpose of their regulation remains unfulfilled.

VAT-refund Incentives.

It is also worth noting that certain steps have been taken to provide tax incentives for innovation. For instance, a VAT refund declaration procedure has been introduced for major organisations. In general however, these steps have been rather tentative.

Bankruptcy Laws.

The legislation on bankruptcy is being tightened up, and the idea of financial rehabilitation and the continued economic operations of insolvent organisations are gradually coming to the fore. Yet there are plenty of contradictory rules in this sphere, too.

So we can see that the post-crisis economy is in need of attention and action in diverse spheres. In my opinion, the actions undertaken by the authorities are, indeed, demonstrating certain systematic features. The main thing now is to keep up the pace and not lose sight of the priorities.

Tax consolidation if introduced will be a very positive sign.  It looks like it will soon become a law and it’s a good start.  I hope the criteria for those who is qualified under current law will be further improved and not only large businesses will be able to consolidate their profits tax bill but medium and small businesses as well.  Otherwise (ie if the criteria for becoming members of a tax group are not relaxed), since tax consolidation is to exempt members of the tax group from transfer pricing requirements, medium-sized businesses will be bearing disproportionate burden of compliance to the new transfer pricing regulations once they are introduced.

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