Country overview: Russia.

05.07.2010

Russia and the global economic crisis

Chambers Europe 2010, Country overview, Contributed by Goltsblat BLP.

In the autumn of 2008, the global economic crisis brought the steady growth of Russia’s economy to a halt. Production fell, world prices for traditional Russian exports such as oil, gas, and metal witnessed a dramatic drop; the rouble was devalued by virtually a third and capital exports increased sharply. The weaknesses of the national banking system became apparent and Russian companies fell sharply in value on the financial markets, with credit and contractual defaults becoming wide-spread, accompanied by bankruptcies, rising unemployment and shrinking consumption, and mergers and acquisitions falling by two thirds.. The legal services market contracted accordingly, with businesses relying more on in-house counsel and when external counsel was used, price, quality and the amount of legal assistance came under closer scrutiny.

The anti-credit crunch measures taken by the Russian state (including a streamlining of the national economy) combined with the improvement in the global economy have helped the country through the worst stage of the crisis with business stabilising and the country regaining its pre-credit crunch confidence illustrated by   signs of economic growth.  The legal market is also reviving with external lawyers’ services requested more often and the number of assignments gradually rising.   

In an effort to learn from the crisis, Russia is putting into place a number of measures to upgrade its economy and shift the focus from raw materials to innovation, sustainability and energy efficiency. This opens up a whole range of new opportunities for lawyers and the demand for their services in this field is growing as the market widens, new legislation is put into place and as Russia becomes a more attractive place to do business.

 Better legislation

 The Russian legal system is based on a complex mix  of the Constitution of the Russian Federation including its federal constitutional laws, federal laws and acts, constitutions and charters, as well as the laws and legal acts of 83 constituent entities of the Russian Federation, an acts issued by municipal entities. The Russian legal system also incorporates universally recognised rules and principles of international law and international treaties to which Russia is a party. Judicial decisions are not actually a source of law, but they are important for application of law. 

In overcoming the economic crisis, one of the top priorities for the Russian state is to create a favourable business climate, attract investment and remove any unjustified legal obstacles to production, trade and consumption. Part of these aims will involve the abolition of  a number of protectionist measures that the State  introduced during the crisis. Business incentives include the adoption of a federal law on access to information on the activities of state authorities and local governments, and the establishment of a Government Commission for economic development and integration. A business representative is on the Russian Government Commission for drafting legislation and new Regulations on the Foreign Investment Advisory Council have been approved.

Much attention is also being focused on making Russia a global financial centre:  Although in general, foreign investments in Russia enjoy national treatment, there are special rules governing access by foreign capital to companies in 42 strategic economic sectors (nuclear materials, military equipment, weapons, communications, subsoil, etc.). A federal law which aids facilitation to such access is anticipated. Legislation on special economic zones is being developed; and on the basis of a large number of international treaties, a customs union is being established between Russia, Belarus and Kazakhstan together with relevant amendments to the Russian legislation.

Rules governing acquisition and use of land and construction are being improved, although they still contain many inconsistent, vague or outdated provisions.

Restrictions on the authorised capital of companies have been revised and a regulatory framework has been provided for shareholders’ agreements, joint-stock companies, and participants’ agreements for limited liability companies. Legal remedies for the transaction rights of shareholders, participants and creditors are being improved and more active measures being taken to combat the illegal take-over of companies.

Much progress has been achieved in anti-monopoly regulation, although there is still some way to go on this.

The adoption of a federal law on energy saving and enhancing energy efficiency has been a major development in Russia.

The unified social tax has been replaced by higher contributions to the pension, social security and medical funds. Innovation is enjoying more and more tax incentives.

The bankruptcy legislation is being streamlined to highlight the idea of actually rehabilitating insolvent organisations and maintaining their viability.

More severe administrative and criminal punishments are now handed down in the corporate sphere particularly within the realm of the securities market and for antimonopoly offences, while criminal measures applied to businessmen for tax crimes have become more lenient.

 Special factors behind doing business

There are still a number of factors which negatively affect Russia’s image as a place for doing business and investing in. Among these are significant administrative barriers in the economic sector involving state and municipal consents and approvals, permits, licences, reports and inspections. Aware of the harm that such barriers cause, the government is introducing a more relaxed system which is supported by the business community.

Many complaints are heard about the way economic legislation is applied by the courts of the Russian Federation and about enforcement proceedings in Russia in general. To rectify this, a federal law has been passed on access to information on the activities of the courts. In addition,  arbitration proceedings are being improved (for example, the concept of “class” actions has been introduced), and court bailiffs’ rights have been broadened. It is intended to restructure the activities of the courts and the enforcement service to ensure the rule of law and true justice.

Corruption is still a problem despite a raft of legal measures taken to fight it. These measures include a federal law on anti-corruption, expert examination of legal acts and drafts; amendments to money-laundering laws; and an income-declaration requirement imposed on state and municipal officials among others.

To conclude, no matter how important a good personal relationship with a contractor is as well as  a benevolent attitude on the part of the authorities, the key factor behind successful business in Russia is compliance with domestic legislation; legislation which is going through a huge period of change and which it is important to keep up-to-date with.
 

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