Russia Overview. Political and economic environment

12.03.2015

Chambers & Partners

 The outgoing year of 2014 has been rich in economic, political, cultural and sports events hosted by Russia, which are believed to shape the business environment in the country and determine the direction in which it will develop in the near future.

On the one hand, the successful hosting by Russia of the Winter Olympics and FIA Formula One World Championship in Sochi has driven improvements in local business operations, increased Russia’s credibility and foreigners’ confidence in the country. In conjunction with other factors, this has generally improved Russia’s investment appeal. On the other hand, 2014 has also been marked by steadily growing tension with the West as the Ukrainian political crisis has developed into a military conflict. The economic sanctions imposed by some Western and other countries, which directly prohibit transactions with persons and companies on the SDN list, as well as sectoral sanctions limiting, among other things, access by certain Russian institutions to the US and European loan markets and technology in the energy sector, are said to have had not only an adverse effect on the Russian economy, but also some European business and, until cancelled or expired, will have a negative impact on both national businesses and foreign investments in Russia.

Looking eastwards

The geopolitical tensions with the US, the European Union and certain other countries have led Russian business to seek alternatives by further strengthening its commercial ties with eastern and Asian partners, as well as partners in Latin and South America.

In co-operation with the biggest Russian companies, the Russian government is increasingly active in China, seeking Chinese partners to establish extensive contacts and expand co-operation in the energy, finance and trade sectors. The most notable arrangements achieved so far are a USD400 billion gas deal between Gazprom and CNPC, as well as a USD85 billion oil supply contract between Rosneft and Sinopec. Chinese players are also becoming active in non-energy areas of the Russian market: the Export-Import Bank of China has signed a credit facility agreement with the Russian major Sberbank for USD2 billion and a credit agreement to finance working capital for 3.1billion yuan.

Large-scale development and redevelopment projects are anticipated in preparation for the forthcoming World Cup 2018 and certain other infrastructure projects.

Co-operation with European and US partners remains, nevertheless, a priority for the Russian economy. Many major European companies have stated their continuing interest in further investment in Russia, despite the political tensions, and national market players remain optimistic about the prospects for developing business with them. The Russian government is aiming to develop investment prospects as well, as is illustrated by Russia’s leap in the World Bank’s Doing Business rating: a 30-position rise in 2014. Russia rose to 62nd place out of 189 ranked countries, and ahead of China, Brazil and India. The World Bank has highly appraised the easier access to loans, clearer enforcement of contractual obligations, accessible and clearer tax payment mechanisms and improvements in legal protection of creditors’ rights during bankruptcy procedures.

Given these positive trends in the Russian business environment, Russia is expected to remain a lucrative foreign investment target and to retain its role as a unique opportunity for dynamic investors from Asia, the East and hopefully traditionally the West.

Evolution of Russian Civil Law

There have been significant amendments to Russian сivil law aimed at reflecting the important social and economic transformations that have taken place since the mid-1990s (when the first Civil Code of Russia was enacted). The amendments are based on a vast demand for development of particular Russian civil law institutions and introduction of totally new concepts and instruments previously unfamiliar to Russian doctrine, and these amendments are intended to establish in Russia a convenient legal framework and facilitate civil turnover in general and business operations in particular.

Special consideration during the reform was focused on updating and significantly developing Russian corporate law and incorporating the best practices of international contractual law, enacting several legal instruments and mechanisms (that are available in foreign jurisdictions and normally used in an ordinary M&A or JV deal) for preserving international Russia-related M&A and joint venture projects, as typically exercised under non-Russian law, in the jurisdiction of the Russian Federation. It is equally true that only a short time has passed since enactment, so all these new concepts and instruments are still to be tested in practice before all the players can be sure how they work and are implemented in practice.

Also remarkable is the completed reform of the judicial system in Russia, abolishing the Russian Supreme Commercial Court, which used to consider economic (commercial) disputes amongst entrepreneurs, and delegating its functions to the Supreme Court of Russia. Though some practitioners expressed considerable scepticism before the reform, arguing that state arbitration courts were more liberal, progressive and business-orientated than the courts of general jurisdiction at the time, current resolutions of the Supreme Court show that such concerns were not quite founded. In addition, as a result of the reform, an additional judicial instance has appeared for challenging rulings of lower instances on commercial disputes and this might become an effective mechanism for protecting business against biased decisions by regional courts.

De-offshorisation

The new rules on de-offshorisation of the Russian economy, including first-ever domestic rules on controlled foreign companies (CFC), beneficial ownership and corporate tax residency, are expected to come into force in 2015. Very generally, once effective, these anti-avoidance rules are expected to require, among others, all Russian tax residents (both individuals and companies) to report to Russian tax authorities their CFCs, including 'controlled' trusts and foundations, and to pay Russian taxes on the full amount of undistributed profits pro rata to their shareholding in such CFCs. In the event of non-compliance, significant punitive measures will apply. It is also expected that beneficial ownership rules will make it more difficult to repatriate profits from Russia to offshore jurisdictions.

http://www.chambersandpartners.com/guide/global/2/180/1

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