Chambers & Partners. Russia Overview. Political and economic environment
After a difficult and turbulent second half of 2014, the start of 2015 seems to be placing Russia into an even more challenging period from the geopolitical and economic standpoint.
The economic sanctions imposed in 2014 by some countries directly prohibit transactions with persons and companies on the SDN list and the sectoral sanctions limit, among other things, access by certain Russian institutions to the US and European debt markets and technology in the energy sector. All these undoubtedly have an adverse effect on the Russian economy.
Sharp devaluation of the Russian currency in Q4 of 2014 seems to be placing a legitimate question mark as to how effectively one can still manage plans to use this as an opportunity to boost economic growth and launch infrastructure internally via facilitation of domestic manufacturing of substitutes for expensive imports, etc.
While there are not likely many who can be too optimistic or at least certain on development paths, there should still be some grounds one can note with some positive remarks or at least opportunities being touched upon.
New economic ties
Faced with geopolitical and economic pressure from the US, the European Union and certain other countries, new alternatives have emerged for consideration to support the national economy, especially by neighbouring countries in Asia, as well as Latin America.
However premature it may be to judge the first signs or trends of such considerations and deals, especially given that with many Asian players it can take a longer time to build relations, certain things deserve mention:
In co-operation with the biggest Russian companies, the Russian government has become increasingly active in China, seeking Chinese partners for establishing extensive contacts and expanding co-operation in the energy, finance and trade sectors. The most notable arrangements so far are a USD400 billion gas deal between Gazprom and CNPC, and an 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 CNY3.1 billion. The Russian Direct Investment Fund has also been actively co-investing with its Chinese partners in the Russian economy.
Large-scale development and redevelopment projects are anticipated in preparation for the forthcoming World Cup 2018 as well as certain other infrastructure projects.
Despite this, a revival of co-operation with European and US partners remains a priority for the Russian economy. There are major European companies that have been supportive in expanding their presence and maintaining their interest in further investment in Russia, despite the political tensions. National market players remain open to the prospects for developing business with them. The Russian government aims to develop investment prospects too, as illustrated by Russia’s leap up the World Bank’s Doing Business rating: a 30-position rise in 2014 to 62nd place out of 189 ranked countries, 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 bankruptcy creditors’ rights.
In addition, the Russian stock market has been at its lowest since the economic crisis of 2008 and many businesses might appear very interesting to foreign investors, who will be especially comforted given the recent weakening of the Russian national currency and be able to invest at a temporary downside.
Given these trends in the Russian business environment, Russia is expected to remain a lucrative foreign investment target and to retain its role as an opportunity for dynamic investors from Asia, the East and, hopefully, still the West.
Evolution of Russian Business Law
There have been significant amendments to Russian civil and corporate law aimed at reflecting the important social and economic transformations that have taken place since the mid-1990s (when the first Russian Civil Code was enacted). The amendments are based on an intensive demand for development of particular Russian civil law institutions and introduction of totally new concepts and instruments previously unfamiliar to Russian doctrine, the purpose being to establish a convenient legal framework in Russia and facilitate civil turnover in general and business operations in particular.
The reform focused particularly on updating and significantly developing Russian corporate law and incorporating the best practices of international contractual law, enacting several legal instruments and mechanisms (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 remain to be tested in practice before all the players can be sure how they work and are implemented.
The new rules on de-offshorisation of the Russian economy, including the first-ever domestic rules on controlled foreign companies (CFC), beneficial ownership and corporate tax residence, are expected to come into force in 2015. Very generally, these anti-avoidance rules are expected to require, among other things, that all Russian tax residents (both individuals and companies) report to Russian tax authorities on their CFCs, including 'controlled' trusts and foundations, and pay Russian taxes on the full undistributed profits pro rata to their shareholding in such CFCs. Failure to comply will incur significant punitive measures. It is also expected that the beneficial ownership rules will make it more difficult to repatriate profits from Russia to offshore jurisdictions.
Furthermore, the new proposal by the Russian President to grant tax relief on capital previously repatriated abroad, especially to offshore jurisdictions, if returned to the Russian economy, should be regarded as a positive way of promoting a new wave of business activity.
The legal business in Russia is relatively young, as is the Russian market economy in general. Even so, the former has grown dramatically over the last 15 years since economic growth was jump-started. It has already seen its highs and lows, especially before and after the economic crisis of 2008. That said, law firms now have more experience of properly addressing the challenges faced during such turbulent times as the current time. Consequently, they will manage to tailor their services to the clients’ specific needs and thus be much more effective.
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