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Foreign Direct Investment in Russia

Russia is the world’s largest exporter of oil and gas and is a profitable market with ample opportunities for investment in multiple sectors including energy, aviation and automotive. Russia’s growing middle class and increasing spending power makes it one of the strongest markets for consumer goods and specialized technology products. Additionally, the recent restructuring of Russia’s healthcare system has created promising opportunities for the import of medical equipment. Further, the country’s tourism industry is rapidly expanding especially with the winter Olympics scheduled to take place in 2014. As a result, there are many more investment opportunities in this region than ever before.

On the multilateral front, Russia has brought its intellectual property legislation in compliance with the World Trade Organization’s (WTO) requirements. To this end, Russia is more consistently enforcing various intellectual property laws thus thwarting infringements. These actions further facilitate the use of Russia’s abundant pool of qualified engineers and scientists for a variety of R&D and other investment projects.

In November 2010, Russia also signed and ratified the International Convention on the Simplification and Harmonization of Customs Procedures (Kyoto Convention) in support of Russia’s bid to join the WTO. In addition to its other free trade agreements, Russia recently established a special free-trade zone between Russia, Kazakhstan and Belarus further enhancing trade within Eurasia. These free trade agreements, along with the Kyoto Convention, will significantly simplify import procedures and facilitate international free trade with Russia.

Russia has also tremendously improved its domestic trade practices. The new amendments to the federal law “On the Protection of Competition” and its implementing regulations lift prohibitions on market allocations, rebates, discounts, coordination of pricing, and selection of distributors. This reduces certain vertical restraints on competition involving parties whose market share does not exceed 20 percent.

On the foreign investment side (PDF), local laws and international investment protection treaties allow foreign investors to repatriate profits, income and other gains from foreign direct investments in Russia. Additionally, there is a treaty for the Avoidance of Double Taxation between the U.S. and Russia that allows for lower withholding taxes on the remittance of dividends (0 to 10 percent) and no withholding tax on interest and royalties (as opposed to 20 to 30 percent).

Generally, foreign direct investment (PDF) does not require prior authorization unless is the investment involves certain strategic sectors. However, foreign entities do require prior authorization from the Central Bank of the Russian Federation (CBR) to establish a bank account or credit in Russia. The most common company forms in Russia are a joint stock company (equivalent of U.S. “Inc.”) and a Society with Limited Liability (equivalent of U.S. “LLC”). The latter qualifies for “pass through/check-the-box” tax treatment in the U.S., but both entities are taxed as corporations in Russia. Further, there are no residency restrictions on shareholders of either type of company and a foreign investor may establish a wholly owned subsidiary in Russia. For more information, please review our Guide to Foreign Direct Investment in Russia (PDF). 

If a dispute arises in connection with Russian transaction, litigation proceeds quickly and inexpensively because of the existence of specialized courts for addressing commercial disputes. On average the cost of litigation is 13.4 percent of the claim with an approximate duration of 281 days. In 2009, Russia also improved its insolvency procedures and introduced a series of legislative amendments to further protect rights of creditors.

Despite Russia’s more welcoming investment environment, many still view Russia as a risky market. Risk identification and management are essential for conducting successful business in Russia. While Russia’s ranking in the transparency International Corruption Perception Index is 154 out of 180 (a relatively poor ranking) businesses can still succeed without resorting to bribes. Russia has amended its corruption legislation in an effort to join the international anti-bribery (OECD) convention and businesses are becoming increasingly aware of the negative consequences of bribery. However, many companies doing business in Russia are still expected to provide bribes in order to win business. Therefore, careful due diligence on potential business partners and transactions is a necessary risk-management tool in order to avoid bribery and other pitfalls.

In order to successfully engage in business in Russia, a complete understanding of its commercial environment and challenges as well as the ability to address them are essential. Armstrong Teasdale’s International practice group is in a unique position to assist its clients with issues surrounding investment in Russia. We have lawyers experienced in Russian transactions as well as a dually qualified Russian attorney, Irina Sandler, based in our global headquarters. Accordingly, we are able to provide assistance in Russia with the following: 

  • Planning, structuring and implementing various transactions including negotiating and drafting various strategic transactions, contractual joint ventures, manufacturing agreements, license agreements,
    distribution and representation agreements; 
  • Implementing optimal structures for foreign direct investment whether through mergers, acquisitions, joint ventures, strategic alliances or the creation of Greenfield investments as well as tax optimization and analysis; Assistance with registering, licensing and protecting intellectual property; 
  • Advising in import and export procedures; 
  • Guidance on local employment and labor law issues; 
  • Conducting due diligence and developing policies designed to mitigate various compliance risks including the FCPA and other applicable anti-bribery laws.

REPRESENTATIVE TRANSACTIONS

  • Represented a North American railcar manufacturer in licensing know-how and technology to a Russian party for development of a state-of-the-art railcar manufacturing facility and building freight railcars.
  • Advised a medical device manufacturer with respect to Russian distributorship, anti-trust and public procurement laws; drafted a strategic agreement for distribution of medical devices.
  • Conducted transactional due diligence of a client’s Russian contracting parties. 
  • Assisted a manufacturer of oil and gas equipment with international trade compliance matters in Russia.
  • Counseled a manufacturer of dietary supplements with respect to health and sanitary regulations and registrations necessary to import dietary supplements to Russia.
  • Represented a steel fabricator in a dispute involving steel for Moscow – St. Petersburg express train terminal. 
  • Established beer distribution for a client in Russia.
  • Assisted U.S. forestry investors with structuring a joint venture with a partner in the Republic of Karelia.

 

For more information, please contact Jennifer Schwesig.