Transparency of the Regulatory System
While the Russian government at all levels offers moderately transparent policies, actual implementation can also be inconsistent. Moreover, Russia’s import substitution program often leads to burdensome regulations that can give domestic producers a financial advantage over foreign competitors. Draft bills and regulations are made available for public comments in accordance with disclosure rules set forth in the Government Resolution 851 of 2012.
Key regulatory actions are published on a centralized web site: www.pravo.gov.ru. The web site maintains regulatory documents that are enacted or about to be enacted. Draft regulatory laws are published on the web site www.regulation.gov.ru. Draft laws that do not fall under Resolution 851 can be found on the State Duma (Russia’s parliament) legal database: http://asozd.duma.gov.ru/ .
Accounting procedures are generally transparent and consistent. Documents compliant with Generally Accepted Accounting Principles (GAAP), however, are usually provided only by businesses that interface with foreign markets or borrow from foreign lenders. Reports prepared in accordance with the International Financial Reporting Standards (IFRS) are required for the consolidated financial statements of all entities who meet the following criteria: entities whose securities are listed on stock exchanges; banks and other credit institutions, insurance companies (except those with activities limited to obligatory medical insurance); non-governmental pension funds; management companies of investment and pension funds; and clearing houses. Additionally, certain state-owned companies are required to prepare consolidated IFRS financial statements by separate decrees of the Russian government. Russian Accounting Standards, which are largely based on international best practices, otherwise apply.
International Regulatory Considerations
As a member of the EAEU, Russia has delegated certain decision-making authority to the EAEU’s supranational executive body, the Eurasian Economic Commission (EEC). In particular, the EEC has the lead on concluding trade agreements with third countries, customs tariffs (on imports), and technical regulations. EAEU agreements and EEC decisions establish basic principles that are implemented by the member states at the national level through domestic laws, regulations, and other measures involving goods. EAEU agreements and EEC decisions also cover trade remedy determinations, establishment and administration of special economic and industrial zones, and the development of technical regulations. The EAEU Treaty establishes the priority of WTO rules in the EAEU legal framework. Authority to set sanitary and phytosanitary standards remains at the individual country level.
U.S. companies cite technical regulations and related product-testing and certification requirements as major obstacles to U.S. exports of industrial and agricultural goods to Russia. Russian authorities require product testing and certification as a key element of the approval process for a variety of products, and, in many cases, only an entity registered and residing in Russia can apply for the necessary documentation for product approvals. Consequently, opportunities for testing and certification performed by competent bodies outside Russia are limited. Manufacturers of telecommunications equipment, oil and gas equipment, and construction materials and equipment, in particular, have reported serious difficulties in obtaining product approvals within Russia. Technical Barriers to Trade (TBT) issues have also arisen with alcoholic beverages, pharmaceuticals, and medical devices.
Russia joined the WTO in 2012. Although Russia has notified the WTO of numerous technical regulations, it appears to be taking a narrow view regarding the types of measures that require notification. In 2017-2018, Russia submitted 12 notifications under the WTO TBT Agreement. However, they may not reflect the full set of technical regulations that require notification under the WTO TBT Agreement. A full list of notifications is available at: http://www.epingalert.org/en
Legal System and Judicial Independence
The U.S. Embassy advises any foreign company operating in Russia to have competent legal counsel and create a comprehensive plan on steps to take in case the police carry out an unexpected raid. Russian authorities have exhibited a pattern of transforming civil cases into criminal matters, resulting in significantly more severe penalties. In short, unfounded lawsuits or arbitrary enforcement actions remain an ever-present possibility for any company operating in Russia.
Critics contend that Russian courts in general lack independent authority and, in criminal cases, have a bias toward conviction. In practice, the presumption of innocence tends to be ignored by Russian courts, and less than one-half of a percent of criminal cases end in acquittal. In cases that are appealed when the lower court decision resulted in a conviction, less than one percent are overturned. In contrast, when the lower court decision is “not guilty,” 37 percent of the appeals result in a finding of guilt.
Russia has a civil law system, and the Civil Code of Russia governs contracts. Specialized commercial courts (also called arbitrage courts) handle a wide variety of commercial disputes. Russia was ranked by the World Bank’s 2019 Doing Business Report as 18th in terms of contract enforcement, unchanged from 2018.
Commercial courts are required by law to decide business disputes efficiently, and many cases are decided on the basis of written evidence, with little or no live testimony by witnesses. The courts’ workload is dominated by relatively simple cases involving the collection of debts and firms’ disputes with the taxation and customs authorities, pension fund, and other state organs. Tax-paying firms often prevail in their disputes with the government in court. The volume of routine cases limits the time available for the courts to decide more complex cases. The court system has special procedures for the seizure of property before trial to prevent its disposal before the court has heard the claim, as well as procedures for the enforcement of financial awards through the banks. As with some international arbitral procedures, the weakness in the Russian arbitration system lies in the enforcement of decisions; few firms pay judgments against them voluntarily.
A specialized court for intellectual property (IP) disputes was established in 2013. The IP Court hears matters pertaining to the review of decisions made by the Russian Federal Service for Intellectual Property (Rospatent) and determines issues of IP ownership, authorship, and the cancellation of trademark registrations. It also serves as the court of second appeal for IP infringement cases decided in commercial courts and courts of appeal.
Laws and Regulations on Foreign Direct Investment
The 1991 Investment Code and 1999 Law on Foreign Investment (160-FZ) guarantee that foreign investors enjoy rights equal to those of Russian investors, although some industries have limits on foreign ownership (see separate section on “Limits on Foreign Control and Right to Private Ownership and Establishment”). Russia’s Special Investment Contract program, launched in 2015, aims to increase investment in Russia by offering tax incentives and simplified procedures for dealings with the government. In addition, a new law on public-private-partnerships (224-FZ) took effect January 1, 2016. The legislation allows an investor to acquire ownership rights over a property. In previous approaches to public-private-partnerships, the public authority retained ownership rights. The aforementioned SSL regulates foreign investments in “strategic” companies. Amendments to Federal Law No. 160-FZ “On Foreign Investments in the Russian Federation” and Russia’s Strategic Sectors Law (SSL), signed by the President into law in May 2018, liberalized access of foreign investments to strategic sectors of the Russian economy and made the strategic clearance process clearer and more comfortable. The new concept is more investor-friendly, since applying a stricter regime can now potentially be avoided by providing the required beneficiary and controlling person information. In addition, the amendments expressly envisage a right for the Federal Antimonopoly Service of Russia (FAS) to issue official clarifications on the nature and application of the SSL that may facilitate law enforcement.
Competition and Anti-Trust Laws
The Federal Antimonopoly Service (FAS) implements antimonopoly laws and is responsible for overseeing matters related to the protection of competition. Russia’s fourth and most recent anti-monopoly legislative package, which took effect January 2016, introduced a number of changes to this law. Changes include limiting the criteria under which an entity could be considered “dominant,” broadening the scope of transactions subject to FAS approval, and reducing government control over transactions involving natural monopolies. Over the past several years, FAS has opened a number of cases involving American companies.
In addition, FAS has claimed the authority to regulate intellectual property, arguing that monopoly rights conferred by ownership of intellectual property should not extend to the “circulation of goods,” a point supported by the Russian Supreme Court. The fifth anti-monopoly legislative package, devoted to regulating the digital economy, has been developed by the FAS and is currently undergoing an interagency approval process.
Expropriation and Compensation
The 1991 Investment Code prohibits the nationalization of foreign investments, except following legislative action and when such action is deemed to be in the public interest. Acts of nationalization may be appealed to Russian courts, and the investor must be adequately and promptly compensated for the taking. At the sub-federal level, expropriation has occasionally been a problem, as well as local government interference and a lack of enforcement of court rulings protecting investors.
Despite legislation prohibiting the nationalization of foreign investments, investors in Russia – particularly minority-share investors in domestically-owned energy companies – are encouraged to exercise caution. Russia has a history of indirectly expropriating companies through “creeping” and informal means, often related to domestic political disputes. Some examples of recent cases include: 1) The privately owned oil company Bashneft was nationalized and then “privatized” in 2016 through its sale to the government-owned oil giant Rosneft without a public tender; 2) In the Yukos case, the Russian government used questionable tax and legal proceedings to ultimately gain control of the assets of a large Russian energy company; 3) Russian businesspeople reportedly often face criminal prosecution over commercial disputes. In February 2018, a prominent U.S. investor was jailed over a commercial dispute. Other, more general examples include foreign companies being pressured into selling their Russia-based assets at below-market prices. Foreign investors, particularly minority investors, have little legal recourse in such instances.
ICSID Convention and New York Convention
Russia is party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. While Russia does not have specific legislation providing for enforcement of the New York Convention, Article 15 of the Constitution specifies that “the universally recognized norms of international law and international treaties and agreements of the Russian Federation shall be a component part of [Russia’s] legal system. If an international treaty or agreement of the Russian Federation fixes other rules than those envisaged by law, the rules of the international agreement shall be applied.” Russia is a signatory but not a party, and never ratified the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID).
Investor-State Dispute Settlement
Available information indicates that at least 14 investment disputes have involved a U.S. person and the Russian Government since 2006. Some attorneys refer international clients who have investment or trade disputes in Russia to international arbitration centers, such as Paris, Stockholm, London, or The Hague. A 1997 Russian law allows foreign arbitration awards to be enforced in Russia, even if there is no reciprocal treaty between Russia and the country where the order was issued, in accordance with the New York Convention. Russian law was amended in 2015 to give the Russian Constitutional Court authority to disregard verdicts by international bodies if it determines the ruling contradicts the Russian constitution.
International Commercial Arbitration and Foreign Courts
In addition to the court system, Russian law recognizes alternative dispute resolution (ADR) mechanisms, i.e. domestic arbitration, international arbitration and mediation. Civil and commercial disputes may be referred to either domestic or international commercial arbitration. Institutional arbitration is more common in Russia than ad hoc arbitration.
Arbitral awards can be enforced in Russia pursuant to international treaties, such as the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the 1958 New York Convention, and the 1961 European Convention on International Commercial Arbitration, as well as domestic legislation.
Mediation mechanisms were established by the Law on Alternative Dispute Resolution Procedure with participation of the Intermediary in January 2011. Mediation is an informal extrajudicial dispute resolution method whereby a mediator seeks mutually acceptable resolution. However, mediation is not yet widely used in Russia.
Russia established a law providing for enterprises bankruptcy in the early 1990s. A law on personal bankruptcy came into force in 2015. Russia’s ranking in the World Bank’s Doing Business 2019 Report for “Resolving Insolvency” is 55 out of 190 economies. In accordance with Article 9 of the Law on Insolvency (Bankruptcy), the management of an insolvent firm must petition the court of arbitration to declare the company bankrupt within one month of failing to pay the bank’s claims. The court will institute a supervisory procedure and will appoint a temporary administrator. The administrator will convene the first creditors’ meeting, at which creditors will decide whether to petition the court for liquidation or reorganization.
In accordance with Article 51 of the Law on Insolvency (Bankruptcy), a bankruptcy case must be considered within seven months of the day the petition was received by the arbitral court.
Liquidation proceedings by law are limited to six months and can be extended by six more months (art. 124 of the Law on Insolvency (Bankruptcy). Therefore, the time dictated by law is 19 months. However, in practice, liquidation proceedings are extended several times and for longer periods.
Total cost of the insolvency proceedings can be approximately nine percent of the value of the estate, including: fees of attorneys, fees of the temporary insolvency representative for the supervisory period, fees of an insolvency representative during liquidation proceedings, payments for services of professionals hired by insolvency representatives (accountants, assessors), and other (publication of announcements, mailing fees, etc.).
In July 2017, amendments to the Law on Insolvency expanded the list of persons who may be held vicariously liable for a bankrupted entity’s debts and clarified the grounds for such liability. According to the new rules, in addition to the CEO, the following can also be held vicariously liable for a bankrupt company’s debts: top managers, including the CFO and COO, accountants, liquidators, and other persons who controlled or had significant influence over the bankrupted entity’s actions by kin or position, or could force the bankrupted entity to enter into unprofitable transactions. In addition, persons who profited from the illegal actions by management may also be subject to liability through court action. The amendments clarified that shareholders owning less than 10 percent in the bankrupt company shall not be deemed controlling, unless they are proven to have played a role in the company’s bankruptcy. The amendments also expanded the list of persons who may be subject to secondary liability and the grounds for recognizing fault for a company’s bankruptcy. This sent a warning signal to management and business owners as well as controlling persons, including financial and executive directors, accountants, auditors and even organizations responsible for maintaining the company’s records.