Transparency of the Regulatory System
While the Russian government at all levels offers moderately transparent policies, actual implementation is 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 comment in accordance with disclosure rules set forth in the Government Resolution 851 of 2012.
Key regulatory actions are published on a centralized web site which also maintains existing and proposed regulatory documents: www.pravo.gov.ru . (Draft regulatory laws are published on the web site: www.regulation.gov.ru . Draft laws can also be found on the State Duma’s 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. 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 SPS 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, construction materials and equipment, and pharmaceuticals and medical devices 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. Certain SPS restrictions on food and agricultural products appear to not be based on international standards.
In April 2021, Russia adopted amendments to Article 1360 of the Civil Code that significantly simplified the mechanism of issuing compulsory licenses in the pharmaceutical industry. Under the adopted amendments, compulsory licenses are allowed “in the interest of life and health protection.” The use of the compulsory license mechanism and the lack of certainty for right holders regarding the calculation of compensation could negatively affect the investment attractiveness of Russia for pharmaceutical companies producing original drugs.
Russia joined the WTO in 2012. Although Russia has notified the WTO of numerous SPS technical regulations, it appears to be taking a narrow view regarding the types of measures that require notification. In 2020, Russia submitted 16 notifications under the WTO TBT Agreement, up from six notifications submitted in 2029. However, they may not reflect the full set of technical regulations that require notification under the WTO TBT Agreement. Russia submitted 38 SPS notifications in 2020, up from 16 in 2019. (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 one 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 code 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 2020 Doing Business Report as 21st in contract enforcement, down three notches compared to the 2019 report. Source: https://www.doingbusiness.org/content/dam/doingBusiness/country/r/russia/RUS.pdf
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 funds, and other state organs. Tax-paying firms often prevail in their disputes with the government in court. As with some international arbitral procedures, the weakness in the Russian arbitration system lies in the enforcement of decisions and 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. 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. The 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 into law in May 2018 by President Putin, 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.
Federal Law № 69-ФЗ on the Protection and Promotion of Investment, entered into force in April 2020, requires that a contract be concluded between public entities and private investors, either domestic or foreign and contain stabilization clauses relating to import customs duties, measures of state support, rules regulating land use, as well as ecological and utilization fees and taxes.
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 Russia’s antimonopoly laws. Changes included 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 February 2019, the FAS submitted to the Cabinet the fifth anti-monopoly legislative package devoted to regulating the digital economy. It includes provisions on introducing new definitions of “trustee,” and a definition of “price algorithms,” empowering the FAS to impose provisions of non-discriminated access to data as a remedy. It also introduced data ownership as a set of criteria for market analysis, etc. The legislative package is still undergoing an interagency approval process and will be submitted to the State Duma once it is approved by the Cabinet. As of March 2021, it was supported by the FAS Public Council, but the review by the Ministry of Digital Development, Communications and Mass Media was largely negative.
FAS has also 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.
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, and other treatment of investors leading to investment 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 allegedly questionable tax and legal proceedings to ultimately gain control of the assets of a large Russian energy company; 3) In February 2019, a prominent U.S. investor was jailed over a commercial dispute and currently remains under house arrest. Other examples of Russia expropriation include foreign companies allegedly 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
According to available information, at least 14 investment disputes have involved an American and the Russian government since 2006. Some attorneys refer international clients who have investment or trade disputes in Russia to international arbitration centers in 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.
Beginning in 2016, arbitral institutions were required to obtain the status of a “permanent arbitral institution” (PAI) in order to arbitrate disputes involving shares in Russian companies. The requirement ostensibly combats the problem of dubious arbitral institutions set up by corporations to administer disputes in which they themselves are involved. The PAI requirement applies to foreign arbitral institutions as well. Until recently there were only four arbitral institutions – all of them Russian – which had been conferred the status of PAI. In April 2019, the Hong Kong International Arbitration Centre (HKIAC) became the first foreign arbitral tribunal to obtain PAI status in Russia. In June 2019, the Vienna International Arbitration Center became the second foreign institution licensed to administer arbitrations in Russia. On May 19, 2021, the International Court of Arbitration of the International Chamber of Commerce (ICC) and the Singapore International Arbitration Centre (SIAC) received from the Russian Ministry of Justice the right to act in Russia as PAIs. The London Court of International Arbitration, and the Arbitration Institute of the Stockholm Chamber of Commerce are occasionally chosen for administering international arbitrations seated in Russia, despite the fact that none of them has PAI status. Arbitral awards rendered by tribunals constituted under the rules of these institutions can be recognized and enforced 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 2020 Report for “Resolving Insolvency” is 57 out of 190 economies, down two notches compared to 2019. Article 9 of the Law on Insolvency requires an insolvent firm to petition the court of arbitration to declare the company bankrupt within one month of failing to pay the bank’s claims. The court then convenes a meeting of creditors, who petition the court for liquidation or reorganization. In accordance with Article 51 of the Law on Insolvency, 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). Therefore, the time dictated by law is 19 months. However, in practice, liquidation proceedings are extended several times and for longer periods. The total cost of insolvency proceedings is approximately nine percent of the value of the estate.
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 people who may be subject to secondary liability and the grounds for recognizing fault for a company’s bankruptcy.
Amendments to the Law on Insolvency approved in December 2019 gave greater protection, in the context of insolvency of a Russian counterparty, to collateral arrangements and close-out netting in respect of over-the-counter derivative, repurchase, and certain other “financial” transactions documented under eligible master agreements.