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Foreign Investments in the Russian Federation

by Denis Biryukov - Russia

(for any comments, please contact Brian Risman, Publisher of The Law Journal UK)

Russia is in its early stages as a constitutional state. The termination of the state monopoly for foreign trade and other spheres of economic activities have created the need for laws adequate to meet modern world issues facing other democratic constitutional states. 

The adoption of the Constitution of Russia on 12 December 1993 was the start of the new legal structure, including investment laws. 

During development of the newest Russian legal categories and institutions, the competitiveness of the Russian economy and business in the world was a priority. The investment law is part of this goal.  

The investment law of Russia represents the system consisting of legal regulations covering almost all fields of the law - private and public law, civil and arbitration processes, and international private law. 

The legislation on foreign investments has two levels - a federal level and a regional level that is the subject of legislation in Russia (republics, borders, areas, and so forth).   

Also, it is important to note that international agreements in which Russia participates are a component of its legal system and have priority over the internal legislation. The Russian Federation has concluded, signed and ratified numerous bilateral treaties regarding the encouragement and protection of capital investments, about avoidance of double taxation, and a number of conventions promoting improvement of foreign trade activities. Russia has corresponding agreements to these ends with the United Kingdom. 

The basic legal document establishing the general bases of foreign investment activity in territory of Russia is the Federal law "About foreign investments in Russian Federation", effective from July 09, 1999 №160. 

Foreign investment is defined as the investment of foreign capital with the object of enterprise activity in the territory of the Russian Federation in the form of objects of the civil law belonging to the foreign investor. Objects of the civil law come under foreign investment if such objects of the civil law are not withdrawn from a turnover or are not limited in a turnover in the Russian Federation according to federal laws, including money, securities (in a foreign currency and currency of the Russian Federation), other property, the property rights having pecuniary valuation of exclusive rights, to results of intellectual activity (intellectual property), as well as services and information. 

Choosing the regime of investment activity is another issue to consider. The Russian legislature has established a national regime for foreign investments. This means that the legal regime of activity of foreign investors and use of the profit received from investments cannot be less favourable than a corresponding regime for the Russian investors. Other regimes with regard to foreign investments could be established by international agreement. Accordingly, most-favoured-nation treatment for investors is established by agreements with USA, France, Canada, Great Britain and other states.  

Foreign investments in territory of Russia can be carried out in various forms: 

1)    Direct foreign investments - purchase shares (deposits) in the capital of the Russian commercial companies, establishment of commercial company in territory of Russia and according to its legislation, capital investments in a fixed capital of foreign company branch established in the territory of Russia, carrying out of financial rent (leasing) of certain equipment by foreign investor as landlord in the territory of Russia.

2)    Fixed investments, that is investments which are carried out in the form of capital investments. These are investments into fixed capital (fixed assets), including expenses for new construction, expansion, reconstruction and modernization of the operating enterprises, purchase of machines, equipment, tools, implements, development works and other expenses. Objects of capital investments are various kinds of  established or modernized property, being any kind of ownership, except for objects, establishment and use of which do not correspond to legislation of the Russian Federation and standards approved when due hereunder (norms, rules), and also over impressments established by federal laws of the Russian Federation. Buildings, constructions, dwellings, machines and equipment, vehicles, high-end industrial technologies, topologies of integrated microchips, know-how, trademarks, and patents could be objects of fixed investments.

3)    Other forms of investments. Purchase of securities by the investor, pawning and mortgages, reinvestment, execution of agreements about dividing of production and so forth. 

Fixed investments possess maximal economic benefit for economy of the Russian Federation as they create new objects in the industry, trade, sphere of services, as well as create new jobs. 

However, it is necessary to remember that public state regulation is highly present in this very sphere of investment activity in capital investments. Realization of investment projects in this sphere is quite often connected with fulfillment of some requirements. For example, investment projects connected with construction of objects are subject to obligatory state expert appraisal, including ecological.  

The Foreign Investor is provided with the following guarantees in Russia:  

- Full and absolute protection of the rights and the interests, provided by the current legislation. This means that the foreign investor can use any defense mechanism stipulated by the law. The investor has a right to self-defense and judicial protection, and also the right for indemnification from illegal activity of the state and municipal bodies and their officials. The foreign investor can also use international-legal questions with regard to defense mechanisms. In certain cases the foreign investor can use a legal protection of the "native" law, as the foreign law is a subject to application in Russia without a condition on reciprocity. Application of the foreign law on conditions of reciprocity can be stipulated by the law. 

- Freedom in realisation of investments in any forms admissible by the legislation. 

- A guarantee of transfer of the rights and duties of the foreign investor to other person(s) in order stipulated by legislation. Such transfer is possible in order of assignment. If the foreign state or the authorized state body executes payment in favor of the foreign investor under guarantee (contract of insurance), given to the foreign investor with regard to investments which have been carried out by the investor in territory of the Russian Federation, and lapse of rights of the foreign investor to this foreign state or authorized state body take place (cession of rights) such transfer of rights (assignment) in the territory of Russian Federation is admitted as lawful. 

- A guarantee from compulsory requisitioning, including nationalization and requisition of property of the foreign investor. Compulsory requisitioning, nationalization or shut-down are possible only in exceptional cases as stipulated by the law. In this case, the cost of property and other losses should be reimbursed to the investor. 

- A guarantee from adverse change of customs, currency and tax laws of the Russian Federation (the stabilisation clause) with respect to foreign investor and the commercial organization with foreign investments. Foreign investor has a guarantee of stability -- that is, non-use of norms of the legislation which have changed for the worst for the investor in pay-back period of the investment project but no more than 7 years. 

-  A guarantee of the appropriate resolution of dispute which have arisen in connection with realization of investments and enterprise activity in Russia. The specified guarantee gives to the foreign investor the right to use mechanism of judicial protection which exists in Russia. Besides Russia is the participant of the New York convention of 1958 according to which decisions of the international commercial arbitration are admitted and executed. The law “About international commercial arbitration" according to which the International commercial arbitration court was created and successfully function at the Commercial and industrial chamber of Russia, has been adopted. There is a system of arbitration courts. Russia admits and executes decisions of foreign courts according to international contracts. 

- A guarantee of use in territory of Russia and transferring outside income, profit and other legally received amounts. This right is given to the foreign investor after payment of lawfully established taxes and tax collections. Transfer of amounts outside of Russia should be carried out according to requirements of the current legislation. 

- A guarantee of participation of the foreign investor in privatisation. The legislation of the Russian Federation supposes an opportunity of participation of foreign persons in privatisation. 

- A guarantee of the right of the foreign investor to unhampered export of property and information in the documentary form or in the form of record on electronic format which have been previously imported on territory of the Russian Federation as foreign investment outside the territory of Russia. 

- A guarantee of granting of the right to lands, other natural resources, buildings, constructions and other real estate to the foreign investor. Foreign citizens and legal persons cannot, however, have land in frontier territories as well as in other especially protected zones according to laws of Russia in property. Foreign citizens and legal persons and also Russian enterprises with the foreign share more than 50 % could have lands or shares in the right of the general property to land from the grounds of agricultural purpose only on the right of rent. State or municipal land could be given to foreign citizens and legal persons in property for payment. 

Foreign persons have priority right of purchase or rent of land if there are buildings, constructions which are property on this land. It is necessary to have in mind that Russian law is applied to agreements related to land, the depths of the earth, isolated water bodies and other real estate on the territory of Russian Federation. 

Foreign investors have also other rights guaranteeing normal realization of their activity in Russia. Spheres of enterprise activity closed for foreign investors are not numerous and as a whole correspond to the standard practice. And, nevertheless, Russian legislation with regard to foreign investments is far from perfect. 

Despite of strengthening of fundamental laws and guarantees of the foreign investors in the Russian law, mechanisms of their realisation at the moment either are absent, or are ineffective. Regulations of the Russian laws mentioning questions of regulation of foreign investment activity often differ in internal inconsistency that essentially complicates their practical application and does not allow naming Russian investment a legislation complex. One of the basic obstacles in a way of foreign investments is also absence of an effective tax policy. 

It is necessary to remember also, that Russia has signed, but did not ratify the Washington convention of 1965.  

Estimation of investment risks by foreign investor represents the complex analysis including not only economic calculation and analysis of state legal system in the sphere of investment, but also political system analysis. 

It is obvious that only countries having a stable political system guarantee economic benefit from investment and their duly full return to the investor.

However, unfortunately, it is necessary to mention, that recent political events occurring in Russia before the eyes of world community did not promote improvement of democratic and in particular investment image of the state.  

First of all we are speaking about situation around the company “YUKOS”. It is difficult to disagree that the events that take place around this company and its separate representatives often appeared to be out of “legal fields”. As a matter of fact the “YUKOS case” is an imperfection of the Russian legislation during the beginning of formation of the civilized economy in the country, and the absence of unambiguous rules of business dealing. All the largest companies in the country faced this problem, but, at this time, it became a problem only for one company. Abstaining from comments in occasion of an event I wish to note that such aspects as collisions of private and public interests is not news in the mutual relationships of authority and private investors. Such public interests traditionally, and Russia is not exception, affect state investment policy. 

There is no doubt that private investors, both foreign, and local, should know with what public interests investors could conflict while investing to this or that country or branch of economy and in my opinion there is only one problem that is at what extend government express their interests and the degree of its non-interference to other spheres of enterprise activity. Public State interests are especially strongly expressed in questions of defense and safety, financial stability, and the tax system.  

In my view, when Putin and the Kremlin began action against Yukos and Khodorkovsky, they simply did not expect such an impact in the internal and international community. 

The consequences of the Yukos situation was unexpected, particularly the special resolution of the US Congress about “Yukos and Khodorkovsky”, and the comments by the US President, as well as other significant figures. 

Few of the influential people in the international community trust that the Yukos situation is one of an economic dispute. Most feel the motivations stem from the political process. 

Recent events, such as the resignation of Mr. Illarionov as Mr. Putin’s Economic Advisor, and the refusal of the ex-Minister of Trade of the USA, Donald Evans, to meet in Rosneft, are fallout from this political perception of the situation. The business community has drawn its conclusions. 

It is likely that Mr. Putin would never have followed this course if he would have anticipated the actual reactions. 

The Yukos legal battles continue, with shareholders suing in overseas courts for their rights. Khodorkovsky and Lebedev prepare their cases in the European Court of Human Rights. 

In an attempt to calm entrepreneurs and investors, amendments to the Civil Code of Russia were adopted. According to these amendments limitation period under insignificant transactions has decreased. This term was ten years -- now it is only three years. 

The specified step has allowed foreign investors but Russian businessmen to breathe a bit easier considering that the specified 10-years limitation period represented serious danger to so-called "privatisation" transactions.  

The question of tax amnesty of capital which has been taken out abroad has been seriously discussed. Other bureaucratic obstacles on the way to normal business are eliminated. 

In particular, recently there is a tendency to improve access to business realization by means of simplification of various registration procedures, including canceling of obligatory licensing of various kinds of economic activities in Russia. 

These changes will work to increase interest of foreign investors in the Russian economy.  

As a whole, the "game rules" for foreign investors in Russia, as well as in all civilized world, are unified and briefly are as follows: 1) respect of the legislation of the Russian Federation at realization of activity in the Russian Federation and  2) keeping of balance between public and private interests.

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