The Legal Factor in the Investment Climate

UnknownAndrey Goltsblat Managing Partner, Pepeliaev, Goltsblat & Partners
Never before has the production sector of Russia's economy seen such high investment growth as nowadays. In particular, foreign direct investment totaled, according to the Russian government, $47 billion in 2007, meaning a growth of more than 20 percent against 2006.

It would, no doubt, be an oversimplification to put all this down to the inflow of petro-dollars and investment in the extraction industries. The successful implementation of large-scale production investment projects, in both the machinery and FMCG sectors, have also contributed to driving economic growth. A stable legal system has now taken shape in Russia for implementation of such projects. At the same time, there still remain a number of misconceptions that prevent Russia's investment potential from being fully realized.

First, there is an underestimation of the role of law and judicial procedures. Second -- an oversimplified perception of the role of the authorities, who supposedly decide everything on just an informal basis. Third -- overestimation of the possibilities of the federal bureaucracy and "knowing the right people in Moscow," combined with a misunderstanding of the role of regional and municipal authorities and local specific conditions.

Today, it is more important for the foreign investor to have a team of skilled managers and external consultants than to lay its hopes merely in support from the authorities. The latter might open their arms to the investor and promise to give the "green light" to all its undertakings. Yet the investor needs an all-round understanding of the real state of affairs -- above all the legal framework for investing capital. This is where qualified legal assistance comes in. The investor needs someone to make sense of the various options for implementing its project.

First of all, the investor needs to organize an efficient corporate structure. This largely depends on business goals, the tax legislation and other factors. Unfortunately, Russian legislation does not yet take full account of international experience of taxing holding companies.

Equally important is the choice of location, the construction site and execution of entitling documents. Carelessness and haste at the stage of acquiring land and formalizing a deal might prove expensive in the long run.

Once production is under way, the investor requires legal support for its operations. This might encompass legal assistance in distribution, relations with suppliers and purchasers, labor law matters, enforcement of trademarks and much, much more. At this point, one can certainly not rely on the customary willingness of bureaucrats to take bribes. Law becomes a more effective tool, helping the investor save substantial funds.

In reality, it is more important for the foreign investor to be able to establish normal business relations with authorities on the regional and local levels. So what exactly can regional authorities do for the investor? Above all, they can cut profit tax by 4 percent from the ordinary rate of 24 percent. They can also exempt the investor from property and land tax or cut these taxes. Regional administrations are entitled to allocate subventions to the investor on a non-repayable basis. Also very important is organizational support on the part of regional officials in establishing an uninterrupted supply of electricity and gas, prompt assistance in execution of agreements, and so on. This is where things get a bit worse. Russian local officials are often underqualified and inexperienced. At the same time, it must be admitted that the Moscow, St. Petersburg, Ulyanovsk, and Rostov regions, for example, do, indeed, offer the investor substantial, professional assistance.

Even so, excessive bureaucracy in the work of the local administrations and complex regional legislation often accompany the arrival of major, strong investors. Officials often meet the inflow of investments with increasing red tape, which it is vital to be able to cut through. Also worth considering is that the existence of professionals in the administration and of tax benefits is of much less significance for a region's appeal than how developed the infrastructure is, how available energy sources are and how capable the regional authorities are of providing real support.

Ultimately, the regional and local authorities cannot ignore investors, as they really need them. After all, investors provide new jobs and local tax revenues and help in creating the local infrastructure. An inflow of investments allows the regional administration to hope for a rise in the region's investment rating.

To conclude, it can be asserted that the regulatory framework for further expansion of an inflow of capital from abroad has already been created. Russia's investment appeal is not open to doubt. Just one small thing is left: professional administration of the inflow of investments and good-quality legal support. It is up to lawyers, of course, to provide top quality, professional support for investors and convince them that the requisite legal mechanisms exist in Russia -- not only for implementing investment projects, but also for protecting them in the future.