Representing Foreign Investors in Russia
- Dec. 03 2015 00:00
Andrey Pushkin, managing partner of Tenzor Consulting Group, talks about the peculiarities of Russian legislation that cause the most difficulty for foreign investors.
What legal services are currently most in demand among foreign investors?
In recent years, foreign investors have lost interest in entering the Russian market. The inflow of investments into Russia dropped significantly from 2014 to 2015. The current economic and political situation in the country means that carefully balanced decisions must be made in business. However, demand remains high among foreign investors for reliable legal consultants, who are often their guides through the complicated webs of Russian law. The only thing that has changed is the scale of the challenges faced by both.
Services related to the sale and purchase of businesses have seen an increase in demand. Many people now need legal services when purchasing or selling real estate. In addition, a great deal of attention is paid to diligence for sale assets. It is believed that by trying to make an object or business more attractive, contractors sometimes try to hide certain pitfalls. For investors who have been operating in Russia for more than a year, the most popular service is legal support in corporate practice — for debt recovery, protection of interests in court, as well as legal support for M&A transactions.
Now more than ever, a foreign investor in Russia is in need of legal protection and representation. In recent years, the most popular service — in addition to the complex legal support of business — has been legal crisis management, which allows the investor to carry out a number of procedures aimed at improving the individual structural units of the company and/or business in general. This service is a comprehensive legal approach to solving management problems in order to maintain financial and economic activity in the face of pressure on business from environmental and industry restrictions and instability, as well as changes in current legislation.
If we are talking about an investor entering the Russian market — now a rather rare occurence — the first thing he is interested in is how to build the structure of a business, what risks are involved in a particular industry, the interaction of the company with the local authorities and the mechanisms he can use to protect his interests.
About 80 percent of foreign investment is not focused on the manufacturing sector, because it is a difficult and troublesome process for foreigners, but on financial capital. Most of this money represents short-term loans — up to 6 months — to Russian companies.
The low investment attractiveness of Russia today is quite understandable and logical. Investors who still maintain a presence in Russia are more than ever in need of professional legal support for their business and rely on fast and efficient problem solving.
Tenzor Consulting Group has been the initiator of draft bills in the past. Is it working on anything like that now? What exactly?
In the portfolio of the Tenzor Consulting Group law firm are several drafted bills that have been submitted to the State Duma. They include "On Private Military and Security Companies," "On Aquatic Planning in the Russian Federation" and "On Single-Industry Municipalities of the Russian Federation (Monotowns)."
The last bill prepared by Tenzor Consulting Group lawyers was "On Amendments to the Federal Law 'On Arbitration Courts in the Russian Federation.'"
"Affiliates of a permanent arbitration court" is a central concept proposed to supplement the law "On Arbitration Courts in the Russian Federation" prepared by Tenzor Consulting Group lawyers. Restrictions on the participation of affiliates in arbitration proceedings are intended to create an independent system to resolve disputes in arbitration courts and eliminate opportunities for a "legal" solutions for certain categories of participant in civil turnover.
The fact is that the cases of creating "pocket" permanent arbitration courts has recently increased, including those attached to public joint-stock companies with a majority participation (directly or indirectly) in the share capital of the Russian Federation, the main activity of which is aimed at addressing national interests in gas, oil, energy and other industries, which has led to an expansion of activities of fictitious arbitration courts according to a well known scenario.
The innovations proposed in the draft law should improve the work system of arbitration courts, increase their efficiency and eliminate the possibility of abuse by public entities, joint-stock companies with a leading position in certain sectors of the Russian economy, that use arbitration proceedings to get "acceptable decisions."
What advice would you give to foreign companies entering the Russian market?
First of all, investors need to understand what legal mechanisms regulate a particular industry and what limits exist.
The localization of foreign production in Russia is the most frequent topic of discussion in the business community. There are two main views on this.
On the one hand, companies want to earn money on their investments in Russia and it is now that it is profitable to invest, due to exchange rate fluctuations. On the other hand, companies want to know before making investment decisions how to build a business model and how to predict the repayment of funds, which, when world markets are unstable, is a limiting factor.
What are the features of the registration of real estate in Russia that foreign investors need to know about?
In this regard, the majority of market players have similar questions, such as what legal mechanisms can protect property rights for construction projects.
Investors who invest in commercial real estate want to have guarantees for their rights and to understand clearly what legal tools they may use.
This is a capacious theme, which includes the land and the City Planning Code, economics, finance and law.
Of course, many foreign companies are faced with a hostile takeover attempt when implementing major projects. When the structure of an investor's ownership is properly established, it is possible to minimize or even eliminate this problem.
What aspect of Russian legislation causes the most difficulty for foreign investors?
The complexity of the Russian legal framework is famous far beyond the borders of our country. It would be fair to say that Russian legislation is an important topic for foreign investors. The World Bank reported that the level of bureaucratization of all important procedures is particularly high in the business sphere in Russia. For example, for a construction project in Russia, it is necessary to collect more than 50 documents, while in Singapore, 11 are needed.
Because of the peculiarities of Russian legislation, foreign companies are faced with many challenges in the formation of the tax base, harmonization of initial permit documentation for capital construction projects, obtaining a construction permit, as well as connection of utilities, including electricity, heat and water supply.
We believe that only a comprehensive legal approach to the implementation of the projects will allow the investor to have the best results in terms of project implementation, as well as the protection of its own financial and property interests.