ALM Properties, Inc.
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Russia’s Evolving Investment Climate
Russian accession to the WTO will significantly spur international investment into Russia, as well as Russian investment to the rest of the world. At the same time much of the global investment community has a very negative perception of the investment climate in Russia. While the substance of this is sometimes true, it is also true that the investment climate is improving, and that recent legal changes are a clear step in the right direction. Potential investors in Russia need to make themselves aware of Russian laws affecting investment, and understand that there are steps they can take to minimise their exposure to the negative perception.
The Russian corporate world is often seen as particularly corrupt generally ranking poorly in global corruption and transparency surveys. At the same time the accession of Russia to the WTO in mid-2012 brought into the global trade body the largest nation previously outside it, and the largest economy in Europe. Coupled with its generally low private debt levels, its rapidly rising living standards, and generally well educated population, Russia is potentially a very attractive market for global corporates.
Corruption certainly does exist in Russia, and many companies doing business in Russia do experience it in one way or another. But it is also true that many participants in the Russian business community agree that the business environment and culture is rapidly improving and that legal influence, from both outside Russia, as well as a renewed focus on business and its needs from the Russian legislators, is playing a key part in crafting the business environment of tomorrow.
It is in the interests of all potential investors in Russia to be aware of the very significant changes embodied in the amended Russian Civil Code which was approved by the State Duma in March this year. At the same time it is in the interests of Russian business and potential investors in Russia to beaware of how corruption can enter business relations in Russia, to stand firmly against it, and to take steps to mitigate the risk.
Legal change in Russia is a constant part of the administrative cycle, the same as it is in most nations. At the same time the amended Russian Civil Code which was approved in the first hearing by the Russian Duma in March this year, and which is expected to go to a second reading within the next month, and start becoming operational soon after, is a major legal landmark. It represents the work of more than 4 years for teams of legislators and lawyers, running to 461 pages, encompassing the most significant revision to civil legislation in a generation, with the introduction of new institutions and rules, as well as amending and updating many existing ones. It is in the interests of all potential investors in Russia to have good legal advice on the changes and how they affect the Russian investment climate.
The amended Civil Code has been put together by a government acutely aware that Russia needs to improve its investment performance, and that the key to doing this is to improve its perception within the global business community. The legal changes are generally intended to make business more straightforward, but although the legislation has begun coming into effect much court interpretation, and administration of provisions, is still evolving.
For investors arguably the most fundamental change is the introduction of the concept of good faith, which now becomes an obligation of all participants in the system. Loss recovery effectively becomes a liability with courts responsible for establishing loss amounts using principles of fairness and proportionality and unable to use lack of confirmation about a loss amount as grounds for refusing to recover losses. The new Civil Code clarifies corporate responsibilities and rights and theoretically minimises potential for corporate disputes, as well as promoting recovery of damages, imposing property liability on management and related parties. It is expected that the amendments will allow more flexible contractual mechanisms and loss recovery made more effective. Company registration types have also been simplified, Shareholders agreements may now include third parties and creditors. The criteria for affiliation have been determined, with courts given greater scope to recognise entities as being affiliated or not depending on the perceived possibility of influence, and criteria denoting control clearly established.
The revised code brings changes to the Real Estate world, including mandatory notarization of all real estate transactions, and a range of new rights for participants in the system depending upon their circumstances. The revised Civil Code introduces the non-accessory, transferable form of mortgage used in Europe, providing a creditor a much stronger legal position concerning obligations secured by mortgage and will bring the Russian property sector generally into line with the best developed international standards.
The financial securitisation market is another impacted by the Civil Code reforms, which change rules on the assignment of claims and factoring. At the same time investors need to understand that doing business in Russia will involve a different business culture. For this reason English law is also increasingly being used in Russian business relations with its long established traditions and procedures widely respected in Russia for providing greater investor surety. Increasingly Russian lawyers are becoming adept at understanding how to structure deals and agreements to ensure the best of both jurisdictions and what risks and advantages are implicit in doing this.
But ultimately the experience of each company looking to invest into Russia is largely in its own hands. Standard worldwide legal concepts such as due diligence and legal process can be their own reward in Russia too. The most pervasive forms of corruption in Russia involve permissions (licenses, permits and the like) for companies looking to undertake a project, or they involve kickbacks for state officials involved in state procurement. The surest way to avoid becoming involved in anything which may lead to corruption is to be overt in having a company policy against corruption, have well established training for individuals involved in sensitive areas, and to have effective reporting mechanisms and legal advice. With global businesses generally operating under legislation such as the U.K. Bribery Act and the U.S. Foreign Corrupt Practices Act (FCPA) even when they are operating away from home markets, it is not just good business in Russia to stand against corruption, but good business at home as well.