Russia

Foreign direct investment in Russia

Russia’s economy is generally attractive to foreign capital: by September 2006 it had accumulated over $130 billion in foreign investment. In 2006 alone, FDI inflow, compared to that of 2005, doubled and reached $23–25 billion, as estimated by the Russian Ministry of Finance. At the same time, this level of FDI inflow is not enough to make Russia leader among the “emerging markets”. For instance, China’s share in accumulated FDI has exceeded $1 trillion.

The euphoria of the early 90s about easy foreign investment mobilisation quieted down, which very soon affected investment process regulation. At present, Russian legislation relating to attraction and security of FDI can neither be called encouraging, nor restrictive. In Russia, FDI regulation is based on the national treatment principle which means that foreign investors generally enjoy the same rights and have the same obligations pertaining to their business activities as Russian investors.

Russia’s main statutory act on international investment is Federal Law “On International Investment” # 160—FZ of 07/07/1999 which enunciates the said principle of national treatment and provides international investors with the following guarantees:

• guarantee of compensation in case of nationalisation or seizure of property of an international investor or a profit organisation with foreign investment;
• guarantee of use within and transfer out of the Russian Federation of revenue, profit and other lawfully obtained monies;
• guarantee of payment of damages incurred in the event of unlawful actions (omissions) on the part of state authorities, local authorities or their officials, in accordance with the civil legislation of the Russian Federation;
• guarantee of recognition by the Russian Federation of transfer of a foreign investor’s rights in order of subrogation to the authorized body of a foreign state that insured such investor’s investment from political risks;
• guarantee of proper resolution of a dispute arising in relation to investment and business activities of a foreign investor in the Russian Federation.

Exceptions to the national treatment principle affecting admission of foreign investors into certain industries may be allowed only by a federal law or an international treaty.

At present, there is a limitation of foreign investment into such areas as:

• Insurance
• Banking
• Gas Supply
• Air Transportation and Aerial Work
• Development, Flight-Testing, Maintenance and/or Disposal of Aircraft

Territorially, foreign investment is limited within the socalled closed administrative-territorial units (ZATO), since they include industrial enterprises for development, production, storage and disposal of weapons of mass destruction, for reprocessing of nuclear and other waste, military and other facilities, and employ a special security and state secret regime including special residence conditions. Formerly, foreign investors encountered many exchange restrictions. But starting from 2004, exchange transactions between residents and non-residents have been gradually liberalised.

As far as taxation is concerned, under the national treatment principle applicable to foreign investors, no enterprise with foreign investment can enjoy any special tax relief or tax holidays. Neither does Russian legislation have any “grandfather provisions” intended especially for organisations attracting foreign capital (the “guarantee against adverse changes for a foreign investor and a profit organisation with foreign investment implementing high-priority projects” stipulated in Article 9 of the Federal Law “On Foreign Investment” has not found its application since there is no list of high-priority projects approved by Russian government).

Equally, no enterprise with foreign investment can enjoy any customs privileges on exported or imported goods. However, property imported as investment into authorised capital stock of a profit organisation with foreign investment is exempt of import duty and VAT, and foreign investment into capital financing is not included in the income tax base of the recipient enterprise.

On 31 January, 2007, the Russian government considered a draft law “On Procedure of Foreign Investment in Russian Federation into Profit Organizations of Strategic Importance for National Security of Russian Federation”. When effective, it will determine 40 activities in nine industries and national economy areas with limited and supervised admission of foreign persons to sharing in Russian organisations of strategic importance. Foreign acquisition of more than 50% shares in such Russian enterprises as well as alienation and transfer thereof for trust administration will be subject to authorisation by a special Commission on Foreign Investment under the Russian government.

An authorisation will also be required to control Russian organisations engaged in the following industries and areas:

• Development, production and sale of military hardware;
• Production and exploitation of special-purpose equipment Aircraft development and production;
• Production, exploitation and storage of nuclear materials and nuclear plant design;
• Exploitation of sub-soil federal areas (continental shelf deposits, oil fields holding over 70 million tons and natural gas fields holding over 50 million cubic meters);
• Activity of natural monopolies;
• Development and production of special-purpose materials and alloys for armament and military hardware;
• Activities relating to usage of infectious agents;

The afore-mentioned restrictions will not apply to the foreign investors who had invested into strategically important industries and areas before this Law took effect. Undoubtedly, during finalisation and the Federal Assembly reading stage, this draft law will be amended and its concept can be altered, but in any case this trend of imposing legislative restrictions on investing in strategic industries and areas is obvious and cannot be ignored.

Beyond these industries and areas where attraction of foreign investment is limited by federal laws, foreign investors are free to choose whichever legal form of investment to employ.

Muranov, Chernyakov & Partners

 

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