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On how to set up business in Russia
August, 23rd 2007
Many foreign investors find Russia to be a rather peculiar country to do business in, mainly on account of the national specifics right from issues of administrative regulations to business psychology and ethics.


Strong trade, cultural and diplomatic ties for decades between India and Russia (and the erstwhile Soviet Union) are now seeing a new dimension in the form of more Indian companies seeking to set up shop in Russia, with Tata Tea being the latest to announce plans in this direction.

However, although Russia opens up huge opportunities in many spheres, doing business in the country may be a tricky affair, especially at the starting point, according to Mr Alexander Mednikov, Deputy Managing Partner of the Moscow- based Jurinflot international law firm, which specialises in maritime law and issues of legal support for foreign investors doing business in the Russian Federation.

In an email interaction with Business Line, on the challenges facing potential investors in Russia, he said that depending on the type of business, getting through all pre-operational formalities and procedures may take longer than in some other countries, which potential investors should be prepared for.

Another important point, especially for smaller and medium-sized companies, is that they may find it difficult to operate successfully without a Russian partner who can provide knowledge of local specifics and take care of formalities more effectively.

Basic steps

Stating that the basic steps for any investor seeking to start a business in the Russian Federation are more or less the same as that for any kind of enterprise, he said that there are a few exceptions, mostly relating to the financial sector.

At present, foreign-owned businesses are subject (again, with very few exceptions) to the same regime as national businesses and joint ventures. There are no longer special organisational forms for businesses with foreign participation or those which are fully foreign-owned.

According to him, a foreign investor may run a business through either an accredited branch of a foreign company or through a fully or a partially owned company that may be organised in one of the forms provided for by Russian legislation (a limited liability company (LLC), or joint stock company (JSC), which may be of open or closed type).

While the pros and cons of each option need to be weighed, where specific permits will be required for running the business, many may not be issued to an outlet of a foreign enterprise, but only to a national company. Once an investor has chosen one of those options, he would need to, respectively, accredit a branch of his foreign company or organise a company in Russia.

Branch matters

To set up a branch, the investor would have to appoint a director, apply to the Government of the region where it plans to locate the branch (not required for Moscow and St Petersburg) and file for accreditation of the branch (which must be renewed every five years).

Once the branch is accredited, the investor must register it with the statistics committee, tax authorities and State pension, medical and social funds, obtain work permits for non-resident personnel and undertake specific steps for running of the planned business, such as obtaining permits, certificates and licences if needed.

For a company, the initial steps would include making a resolution to found the subsidiary company in Russia, approving its charter and appointing its CEO and allocating capital.

Besides, LLC companies must open non-resident accounts in a Russian bank for the founder and deposit not less than 50 per cent of the charter capital.

The company must also take care of other formalities such as filing with the tax authorities and paying the remaining part of the charter capital (for an LLC) or shares of an initial issue(s).

Mr Mednikov informed that foreign-owned companies come under the national regime, which means that all laws applicable to Russian businesses also apply to them.

Basic guarantees for foreign investors, certain exemptions and general rules for investing are provided for by federal law. Principal laws and regulations that govern reporting are the same for national, jointly owned and foreign enterprises. The main ones are those pertaining to the Tax Code and accounting standards issued by the Ministry of Finance.

He added that major projects with foreign investment may even be granted certain exemptions on the basis of a Government decree.

Foreign lawyers

On the issue of foreign lawyers practising in Russia, Mr Mednikov said that foreign advocates are currently only authorised to provide legal advice in respect of the laws of countries in which they have been admitted to practise.

However, he added, legal services to business clients may be rendered by non-admitted lawyers and advocates. Many foreign law firms have offices in Russia. Some Russian firms also employ foreign lawyers.

In Russia, an additional course of one or two years is being introduced to supplement the principal course of five years.

After five years, lawyers graduate with a Bachelors degree, and if they study for an additional year, they become specialists. To gain a Masters degree, they are required to study for an additional two years.

Like many developed nations, Russia has strong representation of women in the legal profession, Mr Mednikov said.

Women make up a fair share of advocates and other lawyers in private practice and in-house lawyers. As far as judges and notaries public are concerned, statistical figures are not widely available but it is quite possible that a majority of them are women.

M&A deals

On the issue of mergers and acquisitions, he said that in general, mergers and acquisitions of Russian enterprises are probably less burdensome from the point of view of obtaining official permissions and approvals.

But, on the other hand, such deals may require much more effort from the side of the acquiring foreign investor particularly the due diligence and post-completion stages.

According to him, investors may face difficulties at the pre-purchase stage in getting a clear picture of the object of purchase, since many businesses are run as private companies and are not very transparent.

Post-completion, some effort may be required in order to incorporate the newly acquired company into the purchasers business group.

Summing up, Mr Mednikov said that many foreign investors find Russia to be a rather peculiar country to do business in, mainly on account of the national specifics right from issues of administrative regulations to business psychology and ethics.

If a foreign client decides to start a business in Russia without much previous experience of working in this market, often it is the lawyers providing legal assistance in formalising the local presence who go beyond their brief, practically acting as guides to the Russian market.



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