Russian investment policy
To better understand threats and opportunities for starting business in Russia, you should study a legal environment for FDI and therefore, pay special attention to the Russian investment policy.
In this article we will explain you all about it and how it influences doing business in Russia.
Attracting foreign investment has been a priority for the Russian government since the country took its first steps towards developing a market economy in 1991. During the past few decades, consistent legislative and administrative measures have been taken to improve the investment climate and provide guarantees and protection for foreign companies undertaking business in Russia.
This trend remains effective and has been maintained by the government within the period of mutual economic sanctions, since investment in Russia is encouraged and supported.
What it is exactly?
It is a result of the measures taken at the multilateral, bilateral, federal and local levels. The country is a signatory of various international and bilateral treaties that have a direct effect on the country’s investment climate and foreign investors protection. In addition, federal and local laws create a legal environment for foreign investments in Russia.
One of the most important international convention is participation in the Washington Convention on procedures of investment disputes settlement between states and foreign residents. It allows business entities to take a host country into the international centre for the settlement of investment disputes in case of an investment related conflict.
As a member of the World Trade Organization, Russia has rights and obligations with regard to all multilateral WTO agreements, including the agreement on trade-related investment measures or TRIMS agreement. This agreement applies only to measures that affect trade in goods recognizing that certain measures can have trade restrictive and distortion effect. It states that no member shall apply a measure that is prohibited by the provisions of GATT Article 3, National Treatment, or Article 11 quantitative restrictions.
The WTO General agreement on trade in services or GATS, also contains principles and approaches relevant both for host countries and foreign investors. Agreements on mutual guarantees protection and incentive of investments, create a stable background for investment flows. Russia signed a large number of such agreement.
It is worth to mention that the first agreements were signed by the Soviet Union and Russia as its adherent took responsibilities over them. By now Russia has such arrangements the United States, Poland, Greece, Cuba, Vietnam and many others agreements on double taxation avoiding, allow to exclude a double taxation of income and property.
Such agreement concluded by Russia, abolish reduce the burden of double taxation by introducing special tax rates on certain types of income of non-residents.
Among the trees with which Russia has concluded such agreements are Germany, the United States, Great Britain, France, Finland, Canada, Spain Switzerland, Japan, Norway, Denmark, Italy, Belgium, the Netherlands, Austria, Cyprus and others, more than 70 countries and total.
The legislation that regulates foreign investment can be divided into two groups. The first one includes general rules that apply to both Russian and foreign investment.
- 1. Civil Code: it establishes among other things general rules for business activities in the country.
- 2. The tax code: contains general taxation principles applied in Russia to all business entities including ones with foreign capital.
- 3. The federal law on limited liability companies, on joint stock companies and many others.
- 4. The federal law on protection of competition: contains the antitrust rules.
- 5. The Russian Customs Code: another act influencing FDI inflows and outflows.
The second group of rules solely regulate foreign investment.
Rules regulating foreign investment
The Foreign Investment law and Strategic Investment law are two main sources.
The first law defines the status of a foreign investor, the legal regimes for foreign investments and guarantees and benefits provided for them. It contains provisions, regulate the establishment and operation of companies with foreign capital and branch offices of foreign companies.
The second one determines state guarantees of an investor’s rights to invest and gain income and profit. And the conditions for will become commercial activities of foreign investors within the Russian territory. This law is not applicable to make an investment of foreign capital into banks and other credit organizations, insurance companies and non-commercial organizations.
This areas are subject to a special regulation. At a certain point in time, the government decided to keep a more deliberate control on investment in certain sectors of the economy. For this purpose in 2008, the federal law on procedures for foreign investments and companies have strategic importance for National Security and defense was enacted.
The law provides a detailed framework for regulating foreign investment and companies operating in industries dream to be of a national or strategic importance. It defines almost 50 so-called strategic sectors.
The list of industries deemed to be of national or strategic strategic importance includes:
- 1. nuclear and radioactive materials,
- 2. large-scale radio and television broadcasting,
- 3. the exploration for and extraction of natural resources on subsoil plots of federal importance,
- 4. large-scale printing and publishing activities,
- 5. production of metals with special characteristics,
- 6. space industry and many others.
The law enables the government to regulate such investments on a case-by-case basis. This should be done by a special government commission on foreign investment monitoring.
Types of investment promotion measures
We will highlight just some of them:
- 1. The Foreign Investment Advisory Council was established in 1994 as a result of the combined effort of the Russian government and foreign businesses to improve the investment climate in Russia.
- 2. Special economic zones provide the benefit and preferences for investors. They might apply a special business activity regime and create a free customs area.
- 3. The number of challenges faced by foreign investors in Russia should be reduced through the conclusion of special investment contracts that secure a stable, legal environment for the investor and can ensure their treatment as Russian producers.
- 4. The Russian government constantly works on supporting local producers and stimulating and foreign investors to develop the production of their goods and Russia. For example, the government establishes restrictions with regard to state procurement. As a result, certain types of goods produced in Russia or made in Russia enjoy an advantage over goods imported from foreign countries in government procurement.
- 5. Production sharing agreements allow to make investments into natural resources extraction more attractive. These are commercial contracts between investors and states. The state grants an investor and exclusive right to develop in mineral deposit, oil and gas field. And an investor undertakes to develop such a field deposit using its own resources and at its own risks. Such contracts as well as concessions license are the most common types of agreements be used in the global oil and gas industry.
- 6. The Russian Direct Investment Fund was created in 2011 to co-invest alongside the global investors, acting as a catalyst for direct investment in Russia. It is Russia’s sovereign wealth fund with a resolved capital of $10 billion under management. By now, it has attracted over 40 billion of foreign capital into the Russian economy through long-term strategic partnerships.
As you can see, in Russia there are all possibilities to start your business and invest!