Attitude toward Foreign Direct Investment
Russian President Vladimir Putin told foreign investors in June 2015, “Russia always wants to be an open and friendly country to all those who want to run their business here.” Russia’s primary approach to attracting foreign direct investment (FDI) has been to pass a variety of measures intended to induce companies to localize their production in Russia. President Putin signed the Industrial Policy Law (No. 488-FZ) in December 2014, which stipulates preferences for Russian-made products in government procurement and major government-funded projects; the law also “recommends” similar preferences for purchasing by state-owned enterprises (SOE). The law also provides for special investment contracts, which would guarantee some preferential treatment for foreign companies that localize production of an item not currently made in Russia.
Most sectors of the economy are open to foreign investment, though there are ownership restrictions in strategic sectors. The Strategic Sectors Law (FZ-57) stipulates 45 activities for which foreign investment requires government approval (see Limits on Foreign Control below). Foreign ownership in air transportation, financial services, insurance, media, and agricultural land is also restricted.
Other Investment Policy Reviews
The Organization for Economic Cooperation and Development (OECD) conducted an Investment Policy Review of Russia in 2010-2012, in the context of Russia's attempt to become an OECD member, based on the OECD Policy Framework for Investment.
Laws/Regulations on Foreign Direct Investment
While a legal structure exists to support foreign investors, the laws are not always enforced in practice. The 1991 Investment Code and 1999 Law on Foreign Investment (FZ-160) guarantee that foreign investors enjoy rights equal to those of Russian investors, although some industries have limits on foreign ownership (see Right to Private Ownership and Establishment below). Russia has sought to enhance consultation mechanisms with international businesses (for example, through the Foreign Investment Advisory Council, whose members are the chief executives of large companies) regarding the impact of the country’s legislation and regulations on the business and investment climate. In 2012, President Putin created the position of Ombudsman for Entrepreneurs’ Rights as an additional measure of protection and advocacy for entrepreneurs. The court system and particularly the Investigative Committee, a body directly under the president of the Russian Federation charged with legal oversight of government agencies, are subject to political interference that may affect foreign investments. In addition, the country's investment dispute resolution mechanisms can be non-transparent and unpredictable (see Dispute Settlement section).
Business Registration
Russia’s business registration website, www.nalog.ru (in Russian), is operated by the Federal Tax Service (FTS). The online registration process is clear, comprehensive, and open to foreign companies, but requires receiving an electronic signature from one of the certification centers designated by the Ministry of Telecom and Mass Communications to submit an application electronically. A company must register with a local FTS Office; application documents can be hand-delivered, sent by mail or submitted electronically. According to Law FZ-129 of 2001, the business registration process must not take more than five days. Foreign companies may be required to notarize the originals of incorporation documents included in the application package.
The Russian Direct Investment Fund (RDIF) was established in 2012 to attract foreign direct investment into the Russian economy. The RDIF co-invests up to 50 percent of ownership in individual projects with foreign investors. The services of the fund are available to co-investors meeting one of the following criteria: more than USD 1 billion worth of assets under management, market capitalization of over USD 1 billion, or a turnover exceeding USD 1 billion, and earnings before interest, taxes, depreciation and amortization (EBITDA) over USD 150 million.
According to Russian legislation, businesses qualify as medium-sized enterprises if they employ 101 to 250 people and have annual revenues, less value-added tax (VAT), of 2 billion rubles (USD 27.4 million) or less. Small enterprises are defined as businesses and sole proprietors that employ 16 to 100 people and whose annual revenues do not exceed 800 million rubles (USD 11 million). Microenterprises are defined as businesses and sole proprietors employing not more than 15 persons and whose annual revenues are under 120 million rubles (USD 1.6 million).
Limits on Foreign Control and Right to Private Ownership and Establishment
Russian government officials have repeatedly stressed that foreign investment and technology transfer are critical to Russia's economic modernization. At the same time, the government continues to limit foreign investment in sectors deemed to have strategic significance for national defense and state security via the Strategic Sectors Law of 2008 (FZ-57). The law originally specified 42 activities and has since been amended on six separate occasions. As of April 2015, 45 activities require government approval for significant foreign investment. Foreign investors wishing to increase or gain ownership above certain thresholds need to seek prior approval from the government commission described below.
On October 15, 2014, President Putin signed a law “On Mass Media,” (FZ-305) which restricts foreign ownership of any Russian media company to 20 percent. Previously only Russia’s broadcast sector was subject to a 50 percent foreign ownership limit. The new law took effect on January 1, 2015, and media owners have until February 1, 2017, to adjust their ownership structures. The law prompted the sale in November 2015 of the leading business paper Vedomosti by its three foreign owners (Dow Jones, Pearson, and Finnish publishing house Sanoma), and has further heightened concern of media consolidation and government influence.
Privatization Program
Due to federal budget constraints in 2016, privatization plans have become a priority, albeit with little action as of March 2016. The Federal Property Management Agency (Rosimushchestvo) reported that revenues generated from the privatization of state-owned property in 2015 (the so-called “mass privatization,” not involving the largest state-owned companies) amounted to only 7.39 billion rubles (USD 104 million), as nearly 80 percent of the auctions were invalidated for lack of demand caused by “high volatility of financial markets and borrowing costs.”
The 2013 Privatization Program for state-owned enterprises (SOEs) fell behind its original schedule for 2014-2016. Most of the sales were supposed to involve the sale of minority share positions, privatization through dilution of shares rather than divestment, and retention of “golden shares” that maintain government veto power on company boards. In June 2014, Prime Minister Dmitriy Medvedev approved the “Plan to Implement State Programs on Federal Property Management in 2014-2016,” in which the Russian government laid out concrete annual plans to decrease its ownership in various companies. However, plans to decrease state ownership in such companies as the national rail monopoly Russian Railways by 5 percent, commercial shipping company Sovkomflot by 25 percent, and the flag carrier airline Aeroflot by 1.2 percent by the end of 2014 did not materialize.
According to a March 2015 report issued by Russia’s Accounting Chamber, an auditing body under the country’s parliament, Russia had fully or partially privatized 1,180 joint-stock companies and 274 federal unitary enterprises between 2010 and 2014. Privatization proceeds for the period, however, amounted to only 21 percent of the planned total, as the bulk of the privatization program was postponed. The main reasons for the postponement was low asset prices, compounded by Russia’s economic downturn and Western sanctions imposed on the country.
Russia also established a separate list of strategic companies that includes the largest and most profitable Russian firms via Executive Order No. 1009 of August 4, 2004. Companies identified on this list have some level of government ownership; the Executive Order sets forth the requirements for privatizing these firms. The 2012 addition of privately held, Russian internet company Yandex to the strategic companies list highlighted the government’s broad interpretation of what is required to protect state security and national defense.
To date, treatment of foreign investment in new privatizations has been inconsistent; at times, and foreign participation has been confined to minority stakes. Subsequently, many investors have faced problems with inadequate protection for minority shareholders and corporate governance. Potential foreign investors are advised to work directly and closely with appropriate local, regional, and federal agencies that exercise ownership or authority over SOEs whose shares they may want to acquire. (See State-Owned Enterprises)
Screening of FDI
Established in 2008, the Government Commission on Monitoring Foreign Investment screens FDI in Russia. The type of industry for a proposed investment and not a threshold level of investment triggers a review by the Commission. The Commission scrutinizes foreign investment in businesses that have strategic importance for national defense and security. The Prime Minister is the Chairman of the Commission, ex-officio. Since 2008, the Commission has received 395 applications for foreign investment (as of March 11, 2016). Of that total number, 150 were recognized as transactions for which approval was not required; 43 applications were withdrawn by applicants; and seven had not been completed. Of the 195 applications that the Commission reviewed, 183 were approved (93.8 percent), including 49 with certain conditions. Only 12 applications (6.2 percent) were rejected.
Competition Law
The current regulation on the Federal Antimonopoly Service (FAS) was adopted by the Russian government in July 2004. The stated primary goal of the agency is to enhance development of competition in the economy and financial services market. Since 2004, control over the activity of natural monopolies and observance of the legislation on advertising has been delegated to FAS.
The Federal Antimonopoly Service has been criticized for being overly aggressive, particularly toward small and medium enterprises (SMEs). In 2013, FAS reviewed over 55,000 cases – more than all other national anti-monopoly agencies worldwide. Over one-third of the cases investigating abuse of market position were against SMEs, often in rural areas where the local market demand could not support multiple businesses. Only 11 percent of cases reviewed by FAS involved major market players that fell within the top 100 Russian companies in terms of annual revenue. The fourth anti-monopoly package law, passed in October 2015, increased the annual sales threshold below which Russian companies would not be recognized as dominant regardless of their market share and entered into force in January 2016. FAS expects that under the new law, annual sales of about 80 percent of all Russian SMEs will fall below the new threshold, leaving only 20 percent of SMEs subject to FAS antimonopoly regulation.
In March 2015, President Putin signed into law amendments to Article 178 of the Criminal Code aimed at reducing pressure both on small businesses and major market players, further liberalizing Russia’s antitrust laws. Article 178 imposes liability on competing business entities for: (1) non-admission, restriction, or elimination of competition by entering into agreements that restrict competition (cartels) or by abusing repeatedly their dominant positions by fixing and/or maintaining monopolistic high or monopolistic low prices for goods; (2) unreasonable refusal to conclude or avoidance of concluding an agreement; and (3) restriction from entering a market, provided such actions cause major damage to individuals, companies, or the state or involve high profits. The amendments changed the definitions of “high profits” and “major damage” by increasing the minimum monetary amounts that constitute a violation, thus avoiding criminal prosecution in the majority of cases that involve SMEs.