6. Financial Sector
Capital Markets and Portfolio Investment
Russia is open to portfolio investment and has no restrictions on foreign investments. Russia’s two main stock exchanges – the Russian Trading System (RTS) and the Moscow Interbank Currency Exchange (MICEX) – merged in December 2011. The MICEX-RTS bourse conducted an initial public offering on February 15, 2013, auctioning an 11.82 percent share.
The Russian Law on the Securities Market includes definitions of corporate bonds, mutual funds, options, futures, and forwards. Companies offering public shares are required to disclose specific information during the placement process as well as on a quarterly basis. In addition, the law defines the responsibilities of financial consultants assisting companies with stock offerings and holds them liable for the accuracy of the data presented to shareholders. In general, the Russian government respects IMF Article VIII, which it accepted in 1996. Credit in Russia is allocated generally on market terms, and the private sector has access to a variety of credit instruments. Foreign investors can get credit on the Russian market, but interest rate differentials tend to prompt investors from developed economies to borrow on their own domestic markets when investing in Russia.
Money and Banking System
Banks make up a large share of Russia’s financial system. Although Russia had 396 licensed banks as of March 1, 2020, state-owned banks, particularly Sberbank and VTB Group, dominate the sector. The three largest banks are state-controlled (with private Alfa Bank ranked fourth); and held 51.4 percent of all bank assets in Russia as of March 1, 2020. The role of the state in the banking sector continues to distort the competitive environment, impeding Russia’s financial sector development. At the beginning of 2019, the aggregate assets of the banking sector amounted to 91.4 percent of GDP, and aggregate capital was 9.9 percent of GDP. Russian banks reportedly operate on short time horizons, limiting capital available for long-term investments. Overall, a share of non-performing loans (NPLs) to total gross loans reached 5.5 percent as of January 1, 2019. Foreign banks are allowed to establish subsidiaries, but not branches, within Russia and must register as a Russian business entity.
Foreign Exchange and Remittances
While the ruble is the only legal tender in Russia, companies and individuals generally face no significant difficulty in obtaining foreign currency from authorized banks. The CBR retains the right to impose restrictions on the purchase of foreign currency, including the requirement that the transaction be completed through a special account, according to Russia’s currency control laws. The CBR does not require security deposits on foreign exchange purchases. Otherwise, there are no barriers to remitting investment returns abroad, including dividends, interest, and returns of capital, apart from the fact that reporting requirements exist and failure to report in a timely fashion will result in fines.
Currency controls also exist on all transactions that require customs clearance, which, in Russia, applies to both import and export transactions and certain loans. As of March 1, 2018, the CBR no longer requires a “transaction passport” (i.e. a document with the authorized bank through which a business receives and services a transaction) when concluding import and export contracts. The CBR also simplified the procedure to record import and export contracts, reducing the number of documents required for bank authorization. The new instruction is an example of liberalization of the settlement procedure for foreign trade transactions in Russia. In 2016, the CBR tightened regulations for cash currency exchanges: a client must provide his full name, passport details, registration place, date of birth, and taxpayer number, if the transaction value exceeds RUB 15,000 (approximately $200). In July 2016, this amount was increased to RUB 40,000 (approximately $535). The declared purpose of this regulation is to combat money laundering and terrorist financing.
The CBR retains the right to impose restrictions on the purchase of foreign currency, including the requirement that the transaction be completed through a special account, according to Russia’s currency control laws. The CBR does not require security deposits on foreign exchange purchases. To navigate these requirements, investors should seek legal expert advice at the time of making an investment. Banking contacts confirm that investors have not had issues with remittances or with repatriation of dividends.
Sovereign Wealth Funds
In 2018, Russia combined its two sovereign wealth funds to form the National Welfare Fund (NWF). These funds have a combined holding of $123.4 billion as of April 2020. The Ministry of Finance oversees the fund’s assets, while the CBR acts as the operational manager. Russia’s Accounts Chamber regularly audits the NWF, and the results are reported to the State Duma. The NWF is maintained in foreign currencies, and is included in Russia’s foreign currency reserves, which amounted to $563.4 billion as of March 31, 2020.
8. Responsible Business Conduct
While not standard practice, Russian companies are beginning to show an increased level of interest in their reputation as good corporate citizens. When seeking to acquire companies in Western countries or raise capital on international financial markets, Russian companies face international competition and scrutiny, including with respect to corporate social responsibility (CSR) standards. As a result, most large Russian companies currently have a CSR policy in place, or are developing one, despite the lack of pressure from Russian consumers and shareholders to do so. CSR policies of Russian firms are usually published on corporate websites and detailed in annual reports but do not involve a comprehensive “due diligence” approach of risk mitigation that the OECD Guidelines for Multinational Enterprises promotes. Most companies choose to create their own non-government organization (NGO) or advocacy outreach rather than contribute to an already existing organization. The Russian government is a powerful stakeholder in the development of certain companies’ CSR agendas. Some companies view CSR as merely financial support of social causes and choose to support local health, educational, and social welfare organizations favored by the government. One association, the Russian Union of Industrialists and Entrepreneurs (RSPP), developed a Social Charter of Russian Business in 2004, which 269 Russian companies and organizations have joined as of April 1, 2020.
According to a study conducted by Skolkovo Business School, together with UBS Bank, corporate contributions to charitable causes in Russia reached an estimated RUB 220 billion ($2.9 billion) in 2017. RSPP reported that as many as 185 major Russian companies published 1,038 corporate non-financial reports between 2000 and 2019, including on social responsibility initiatives.
Despite some government efforts to combat it, the level of corruption in Russia remains high. Transparency International’s 2019 Corruption Perception Index (CPI) ranked Russia 137 out of 180, which was one notch below its 2018 rank.
Roughly 24 percent of entrepreneurs surveyed by the Russian Chamber of Commerce in October and November 2019 said they constantly faced corruption. Businesses mainly experienced corruption during applications for permits (35.3 percent), during inspections (22.1 percent), and in the procurement processes (38.7 percent). The areas of government spending that ranked highest in corruption were public procurement, media, national defense, and public utilities.
In March 2020, Russia’s new Prosecutor General Igor Krasnov reported RUB 21 billion ($281 million) were recovered in the course of anticorruption investigations in 2019. In December 2019, Procurator General’s Office Spokesperson Svetlana Petrenko reported approximately over 7,000 corruption convictions in 2019, including of 752 law enforcement officers, 181 Federal Penitentiary Service (FPS) officers, 81 federal bailiffs, and 476 municipal officials.
Until recently, one of the peculiarities of Russian enforcement practice was that companies were prosecuted almost exclusively for small and mid-scale bribery. Several 2019 cases indicate that Russian enforcement actions, finally, may extend to more severe offenses as well. To date, ten convictions of companies for large- or extra large-scale bribery with penalty payments of RUB 20 million ($268,000) or more have been disclosed in 2019 – compared to only four cases in the whole of 2018. In July 2019, Russian Standard Bank, which is among Russia’s 200 largest companies according to Forbes Russia, had to pay a penalty of RUB 26.5 million ($355,000) for bribing bailiffs in Crimea in order to speed up enforcement proceedings against defaulted debtors.
Still, there is no efficient protection for whistleblowers in Russia. In June 2019, the legislative initiative aimed at the protection of whistleblowers in corruption cases ultimately failed. The draft law, which had been adopted at the first reading in December 2017, provided for comprehensive rights of whistleblowers and responsibilities of employers and law enforcement authorities. Since August 2018, Russian authorities have been authorized to pay whistleblowers rewards which may exceed RUB 3 million ($40,000). However, rewards alone will hardly suffice to incentivize whistleblowing.
Russia adopted a law in 2012 requiring individuals holding public office, state officials, municipal officials, and employees of state organizations to submit information on the funds spent by them and members of their families (spouses and underage children) to acquire certain types of property, including real estate, securities, stock, and vehicles. The law also required public servants to disclose the source of the funds for these purchases and to confirm the legality of the acquisitions.
In July 2018, President Putin signed a two-year plan to combat corruption. The plan required public consultation for federal procurement projects worth more than RUB 50 million ($670,000) and municipal procurement projects worth more than RUB 5 million ($67,000). The government also expanded the list of property that can be confiscated if the owners fail to prove it was acquired using lawful income. The government maintains an online registry of officials charged with corruption-related offences, with individuals being listed for a period of five years.
The Constitutional Court has given clear guidance to law enforcement on asset confiscation due to the illicit enrichment of officials. Russia has ratified the UN Convention against Corruption, but its ratification did not include article 20, which deals with illicit enrichment. The Council of Europe’s Group of States against Corruption (GRECO) reported in 2019 that Russia had implemented only 10 out of 22 recommendations: eight concern members of the parliament, nine concern judges, and five concern prosecutors , according to a draft report by the office of the Prosecutor General of the Russian Federation that was submitted to the State Duma.
U.S. companies, regardless of size, are encouraged to assess the business climate in the relevant market in which they will be operating or investing and to have effective compliance programs or measures to prevent and detect corruption, including foreign bribery. U.S. individuals and firms operating or investing in Russia should take time to become familiar with the relevant anticorruption laws of both Russia and the United States in order to comply fully with them. They should also seek the advice of legal counsel when appropriate.
Resources to Report Corruption
Andrey Avetisyan Ambassador at Large for International Anti-Corruption Cooperation
Ministry of Foreign Affairs
32/34 Smolenskaya-Sennaya pl, Moscow, Russia
+7 499 244-16-06
Transparency International – Russia
Rozhdestvenskiy Bulvar, 10, Moscow
Individuals and companies that wish to report instances of bribery or corruption that affect their operations and request the assistance of the United States government with respect to issues relating to corruption may call the Department of Commerce’s Russia Corruption Reporting hotline at (202) 482-7945, or submit the form provided at .
10. Political and Security Environment
Russia continues to restrict the fundamental freedoms of expression, assembly, and association by cracking down on political opposition, independent media, and civil society. Since July 2012, Russia has passed a series of laws giving the government the authority to label NGOs as “foreign agents” if they receive foreign funding, greatly restricting the activities of these organizations. To date, more than 150 NGOs have been labelled foreign agents. A law enacted in May 2015 authorizes the government to designate a foreign organization as “undesirable” if it is deemed to pose a threat to national security or national interests. As of April 2020, 22 foreign organizations were included on this list. ( )
According to the Russian Supreme Court, 7,763 individuals were convicted of economic crimes in 2019; the Russian business community alleges many of these cases stemmed from commercial disputes. Potential investors should be aware of the risk of commercial disputes being criminalized. Chechnya, Ingushetia, Dagestan, and neighboring regions in the northern Caucasus have a high risk of violence and kidnapping.
Public protests continue to occur intermittently in Moscow and other cities. In July and August 2019 in Moscow, large protests took place to voice frustration with the banning of opposition candidates from running in September municipal elections. Some protests were marred by police brutality and indiscriminate arrests of participants and innocent bystanders. In April, the Russian government imposed self-isolation orders in an effort to stop the spread of the COVID-19 pandemic. Protesters could not gather in person but did so virtually through on-line platforms, demanding the government provide social assistance or lift restrictions.
11. Labor Policies and Practices
The Russian labor market remains fragmented, characterized by limited labor mobility across regions and substantial differences in wages and employment conditions. Earning inequalities are significant, enforcement of labor standards remains relatively weak, and collective bargaining is underdeveloped. Employers regularly complain about shortages of qualified skilled labor. This phenomenon is due, in part, to weak linkages between the education system and the labor market and a shortage of highly skilled labor. In 2019, the minimum wage in Russia was linked to the official “subsistence” level. As of April 2020, this was RUB 12,130 ($162).
The 2002 Labor Code governs labor standards in Russia. Normal labor inspections identify labor abuses and enforce health and safety standards . The government generally complies with ILO conventions protecting worker rights, though enforcement is often insufficient, as labor inspectors are over-stretched. Employers are required to make severance payments when laying off employees in light of worsening market conditions.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
* Source for Host Country Data: FDI data – Central Bank of Russia (CBR); GDP data – Rosstat (GDP) (Russia’s GDP was RUB 104,630 billion in 2018, according to Rosstat. The yearly average RUB-USD-exchange rate in 2018, according to the CBR, was RUB 62.7078 to the USD).
|Direct Investment from/in Counterpart Economy Data (as of October 1, 2019)|
|From Top Five Sources/To Top Five Destinations (US Dollars, Millions)|
|Inward Direct Investment||Outward Direct Investment|
|Total Inward||550,209||100%||Total Outward||473,141||100%|
|“0” reflects amounts rounded to +/- USD 500,000.|
|Portfolio Investment Assets (as of October 1, 2019)|
|Top Five Partners (Millions, US Dollars)|
|Total||Equity Securities||Total Debt Securities|
|All Countries||76,326||100%||All Countries||7,529||100%||All Countries||68.797||100%|