The Russian Federation remained in 28th place out of 190 economies in the World Bank’s Doing Business 2020 Report, reflecting modest incremental improvements in the regulatory environment in prior years. The World Bank paused the publication of the Doing Business 2021 report to assess a number of irregularities that have been reported, therefore no updates since last report are available. However, fundamental structural problems in Russia’s governance of the economy continue to stifle foreign direct investment throughout Russia. In particular, Russia’s judicial system remains heavily biased in favor of the state, leaving investors with little recourse in legal disputes with the government. Despite on-going anticorruption efforts, high levels of corruption among government officials compound this risk.
Throughout 2020, a prominent U.S. investor, who was arrested in February 2019 over a commercial dispute, remained under modified house arrest. Moreover, Russia’s import substitution program gives local producers advantages over foreign competitors that do not meet localization requirements. Finally, Russia’s actions since 2014 have resulted in EU and U.S. sanctions – restricting business activities and increasing costs.
U.S. investors must ensure full compliance with U.S. sanctions, including sanctions against Russia in response to its invasion of Ukraine, election interference, other malicious cyber activities, human rights abuses, use of chemical weapons, weapons proliferation, illicit trade with North Korea, support to Syria and Venezuela, and other malign activities. Information on the U.S. sanctions program is available at the U.S. Treasury’s website: . U.S. investors can utilize the “Consolidated Screening List” search tool to check sanctions and control lists from the Departments of Treasury, State, and Commerce: .
Russia’s Strategic Sectors Law (SSL) established an approval process for foreign investments resulting in a controlling stake in one of Russia’s 46 “strategic sectors.” The law applies to foreign states, international organizations, and their subsidiaries, as well as to “non-disclosing investors” (i.e., investors not disclosing information about beneficiaries, beneficial owners, and controlling persons).
Since 2015, the Russian government has had an incentive program for foreign investors called Special Investment Contracts (SPICs). These contracts, managed by the Ministry of Industry and Trade, allow foreign companies to participate in Russia’s import substitution programs by providing access to certain subsidies to foreign producers who establish local production. In August 2019, the Russian government introduced “SPIC-2.0,” which incentivizes long-term private investment in high-technology projects and technology transfer in manufacturing.
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
The Ministry of Economic Development (MED) is responsible for overseeing investment policy in Russia. The Russian Direct Investment Fund (RDIF) was established in 2011 to facilitate direct investment in Russia and has already attracted over $40 billion of foreign capital into the Russian economy through long-term strategic partnerships. In 2013, Russia’s Agency for Strategic Initiatives (ASI) launched an “Invest in Russian Regions” project to promote FDI in Russian regions. Since 2014, ASI has released an annual ranking of Russia’s regions in terms of the relative competitiveness of their investment climates and provides potential investors with information about regions most open to foreign investment. In 2021, 40 Russian regions improved their Regional Investment Climate Index scores (https://asi.ru/investclimate/rating). The Foreign Investment Advisory Council (FIAC), established in 1994, is chaired by the Prime Minister and currently includes 53 international company members and four companies as observers. The FIAC allows select foreign investors to directly present their views on improving the investment climate in Russia and advises the government on regulatory rulemaking.
Russia’s basic legal framework governing investment includes 1) Law 160-FZ, July 9, 1999, “On Foreign Investment in the Russian Federation;” 2) Law No. 39-FZ, February 25, 1999, “On Investment Activity in the Russian Federation in the Form of Capital Investment;” 3) Law No. 57-FZ, April 29, 2008, “Foreign Investments in Companies Having Strategic Importance for State Security and Defense (Strategic Sectors Law, SSL);” and 4) the Law of the RSFSR No. 1488-1, June 26, 1991, “On Investment Activity in the Russian Soviet Federative Socialist Republic (RSFSR),” and (5) Law No. 69-FZ. April 1, 2020, “On Investment Protection and Promotion Agreements in the Russian Federation.” This framework of laws nominally attempts to guarantee equal rights for foreign and local investors in Russia. However, exemptions are permitted when it is deemed necessary to protect the Russian constitution, morality, health, human rights, or national security or defense, and to promote its socioeconomic development. Foreign investors may freely use the profits obtained from Russia-based investments for any purpose, provided they do not violate Russian law.
The new 2020 Federal Law on Protection and Promotion of Investments applies to investments made under agreements on protection and promotion of investments (“APPI”) providing for implementation of a new investment project. APPI may be concluded between a Russian legal entity (the organization implementing the project established by a Russian or a foreign company) and a regional and/or the federal government. APPI is a private law agreement coming under the Russian civil legislation (with exclusions provided for by the law). Support measures include reimbursement of (1) the costs of creating or reconstructing the infrastructure and (2) interest on loans needed for implementing the project. The maximum reimbursable costs may not exceed 50 percent of the costs actually incurred for supporting infrastructure facilities and 100 percent of the costs actually incurred for associated infrastructure facilities. The time limit for cost recovery is five years for the supporting infrastructure and ten years for the associated infrastructure.
Limits on Foreign Control and Right to Private Ownership and Establishment
Russian law places two primary restrictions on land ownership by foreigners. The first is on the foreign ownership of land located in border areas or other “sensitive territories.” The second restricts foreign ownership of agricultural land, including restricting foreign individuals and companies, persons without citizenship, and agricultural companies more than 50-percent foreign-owned from owning land. These entities may hold agricultural land through leasehold rights. As an alternative to agricultural land ownership, foreign companies typically lease land for up to 49 years, the maximum legally allowed.
In October 2014, President Vladimir Putin signed the law “On Mass Media,” which took effect on January 1, 2015. The law restricts foreign ownership of any Russian media company to 20 percent (the previous law applied a 50 percent limit to Russia’s broadcast sector). U.S. stakeholders have raised concerns about similar limits on foreign direct investments in the mining and mineral extraction sectors and describe the licensing regime as non-transparent and unpredictable. In December 2018, the State Duma approved in its first reading a draft bill introducing new restrictions on online news aggregation services. If adopted, foreign companies, including international organizations and individuals, would be limited to a maximum of 20 percent ownership interest in Russian news aggregator websites. The second, final hearing was planned for February 2019, but was postponed. To date, this proposed law has not been passed.
Russia’s Commission on Control of Foreign Investment (Commission) was established in 2008 to monitor foreign investment in strategic sectors in accordance with the SSL. Between 2008 and 2019, the Commission received 621 applications for foreign investment, 282 of which were reviewed, according to the Federal Antimonopoly Service (FAS). Of those 282, the Commission granted preliminary approval for 259 (92 percent approval rate), rejected 23, and found that 265 did not require approval (https://fas.gov.ru/news/29330). International organizations, foreign states, and the companies they control are treated as single entities under the Commission, and with their participation in a strategic business, are subject to restrictions applicable to a single foreign entity. There have been no updates regarding the number of applications received by the Commission since 2019. Due to COVID-19, the Commission met only twice since then, in December 2020 and February 2021.
Pursuant to legal amendments to the SSL that entered into force August 11, 2020, a foreign investor is deemed to exercise control over a Russia’s strategic entity even if voting rights in shares belonging to the investor have been temporarily transferred to other entities under the pledge or trust management agreement, or repo contract or a similar arrangement. According to the FAS, the amendments were aimed to exclude possible ways of circumventing the existing foreign investments control rules by way of temporary transfer of voting rights in the strategic entity’s shares.
In an effort to reduce bureaucratic procedures and address deficiencies in the SSL, on May 11, President Putin signed into law a draft bill introducing specific rules lifting restrictions and allowing expedited procedures for foreign investments into certain strategic companies for which strategic activity is not a core business.
Since January 1, 2019, foreign providers of electronic services to business customers in Russia (B2B e-services) have new Russian value-added tax (VAT) obligations. These obligations include VAT registration with the Russian tax authorities (even for VAT exempt e-services), invoice requirements, reporting to the Russian tax authorities, and adhering to VAT remittance rules.
Other Investment Policy Reviews
The WTO conducted the first Trade Policy Review (TPR) of the Russian Federation in September 2016. The next TPR of Russia will take place in October 2021, with reports published in September. (Related reports are available at ).
The United Nations Conference on Trade and Development (UNCTAD) issues an annual World Investment Report covering different investment policy topics. In 2020, the focus of this report was on international production beyond the pandemic ( ). UNCTAD also issues an investment policy monitor ( ).
The Federal Tax Service (FTS) operates Russia’s business registration website: . Per law (Article 13 of Law 129-FZ of 2001), a company must register with a local FTS office, and the registration process should not take more than three days. Foreign companies may be required to notarize the originals of incorporation documents included in the application package. To establish a business in Russia, a company must register with FTS and pay a registration fee of RUB 4,000. As of January 1, 2019, the registration fee has been waived for online submission of incorporation documents directly to the Federal Tax Service (FTS).
The publication of the Doing Business report was paused in 2020, as the World Bank is assessing its data collection process and data integrity preservation methodology.
The 2019 ranking acknowledged several reforms that helped Russia improve its position. Russia made getting electricity faster by setting new deadlines and establishing specialized departments for connection. Russia also strengthened minority investor protections by requiring greater corporate transparency and made paying taxes easier by reducing the tax authority review period of applications for VAT cash refunds. Russia also further enhanced the software used for tax and payroll preparation.
The Russian government does not restrict Russian investors from investing abroad. Since 2015, Russia’s “De-offshorization Law” (376-FZ) requires that Russian tax residents notify the government about their overseas assets, potentially subjecting these assets to Russian taxes.
While there are no restrictions on the distribution of profits to a nonresident entity, some foreign currency control restrictions apply to Russian residents (both companies and individuals), and to foreign currency transactions. As of January 1, 2018, all Russian citizens and foreign holders of Russian residence permits are considered Russian “currency control residents.” These “residents” are required to notify the tax authorities when a foreign bank account is opened, changed, or closed and when funds are moved in a foreign bank account. Individuals who have spent less than 183 days in Russia during the reporting period are exempt from the reporting requirements and restrictions using foreign bank accounts. On January 1, 2020, Russia abolished all currency control restrictions on payments of funds by non-residents to bank accounts of Russian residents opened with banks in OECD or FATF member states. This is provided that such states participate in the automatic exchange of financial account information with Russia. As a result, from 2020 onward, Russian residents will be able to freely use declared personal foreign accounts for savings and investment in wide range of financial products.