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Basics of Russian Legal Framework for Foreign Investors

MAY 2010

Following ten years of spectacular growth, the Russian economy has slowed with the onset of the global financial crisis. Sensitive to shifts in exchange rates and commodity prices, the investment climate has faced uncertainty as many speculative funds have withdrawn and the state has stepped up funding to key enterprises. The changing times have caused many investors to reassess their commitment to Russia while others have seen the contagion as an opportunity to acquire new assets at undervalue. In Russia, the legal climate remains complex and ambiguous, with a rigid approach by state authorities and a system based on a number of complex mandatory rules. Russian laws are still not entirely suited to the sophisticated structures of some high-profile transactions, to overcome this, foreign investors can use a number of legal tools and procedures which we detail in this note. One key change has been the introduction in 2008 of the Foreign Investments Law, which places tight restrictions on foreign investment in certain key "strategic" industries. While not friendly to all foreign investors, some have argued that the law promotes transparency with a clear set of criteria that will hopefully better regulate foreign investments. Meanwhile other domestic reforms have helped to expand the legal toolkit for investors with new rules for Russian joint-stock companies and limited liability companies and the enforcement of pledges. As for Russian courts, investors have had difficulty in the past due to a lack of developed court practice, especially where the transactions or instruments in dispute are unfamiliar to Russian courts and officials. Several decisions of the higher courts leave room for accommodation of new investment concepts in the future.
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