Difficult jurisdictions: Russia

Winston Churchill once described Russia as a “riddle, wrapped in a mystery, inside an enigma”. While it is still a comparatively uncertain place for foreign businesses, the country has come a long way since the collapse of the Soviet Union in 1991 and Russia now offers vast investment opportunities.
The global economic crisis hit Russia hard. The economy, however, has bounced back, with the government forecasting 4% growth for 2011 and 2012. Russia’s successful bids for the 2014 Winter Olympics and the 2018 World Cup have provided a boost to the construction and infrastructure sectors.
But there are still obstacles to overcome when doing business in Russia. Attention to procedure and structuring your venture to maximise contract enforceability are vital.

Regulatory environment

A crucial regulatory development in Russia’s construction sector was the recent reform of design, engineering and construction licensing in January 2010. Previously, licences were issued by the state authorities. Under the new regime, the list of activities requiring licences has been shortened. To perform one of these activities, a company must become a member of the relevant self-regulated industry association that issues the necessary licences.

In general, foreign investments in Russia are unrestricted and the Federal Law on Foreign Investments 1999 defines the parameters of foreign investment in the Russian Federation. Russia’s Strategic Investment Law places an obligation on a foreign investor wishing to acquire control over a strategic company to obtain prior governmental consent. The restriction applies to strategic sectors, such as subsoil use or cryptography, and is unlikely to affect most of the investments in the construction sector.

Corruption

Transparency International’s 2010 Corruption Perceptions Index ranked Russia 154th out of 178 countries. On a scale from 10 (very clean) to 0 (highly corrupt), Russia received an index score of only 2.1. With this in mind, UK companies operating in Russia should be aware of the UK’s Bribery Act 2010, which, when it becomes law from today, will criminalise bribery and corruption not only in the UK, but in other jurisdictions. Companies can also be found liable under local Russian laws for bribery and incitement to bribery.

In 2008, a law was enacted to counteract corruption. However, the law merely sets out guidelines for combating corruption and, as a result, has had minimal practical impact to date. The most common penalties for corruption are found in the Russian criminal code, with the provision and acceptance of bribes receiving substantial prison sentences.

Russian legal system and courts

Since the fall of the Soviet Union the Russian legal system is generally classified as a civil law system. Russia’s judicial system is made up of several types of courts: the constitutional court, civil courts, “arbitrazh” courts, justices of the peace, and military tribunals. Commercial disputes among legal entities and/or entrepreneurs will be considered by arbitrazh courts, and non-commercial disputes among individuals and legal entities, by the civil courts. There is no specialist construction court.

Arbitration

Russia is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Russian arbitration law provides for foreign arbitral awards to be recognised and enforced, subject to obtaining the permission of the court. In practice, enforcement is not always straightforward, especially in certain Russian regions and against the key regional enterprises.

Russia withdrew from the Energy Charter Treaty (ECT) in July 2009 casting doubt over its willingness to be bound by international investment treaties. Since then there have been arbitration proceedings between Yukos Oil and the Russian Federation concerning the unlawful expropriation of investments by the state. The arbitral tribunal found that (i) the ECT bound the Russian Federation; and (ii) the withdrawal from the ECT had no impact on investments made before the termination took effect. The decision is seen as a positive result for investors in the Russian energy sector.

Chris Hill is a partner at Norton Rose