The Russian legal system generally belongs to the continental European legal family. The legal structure developed at a rapid pace during the 1990s. During this period, significant reforms were enacted in almost every area of law as the country moved away from its Soviet command economy.
The Constitution, federal laws and regional laws form the foundation of the Russian legal system. Presidential executive orders, decrees of the Russian Government and the decisions of various ministries are used to support and develop the provisions of primary legislation.
The Constitution states that general principles of international law and international treaties are part of the Russian legal system. Consequently, if Russia is a signatory to an international treaty containing provisions contrary to the provisions of any domestic legislation, the provisions of the international treaty will prevail. The Constitution, however, takes precedence over any contradicting provision of an international treaty.
The Russian Civil Code (the “Civil Code”) sets out the foundation of civil law and is the key source of law for business. As part of the reform, significant amendments to the Civil Code concerning corporate law and the law of obligations came into force in September 2014 and June 2015. These amendments form the most significant development since the shaping of modern corporate and commercial law in Russia. Today, a number of concepts which have for a long time been common to international practice in corporate, debt and general commercial areas, are also recognised and widely used in Russia, in particular:
- corporate agreements;
- the “four-eyes” principle;
- the conditional performance of obligations;
- the concept of representations (“zavereniya ob obstoyatelstvakh”) (an intended equivalent of “representations” and “warranties” as used in contracts under English law);
- the concept of the reimbursement of losses arising from the occurrence of certain events specified in a contract (the intended equivalent of the English law concept of an “indemnity”);
- new types of civil law contracts, such as options, framework agreements and subscription agreements;
- rules for the conduct of negotiations to conclude a contract; and
- new mechanisms to secure the performance of contractual obligations by the parties.
These highly significant changes to the Civil Code are intended to accommodate the growing trend of submitting complicated transaction documents to Russian law and Russian courts instead of English law and international arbitration which were traditionally the “well-trodden path” in Russia. It is yet to be seen how the new concepts and provisions will be enforced by courts and arbitral tribunals. Nevertheless, in practice, companies are actively using the new concepts in their projects.
Following 18 years of negotiations, Russia finally joined the World Trade Organisation in summer 2012 (please see the Customs regulations chapter).
At the time, WTO accession sent a positive signal to foreign investors. However, notable changes such as a material drop in tariffs on imported goods and changes to the quotas for foreign participation in the insurance sector have not yet come into effect because of the long grace periods that are allowed. For example, under WTO rules, foreign insurance companies will be able to open branch offices in Russia, but this is not required to take effect until nine years after accession. The relevant bill to implement this change is in progress and has yet to be submitted to the State Duma.
The main legislative act governing foreign investments is Federal Law No. 160-FZ “On Foreign Investment in the Russian Federation” dated 9 July 1999. This law states that foreign investors and investments will be treated no less favourably than domestic investors and investments, subject to certain wide-ranging exceptions.
Exceptions/restrictions may be introduced, amongst others, to protect the Russian constitutional system; the morality, health and rights of third parties; or in order to ensure state security and/or defence. Some of the sectors concerned are commented on separately below. By and large, foreign investment is permitted in most sectors of the Russian economy, including investment in portfolios of government securities, stocks and bonds, direct investment in new businesses, in the acquisition of existing Russian-owned companies and in joint ventures.
Foreign investors are protected against nationalisation or expropriation, unless this is provided for by federal law. In these cases, foreign investors are entitled to receive compensation for their investment and other losses.
In addition to the so-called “Strategic Industries Law” (please see the Common forms of business structures for foreign investors chapter), restrictions on foreign investment exist notably in the insurance and banking sectors.
Federal Law No. 4015-1 “On Insurance” dated 27 November 1992 currently prohibits foreign investors from owning more than 25% of the total market for domestic insurance. Insurance companies in which foreign shareholders own more than 49% of the charter capital may not engage in certain types of insurance business, including, for example, life assurance. The existing limitations will be partly lifted by the legislative amendments which will be considered in connection with WTO accession.
In the banking sector, the Central Bank of Russia has the right to use reciprocity as a criterion to specify the types of business that subsidiaries or branches of foreign banks may be licensed to operate in Russia. In practice, however, branches of foreign banks are not able to carry out any banking activities on the Russian market. Additionally, a ceiling on the total amount of foreign bank capital, as a percentage of the total bank capital in Russia, can be imposed by federal law; however, no such limit applies at the time of writing. Under WTO rules, any such ceiling may not be less than 50%.
In 2014, the European Union and the United States of America (among others) imposed individual sanctions on certain Russian and Ukrainian nationals and entities that they believe to be responsible for the actions which led to the declaration of sovereignty by Crimea, and subsequently, it becoming part of the Russian Federation. Sanctions targeting certain sectors of the Russian economy (or so-called “sectoral sanctions”), as well as regional sanctions prohibiting certain economic activity related to Crimea and Sevastopol, have also been adopted.
In retaliation, Russia adopted countersanctions to prohibit the import of certain agricultural products, raw materials and foodstuffs from countries that have imposed sanctions on Russia. In parallel, it also launched an import substitution policy (please see the Import substitution and production localisation in Russia chapter).
2018 marked a turning point in terms of sanctions for Russia. In May, the US enacted legislation that may result in non-US persons being held liable for knowingly facilitating “significant transactions” for or on behalf of persons sanctioned under Ukraine-/Russia-related sanctions imposed by the US (so-called “secondary sanctions”). In October 2018, the EU adopted a new sanctions framework in connection with the use and proliferation of chemical weapons which does not expressly target Russia, but is expected to be used against Russia in future.
Again, Russia reacted to these developments. Firstly, it adopted a framework law on measures against unfriendly actions of the US and other foreign states in June 2018 and imposed the first sanctions under such law against Ukrainian individuals and legal entities in November 2018. Secondly, it imposed duties on a selection of goods imported from the US from 6 August 2018. Thirdly, a ban on the import to Russia of a number of goods of Ukrainian origin or transiting through Ukraine was declared in December 2018 and expanded in scope in December 2019.
Sanctions against Russia
Even though each national sanctions regime will vary in scope, the restrictions imposed can be broadly characterised as follows.
Under the individual sanctions regime, travel restrictions and asset freezes have been imposed on individuals and entities listed under the relevant legal acts.
Sectoral sanctions have been imposed on the following sectors of Russian economy:
- Energy sector: the sale, supply, transfer or export of items for certain types of oil exploration and production projects in Russia and the provision of associated services are prohibited, or subject to prior authorisation by the competent authorities of the exporting country. Departing from previous widely worded prohibitions, in December 2019, the US adopted a targeted approach in the energy sector by restricting activities connected with the construction and operation of the Nord Stream 2 and TurkStream pipelines.
- Financial sector: major Russian financial institutions, as well as certain defence and energy companies, have been prohibited from dealing with bonds, equity or similar financial instruments with a maturity exceeding 14, 30 or 90 days. It is also prohibited to make loans or credit available to any of the entities covered by the measures.
- Defence sector: Russia is subject to a weapons embargo. In addition, supplying dual use goods and technology to Russia is subject to individual authorisation by the respective authorities of the exporting country. The authorisation will be denied if those items are intended for military use or for a military end-user. This type of sanction also affects the manufacture of civil goods and equipment.
The activities prohibited under regional sanctions include importations from and exportations to Crimea, as well as making new investments (either in general or in certain sectors).
As a result of some recent measures aimed at the Russian state, US banks can no longer participate in the primary market for non-rouble denominated bonds issued by the Russian sovereign and lend non-rouble denominated funds to the Russian sovereign.
Sanctions imposed on Russia are not prohibiting all commercial activity. They are focusing on very specific individuals, entities, regions and economic sectors. Companies wishing to contract with Russian entities should carry out enhanced due diligence to ensure that they do not become involved in activities prohibited under the relevant sanctions regime.
Given how slowly the legal culture has developed in Russia, businesses tend not to expend their lobbying efforts on attempting to influence the drafting of new laws or the actions of those drafting them. Instead, businesses tend to seek de facto special treatment, such as tax deferments, customs benefits, operation licences and the right to engage in certain kinds of activity. In doing so, however it may be that these companies expose themselves unduly to “political risk” upon any change of administration and companies entering the market need to consider how secure such concessions might be for their business in the long term.
There are not many legally recognised lobbying associations with a large membership base. Prominent examples of associations that do exist are the Association of Russian Banks, the Chamber of Commerce and Industry of the Russian Federation, the Federation of Independent Trade Unions of Russia and the Union of Industrialists and Entrepreneurs.
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