RUSSIA TO DAY, DOING BUSINESS
- Strategy for New Growth
- Investing in
- General Economic Trends
- Companies
- Taxes
-
- Key definitions used in this Federal Law
- Activities having strategic significance for the
- Démarrer des relations d'affaires
By H.E. Vadim Loukov, Ambassador of
The world's biggest country has elected a new President, with a new government to appear. What path will
This is why I will try to outlay here key elements of the economic, social and political program of the new President of Russia, Mr. Dmitry Anatolyevich Medvedev.
The strategic goal of the Russian leadership is to make our country by the year 2020 the world's fifth economy, and the leading economy in
This is an ambitious yet quite realistic goal.
First of all, because it is supported by the society. The best proof of this is 70,5% votes cast by the electorate in favor of Mr. D.A. Medvedev.
The realism of this strategic goal is further supported by the dynamics of
From 2000 to 2007 our GDP grew by 72%. Last year the growth rate was 8,1%. As a result our economy in 2007 superceded such EU countries as
Industrial growth should especially be noted. In 2007 its rate was 6,3%, with car and aircraft industries leading the way. Some sectors are experiencing real boom, for instance, construction with its 21,3% growth last year.
Furthermore, realism of the strategic goal set by the government is supported by available financial reserves, natural resources and skilled labor force.
In 2007 foreign currency reserves grew by US $ 170 bln, reaching US $ 478,6 bln. by the end of the year. Stabilization Fund stands at US $ 153,6 bln. today.
Favourable investment climate is a key development resource in any country. It is setting in in
The accumulated foreign investment in our economy grew by 7 times in the last 8 years. This is, I believe, the best proof of confidence of Russian and foreign investors in
The rate of growth of capitalization of stock market is yet another important indicator of any country's development. In
By what means do we intend to reach our strategic goal?
First and foremost, by switching over from the energy and raw materials-based scenario of development to the one based on innovation. This will decrease dependence on exports of raw materials and energy resources.
We intend to increase labor productivity in industry four-fold in the next 12 years. This will be done through massive modernization of enterprises and introduction of the new quality of their management.
Technical rearmament of our industry is underway already. This presents a unique chance not only for Russian but also for foreign producers of industrial equipment. I urge Flemish businessmen not to miss this chance.
We are beginning to radically change the structure of economy through accelerated growth of high-tech sectors. Airspace industry, ICT, nanomaterials and shipbuilding are leading the way.
Just one example. The government has established a specialized corporation "Rosnanotechnologies" for promoting R & D and venture companies in the sphere of nanotechnologies. The starting capital of the Corporation is US $ 5,3 bln. Belgian Ministry of Scientific Policy is preparing now a visit by a big delegation of businessmen and experts to
Secondly, we aim at massive development and modernization of our transport and IC infrastructure.
I call on Flemish businessmen who are reputed worldwide for their experience in constructing transportation hubs and logistics, not to miss this chance at the Russian market. Specially for you the Embassy in collaboration with governments of Flanders, the Moscow Region and
Thirdly, we are striving to create a modern energy base for developing economy and consolidating
The Russian energy sector is to undergo a real revolution by 2020. There will be profound change in the structure of generating capacities which will be boosted by construction of coal-burning and nuclear power plants as well as hydroelectric power plants.
Just one example: in the next 20 years on the average two nuclear reactors are to be built every year in my country.
Parallel to this, another revolution will unfold, aimed at reducing by 50% the energy intensity of our industry.
As a result we will not reduce, but, on the contrary, increase the potential of export energy resources. This will enhance
Fourthly, we will substantially improve investment, legal and administrative environment for business in
The following concrete steps will be taken:
laws guaranteeing independence of the judiciary will be passed or amended;
state bureaucracy will be significantly reduced;
tax pressure will be lessened through considerable reduction of VAT, and subsequently through its substitution by the sales tax;
national anti-corruption program will be devised;
the most part of procedures implying permissions for small and medium business will be replaced by notification procedures;
institutions for long-term refinancing and emergency support of banks will be created;
the government will promote the rouble as a major reserve currency of regional importance. In particular Russian export goods will be traded at commodity exchanges for roubles.
All measures which I described to you are not an end in itself. They are, rather, a means for achieving the key goal of radical improvement of living standards of my compatriots.
The federal government is determined to eradicate poverty. From 2000 to 2007 we succeeded in reducing the number of people living beyond the poverty level by 50% or by 20 mln. Less than 14% of the population are below the poverty line today. By 2009 we hope to reduce their number to 8%.
Full employment policy is at the heart of this encouraging trend. The unemployment rate in
Real disposable income of the population in recent years grew by 2,5 times. Growing of welfare leads to rapid increase in consumer demand.
All this is good, but not enough. By 2020 we hope to increase the share of the middle class in
We strive to stabilize the size of the population in the next 3 to 4 years. By 2020 mortality rate in
First steps in this direction have been made already thanks to the national program "Healthcare". Mortality diminished by 7%. Birth rate in 2007 grew by 7%. Women get a state subsidy of US $ 10,000 for the second child. However, the main stimulus is not money, of course, but the confidence in the future which is spreading among young families.
Hospitals and emergency stations are being massively re-equipped with new medical technologies and materials. I call on Flemish businessmen who specialize in production and supply of medical equipment and pharmaceuticals not to miss their chance at the largest and most dynamic market of health care services in
In the sphere of housing our goal is to build by 2020 one square meter of living space per capita per year. We constructed 69 mln. square meters in 2007. It is very much in comparison with the past 15 years. Yet it is very little if we note that the end result was just
The Moscow Region is the leader in housing construction in
The Russian housing program is forming the largest market for construction materials and services in
The scale and nature of plans of the new Russian leadership show clearly that our national priority is accelerated economic and social development. For the first time in the last 500 years our nation got a chance to spend everything we earn for improving our own life, for resolving problems that were piling up not during decades but centuries. The people of
Our western partners should not be afraid of
Trade of the
Investing in
In the last several years, the level of investment activity in Russia has grown by several times, the wage level has been rising, and economic stability has been achieved thanks, in part, to the level of gold and currency reserves, which have experienced unprecedented growth – 71% year-on-year
– placing
It’s no secret that a low level of inflation stimulates investment, and the rate of inflation has recently slowed dramatically.
In the last three years,
We are actively working to implement new investment mechanisms (public–private partnerships, special economic zones, investment funds, etc.)
A survey taken in 2006 by the Foreign Investment Advisory Council in
All these factors confirm
In carrying out economic reforms, we aim to put
exhibition that has become traditional for purposes of forming closer contacts between regional governments and other participants at the Petersburg International Economic Forum.
The experience of previous years has demonstrated the Forum’s effectiveness in achieving its primary goals. The10th Petersburg International Economic Forum had over 5,000 attendees, with about 1,000 delegates from 46 countries around the world, including presidents and heads of government. The current 11th Petersburg International Economic Forum is to have a broader format and involve an even greater number of participants. The topic of the plenary session –“Modern Russia – Looking Forward” – expresses the event’s central theme. This year we have also decided to give special attention to the role of integration associations in contemporary economic life. President Vladimir Putin as well as foreign heads of state and government will take part in the discussion of this issue.
It is my hope that the forum will be not only a splendid opportunity to form economic and business partnerships and develop cooperation, but also an excellent starting point for those who have not yet invested in
Sincerely,
German Gref
General Economic Trends
The Russian transition to a post-industrial market economy was a painful one. Real economic output
measured by GDP declined approximately 40% from 1990 to 1998. Living conditions substantially deteriorated.
Since 1999 the average GDP growth rate has been approximately 6.7% per year in real terms. This will not decrease much in 2007 (the official forecast is 6.2–6.5%). The dollar growth rate has been even more substantial, as the rouble has strengthened steadily against the dollar in real terms.
In 1999–2006, the average GDP growth in dollar terms was 26% per year. As of 1 April 2007, the exchange rate of the dollar to the rouble is 26.01.
Overall the Russian economy has achieved macroeconomic and financial stability, the investment climate has improved, and the country’s debt problem has been alleviated. The economy has grown at a rate that has far outstripped average international growth rates.
Despite the past six years of growth, the state of the Russian economy is far from ideal. More institutional and structural reforms need to be completed.
This will require a continuation of the reform drive, with the principle focus on the sphere of government administration.
In the economic program approved in 2006, the Ministry of Economic Development and Trade developed the same priorities of economic policy as for 2005–2008:
• Developing human capital through the reform of the health sector and education and by increasing mobility
• Administrative reform of the government, reform of the budget system, continuing tax reform, and increased outsourcing of the public sector to private firms through private–public partnership (PPP) models
• Building trust in market institutions such as property rights, the arbitration court system, corporate disclosure, financial markets, and companies.
It is generally considered that Russia’s accession to the World Trade Organization (WTO) would be a positive step forward, confirming the country’s adherence to a long term, market - centered economic policy that will enhance the predictability of government policy, lower risks, and better protect Russia’s interests in global trade. Progress toward this goal was made in 2006, when the agreement with the
The Russian legislative branch has protracted and intensive work ahead of it, because implementing social and economic reform calls for the proactive development of the regulatory framework and for bringing it into line with international standards. A key problem for the Russian economy is weak enforcement; therefore, it is essential to improve enforcement and judicial proceedings. The situation to make positive progress, resulting from the government’s economic policy, changes in the business community, and the increasing availability of funds from capital markets and international and Western strategic investors.
Management boards of high-growth companies tackling the task of long-term strategic development have realized the need for improving corporate governance practices.
An Overview
The
Following the collapse of the Soviet Union in 1991,
and tax liberalization. These reforms, along with increased export earnings from the higher price of oil and gas, have brought about considerable improvements. As a result,
.
Energy, Mineral, and Other Natural
Resources
While most industrial branches of the Russian economy experienced a sharp decline for most of the 1990s, gas and oil production remained relatively stable, and the electricity sector maintained more than enough capacity to meet demand.
– and currently supplies a quarter of all gas on the world market. The natural gas sector is dominated by Gazprom, in which the government has a stake of more than 50%. Gazprom has a virtual monopoly on the production, transport, processing, and storage of gas.
Leading Industries
The rapid and strong growth of the Russian economy is spread across many relatively new industries. For example, retail, communications services, automotive sales, maintenance services, insurance, production of construction materials, branded consumer durables, value-added foods and beverages, hospitality services, and personal care and fitness services are all segments where significant growth has been visible and is projected for several years to come.
Official statistics significantly underestimate the size of the retail market in
Accordingly, it is projected that the retail industry will continue to grow steadily across most regions of the country.
Financial System
Central Bank and Bank Regulators
The Central Bank of the Russian Federation (CBRF) is the main regulator of commercial banks and issues licenses for all credit institutions in
Stock Exchange and Securities Regulating Authority
In March 2004, the Federal Commission for Securities Markets was abolished and its control and supervisory functions with respect to financial markets were transferred to the Federal Service on Financial Markets (FSFM).
The function of the management of the Commission for Commodity Exchanges was also entrusted to the FSFM.
The aim of the government is to eventually create a combined body responsible for regulation and supervision of the financial markets, exclusive of insurance, banking, and audit activity.
The FSFM is responsible for implementing government policy on the securities market, regulating the activities of participants in the professional securities market, and protecting the rights of investors and shareholders.
The functions of the FSFM are as follows:
• Oversee issuers and participants in the professional securities market
• License professional activities on the securities market
• License investment funds, non-governmental pension funds, management companies, and special depositories
• Register the results of security issuance
• Ensure the disclosure of information on the securities market
• Develop a regulatory legal framework for the securities market
• Determine key directions for the development of the securities market. certain formalities are still to be observed: mandatory repatriation and passports of transaction, which apply to Russian residents.
Liability for Violation of Currency Law
Despite the fact that most restrictions and currency controls were lifted starting 1 January 2007, the Code on Administrative Offenses has not been duly amended. It still stipulates that conducting prohibited currency operations, non-compliance with special accounts or reserving requirements, non-compliance with obligatory sale requirements, and the non-repatriation of export earnings by residents are subject to an administrative fine of 75–100% of the amount of the non-compliant currency operation. However, since the Russian currency legislation no longer requires the observance of formalities in regard to certain types of currency operations, the abovementioned provisions of the
Code on Administrative Offenses are not applicable. It may be amended in the near future.
At present, currency control legislation is being revised, and most limitations and requirements are being removed.
However, some others are still in force. Therefore, it is still recommended that this area be given due focus while concluding any transactions.
Currency Control
The area of currency control has historically been a source of confusion and uncertainty for foreign investors operating in
Russian currency, and Russian securities are subject to currency control. On 18 June
Until 1 January 2007, the regulatory system restricted only specific types and a more limited number of transactions.
Starting 1 January 2007, most of the controls on currency were lifted, which suggests that the rouble is now fully convertible.
Common currency operations (i.e., sale and purchase of Russian securities) between residents and non-residents no longer require such formalities as registration requirements, requirements to use special accounts for certain activities, or reserve deposit requirements. Consequently, the functions of the CBRF in this field were also limited.
Companies
Forms of Enterprises
Corporate Forms
There are two forms through which a foreign company can undertake business activities in the
• Through a separate Russian legal entity, such as a joint stock company or limited liability company
• Through a branch or representative office. Territorial bodies of the Federal Tax Service are in charge of the state registration of legal entities and private entrepreneurs based on the “one window” concept. State registration must be completed within five business days after the documents are filed with the registering body.
To register a legal entity, the following documents are required: an application prepared following the established form, the decision to organize a legal entity in the form of a protocol or other document, constituent documents, an excerpt from the corporate register of the country of origin (or other legally equivalent instrument attesting to the legal status) of the foreign legal entity establishing the company,
and a stamp duty receipt.
Representative offices of foreign companies are accredited with the State Registration Chamber Attached to the Ministry of Justice of the
In addition, certain activities are subject to licensing. Russian legislation provides an exhaustive list of licensed activities.
In accordance with the Civil Code, there are two types of Russian entities that can be established by a foreign company:
• Joint stock companies
• Limited liability companies.
Joint Stock Company
Joint stock companies (JSC) fall into two categories: closed and open. The fundamental difference between an open JSC and other Russian companies is that, in an open JSC, shares may be freely sold to third parties, while in a closed JSC share transfers are subject to the pre emptive rights of other shareholders. An unusual feature of Russian law is that a shareholder may not waive his or her pre emptive right but, at the appropriate time, either elects to exercise it or not to exercise it. Open stock companies have to comply with a number of requirements of the Russian securities authorities,
and for this reason closed JSC s are generally preferred.
The minimum capital requirement for incorporation of a JSC is equivalent to 1,000 minimum monthly wages for an open JSC and 100 minimum monthly wages for a closed JSC (the minimum monthly wage is RUB 100, or approximately USD 3.60). The maximum number of shareholders is unlimited for an open JSC but cannot exceed 50 for a closed JSC.
A JSC cannot be established and/or owned by a single shareholder if the latter, in turn, has only one shareholder/ participant. The governing bodies of a JSC are general shareholders’ meetings and the board of directors. In a JSC with fewer than 50 shareholders, it is not necessary to have a board of directors. A general director runs the day-to-day business of a JSC. There can also be a managing board running the day-to-day business of a JSC, together with the general director.
Limited Liability Company
A limited liability company (LLC) is the entity of choice when an investor creates a wholly owned subsidiary because it is not subject to the same regulatory requirements as a closed JSC. The statutory documents of an LLC can contain certain restrictions related to the transfer of a participant’s
rights, such as a prohibition against sales to third parties.
A participant in an LLC does, however, have the right to withdraw from the LLC without requiring the consent of other participants; in such a case, the withdrawing participant should be repaid the actual value of his/her participation in the LLC. For most investors, this treatment creates an unacceptable risk and, therefore, an LLC is not favored as a joint venture vehicle.
The minimum capital requirement for the establishment of an LLC is 100 minimum monthly wages. An LLC has participatory rights rather than shares, although with the exception of certain state duty issues, the differences for practical purposes are limited. The number of participants in an LLC cannot exceed 50. An LLC cannot be established and/or owned by a single shareholder if the latter, in turn, has only one shareholder/participant.
Branch
A branch of a legal entity is a separate subdivision of a legal entity whose headquarters are in another location and may be in another country. A branch may perform all the functions of a legal entity. The branch should have a manager or head of branch who acts on the basis of a power of attorney from an officer of its legal entity. Since the branch has no separate legal identity, the company of which it is a part bears full liability for the actions and obligations of the branch. A branch may be inappropriate
