Practical Recommendations on How to Set Up a Business in Russia

Association of European Businesses

Russia is currently in need of foreign investments and the experience of Western companies. It is well known that in many sectors, European companies substantially outstrip their Russian counterparts in terms of development; they possess state-of-the-art technologies that could enable the Russian economy embark on a course of modernisation. This means that Russia continues to offer serious opportunities for the businesses of foreign companies. How should such operations start?

The starting point differs for each company, depending on its potential and ambitions. For some companies this may mean large-scale projects, such as the establishment of production facilities in Russia. For others, it may involve the supply of corresponding industrial goods, the performance of work or provision of services in a respective area.

For others still, the starting point may be the development of a sales and distribution system for consumer goods in Russia, etc. The scale and individual specifics of a project will also dictate the corresponding individual approach, which is based on internal experience and the strategy of the individual company. Thus, the needs and conditions for setting up business in Russia are very different.

Nevertheless, irrespective of the type of investment project, there are a number of universal practical aspects that all investors should consider on each occasion. We would like to draw your attention to some of them:

1. Be informed

When entering the Russian market, you need to have a clear understanding of doing business in Russia. Most investors tend to base their views on Russia on the information that they receive from the foreign mass media. In practice, this information is mostly subjective and reflects a particular political outlook.

However, as a rule, foreign companies already operating in Russia have a far more positive attitude to the country than new entrants, whose impression of Russia is formed mainly on the basis of the information provided by the Western media. The former base their opinions on facts and objective reality, and then submit them to their own analyses.

If we now go into the implementation of a specific project, it is necessary, as a first step, to identify whether this will involve interaction between the investor and the state, or will be based on business-to-business relations.

The second step is to search for information about potential partners and market conditions, and at the same time, establish some reliable contacts with regional authorities, experts and organizations that represent, promote and develop the interests of business. As a rule, experience shows that positive contacts can play a key role in the development of a business project in Russia.

If you are interested in starting up production in Russia, the proper investment site must be chosen. Russian regions have recently started becoming more proactive in their attempts to attract foreign investments; therefore, regional authorities are open to investors. It’s now quite clear that investments will only go to a specific region if that region has established favorable terms and conditions for doing business and has an investment framework in place. As a result, regions may offer an investor established utilities’ networks and transport infrastructure, staffing and administrative support, as well as the provision of investment concessions and preferences. In business-to-business relations, business contacts take precedence over the deal, where appropriate opportunities to assess your potential business partner exist. For this reason, both publicly accessible and private sources of information may be used. There are now a number of sources in Russia of inter alia information about the business history of a potential partner, the negative experiences of doing business with him or any past or present litigation involving the partner. This also applies to any potential leader or CEO of your representative office or subsidiary company. Finally, it is necessary to gather information about potential competitors of your business. Today’s business requires that you always stay informed and be on top of issues at all times.

2. Think about compliance

Unfortunately, Russia is still ranked as one of the leaders in lists of countries with high levels of corruption. Therefore, the concept of compliance has gained particular prominence, and for many companies it has become a standard requirement.What does compliance mean to you? Would you like to pay particular attention to compliance with respect to your business in Russia? Obviously, each company develops its own individual norms of business ethics. To what extent could particular actions prove useful for the company if implemented, and to what extent could they prove harmful if not implemented?

3. How would you like to be represented in Russia?

The presence of a foreign company on the Russian market can take different forms. Generally, the form chosen depends on established business goals and the selected strategy for project implementation. One possibility is to supply goods directly to Russian customers from abroad, which does not require the opening of a representative office or subsidiary company in Russia. This approach may be advantageous if you do not plan to have a permanent business in Russia.

Another possibility is to develop your business in Russia and expand on the Russian market. This would require your permanent activity in Russia and the establishment of a Russian subsidiary of your company. In practice, the establishment of a wholly-owned Russian subsidiary is relevant to most companies that are involved in the sale of goods, performance

of work or provision of services in Russia. The most common form of business structure in Russia in such cases is a limited liability company (Russian acronmym “OOO”). The brief amount of time required to register the company and the minimum requirement for the charter capital enable foreign investors indicate their presence on the Russian market and develop their business. However, when setting up production facilities, the situation is not as clear-cut. Frequently, in such cases, investors prefer forming a joint venture with a Russian partner. A joint venture appears preferable, particularly, in cases where the Russian partner already possesses the relevant production capacities or other resources that make it possible to implement a project as rapidly as possible and at a lower cost. The establishment of a joint venture has, nevertheless, its own advantages and drawbacks; thus, it is important to secure your interests at the very beginning in order to be protected from unfavourable developments in the future and avoid potential disputes and conflicts. Present Russian legislation makes it possible to structure relations within the framework of a joint venture so that the parties may determine, in detail, their rights and obligations, and structure the governance system of the company when entering into the Joint Venture Agreement.

4. Pay attention to the legal requirements

The performance of any business assumes the existence of a specific legal framework. This differs from country to country. In Russia, rigid formalism is a distinguishing feature. Consequently, before starting up a business, it is necessary to understand the mandatory requirements that effective legislation imposes on a specific activity. A number of activities, for example, pharmaceuticals, construction, etc., assume that a party has a special permit (license) or requires an access permit to carry out work, which may take several months to obtain, and stipulate that the applicant complies with the terms and conditions established by law. For example, specific standards or technical regulations can have a number of special requirements for particular kinds of goods to be sold in Russia.In a number of instances legal mechanisms that are employed successfully in Europe may not be available in Russia, or their practical application may be complicated or fraught with material risks. Consequently, doing business in Russia assumes, above all that the business conforms to Russian legal realities.

In practice, things do not always run smoothly for the following reason: foreign investors usually have extensive experience of doing business abroad and tend to be accustomed to European public and legal realities. Accustomed to a practically focused and rational European approach, the investor may not always be willing or able to understand and accept the legal formalism frequently encountered in Russia. This can be a stumbling block for the investor, as the rules established by law represent the only legal option for doing business in Russia and for the legal protection of an investor’s rights and interests.

Consequently, consideration of the mandatory requirements of effective legislation that must be met when engaging in individual types of activity is a key point.

5. Protect your trademark

If you are planning to operate in Russia under a specific trademark, this trademark will have tobe duly protected in Russia. First, you should review whether the same or a similar trademark is already in use in Russia, to avoid any conflict with a competitor. Subsequently, you should register all the trademarks that you want to use in the Russian market at the Russian Patent Office (Rospatent). Note that the trademark should be registered in both Latin and Russian characters. Otherwise, your trademark may be used in Russia by a third party and you will have no legal basis for protecting your rights.

6. How to build a distribution system

Developing a business in Russia frequently involves the development of a distribution system. This is particularly relevant in Russia owing to the geographical scale of the country. How can such distribution system be built? As a rule, a product manufacturer does not engage directly in its distribution to end consumers.

The following main variants are used:

· the manufacturer sells the product on a wholesale basis to distributors that sell it to the final buyers;

· the investor establishes a so-called subsidiary “sales” company, which acts as the intermediate link between the manufacturer and the distribution network.

The reason for this structure is that Russian distributors are generally more familiar with the needs of the Russian market. Russian legislation makes provision for reaching an official agreement with distributors on certain terms and conditions regarding exclusivity and the division of a market (for example, based on the territorial principle or the composition of buyers, etc.). Such relations can be structured through the conclusion of distribution agreements on special terms, the existence of which may make such relations favorable for both parties. By these agreements it is also possible to minimise the risks for the investor.

7. Contract law: Take due care with contractual documentation

Apart from establishing a subsidiary company for distribution, appropriate contractual documentation is essential to avoiding future headaches. However, as trust builds, when business relations develop between partners, it is often the case that a number of understandings are reached orally and are not confirmed by supporting documentation. This is the wrong approach to take, and may entail huge risks. When registering contractual relations, as a first step, it is necessary to decide on the governing law. Russian legislation allows the parties to select the law that will apply to their contractual relations in cases, where one of the parties is a foreign party.

However, please note that Russian law also makes a number of national mandatory provisionsthat must be adhered to regardless of the chosen law.

However, many foreigners are initially skeptical about Russian law. This is attributable primarily to the fact that Russian law constitutes unfamiliar territory and this unfamiliarity breeds at the very least a certain degree of caution. However, Russian law is on the contrary a more preferred option when it comes to certain aspects. For example, Russian law provides rules for license agreements; whereas, German law for instance lacks such rules. Nevertheless, this issue should be treated with caution. In a number of instances legislation does not permit liability to be limited or allocated to a third party, and thus, any agreement of the parties in violation of such imperative requirements of the law will be null and void. Accordingly, when entering into contractual relations, it is necessary to have a clear understanding as to what is permissible under Russian law and whether the provisions of the contract are capable of protecting the interests of the party in future and preventing the onset of negative consequences for the party. In any event, the following steps should be taken when preparing a contract:

· parties have to agree on applicable law and jurisdiction (see point 8 below);

· the goal and intentions of the parties should be clearly and precisely determined;

· the arrangements of parties should be adapted to Russian law.

8. Enforcement through the courts:

Keep the worst-case scenario in mind

The requirement on appropriate document management is particularly relevant in cases when disputes arise. You need to take precautions with regard to potential developments tomorrow, today. Nobody is insured against the risk that difficulties in relations with partners may someday arise, for economic or other reasons.

As a result, the investor needs to protect his interests, inter alia in court. As a rule, the parties select the jurisdiction at the conclusion stage of the contract. Here, the following should be borne in mind.

It is often the case that the investor believes that he will receive more reliable legal protection in his country of origin than in Russia, and insists that a provision in a contract stipulate the state court of his own country as the place of jurisdiction. At the same time, however, please note that the judgments made by courts outside the Russian Federation are only recognised and enforced in Russia in cases where Russia and the corresponding country have a treaty on the mutual recognition and enforcement of court judgments. As a result, in the event of a dispute an investor may end up in a tight spot, if the investor’s country does not have such a treaty with Russia. Even if it wins a favorable court judgment in its country, the investor may not be able to enforce it in Russia, and to all intents and purposes ends up with nothing.

To avoid such an eventuality, it is recommended that you agree either on a Russian state court or an arbitration tribunal, both in Russia and abroad, as the awards of foreign arbitration tribunals, unlike the judgments of the state courts, are enforceable in Russia. In connection with this, one recommendation would be to opt for the Russian law as the governing law in order to avoid situations where a Russian judge has to make a decision according to the legal provisions of another country.

Falk Tischendorf, Lawyer, Partner,Head of BEITEN BURKHARDT’s Moscow office

Bilgeis Mamedova, LL.M., Senior Associate, BEITEN BURKHARDT Moscow

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