Docstoc

direct marketing23_Guide

Document Sample
direct marketing23_Guide Powered By Docstoc
					DEVELOPING YOUR INTERNATIONAL TRADE POTENTIAL



Russia
Business
Guide
UK TRADE & INVESTMENT CONTACT DETAILS
IN RUSSIA


                     British Trade Offices
                     in Russia
                     British Embassy
                     Trade and Investment Office
                     Moscow
                     Tel: +7 (495) 956 7459
                                                                Russia
                     Fax: +7 (495) 956 7480
                     Website: www.ukinrussia.fco.gov.uk/en      Business
                     British Consulate-General, St Petersburg
                     Tel: +7 (812) 320 3200
                     Fax: +7 (812) 320 3222                     Guide
                     British Consulate-General, Ekaterinburg
                     Tel: +7 (343) 379 4931
                     Fax: +7 (343) 359 2901

                     UK Trade & Investment
                     Enquiry Service
                     Telephone: +44 (0)20 7215 8000
                     Email: enquiries@uktradeinvest.gov.uk
                     Website: www.uktradeinvest.gov.uk




2                                                                          3
    CONTENTS

    INTRODUCTION              Why Russia?                              6
                              How to use this guide                    8

    RESEARCHING THE MARKET    Taking the strategic approach            9
                              Sources of information                  10
                              Where to start                          12
                              Market challenges and opportunities     14
                              Suggested approach to the market        16

    MARKET ENTRY AND          Distribution and sales channels         18
    START-UP CONSIDERATIONS   Using an agent or distributor           20
                              Franchising                             22
                              Direct marketing                        24
                              Electronic commerce                     25
                              Advertising and trade promotion         28

    BEST PRACTICE             Due diligence                           30
    AND RISK MANAGEMENT       Local professional services             31
                              Importing and exporting                 32
                              Customs duties                          33
                              Customs duties incentives               35
                              Documentation and procedures            36
                              Contract and terms of sale              39
                              Getting paid and managing credit risk   44
                              Certification                           52
                              Establishing a legal presence           55
                              Representative office and branch        56
                              Forming a Russian legal entity          60
                              Limited liability companies             62
                              Joint stock companies                   68
                              Taxation                                74
                              Currency regulations                    96

    ADDITIONAL INFORMATION    Other sources of information            100




4
INTRODUCTION
WHY RUSSIA?


               Russia is the largest          The Russian coastal zone      In Moscow, the cold starts      In Ekaterinburg and the       Russia is a middle-income
               country in the world           of 23,533 miles (37,653       to set in during October        Urals region, winters are     country. It is the eighth-
               in both total area and         km) along the Arctic and      with snow and                   generally colder and          largest retail market in the
               geographic extent,             Pacific Oceans, the Baltic,   temperatures below zero         summers are generally         world - having surpassed
               constituting more than         Black and Caspian Seas,       beginning and continuing        warmer than in Moscow.        Brazil, Mexico, Spain and
               one-ninth of the world's       holds significant reserves    until March or April.           You can expect to have        Italy in recent years - and
               land surface. It has an area   of fish and energy            Average January                 snow on the ground any        the fourth-largest market
               of 10,672,000 sq miles         resources on the sea shelf.   temperatures are around         time from October to May,     in Europe, behind only the
               (17,075,200 sq km) and a                                     -15°C but can drop to           and even longer in the        UK, Germany and France.
               population of 142 million      Most of the country's         -30°C. This is not as bad as    northern parts of the
               people. It extends across      territory is dominated by     it sounds, as this is a “dry”   Tyumen region (the            UK-Russia economic
               the whole of northern Asia     the strongly continental      cold, in contrast to the        main oil and gas area).       relations remain strong.
               and 40 per cent of Europe,     and subarctic climate,        chilly dampness of the                                        Russia is now the UK's
               spanning 11 time zones         which is prevalent in         average UK winter. In           For more information on       twelfth largest export
               and incorporating a great      European and Asian Russia     summer, temperatures            the Russian climate see       market.
               range of environments          except for the tundra and     average around 24°C             www.bbc.co.uk/weather/
               and landforms.                 the extreme Southeast.        with the occasional             world/country_guides
                                              Only a small part of Black    thunderstorm.
               The country possesses a        Sea coast around Sochi has                                    Russia's geographic extent,
               wide array of mineral and      a subtropical climate.        Winters in St Petersburg        severe climate and
               energy resources including                                   are moderated by                remoteness from major
               major deposits of oil, coal,                                 (relatively) warm air           sea lanes impede even
               natural gas, iron ore,                                       blowing in from the             economic and social
               manganese, chromium,                                         Atlantic Ocean. In summer,      development of the
               nickel, platinum, titanium,                                  temperatures are slightly       country's territories, with
               copper, tin, lead, tungsten,                                 cooler than in Moscow.          large parts of the country
               diamonds, phosphates and                                                                     having almost no
               gold. The forests of Siberia                                                                 population and
               contain an estimated one-                                                                    development.
               fifth of the world's timber.




6                                                                                                                                                                    7
INTRODUCTION                                                                                  RESEARCHING THE MARKET
HOW TO USE THIS GUIDE                                                                         TAKING THE STRATEGIC APPROACH


This guide should be          What does this guide             The objective of this          Often, new exporters will
                                                                                                                            YOUR AIMS:
used in conjunction           aim to do?                       guide is to steer companies    feel a bit overwhelmed
                                                                                                                              DO YOU WISH TO SELL TO RUSSIA?
with the UK Trade &           This guide aims to provide       through the initial research   about trading with Russia.
Investment website:           a route map of the way           and preparation stages of      Much consideration and          DO YOU WISH TO ESTABLISH YOUR OWN COMPANY
www.uktradeinvest.gov.uk.     ahead, together with             entering the Russian           planning will need to           PRESENCE IN RUSSIA, FOR EXAMPLE THROUGH A
The guide will take you       signposts to sources of          market. It is far better       go into deciding on the         REPRESENTATIVE OFFICE OR LIMITED LIABILITY COMPANY?
through the process of        help. It identifies the main     to spend time and money        company type, delivery
doing business with Russia,   issues associated with initial   in carrying out thorough       of products and services,       DO YOU NEED TO BE INVOLVED IN RUSSIA AT ALL?
while the website will        research, market entry, risk     research and preparation       marketing strategies and
provide registered users      management and cultural          before entering the market     local conditions. Before      YOUR COMPANY:
                                                                                                                              WHAT ARE THE UNIQUE SELLING POINTS (FEATURES
with regularly updated        matters. It also includes        than to enter Russia in a      making these big decisions
                                                                                                                              AND BENEFITS) FOR YOUR PRODUCT OR SERVICE?
market and sector             questions you should ask         hurry, not wishing to miss     exporters and investors
information, business         at the beginning of your         the boat, only to discover     should spend some               DO YOU KNOW IF THERE IS A MARKET FOR YOUR
opportunities and details     research into Russia.            that you have made a very      time thinking about             PRODUCT OR SERVICE IN RUSSIA?
of further contacts.                                           costly mistake.                business objectives.
                              We do not pretend to                                                                            DO YOU KNOW IF YOU CAN BE COMPETITIVE
Who is this guide for?        provide all the answers in                                      The questions listed            IN RUSSIA?
This guide is aimed at        this guide. It will not cover                                   opposite should help you
companies experienced         all the provinces of Russia                                     to focus your thoughts.         DO YOU HAVE THE TIME AND RESOURCES TO HANDLE
                                                                                                                              THE DEMANDS OF COMMUNICATION, TRAVEL, PRODUCT
in overseas trade that        in any detail, current sector                                   Your answers to them will
                                                                                                                              DELIVERY AND AFTER-SALES SERVICE?
are new to doing business     opportunities, legal,                                           highlight areas for further
with Russia. Your company     taxation or accounting                                          research and also suggest     YOUR KNOWLEDGE:
may be an exporter            aspects of setting up a                                         a way forward that is right     DO YOU KNOW HOW TO SECURE PAYMENT FOR YOUR
looking to sell directly      permanent presence in                                           for your company.               PRODUCTS OR SERVICE?
to Russian customers          Russia – but it will point
or through an agent or        you in the direction of the                                     You may then want to            DO YOU KNOW WHERE IN RUSSIA YOU
distributor in Russia.        people, organisations and                                       use this as a basis for         SHOULD START?
Alternatively, you may        publications that will be                                       developing a formal
                                                                                                                              DO YOU KNOW HOW TO LOCATE AND SCREEN POTENTIAL
be planning to set up         able to answer these and                                        strategy, although this
                                                                                                                              PARTNERS, AGENTS OR DISTRIBUTORS?
a representative office,      many other questions.                                           will not be necessary
joint venture or other        For help with current                                           or appropriate for
form of permanent             information on the market                                       all companies.
presence in Russia.           please see the section
                              “Where to start” on page 12.


8                                                                                                                                                                               9
RESEARCHING THE MARKET
SOURCES OF INFORMATION


                         UK Trade & Investment -       International trade contacts in        British Trade Offices in Russia
                         international trade teams     Scotland, Wales and Northern Ireland   British Embassy,
                         In England, UK Trade                                                 Trade and Investment Office,
                         & Investment provides         Scottish Enterprise                    Moscow
                         support for UK companies      150 Broomielaw                         Tel: +7 (495) 956 7459
                         through a network of          Atlantic Quay                          Fax: +7 (495) 956 7480
                         international trade teams     Glasgow G2 8LU                         Website: www.ukinrussia.fco.gov.uk/en
                         (ITTs) based in the English   Tel: +44 (0)141 248 2700
                         regions. UK Trade &           Fax: +44 (0)141 221 3217               British Consulate-General,
                         Investment services are       Website: www.scottish-enterprise.com   St. Petersburg
                         delivered in Scotland,                                               Tel: +7 (812) 320 3200
                         Wales and Northern Ireland    International Business Wales           Fax: +7 (812) 320 3222
                         in co-operation with the      Welsh Assembly Government
                         respective national           Trafalgar House                        British Consulate-General,
                         development agencies.         5 Fitzalan Place                       Ekaterinburg
                                                       Cardiff CF24 0ED                       Tel: +7 (343) 379 4931
                         The ITTs also organise        Tel: +44 (0)1443 845500                Fax: +7 (343) 359 2901
                         roadshows, seminars           Fax: +44 (0)29 2044 2696
                         and events that highlight     Website: www.ibwales.com
                         Russia.
                                                       Invest Northern Ireland
                         To find your nearest          Bedford Square
                         International Trade Adviser   Bedford Street
                         call +44 (0)20 7215 8000      Belfast BT2 7ES
                         or use the database at        Tel: +44 (0)28 9023 9090
                         www.uktradeinvest.gov.uk      Fax: +44 (0)28 9043 6536
                                                       Website: www.investni.com




10                                                                                                                                    11
RESEARCHING THE MARKET
WHERE TO START


“I’M THINKING   Research of published
                information (desk research)
                                              General statistical data on
                                              Russia, eg gross domestic
                                                                              Overseas Market
                                                                              Introduction Service
                                                                                                             Export Marketing
                                                                                                             Research Scheme (EMRS)
                                                                                                                                             To check on eligibility
                                                                                                                                             please contact:
 OF DOING       to scope a market is
                becoming increasingly
                                              product, industrial
                                              production figures,
                                                                              (OMIS)
                                                                              OMIS puts you directly
                                                                                                             EMRS is the systematic
                                                                                                             collection, analysis and
                                                                                                                                             British Chambers
                                                                                                                                             of Commerce
 BUSINESS       common as a means of          consumption rates and           in touch with staff in         interpretation of information   enquiry@
                carrying out market           international trade data        our three offices in Russia    about an overseas market.       britishchambers.org.uk
 IN RUSSIA…     intelligence.                 can be found in business        (Moscow, St Petersburg and     An export marketing             Tel: +44 (0)24 7669 4484
                                              libraries or on the internet.   Ekaterinburg), which           research project typically      Fax: +44 (0)24 7669 5844
 BUT DON’T      The Russia pages of the       Check publications such as      are able to give you access    involves the collection of      www.britishchambers.org.uk/
 KNOW WHERE     UK Trade & Investment
                website
                                              country supplements
                                              produced by the Financial
                                                                              to the best country - and
                                                                              sector-specific business
                                                                                                             information such as:            6798219243281114437/
                                                                                                                                             what-is-the-export-
 TO BEGIN!”     www.uktradeinvest.gov.uk
                are a practical tool to
                                              Times www.ft.com, the
                                              Russia Factsheet published
                                                                              advice, as well as offering
                                                                              support during your visits
                                                                                                             • the size of the market,       marketing-research-
                                                                                                                                             scheme.html
                search for generic            by the Economist Intelligence   to Russia. They can advise     • how it is segmented
                market information            Unit www.eiu.com and            on local business conditions     between different types       Industry summaries
                and advice on:                other relevant publications.    and provide tailored             of customers,                 Sector market summaries
                                                                              information specific to                                        are available on the
                • setting up and contact      For Russian news,               your needs.                    • an explanation of the         UK Trade & Investment
                  information,                see The Moscow Times                                             various distribution          website:
                                              www.themoscowtimes.com          OMIS is delivered online,        channels, and                 www.uktradeinvest.gov.uk
                • selling and                 an English language             giving you a direct link
                  communications,             newspaper and its               to local experts, with fast    • competitor activity-
                                              companion paper The             access to reports and            their strategy and
                • tariffs and regulations,    St Petersburg Times             advice, and allowing             performance, etc.
                                              www.sptimesrussia.com           you to keep in touch
                • visiting and social                                         wherever you are.
                  customs, and                Market and                      For general enquiries about
                                              sector research                 doing business overseas
                • background and              UK Trade & Investment           and for further information
                  geography.                  offers two principal            about commissioning
                                              services to UK-based            OMIS, please contact
                                              companies looking to make       your local International
                                              those initial approaches        Trade Team.
                                              into new overseas markets:


12                                                                                                                                                                   13
RESEARCHING THE MARKET
MARKET CHALLENGES AND OPPORTUNITIES


                                            Market challenges                 • Adequate financial          • Finding qualified local       • The Russian Government
MARKET OPPORTUNITIES                        • European (German, Italian)        resources for Russian         partners and Russian            continues to use its oil
                                              and Asian companies               small- and medium-sized       employees has become            and gas resources to
UK TRADE & INVESTMENT HAS IDENTIFIED FIVE
                                              remain tough competitors          companies still remain a      more difficult and salaries     increase state ownership
MAJOR SECTORS FOR UK COMPANIES IN RUSSIA:     for UK firms, due to their        problem, but it is not as     for local employees have        in strategic industries
                                              proximity to the Russian          acute as it was in years      risen significantly,            and companies. Foreign
     ADVANCED ENGINEERING                     market and their long-            past. More foreign banks      especially in Moscow            companies can find it
                                              standing relations with           are operating in Russia       and St Petersburg. The          unclear as to which
     FINANCIAL SERVICES                       Russian organisations             and more cash is              pool of managers who            sectors are open to
                                              and companies.                    circulating within the        understand Western              investment without
     ICT                                                                        economy due to the            accounting and business         Russian majority partners.
                                            • Bureaucracy, poorly               Russian oil and gas boom.     practices remains limited,      Legislation defining
     POWER/ENERGY AND                         established rule of law                                         as do those qualified,          strategic sectors remains
     SPORTS AND LEISURE                       and corruption affect           • Increasingly high             experienced Russians            under discussion in the
                                              such areas as establishing        overhead costs can            proficient in English.          Duma, the Russian
     INFRASTRUCTURE                           a business, tax collection,       sometimes out outweigh        As a result, this group         parliament.
                                              dispute settlement, property      high profit margins.          circulates among major
                                              rights, product certification                                   companies, bidding up         • One of the major barriers
OPPORTUNITIES HAVE ALSO BEEN
                                              and standards, as well as                                       salaries. Recently, Russian     to the Russian market
IDENTIFIED IN THE FOLLOWING SECTORS:          Russian Customs clearance.                                      authorities have taken          remains its differing
                                                                                                              steps to encourage              business etiquette
     AIRPORTS                                                                                                 international companies         and culture.
                                                                                                              to rely more on local
     CONSTRUCTION                                                                                             talent by tightening
                                                                                                              visa regulations for
     CREATIVE INDUSTRIES                                                                                      foreign workers.
     RAIL AND
     WATER




14                                                                                                                                                                   15
RESEARCHING THE MARKET
SUGGESTED APPROACH TO THE MARKET


             Reducing the market             Research and
             to bite-size pieces             initial planning
             Russia is quite a challenging   Maintain a long-term time
             market for UK companies         frame to implement plans
             new to exporting, as it         and achieve positive
             requires serious time and       results.
             financial commitment.
             The majority of exporting       Remember that collection
             companies experience            and analysis of information     Use the experience of         Associations' directories     Provided that you have
             problems with lack of           about the market, major         other, successful UK          present a useful market       UK customers with Russian
             management time and             players, potential partners     companies in the market.      research tool. Consider       connections, request from
             resources. It is important      and clients, local rules and    The Russo-British Chamber     the associate members of      them details of their
             therefore to concentrate        regulations are essential for   of Commerce                   these associations as well,   equivalent Russian
             efforts where there is the      informed business decision      www.rbcc.com                  including distributors,       operations and names of
             highest degree of success       making.                         is a valuable resource.       lawyers, accountants,         suitable contacts therein.
             probability. If you are not                                                                   consultants, etc as ones      With good research, and
             a web-based business,           In-depth and focused            Another useful source of      having useful industry        confidence in that research,
             Russia is best broken down      market research is              information is the website    intelligence as you           a sound business
             to economic regions, eg         invaluable in making            Small Business in Russia      move further down             judgement can be made
             Central Russia, North West      decisions across market         www.business-in-russia.com    the export road.              as to whether there is
             of Russia, Siberia, etc.        entry strategy formulation                                                                  sufficient opportunity
                                             and local partner selection.    There are thousands of                                      to proceed, and where.
             A concentrated effort of                                        Russian trade associations.
             sales, technical support        Establish a local presence      Many are very professional
             and executive staff is to       or select a local partner       and are an excellent source
             be directed at the selected     for effective marketing         of industry information
             region or regions. Regional     and distribution of your        and practice.
             success correspondingly         products in Russia. Due
             will allow expansion out        diligence is a must.
             in diverging rings from
             this initial base.




16                                                                                                                                                                17
MARKET ENTRY AND START-UP CONSIDERATIONS
DISTRIBUTION AND SALES CHANNELS


THE MARKET     Local presence is essential
               for the success of foreign
                                              Methods of distribution
                                              and the number and
                                                                            However, these retail chains
                                                                            tend not to import and
FOR MOST       firms in the Russian           functions of intermediaries   prefer to deal with local
               market. This is especially     vary widely by product area   firms.
CONSUMER       true when considering          and local conditions. The
PRODUCTS IS    the fact that business         market for most consumer      The most common routes
               relationships in Russia are    products is concentrated in   to Russia are by road or
CONCENTRATED   built upon personal ties       major cities. There are       rail overland across
IN MAJOR       and social introductions,
               and that much of the
                                              many large-scale retail
                                              stores in the major cities,
                                                                            Western Europe, Poland,
                                                                            Belarus to Moscow, or by
CITIES.        major competition is only      especially in Moscow,         sea to St Petersburg or
               a few flight-hours away.       St Petersburg and the         Finland and then road or
               In addition, for sectors       outlying suburbs. Large       rail through St Petersburg
               that involve any type of       shopping malls have           and to Moscow. For
               government procurement,        opened up on the ring         smaller consignments or
               an entity must be              road circling Moscow.         goods which are required
               registered with the            However, much distribution    urgently, air freight is a
               Russian Government             and retailing in some of      viable option and there is
               in order to bid on the         the Russian regions takes     a good range of air-freight
               procurement projects.          place through such            services available to Russia
               Hence, many Western firms      informal channels as kiosks   from the UK.
               enter into a consortium        and open markets.
               with a Russian company or
               enter into a representative    Foreign companies also
               agreement, especially for      export directly to end
               the purposes of market         users, and this method is
               entry. Finally, the language   often observed where
               barrier and established        equipment is manufactured
               social/business circles        on a one-off basis. Many
               make it extremely difficult    large retail chains,
               to enter the Russian           including department
               market without a qualified     stores and supermarkets,
               Russian representative.        can purchase in bulk rather
                                              than using traditional
                                              wholesale channels.

18                                                                                                         19
MARKET ENTRY AND START-UP CONSIDERATIONS
USING AN AGENT OR DISTRIBUTOR


              UK exporters have four basic   Distributors                    Branch/representative              Foreign subsidiaries
              options when choosing a        The most common market          offices                            Some foreign manufacturers,
              distribution channel:          entry strategy is to select a   Some foreign manufacturers,        particularly in the cosmetics,
                                             good distributor or several     in addition to a distributorship   pharmaceuticals, consumer
              Agents                         distributors (depending on      network, operate their own         electronics, durables and
              It is not a common             the product).                   representative office.             other industrial products
              practice in Russia for                                                                            sectors, register their
              foreign companies to rely      A good distributor              The main advantage of              wholly owned subsidiaries in
              solely upon the services       usually provides a wide         opening a representative           Russia. Registered-in-Russia
              of an agent, since agents      range of logistical support     office is a direct access to       subsidiaries import products
              do not provide product         to an exporting partner,        the market/end-customers           from their parent company
              promotion support.             including customs               and control over the               and then resell the products
              Distributors and               clearance, warehousing,         promotion and distribution         to local wholesale traders
              representative offices,        inventory management,           of their products. However,        or retailers.
              however, often employ          etc. However, handling          such offices cannot be
              agents in order to sell        promotion and advertising       directly involved in               This export arrangement
              their products in remote       campaigns exclusively           commercial activity,               provides for even more
              Russian regions.               through independent             having no right to operate         stringent control of the
                                             distributors can turn out       commercial accounts under          supplier over distribution
                                             to be inefficient. Russian      the Russian law. Instead,          and helps to further
                                             distributors normally handle    they typically oversee a           reduce possible risks
                                             products from multiple          network of distributors            of false invoicing and other
                                             suppliers and are not           and/or agents who are              potential fraud committed
                                             necessarily dedicated           directly engaged in trade          by independent importers
                                             to promoting a specific         activity. Operation through        and distributors. For more
                                             company’s product unless        a representative office            information on registering
                                             the supplier provides           ensures an exporter's              a company in Russia please
                                             substantial financial           greater control over the           refer to the “Establishing a
                                             support for promotion           distribution channels and          legal presence” section on
                                             and advertising.                helps to reduce risks.             page 55.




20                                                                                                                                               21
MARKET ENTRY AND START-UP CONSIDERATIONS
FRANCHISING


THE REGIONAL    The franchise concept first
                entered the Russian market
                                                 The development of
                                                 franchising in Russia is
                                                                                 There is no dispute that the
                                                                                 numbers are increasing. One
                                                                                                                 The majority of franchisers
                                                                                                                 prefer to establish
                                                                                                                                                  There are several associations
                                                                                                                                                  in Russia promoting
CITIES MAY      in the early years of the        difficult to estimate because   estimate is that the number     partnerships with franchise      franchising. The Russian
                1990s, when it was               no reliable statistics are      of systems grew 19 per cent     partners in Moscow or            Franchise Association,
REPRESENT       introduced by foreign            available. The franchisers      in 2008 and the number of       St Petersburg. However,          (RFA) www.rarf.ru was
SIGNIFICANT     franchisers. The first and       and franchisees prefer to       newly signed deals 20 per       markets in Moscow and            established in 1997 as a
                foremost franchise pioneers      register franchise agreements   cent. A recent publication      St Petersburg no longer          non-profit organisation.
BUSINESS        were such brands as Pizza        under various legal forms       suggested that the number       represent an easy opportunity    The RFA promotes
OPPORTUNITIES   Hut, KFC, Subway, and
                AlphaGraphics. The second
                                                 such as licensing agreements
                                                 or sales contracts, making
                                                                                 of franchisees will rise to
                                                                                 60,000 in a few years.
                                                                                                                 for entry due to increased
                                                                                                                 competition and high costs.
                                                                                                                                                  franchising as a business
                                                                                                                                                  concept and lobbies for
FOR FOREIGN     wave of market entries came      the compilation of statistics                                   There are a number of            the amendment of the
                at the beginning of the new      impossible. The Russian         The Russian franchising         challenges to be aware           Civil Code. Association
FRANCHISERS.    millennium, when economic        Franchise Association           sector has developed mainly     of, such as access to good       members include
                reforms initiated by a new       estimates 400 franchise         in customer-oriented            locations, increasing            franchisers, franchisees,
                Government led to gradual        systems; a private firm,        segments, such as restaurants   competition from local           and government agencies,
                improvement of the business      Newbridge Group, estimates      and fast food, education        and international service        business support
                environment, and Russia          it as 165; another source       and training, recreation and    providers, necessity of an       organisations, non-
                joined the list of the world's   claims it’s 200. The number     entertainment, automotive       aggressive promotional           government funds,
                fastest-growing economies.       of franchisees is estimated     and retail, travel and          campaign and a significant       banks, accounting firms
                                                 by some at 6,000, by others     lodging. Franchising in         marketing budget.                and consultants.
                Franchising legislation in       at half that number. An         business-oriented services
                Russia was formally adopted      interesting feature of the      is also gaining momentum.       The regional cities may
                in 1994 by the Russian Civil     Russian franchise scene         Good examples of the            represent significant business
                Code, specifically in Chapter    is the composition of           business-to-business (B2B)      opportunities for foreign
                54 where franchising is          franchisers here: Newbridge     segments where franchise        franchisers. Several regional
                defined as a “Commercial         estimates 68 per cent are       models work successfully        cities have populations
                Concession.” In addition,        established domestically,       are cleaning services and       exceeding one million people.
                a number of provisions in        20 per cent are brought         maintenance, transportation,    These areas have educated
                the Tax Code, intellectual       to Russia by European           logistics, express mail         workforces, entrepreneurs
                property, competition            franchisers, and 12             services, management            with excellent experience,
                and consumer protection          per cent are American           training, and consulting.       good relationships with local
                legislation refer to, or are     franchise concepts.                                             administrations and access to
                applicable to franchising                                                                        fine locations. The demand
                relationships in Russia.                                                                         for well-known brands and
                                                                                                                 high-quality services in the
                                                                                                                 regions is very strong.
22                                                                                                                                                                           23
MARKET ENTRY AND START-UP CONSIDERATIONS                                       MARKET ENTRY AND START-UP CONSIDERATIONS
DIRECT MARKETING                                                               ELECTRONIC COMMERCE


              Direct marketing was             and more direct marketers       Russia was placed fifty-ninth      and subsequent client            of internet connection in
              introduced to the Russian        and mail-order companies        in the 2008 Economist              support via companies’           Russia has grown rapidly
              economy in 1991-1993.            from around the world are       Intelligence Unit’s                websites are limited.            over the past two years.
              The approach is being            entering Russia. As far as      E-readiness rankings report of     Russian internet stores          The Russian Ministry of
              practised via telemarketing,     B2B is concerned, response      64 countries, using a system       have also adopted little of      Information Technologies
              broadcast media planning         rates are usually higher        of over one hundred criteria       the best practices               and Communications
              and extensive promotions.        than in Western Europe,         measuring infrastructure,          witnessed on American or         forecasts that 50 million
              The privatisation of state       but undeliverable mailings      available services and e-skills,   European sites; there is         Russians will be connected
              companies and the expansion      are also higher. Person-to-     and the highest among the          limited product information      to the web by 2010. The
              of industries have also          person direct marketing         four countries in the 2006         and the catalogue structures     Russian online advertising
              contributed to the use of        works well, for example with    study report. Russia’s overall     navigation can be difficult.     market is projected to reach
              direct marketing in business.    health and beauty products.     score was 4.42 (up from 4.3                                         US$685 million in 2008,
                                                                               in 2006), scoring highest in       Nevertheless, sales through      after doubling in 2007 to
              Direct marketing in Russia       For more information            business environment and           these channels are expected to   US$369 million, according
              is growing rapidly as a          on the direct marketing         lowest in consumer and             grow rapidly in the coming       to Mindshare Interaction.
              channel. The DM industry is      industry in Russia, visit the   business adoption.                 years. Russian e-commerce
              growing by 40-70 per cent        Russian Direct Marketing                                           revenue is set to increase       According to Rambler’s Top
              every year – at a quicker rate   Association website at:         Rosstat estimates that only        ninefold in the coming year,     100, there were 3,510 online
              than advertising generally –     www.rdsa.ru                     24.9 per cent of Russian           according to a new study         news and mass media sites
                                                                               businesses had their own           from International Data          (out of a total of 169,000
                                                                               websites at the beginning of       Corporation (IDC). According     websites registered .ru sites)
                                                                               2008. This is an extremely         to it the total volume of        as of 16 May 2008 and,
                                                                               low figure in comparison with      e-commerce has increased         according to the same
                                                                               the EU where the figure is         by 2.5 times and reached         source, about 3,888 Russian
                                                                               on average 62 per cent.            US$10.1 billion (1 per cent      online shops. According to
                                                                               Such a small proportion of         of GDP). The largest             the National Association of
                                                                               companies with websites            segment of e-commerce            the Participants of e-Trade
                                                                               represents a considerable          in Russia became B2B trade,      (NAUET) 18.6 per cent of
                                                                               obstacle to e-commerce             which mounted to about           internet users made at
                                                                               development, as product            US$b6.15 billion (growth         least one online purchase
                                                                               marketing, electronic sales        by 4.7 times). The rate          during 2008.




24                                                                                                                                                                            25
MARKET ENTRY AND START-UP CONSIDERATIONS
ELECTRONIC COMMERCE (CONTINUED)


              E-commerce in Russia            The overwhelming majority
              is dominated by small           of internet shoppers pay in
              specialised companies.          cash upon home delivery.
              The most popular products       Online debit – and credit –
              sold online are books,          card transactions remain
              video cassettes, DVDs, CDs,     limited because Russians
              computers and computer          generally distrust retail
              software, airline tickets and   banking. However, retail
              prepaid telephone cards.        banking services are rapidly
              There are also a growing        developing with the arrival
              number of e-commerce            of several major foreign
              companies in the grocery        players in the market.
              trade in Moscow and             Although there are around
              St Petersburg. Some             30 million plastic cards in
              supermarkets, including         Russia, only 300,000 of
              the Sedmoi Kontinent            these are credit cards (the
              chain, now offer online         rest—the vast majority—are
              ordering. But overall           debit cards), and this         Other, less common, forms     Business-to-business B2B      The “electronic Russia
              business-to-consumer            restricts the growth of        of online payment include     e-commerce consists of        (also known as e-Russia)
              (B2C) e-commerce in             online sales.                  direct bank transfers, pre-   distributors’ outlets,        Plan” was launched in 2000,
              Russia is limited, mainly                                      payment cards and digital     marketplaces for small- and   as a ten-year programme
              because of low internet                                        money. A number of            medium-size enterprises       to improve Russia’s ICT
              penetration rates,                                             “virtual wallet” sites have   and the first online          infrastructure, improve the
              consumers’ restricted                                          been established to address   marketplaces for industrial   legislative framework and
              purchasing power and                                           internet payment needs.       commodities. Computer         improve publicly available
              limited use of credit cards.                                   These sites receive bank      and office equipment sales    databases. Total investment
                                                                             transfers from Sberbank       dominate the first two        for the project is estimated
                                                                             and other retail banks, and   categories. Industry-based    at 77,179 million RUB
                                                                             then hold the cash on         marketplaces have recently    (2.24 billion euro), with 2.6
                                                                             deposit to be spent           begun to develop, notably     billion RUB allocated to the
                                                                             elsewhere on the internet.    in the metals sector. B2B     first stage, 25.5 billion RUB
                                                                                                           trading consists of one-to-   for the second stage and
                                                                                                           one transactions rather       49 billion RUB for the
                                                                                                           than online marketplaces.     third stage.


26                                                                                                                                                                 27
MARKET ENTRY AND START-UP CONSIDERATIONS
ADVERTISING AND TRADE PROMOTION


              Advertising in Russia plays      Most major western              Industry publications,          Trade & Investment offices.      Promotional seminars are
              a very important role in         advertising agencies are        which are widely read by        Trade shows are an important     also effective in increasing
              marketing as elsewhere in        active in Russia; domestic      industry managers and           part of marketing in Russia.     awareness of the equipment
              the world, according to          agencies are growing and        specialists, are among the      Russians prefer to shop at the   and brand names in the
              Russian buyers and industry      their professionalism           most effective places to        shows because they can           Russian business community.
              sources. For consumer            continues to improve.           advertise. In addition to       learn from the variety of        Often companies sponsor
              goods, traditional advertising   Advertising tax is levied       seminars and exhibitions,       technical experts and            a seminar for specialists
              media are well established       at 5 per cent on all direct     industry professionals rely     company displays. The            at a scientific and research
              in Russia. Television, print     and indirect advertising        upon them as key sources        high participation rate          institute under the auspices
              media, outdoor billboards,       expenses, excluding VAT.        on industry development         of European companies in         of the Ministry of Industry
              magazines, point-of-sale         Tax is paid in full to the      and technology. Advertising     Russian shows is a source        and Energy or other
              promotions and displays,         local budgets. Local            in such publications builds     of their success in this         governmental agencies.
              and free samples are widely      authorities may decrease        name recognition and            market. Around 90 per cent       Such seminars are very
              used. Foreign products face      the tax rate but in Moscow      product awareness in the        of all foreign companies         popular among industry
              tough competition against        and St Petersburg the           professional community.         participating in Russian         specialists. During the
              Russian products. There is a     maximum rate of 5 per                                           trade shows are European,        seminars the company
              need to "Russify" advertising    cent applies. Advertising       There are general-interest      and their market share           tells the specialists about
              to suit Russian culture.         tax is deductible for profits   newspapers in Russia, several   of industrial equipment          technologies where its
                                               tax purposes.                   of which have national          is about 70 per cent.            equipment can be used.
                                                                               circulation; some are           Representatives of regional      Usually, such seminars
                                               For industrial goods, trade     distributed for free and        governments and state            receive very good press
                                               shows and trade magazines       depend entirely on ad           enterprises from remote          coverage in industry
                                               are effective advertising       revenue. In Moscow and          areas often visit exhibitions    publications.
                                               methods.                        St Petersburg, there are        in major cities to purchase
                                                                               high-quality English and        goods.
                                                                               German language daily or
                                                                               weekly newspapers that
                                                                               reach the high-income
                                                                               foreign business and
                                                                               government communities.
                                                                               For contact and price
                                                                               information on local
                                                                               newspapers and magazines
                                                                               please contact the UK


28                                                                                                                                                                       29
BEST PRACTICE AND RISK MANAGEMENT                                             BEST PRACTICE AND RISK MANAGEMENT
DUE DILIGENCE                                                                 LOCAL PROFESSIONAL SERVICES




             Before entering any new          It is equally important to      UK Trade & Investment          As Russian commercial           Western accounting, legal
             market it is vitally important   carry out due diligence and     offices in Russia offer a      legislation, and tax            and consulting firms.
             to assess risk using proven      check the integrity of the      range of assistance to         legislation in particular,      Competent smaller firms
             business intelligence tools      proposed business partner       UK firms interested            contains provisions which       also operate under Russian
             and due diligence checks.        and examine their               in developing market           can be interpreted in more      or Western management.
             This will include an             relationship to the local       opportunities or increasing    than one way, they often
             analysis which examines          business environment.           their business in Russia.      overlap or conflict. Early      UK Trade & Investment
             the political, economic,         Consider the accuracy of any    If company-specific            advice on tax and legal         offices throughout Russia
             social, technological and        claims relating to reputation   information is needed or       issues is highly recommended.   maintain lists of local
             legislative environment          and business performance,       detailed research would be     Furthermore, Russian            attorneys and accounting
             (often referred to as PEST).     and review the company          required, a fee would apply.   accounting practices differ     firms. The Russo-British
             In Russia, standards of          culture with an analysis of                                    from Western standards.         Chamber of Commerce
             corporate governance,            the ethics of key executives.                                  Moscow and St Petersburg        in Russia is also a
             transparency and                 In the extreme this could                                      have large offices of major     good source.
             intellectual property            mean uncovering links to
             protection are evolving,         organised crime, corruption
             but are often lower than         or money laundering.
             in US or EU markets.




30                                                                                                                                                                   31
BEST PRACTICE AND RISK MANAGEMENT                                                                BEST PRACTICE AND RISK MANAGEMENT
IMPORTING AND EXPORTING                                                                          CUSTOMS DUTIES


THIS SECTION (PAGES 32-37)   Tips for exporters                Customs policy                    Classification of goods        Base customs duty rates vary     • goods imported by
IS KINDLY PROVIDED BY        • Generally, under exports        Russia’s customs policy           The Russian tariff             widely, from 100 per cent          individuals for personal
PRICEWATERHOUSECOOPERS         and imports between             has seen several key areas        classification system is       on spirits to 0 per cent for       use (worth not more
                               a foreign company and           of development:                   based on the internationally   some printed matter and            than approximately
                               a Russian company, the                                            adopted Harmonized             some other priority imports.       US$2,500 and weighing
                               Russian company is              • lowering of customs duty        Commodity Description          Zero duty applies, for             less than 35kg),
                               responsible for the               on imports of technical         and Coding System.             example, to a wide range
                               customs procedures.               equipment,                                                     of equipment and                 • means of transport
                                                                                                 Valuation rules                machinery. On average,             involved in the
                             • In order to import goods        • simplification of the           The customs valuation          duty rates fall between            international movement of
                               into Russia and clear             customs clearance process,      procedure is established       5 per cent and 20 per cent         goods and passengers, and
                               them through customs,                                             in line with GATT/WTO          of the goods’ customs value.
                               an importer has to make         • tighter customs control         principles and is generally    The base rates specified         • humanitarian aid and
                               all customs payments              after customs clearance         equivalent to the              in the legislation apply to        some others.
                               due in accordance with            of goods, and                   DAF/Russian border             countries that have been
                               the chosen customs                                                transaction value of           granted Most Favoured            Free trade agreements
                               regime and comply with          • further development of          the goods concerned.           Nation status. Some goods        Russia has adopted
                               other requirements                customs integration in                                         from “developing” and “least     free trade agreements
                               established by customs            the Commonwealth of             Rates                          developed” countries may be      with countries of the
                               legislation (eg certification     Independent States (CIS).       Import duty applies to         imported at 75 per cent of       Commonwealth of
                               requirements).                                                    most goods. The majority       the base rates or zero rates,    Independent States (CIS).
                                                               Import restrictions               of customs duty rates in       respectively. However, these     Goods originating from CIS
                             • Importation of certain          Certain imports to Russia         Russia are ad valorem          are limited to raw materials     countries (eg Ukraine) are
                               goods (eg pharmaceuticals,      require permission and            (ie a percentage of the        and handmade goods.              exempt from customs duty
                               meat, etc) requires             certificates (eg of conformity,   goods’ customs value).         Goods originating in other       for import to Russia (subject
                               licences.                       sanitation), licences and         There are also specific        countries will be subject to     to certain conditions).
                                                               other approvals. They             duties for certain types       duty at double the base rates.   Russia, Belarus, Kazakhstan,
                             • Russia has several special      should be submitted to            of imports, calculated by                                       Kyrgyzstan and Tajikistan
                               economic zones that             the customs authorities           volume, weight or quantity.    The following are exempt         form a Customs Union,
                               offer customs benefits.         for clearance. The Russian        Some duties have a combined    from customs duty:               and goods originating
                                                               Federation imposes an             rate incorporating the                                          from these countries are
                                                               anti-dumping duty on              above two types of duty        • transit goods,                 not subject to customs
                                                               certain goods (ie metal           and, therefore, the tax                                         duty within it.
                                                               pipes from Ukraine).              base may vary.                 • cultural valuables,


32                                                                                                                                                                                         33
BEST PRACTICE AND RISK MANAGEMENT                                                                BEST PRACTICE AND RISK MANAGEMENT
CUSTOMS DUTIES (CONTINUED)                                                                       CUSTOMS DUTIES INCENTIVES


Certain categories of goods      Payments                        of the goods, these customs     Charter capital                Tolling                         Special economic eones
are subject to excise tax        Customs payments are            payments are not refunded.      contributions                  Goods imported into             A number of special
for import to Russia             generally paid before or        Customs has the right to        Fixed production assets        Russia for processing may       economic zones (SEZ) with
(eg alcoholic beverages,         when submitting customs         require security for customs    imported as a charter          be placed under an inward       a free customs regime have
cigarettes, cars, motorcycles    declarations to customs.        payments (eg a deposit,         capital contribution by a      processing relief (IPR)         been established in Russia.
with a capacity of over                                          pledge, bank guarantee, etc).   foreign investor are free      procedure (subject to certain   Imports to SEZs are free of
150 horsepower, etc).            Temporary import relief                                         from customs duty. The         conditions). Under IPR,         duty and VAT, ie foreign
Generally, the excise tax        Goods may be imported           Goods which qualify as          goods must not be              goods (eg raw materials)        goods are delivered to and
rates are specific (ie the       under a temporary import        fixed assets for production     excisable and should be        imported for processing are     used within the SEZ free of
rates are based on the           customs regime, normally        purposes may be admitted        imported within the time       eligible for full exemption     import customs duty and
volume, weight or other          for a period of up to two       and be subject to a 3 per       frame established for the      from customs duty and           VAT. When foreign goods or
characteristics of the goods).   years. Generally, goods are     cent monthly customs            formation of the charter       import VAT, provided the        products of their processing
                                 permitted for temporary         payment for a temporary         capital. Customs authorities   processed/finished goods        are subsequently released
Import VAT                       importation if it is possible   import period of 34 months      can check to ensure the        are subsequently moved          into free circulation to
For most goods, the import       to identify them upon their     if the Russian user does        correct use and further        out of Russia within a          the rest of Russia, import
VAT rate is 18 per cent of       re-export. Temporary            not yet have property           disposal of goods exempted     deadline agreed on with         customs duty and VAT
the customs value, inclusive     importation requires            rights (eg for leasing).        from customs duty. A VAT       customs. No export customs      are payable. If the goods
of customs duty and excise       permission from the customs     After this period the goods     exemption is also available    duty is charged upon the        manufactured in a particular
(if any). Food, a certain        authorities. Upon expiry of     are considered released for     for technical equipment        export of finished goods        SEZ are exported to foreign
range of children’s goods        the period for temporary        home use. In these              imported as a charter          from Russia. IPRs must          countries, they will be
and a limited range of other     importation, goods shall        instances, the interest on      capital contribution.          be authorised by customs.       subject to export duty,
goods may be subject to 10       be moved out of Russia          customs duty and taxes is                                      Only a Russian company          if applicable.
per cent or 0 per cent VAT.      or placed under another         not payable by instalments.                                    may apply for
                                 customs regime (eg release                                                                     an IPR.                         Foreign goods which were
Customs processing fees          for free circulation).          Temporarily imported goods                                                                     imported into the SEZ but
Customs processing fees are      Temporary importation           can only be used by a                                                                          not processed may be re-
established as a flat fee and    requires periodic customs       person who has obtained                                                                        exported without payment
vary from approximately          payments of 3 per cent per      customs’ permission for                                                                        of export customs duty.
€15 to €3,000 per customs        month of the total customs      their temporary importation.
declaration, depending on        payments due had the
the customs value of             goods been imported for
imported goods.                  free circulation. Upon export




34                                                                                                                                                                                       35
BEST PRACTICE AND RISK MANAGEMENT
DOCUMENTATION AND PROCEDURES


             Registration of importers       Declaration of the               Warehousing and storage        months. Warehouses for
             and exporters                   customs value                    Goods which are subject        temporary storage are
             There is no established         The customs value should be      to customs control (eg         usually located near
             procedure for registering       properly confirmed by the        imported goods, which          customs offices.
             importers/exporters with        appropriate documents. The       have not yet cleared through
             customs. However, in            list of such documents may       customs) can be temporarily    Re-exports
             practice certain documents      vary depending on the terms      stored at special warehouses   Goods which have been
             may be required by customs      of a particular transaction.     before they are released by    imported into Russia may
             prior to importation (charter   While the Russian customs        customs. The period for        be re-exported provided they
             documents, tax registration     regulations set a general list   storage should not exceed      haven’t been released for
             certificate, etc).              of documents required for        two months, but an             free circulation in Russia.
                                             confirmation of the customs      importer can ask the           They are re-exported
             Documentation                   value, the list is not           customs authorities to         without payment of
             Russian customs regulations     exhaustive.                      extend it to up to four        export customs duty.
             establish a comprehensive
             list of documents required      If the customs authorities
             for customs clearance           disagree with the customs
             purposes. In practice, the      value declared by an importer,
             set of documents to be          they may adjust it. If the       THIS GUIDE HAS BEEN PREPARED FOR GENERAL GUIDANCE ON MATTERS OF
             submitted to the customs        customs authorities disagree     INTEREST ONLY, AND DOES NOT CONSTITUTE PROFESSIONAL ADVICE. YOU SHOULD
             authorities may vary            with the customs value           NOT ACT UPON THE INFORMATION CONTAINED IN THIS GUIDE WITHOUT OBTAINING
             depending on the character      declared by an importer they     SPECIFIC PROFESSIONAL ADVICE. NO REPRESENTATION OR WARRANTY (EXPRESS
             of imported/exported            may seek to negotiate with       OR IMPLIED) IS GIVEN AS TO THE ACCURACY, TIMELINESS OR COMPLETENESS OF
             commodities, conditions         the importer an adjustment       THE INFORMATION CONTAINED IN THIS GUIDE, AND, TO THE EXTENT PERMITTED
             of the transaction, etc.        of the customs value.            BY LAW, PRICEWATERHOUSECOOPERS, ITS MEMBERS, EMPLOYEES AND AGENTS
                                             Should the importer refuse       ACCEPT NO LIABILITY, AND DISCLAIM ALL RESPONSIBILITY, FOR THE CONSEQUENCES
                                             to adjust the customs value,     OF YOU OR ANYONE ELSE ACTING, OR REFRAINING TO ACT, IN RELIANCE ON THE
                                             the customs authorities may
                                                                              INFORMATION CONTAINED IN THIS GUIDE OR FOR ANY DECISION BASED ON IT.
                                             adjust the customs value
                                             themselves.
                                                                              2008 PRICEWATERHOUSECOOPERS. ALL RIGHTS RESERVED.
                                                                              “PRICEWATERHOUSECOOPERS” REFERS TO THE NETWORK OF MEMBER FIRMS
                                                                              OF PRICEWATERHOUSECOOPERS INTERNATIONAL LIMITED, EACH OF WHICH
                                                                              IS A SEPARATE AND INDEPENDENT LEGAL ENTITY.



36                                                                                                                                                         37
     BEST PRACTICE AND RISK MANAGEMENT
     CONTRACT AND TERMS OF SALE


     General terms of sale (GTS)    A properly prepared GTS        • An arbitration clause
     It is normally advisable for   tailored to the Russian          stating that all disputes
     a UK exporter to have a        market should normally           will be resolved by
     lawyer prepare GTS suitable    contain, among others,           arbitration in a
     for the Russian market and     the following provisions:        designated city.
     in accordance with Russian                                      Arbitration is usually
     law and practice. If used      • A clause providing for         cheaper and faster than
     properly, either for direct      interest on late payments      a suit in the courts.
     exports (without a Russian       at a specified current
     distributor) or by the UK        interest rate. Without       UK companies frequently fail
     company's Russian                such a clause, only          to adapt their GTS to the
     subsidiary or joint venture      interest at the legal rate   Russian market. Instead, they
     company, they offer distinct     can be recovered in all      use their customary form
     advantages for ensuring          or nearly all the courts     which contains a clause
     payment, recovering interest     of Russia.                   stating that the courts in
     and costs of collection, and                                  the UK will have exclusive
     for reducing risks.            • A clause allowing the        jurisdiction over all disputes
                                      seller to recover their      between the manufacturer
                                      costs of collection,         and the distributor/agent.
                                      including the seller's       Unless it can be said that
                                      reasonable attorney's        the buyer has truly
                                      fees.                        “accepted” this clause,
                                                                   a judgement against
                                    • Clauses limiting the         the Russian buyer may not
                                      warranties that the seller   be enforceable in Russia.
                                      makes. These can be
                                      limited but only if
                                      properly drafted.




38                                                                                            39
BEST PRACTICE AND RISK MANAGEMENT
CONTRACT AND TERMS OF SALE
(CONTINUED)

             The distribution or             • minimum purchase or               Most of the points listed       Terms and conditions of         If the goods require any
             sales agency agreement            minimum sales obligations         above for a distributorship     shipment and delivery           special handling, either
             There is no question that a       of distributor, particularly      agreement apply likewise        Russian businesses are          because they are fragile,
             written distribution or sales     if exclusivity for all or part    to the sales representative     generally familiar with         perishable or contain
             agency agreement prepared         of Russia is granted,             or sales agency agreement,      international terms and         dangerous or hazardous
             by a Russian lawyer is                                              with appropriate                conditions of trade             materials, the UK supplier
             necessary. A non-Russian        • promotional expenses,             adaptations. Like their         (Incoterms). However,           should take special care to
             style distribution or agency                                        European counterparts,          unless the sales contract or    inform the customer about
             agreement is not satisfactory   • prior approval by supplier        sales representatives and       purchase order specifically     appropriate shipping and
             for the Russian market.           of distributor's advertising/     commercial agents normally      addresses shipment and          handling methods.
                                               promotional material,             only provide a supplier with    delivery, disputes may arise
             Some critical contractual                                           customer prospects and          leading to misunderstandings,
             points to be negotiated are:    • terms of sale, prices,            obtain orders for goods         customer relations problems
                                               discounts, price changes,         subject to the supplier's       and, even worse, delay
             • territory,                      payment, currency, etc,           acceptance.                     in payment.

             • exclusive or non-exclusive    • security interest clause,         Other points of                 The sales contract
               distributorship,                                                  importance are:                 or purchase order
                                             • clauses as to product                                             should specify:
             • scope of products,              liability risk, insurance, etc,   • commission rate and basis;
               including whether later                                             – when the agent is           • whether the price includes
               developed products are        • terms of contract,                    entitled to receive his       shipment and delivery,
               automatically included,         renewal, termination                  commission,
                                               clauses, consequences               – advances against            • the mode of transport:
             • non-competition clause          of termination,                       commission, etc,              sea, land, air or special,
               (caveat: anti-trust law),
                                             • clauses protecting                • scope of the agent's          • the destination, and
             • sales outside territory and     supplier's trademark(s)             function generally, and
               exports by distributor          and other intellectual                                            • when title and risk of loss
               (caveat: anti-trust law),       property rights, and              • overlap of two or more          pass from supplier to
                                                                                   agents with respect to a        purchaser.
                                             • arbitration and                     particular order, splitting
                                               applicable law.                     of commissions, etc.



40                                                                                                                                                                        41
BEST PRACTICE AND RISK MANAGEMENT
CONTRACT AND TERMS OF SALE
(CONTINUED)

             Dispute resolution              Freight                         Use of a customs broker           Customs brokers are              The Association of
             The best method of resolving    There are a number of           Most international trade          individuals or firms             European Businesses
             disputes is by avoiding them.   routes that can be used for     transactions could not be         licensed by the customs          www.ebc.ru is in regular
             Careful drafting and            shipping goods into Russia.     completed efficiently without     authorities to act as agents     contact with the Russian
             communications will             The most common ways            the use of a reputable and        for importers. Depending         State Customs Committee,
             avoid most, if not all,         are by road or rail overland    competent customs broker.         on the role that customs         and their Customs and
             the potential disputes.         across Western Europe,          Customs brokers perform           brokers play and the extent      Transport Committee can
             Occasionally something          Poland, Belarus and to          almost all the work at point      of the services rendered,        give practical advice on
             happens which will require      Moscow, or by sea to            of entry, have experience in      their fees will vary.            various customs issues
             dispute resolution.             Finland and then road           dealing with local customs
                                             through St Petersburg and       officials and generally have      A list of brokers is available   There are 370 authorised
             Although there are              to Moscow. Each route           a wealth of knowledge which       on the website of the Russian    customs brokers in Russia,
             numerous alternative            presents different benefits     they can bring to bear in         State Customs Committee,         which provide various
             dispute resolution              in terms of cost and time       avoiding problems associated      www.customs.ru or a website      services to their clients.
             mechanisms available, the       and the mode of transport       with classification and           for National Customs Brokers
             UK exporter should insist       to be used. Most freight        valuation. Since classification   www.customsbrokers.ru
             upon arbitration in all         forwarders will have routes     is not always a cut-and-dried     – note that this site is in
             circumstances. In any event,    that they prefer and use        issue, a customs broker will      Russian only. Examples of
             careful consideration should    most of the time. It is very    be of valuable assistance in      documents, recent changes
             be given to the provision of    important to use a reputable    providing information on          in legislation and samples
             the sales contract or GTS       freight forwarder that has      how customs inspectors in a       of paperwork are available at
             that spells out arbitration     experience of shipping          particular customs territory      www.vch.ru/index_eng.html
             procedures. Again, the UK       goods to Russia and             may handle certain cases.         or www.tks.ru/ (Russian only).
             exporter should consult         preferably has representation
             a legal expert before           in Russia.
             preparing or agreeing
             to any arbitration clause
             or provision.




42                                                                                                                                                                      43
BEST PRACTICE AND RISK MANAGEMENT
GETTING PAID AND MANAGING CREDIT RISK


              Russian bank accounts            When choosing an overseas      Recommended methods             If you are a first-time          Open Account and Bills for
              When exporting to Russia         bank it is important that it   of payment                      exporter to Russia the           Collection are other payment
              normal commercial rules          has the capability to make     The lowest-risk form of         standard method of               methods commonly used
              should be followed, and          and receive international      transaction for the exporting   receiving payment for your       between UK exporters and
              you should discuss the           payments. Generally, it is     UK company is cash paid in      goods is by documentary          Russian importers when
              arrangements for security        advisable to avoid the huge    advance, a form of payment      letter of credit. However,       a trustworthy relationship
              of payment with the              money centre banks because     used most often in markets      credit is not always available   between the two parties
              international department         you are likely to be too       where there is likely to be a   and it is wise to consult        has been developed. Major
              of your UK bank, the UK          small to be of interest        high risk attached or where     your bank in that event.         exports and those requiring
              offices of Russian banks         to them. It is also best to    the purchaser is being very     Even if credit is forthcoming,   long-term finance will
              or UK-based banks that           avoid the “mutual” banks       generous!                       not all Russian banks' letters   require specialist payment
              have offices in Russia. UK-      (similar to our own building                                   of credit will be acceptable     and financing.
              based banks offer currency       societies) as they tend not                                    to and therefore confirmed
              accounts but may be a little     to be able to make                                             by a UK bank. The opening
              inflexible for receiving large   international payments.                                        of the documentary letter
              numbers of small payments.       Utilise the services of your                                   of credit is based on the
              A domestic account with a        own UK bank to help                                            contract signed between
              bank in Russia that offers       make your choice of                                            the Russian buyer and
              telephone banking can            a Russian bank.                                                the foreign seller, and it
              often be a better solution                                                                      is important to agree the
              for receiving cheques,           All cash transactions in                                       price and for documents
              electronic transfers, credit     Russia must now be made in                                     associated with the
              card and other US dollar-        rubles, even though invoices                                   transaction to be correct.
              based payments.                  often quote dollar prices.
                                               In certain circumstances
                                               bank transfers can be
                                               done in hard currencies.




44                                                                                                                                                                      45
BEST PRACTICE AND RISK MANAGEMENT
GETTING PAID AND MANAGING CREDIT RISK
(CONTINUED)

              Knowledge of your customer      Credit information is          It can be useful for            • pledging of accounts          If any of these warning
              and/or business partners        available in a variety         credit managers to have a         receivables to a bank,        signs is noticed, it may
              Sooner or later in the          of forms, ranging from         rudimentary understanding                                       be necessary to seriously
              exporting process, it will be   impersonal (third-party        of their customer's business,   • collection claims, suits,     consider whether to extend
              necessary either to appoint     reports) to experience-based   in order to anticipate            judgements obtained by        credit to a prospect or to
              others to act on your behalf    reports. Several UK firms      potential payment                 other suppliers,              turn an existing customer
              such as shipping agents,        can help with information      difficulties which result                                       account over to a
              distributors, warehouse         on a prospect's credit and     from, for example, seasonal     • refusing to share             collection agency.
              operators, etc and/or to        payment history. A more        fluctuations in business.         financial information,
              deal directly with customers,   comprehensive perspective
              where payment in advance        can be obtained by adding      In these cases, a good          • abrupt and frequent
              cannot be achieved. It is       to this information the        customer relationship can         change of banks,
              essential to know your          experiences of other           be maintained through the
              prospects.                      companies that have had        customer's demonstration        • partial and erratic
                                              recent financial dealings      of his/her ability to make        payments on accounts,
                                              with a prospect company.       some level of “on account”
                                              This type of information is    payments. Lack of co-           • excess irritation on credit
                                              available through membership   operation in setting up           and collection contacts,
                                              of a credit information        such an arrangement,
                                              interchange group. If the      however, should act as a        • refusal to respond to
                                              decision is to expand or       warning that this may be          collection demands,
                                              restrict an existing line of   a more serious collection
                                              credit, the best information   problem.                        • purchases out of normal
                                              to rely on is, of course,                                        needs,
                                              the credit manager's           To be aware that a
                                              own experience with            customer could be a             • slowdown of payments
                                              the customer.                  potential collection              with a pattern of excuses,
                                                                             problem, credit managers          and
                                                                             should keep in mind the
                                                                             following warning signals:      • reduced mercantile
                                                                                                               agency rating.




46                                                                                                                                                                  47
BEST PRACTICE AND RISK MANAGEMENT
GETTING PAID AND MANAGING CREDIT RISK
(CONTINUED)

              Financial information         a pattern of growth,           Credit insurance                Credit is scarce in Russia.     However, private sector
              and statements                stagnation or decline.         One option open to              Many importers, however,        insurance has some
              Another means of                                             companies wishing to extend     prefer to pay for goods         limitations, particularly
              ascertaining both the         Whenever possible, the         credit to UK companies is       on 30 or 60 days terms.         for sales of capital goods,
              current financial condition   credit manager should          business credit insurance.      This could be considered        major services and
              as well as the medium-term    insist that these financial    However, it is important        once an exporter has            construction projects
              financial stability of a      statements be audited          to note that the use of         established a good              that require longer credit
              prospect is to request        by a Certified Public          a credit insurer should be      relationship with               packages or are in riskier
              financial statements.         Accountant. This is            only one component in a         a Russian company.              markets. The Export Credits
              It is a good policy to        particularly important         comprehensive credit policy.                                    Guarantee Department
              request statements from       when dealing internationally                                   Credit insurance for            (ECGD), a separate
              the previous three years.     as it offers the credit        A credit insurer is a           consumer goods and other        government department
              Taking this three-year        manager an assurance           company which assumes           business normally transacted    that reports to the Secretary
              perspective allows the        of the data contained in       part of the risk (often up to   on credit terms of less than    of State for Business,
              credit manager to observe     the financial statements.      90 per cent) associated with    two years is regarded as        Enterprise & Regulatory
                                                                           granting credit to a foreign    a function of the private       Reform, provides a range
                                                                           company. However, credit        sector. The private sector      of products for exporters
                                                                           insurance is not a panacea.     provides credit insurance for   of such goods and services.
                                                                           Even when a company has         exports of consumer goods,      Its details are as follows:
                                                                           taken out credit insurance      raw materials and other         Export Credits
                                                                           against possible default, the   similar goods. Speak to your    Guarantee Department
                                                                           insurer will usually require    banker or insurance broker      PO Box 2200
                                                                           that its client company         for more information, or        2 Exchange Tower
                                                                           pursues recovery of the         contact the British Insurance   Harbour Exchange Square
                                                                           debt prior to validation        Brokers’ Association (BIBA)     London E14 9GS
                                                                           of the claim by the insurer.    for impartial advice. Its       Tel: +44 (0)20 7512 7000
                                                                           In most cases, once the         details are as follows:         Fax: +44 (0)20 7512 7649
                                                                           claim has been validated,       British Insurance               Email: help@ecgd.gsi.gov.uk
                                                                           the insurer will share in       Brokers’ Association            Website: www.ecgd.gov.uk
                                                                           the costs associated with       14 Bevis Marks
                                                                           collection through a            London EC3A 7NT
                                                                           collection agency or            Tel: +44 (0)870 950 1790
                                                                           even through litigation.        Fax: +44 (0)20 7626 9676
                                                                                                           Email: enquiries@biba.org.uk
                                                                                                           Website: www.biba.org.uk

48                                                                                                                                                                   49
BEST PRACTICE AND RISK MANAGEMENT
GETTING PAID AND MANAGING CREDIT RISK
(CONTINUED)

              Letters of credit                 Tips for the UK exporter:         Credit management                A good credit application      Once the creditor has
              A letter of credit is a form of   • Take control of the             /control policies                should solicit the following   developed a comprehensive
              contract between two banks.         process. You, as the            It is essential for an           information:                   picture of the potential
              A bank will make payment            exporter, will probably         exporting company to             • the length of time the       customer by gathering the
              provided that the documents         need to tell your customer      have a clear-cut credit            company has been in          information indicated above,
              submitted to it are in strict       the requirements.               policy and to communicate          business,                    an initial line of credit must
              compliance with the                                                 that policy to its customers.                                   be determined. It is very
              conditions of the letter          • Utilise the services            If the exporter does not         • other suppliers with         important that the line of
              of credit. This is regardless       of your own bank.               clearly demonstrate to its         whom the potential           credit not be automatic –
              of the purchase contract.                                           customers that it is important     customer has done            rather, it should be
              To prevent the possibility        • Read the letter of credit       to make timely payments,           business,                    determined on an individual
              of a payment being made             issued in your favour and       then the customers will not                                     basis, taking into account
              if the terms of the purchase        make sure you comply            respect the policy. The key      • the legal structure of the   all the information obtained.
              contract are not met, the           with the terms. If you          to an effective credit policy      potential customer (sole     Likewise, it is of the utmost
              seller should check the letter      cannot, tell your buyer         is to gather as much               proprietor, partnership,     importance that the line of
              of credit against the terms         to have it amended before       information about a                corporation, etc), and       credit be monitored closely,
              of the purchase contract and        you ship.                       customer before the                                             and that it not be
              request amendments from                                             decision to grant                • general banking              automatically expanded
              the buyer. The Russian bank       • When you ship, carefully        credit is reached.                 information.                 without review.
              will make payment provided          prepare all documents
              that the requirements of the        required so that they
              letter of credit are met.           comply exactly with the
              • Further information on            letter of credit. Usually
                 securing payment and             your freight forwarder
                 dispute resolution can be        will prepare some of
                 obtained from:                   the documents. If you
                 www.uktradeinvest.gov.uk         provide a copy of the
                                                  letter of credit, the freight
                                                  forwarder will then know
                                                  the requirements.

                                                • Specify your bank's
                                                  respondent UK bank
                                                  for payment.


50                                                                                                                                                                           51
BEST PRACTICE AND RISK MANAGEMENT
CERTIFICATION


PRODUCTS IMPORTED TO RUSSIA MUST HAVE            Standards organisations        products, including the         Conformity assessment        The Certificate normally
THE GOST-R CERTIFICATE OF CONFORMITY. THIS IS    The current authority for      Ministry of Agriculture         Many products imported       travels with the goods.
A DOCUMENT CERTIFYING THAT THE PRODUCT           standardisation, metrology     (food products), the Ministry   for sale into the Russian    It is presented to the
                                                 and certification matters      of Health (medical devices      Federation are required      Russian customs at the
CONFORMS TO GOST STANDARDS (RUSSIAN              in Russia is the Federal       and pharmaceuticals), the       to have a certificate of     point of entry and should
STATE STANDARDS OR GOSSTANDART).                 Agency on Technical            State Communications            conformity issued by         be available on demand by
                                                 Regulating and Metrology.      Committee                       The Federal Agency on        the authorities as evidence
EUROPEAN CERTIFICATES OF QUALITY ARE NOT                                        (telecommunications             Technical Regulating         of certification. Goods
VALID IN RUSSIA FOR IMPORT. RUSSIA CONTINUES     Federal Agency on              equipment and services),        and Metrology .              without a valid Certificate
TO RELY ON PRODUCT TESTING AS A KEY ELEMENT      Technical Regulating           the State Mining and                                         of Conformity can be
                                                 and Metrology                  Industrial Inspectorate         GOST-R Certificate of        impounded, thus incurring
OF THE PRODUCT APPROVAL PROCESS. OTHER TYPES     9 Leninsky Prospekt Street     [Gosgortechnadzor]              Conformity should be         demurrage and storage
OF PRODUCT SAFETY ASSURANCE, SUCH AS PLANT       119991 Moscow                  (equipment for mining,          obtained from an             charges.
AUDITING, QUALITY SYSTEMS, AND POST              V-49, GSP-1                    oil and gas industries), the    organisation authorised
MARKET VIGILANCE, ARE UNDERDEVELOPED.            Russia                         Federal Security Service        by the Agency. The list of   The Certificate of
                                                 Tel: +7 (495) 236 0300         (security equipment and         the authorised bodies is     Conformity can be obtained
RUSSIA CONTINUES TO ADHERE TO THE PRACTICES      Fax: +7 (495) 236 6231/        systems), and others.           available at the website     by the exporter or by the
                                                               237 6032                                         www.gost.ru. One of those    Russian partner/agent.
OF FURTHER TESTING OF INTERNATIONALLY ACCEPTED   Email: info@gost.ru            Russia’s time-consuming         bodies outside Russia is
CERTIFIED PRODUCTS, WHICH CAN DELAY ENTRY OF     www.gost.ru/wps/portal/        system of certification may     SGS United Kingdom Ltd       Textiles and clothing are
A VARIETY OF PRODUCTS INTO THE COUNTRY. BE       pages.en.Main (in English)     become a challenge to UK        (www.uk.sgs.com). SGS        subjects for mandatory
PREPARED TO SPEND QUITE A LOT OF TIME ON                                        companies attempting to         is the only Gosstandart-     certification, raw materials
THE CERTIFICATION PROCESS.                       The list of authorised         certify products without        accredited certification     are optional. However,
                                                 certification bodies is        appropriate legal advice or     body in Great Britain that   companies are advised to
                                                 available at www.gost.ru       assistance from experienced     has the authority to issue   clarify with their partner in
BE PATIENT.
                                                                                distributors or consultants.    GOST-R Certificates of       Russia which products of
                                                 The Federal Agency on                                          Conformity.                  their range should have a
                                                 Technical Regulating and       UK companies are                                             Certificate of Conformity,
                                                 Metrology and its authorised   recommended to work                                          as it is certainly required at
                                                 agents is the main             with reliable partners                                       the point of sale. In most
                                                 authority for certification    and consulting companies                                     cases, it is recommended
                                                 in Russia. However, other      on registration and                                          that this is done by the
                                                 agencies are involved in       certification issues.                                        Russian partner.
                                                 certification of certain


52                                                                                                                                                                        53
BEST PRACTICE AND RISK MANAGEMENT                                                              BEST PRACTICE AND RISK MANAGEMENT
CERTIFICATION (CONTINUED)                                                                      ESTABLISHING A LEGAL PRESENCE


Certificate types              Labelling and marking            • conditions of storage;       THIS SECTION (PAGES 53-71)   UK TRADE & INVESTMENT   In Russia, foreign
Over 100 certification types   requirements                       expiration date (or          IS KINDLY PROVIDED BY        SECTIONS CAN PROVIDE    investors may:
exist in Russia, some 20 of    Labels on food items               production date and          BAKER & MCKENZIE – CIS,      INITIAL ADVICE ON
which are mandatory, the       must feature the following         period of storage),          LIMITED
                                                                                                                            REGISTRATION            • establish a representative
rest are optional. Major       information in the Russian                                                                   REQUIREMENTS AND          office or a branch of a
mandatory certification        language:                        • directions of preparation                                 PROCEDURES. HOWEVER,      foreign legal entity,
types include:                                                    of semi-finished goods                                    IT IS STRONGLY
• GOST-R,                      • type and name of the             or children’s foodstuffs,                                 RECOMMENDED THAT        • establish a Russian legal
• Hygienic Certificate, and      product,                                                                                   INTERESTED UK             entity in the form of an
• Fire Safety Certificate.                                      • warning information on                                    COMPANIES SEEK LEGAL      enterprise with foreign
                               • legal address of the             any restrictions and side                                 ADVICE ON BUSINESS        investment, which is either
The products subject to          producer (which may be           effects, and                                              REGISTRATION.
mandatory certification          given in Latin letters),                                                                                             (a) entirely foreign-
are listed in Decree N64                                        • terms and conditions                                      UK TRADE & INVESTMENT         owned, or
of 30 July 2002 issued         • weight or volume of the          of use.                                                   STAFF CAN PROVIDE
by Gosstandart. If the           product (if a food item                                                                    CONTACT INFORMATION       (b) co-owned with a
products are not listed          is preserved in liquid –       Labels on non-food items                                    FOR UK AND RUSSIAN            Russian partner(s), or
in this document their           weight without the             must include the name of                                    CONSULTING FIRMS THAT
certification is optional,       liquid mass),                  the product, the country of                                 OFFER PROFESSIONAL      • act directly as a pure
and a confirming letter                                         origin and the name of the                                  LEGAL ADVICE IN           foreign investor.
from an accredited             • food contents (name            manufacturer (which may                                     THIS AREA.
certification organisation       of basic ingredients and       be given in Latin letters),
may be required for              additives listed by weight     usage instructions, the main
exporting the product            in decreasing order),          characteristics, rules and
to Russia. Since it is not                                      conditions for effective
easy to understand the         • nutritional value              and safe use of the product,
system, we recommend you         (calories, vitamins if their   and other information
to seek professional advice.     content is significant or      determined by the state
                                 if the product is intended     regulation body.
                                 for children or for
                                 medical or dietary use),




54                                                                                                                                                                             55
BEST PRACTICE AND RISK MANAGEMENT
REPRESENTATIVE OFFICE AND BRANCH


             Legal status                      A branch is a subdivision of        Registration                      All documents from               • the registration
             A representative office or        a foreign legal entity, which       An appropriate accrediting        a foreign legal entity             certificate, Certificate of
             a branch of a foreign legal       may fulfil all or part of the       body must approve                 must be notarised and              Incorporation, or extract
             entity is not considered to       functions of its foreign            representative offices. There     apostilled/legalised in the        from the trade register of
             be a Russian legal entity, but    founder. These functions            are numerous accrediting          country of execution, and          the foreign legal entity
             rather a body representing        include the repatriation            bodies authorised to grant        any document supplied in a         certifying that the parent
             the interests of a foreign        of management fees                  such accreditation, including     language other than Russian        is a validly existing legal
             legal entity in Russia.           earned in foreign currency,         those responsible for the         must be accompanied by             entity under the legislation
                                               contracting with Russian            accreditation of representative   a translation which has            of its home country,
             A representative office is        entities with payments in           offices in a particular           a notarised certification.       • the resolution of the
             entitled to carry out liaison     foreign currency and rubles,        industry – representative         Accreditation is usually           foreign legal entity
             and ancillary functions in        and the appointment of a            offices of foreign banks, for     granted for a period of up         resolving to establish
             order to promote the              sales force.                        example – are accredited          to three years, with the right     the representative office
             business of its foreign                                               by the Central Bank of            to extension. An application       in the Russian Federation
             founder. Representative           The obligations imposed on          the Russian Federation.           letter for the accreditation       and to appoint the chief
             offices are not permitted         a branch may include the            The bodies most frequently        of a representative office         representative(s),
             to engage in commercial           same obligations as those           charged with the                  should be submitted to the
             activities in Russia.             imposed on a representative         accreditation of foreign          appropriate accrediting body     • the regulations which
             Consequently, most                office. However, a branch           entities are the Chamber          and must be accompanied            will govern the operation
             representative offices are not    has less flexibility in selecting   of Commerce and Industry          by the following documents:        of the representative office,
             subject to profits tax, unless    an accrediting authority            of the Russian Federation
             their activities give rise to a   in Russia compared to               (the CCI) and the State           • the Charter or Articles of     • a bank letter confirming
             “permanent establishment”         a representative office.            Registration Chamber at             Incorporation (articles of       the good credit standing
             for tax purposes, ie when         This can sometimes affect           the Ministry of Justice             association, or equivalent)      of the foreign legal entity,
             a foreign legal entity            certain areas such as the           of the Russian Federation           of the foreign legal entity,
             engages in regular                effectiveness of visa support.      (the SRC).
             commercial activity through
             its representative office (for
             example, the sale of goods
             or the provision of services).




56                                                                                                                                                                                57
BEST PRACTICE AND RISK MANAGEMENT
REPRESENTATIVE OFFICE AND BRANCH
(CONTINUED)

• a document confirming        • the Accreditation Card          • a copy of a lease              • the resolution of the          • the Accreditation Card          • documentation of
  co-ordination with the         containing information on         agreement or landlord            foreign legal entity to          containing information            payment of the
  regional authorities of        the representative office,        guarantee letter, together       establish the branch             on the branch office              registration fee.
  the Russian Federation         filled out in accordance          with confirmation of the         office in the Russian            filled out in accordance
  on the establishment of        with a sample form of a           landlord’s right to the          Federation,                      with a sample form of a         All documents from a
  a representative office        particular accrediting            property to be leased by                                          particular accrediting          foreign legal entity must
  (not required for              body and signed by an             the representative office.     • the regulation which will        body and signed by a            be notarised and apostilled/
  representative offices to      authorised representative                                          govern the operation of          representative of the           legalised in the country of
  be located in Moscow),         of the foreign legal entity,    Branch offices must be             the branch office,               foreign legal entity,           execution. Any document
                                                                 accredited by the SRC in                                                                            supplied in a language
• General Power of             • certification from the tax      accordance with the 1999         • a bank letter confirming       • Certification from the tax      other than Russian must
  Attorney issued to the         authorities in the country      Federal Law on Foreign             the good credit standing         authorities in the country      be accompanied by a
  chief representative(s),       of the foreign legal entity’s   Investments. An application        of the foreign legal entity,     of the foreign legal entity’s   translation which has a
                                 incorporation confirming        letter for the accreditation                                        incorporation confirming        notarised certification.
• Power of Attorney for          that the foreign legal          of a branch should be            • a document confirming            that the foreign legal
  filing the application for     entity is registered as         submitted to the SRC and           co-ordination with the           entity is registered as a       Following accreditation,
  accreditation on behalf of     a taxpayer and                  should be accompanied by           regional authorities of          taxpayer and specifying         the representative office
  the foreign legal entity,      specifying the taxpayer         the following documents:           the Russian Federation           the taxpayer identification     or branch office must
                                 identification code,                                               on establishment of a            code,                           carry out a number of
                                                                 • the Charter or Articles          branch office (not                                               post-accreditation
                               • two letters of                    of Incorporation                 required for branches to       • expert opinions from the        procedures before it
                                 recommendation                    (articles of association,        be located in Moscow),           respective ministries of        becomes fully operative,
                                 from Russian trading              or equivalent) of the                                             the Russian Federation          including registration
                                 partners (preferably              foreign legal entity,          • a General Power of               (the Ministry of Energy,        with the State Statistics
                                 government bodies,                                                 Attorney issued to the           the Ministry of Natural         Committee, with the tax
                                 social organisations,           • the registration                 Director of a branch             Resources, etc) as required     authorities, and with the
                                 or 100 per cent Russian-          certificate, Certificate of      office,                          by the statutes of the          Russian social benefits
                                 owned entities) on the            Incorporation, or excerpt                                         Russian Federation for          funds.
                                 official letterhead of            from the trade register        • a Power of Attorney for          certain types of
                                 the recommending                  of the foreign legal entity      filing the application for       activities, and
                                 organisation, and                 certifying that the parent       accreditation on behalf of
                                                                   is a validly existing legal      the foreign legal entity,
                                                                   entity under the legislation
                                                                   of its home country,


58                                                                                                                                                                                               59
BEST PRACTICE AND RISK MANAGEMENT
FORMING A RUSSIAN LEGAL ENTITY


             The Civil Code of the        Moreover, additional             Choosing between                Still, a JSC may be              Also, participants in an LLC
             Russian Federation           legislation has been passed      an LLC and a JSC                preferable for a joint           who either individually or
             recognises, among others,    governing the establishment      In choosing between an LLC      venture in Russia between        collectively hold at least a
             the following types of       of limited liability companies   and a JSC in establishing a     unrelated parties. This is       10 per cent interest in the
             commercial legal entities:   (LLC) and joint stock            wholly owned subsidiary,        mainly due to the following      company’s charter capital
                                          companies (JSC), notably         LLCs appear to be more          reasons. In an LLC, each         can apply to a court
             • general partnerships,      the Federal Law No. 14-FZ        popular than JSCs, due to       participant is entitled to       seeking the expulsion
                                          On Limited Liability             the various establishment       leave the company at any         of another participant.
             • limited partnerships,      Companies dated 8 February       considerations discussed        time and for no reason,          In order to actually exclude
                                          1998 (as amended), (the          below. Generally speaking,      irrespective of the consent      a participant from the LLC,
             • limited liability          LLC Law) and the Federal         the main general corporate      of the other participants.       the other participant(s)
               companies,                 Law No. 208-FZ On Joint          benefit of an LLC in            This right entitles the          must prove that the
                                          Stock Companies dated            comparison with a JSC           participant to receive from      participant substantially
             • additional liability       26 December 1995 (as             is that the procedure for       the LLC an amount                hindered the company’s
               companies, and             amended), (the JSC Law).         the establishment and           corresponding to its             operations or materially
                                          Since these two forms of         the operation of an LLC         proportionate share of the       breached its obligations.
             • joint stock companies.     corporate structure are the      is significantly less           value of the LLC’s property,
                                          most popular with the            burdensome and time-            determined by reference to       Further, in contrast to
                                          foreign investors, the           consuming, since there is       its proportionate share in the   the JSC Law, the LLC
                                          provisions of the LLC            no legal requirement that       charter capital of the LLC.      Law contemplates a large
                                          Law and the JSC Law              an LLC must issue shares                                         number of issues which
                                          are examined below.              or perform the procedural                                        require a unanimous voting
                                                                           steps required in connection                                     decision of all the LLC
                                                                           with its issuance (eg the                                        participants, that may
                                                                           establishment and                                                be unfavourable for a joint
                                                                           maintenance of a securities                                      venture partner who is
                                                                           register, etc). The absence                                      a majority participant in
                                                                           of necessity to issue shares                                     the LLC.
                                                                           in an LLC makes this form
                                                                           of legal entity more mobile
                                                                           and flexible when it is
                                                                           necessary for participants of
                                                                           the LLC to change (increase
                                                                           or decrease) the charter
                                                                           capital of the company.

60                                                                                                                                                                   61
BEST PRACTICE AND RISK MANAGEMENT
LIMITED LIABILITY COMPANIES


                           Number of participants          Rights of participants            • withdraw from the LLC          • Where additional rights
                           An LLC may be established       The participants in an              without first seeking the        are granted by the
                           by one or more persons          LLC have the right to:              approval of the other            decision of the LLC’s
                           or legal entities (the                                              participants, and                General Participants’
                           “participants”). However, if    • participate in the                                                 Meeting, this decision
                           the number of participants        management of the               • receive a portion of the         must be unanimous.
                           exceeds 50, the entity must       LLC in accordance with            assets left after settlement
                           be reorganised into an open       procedures established by         with creditors in the case     • Additional rights granted
                           joint stock company or a          the LLC Law and the LLC           of the liquidation of            to a particular participant
                           production co-operative           foundation documents,             the LLC.                         in the LLC do not transfer
                           within one year.                                                                                     to any party acquiring all
                           Furthermore, an LLC             • obtain information              The participants in an LLC         (or a part) of such
                           may not have as its sole          concerning the activities       also have other rights as          participant’s ownership
                           participant another business      of the LLC and have             provided by the LLC Law,           interest if it is transferred.
                           entity consisting of a single     access to its accounting        and may have additional
                           person. The charter capital       and other documents in          rights set forth in the LLC
                           of the LLC is divided into        accordance with the             charter or foundation
                           participation interests held      procedures established          documents during the
                           by its participants, as set       by the LLC foundation           establishment of the LLC, or
                           forth in the charter.             documents,                      which are granted at a later
                                                                                             date by a decision of the
                                                           • participate in the              LLC’s General Participants’
                                                             distribution of profits,        Meeting. The following
                                                                                             points should be noted
                                                           • sell or otherwise assign        with regard to granting
                                                             their participation interests   of additional rights to
                                                             in the LLC charter capital,     LLC participants:
                                                             or a part thereof, to one
                                                             or more of the participants
                                                             in the LLC in accordance
                                                             with the procedure
                                                             established by the LLC
                                                             Law and LLC charter,



62                                                                                                                                                         63
BEST PRACTICE AND RISK MANAGEMENT
LIMITED LIABILITY COMPANIES (CONTINUED)


               Obligations of participants    Participants in an LLC also    • If additional obligations    Charter capital                Participation interests
               The participants in an LLC     have other obligations as        are imposed by the           The charter capital            A participation interest
               are required to:               provided for by the LLC Law,     decision of the LLC          of an LLC consists of          (ie an ownership share)
                                              and may have additional          General Participants’        contributions made by its      in an LLC is not considered
               • make contributions to        obligations set forth during     Meeting on a particular      participants. The initial      a security under current
                 the charter capital as       the establishment of the LLC     LLC participant, such        charter capital may not be     Russian legislation. Therefore,
                 specified in the LLC         in the LLC charter, or which     decision must be made        less than an amount equal      in contrast to the shares of
                 Law and the LLC              are imposed on them at a         by a two-thirds majority     to 100 times the statutory     a joint stock company, LLC
                 foundation documents         later time by a decision of      vote of the total number     monthly minimum wage,          participation interests do
                 (or in the decision on       the LLC’s General                of votes held by the LLC     currently 100 RUB. As at       not need to be registered.
                 the establishment of the     Participants’ Meeting.           participants, provided       the date of publication,
                 LLC, if there is only one                                     that the LLC participant     the minimum required           Participation interests in
                 participant in the LLC)      The following issues should      on whom such additional      charter capital for an LLC     an LLC may be sold to third
                 and within the time          be considered when imposing      obligations are imposed      is approximately US$405.       parties, but they are subject
                 periods specified in         additional obligations on        voted in favour of such                                     to the right of first refusal
                 the LLC Law, and             participants of an LLC:          decision or consented        At least 50 per cent of        of other participants to
                                                                               to it in writing.            the charter capital amount     purchase the participation
               • keep confidential all        • When additional                                             must be paid by the date       interests at the price
                 information concerning         obligations are imposed      • Additional obligations       of the LLC’s registration,     offered to the third parties.
                 the activities of the LLC.     by the decision of the         imposed on a particular      and the balance must be        The participants in an LLC
                                                LLC’s General                  participant(s) in the LLC    paid in full within the        also have a unilateral right
                                                Participants’ Meeting          do not pass to any party     first year of its operation.   to withdraw from the LLC
                                                on all LLC participants,       acquiring all (or part) of   Contributions may be           and to be compensated for
                                                this decision must be          such participant’s           made in cash or in kind,       their participation interests.
                                                made unanimously.              ownership interest in        and certain customs
                                                                               case it is transferred.      benefits may be available      Finally, a participant
                                                                                                            for in-kind contributions      (participants) with more
                                                                                                            made by foreign investors.     than a 10 per cent ownership
                                                                                                            The charter capital may be     interest in an LLC may
                                                                                                            increased only after the       demand the expulsion of
                                                                                                            original charter capital has   any participant who grossly
                                                                                                            been paid in full.             violates his obligations as a
                                                                                                                                           participant, or whose actions
                                                                                                                                           (or lack thereof) substantially
                                                                                                                                           hinder the LLC or make its
                                                                                                                                           activity impossible.
64                                                                                                                                                                     65
BEST PRACTICE AND RISK MANAGEMENT
LIMITED LIABILITY COMPANIES (CONTINUED)


Management structure           • delegate to a commercial      The daily management of         Registration                     • The protocol of the          • The Charter (Articles of
The General Participants’        organisation or to an         the LLC is the responsibility   With effect from 1 July            founders’ meeting or,          Association, Bylaws) of
Meeting is the highest           individual entrepreneur       of the Executive Body, which    2002, the new Federal              if the LLC has only one        any foreign legal entities.
governing body of the            the authority reserved to     may comprise of one             Law On State Registration          founder, the resolution
LLC, and almost all matters      the LLC executive and         person (the General Director)   of Legal Entities (the             of the founder on the        • Confirmation of payment
fall within its exclusive        approve the conditions of     or may consist of both the      Registration Law) entered          establishment of the LLC.      of the state registration fee.
competence. Should the           the agreements with such      General Director and the        into force, transferring
LLC participants choose to       organisations or persons,     Management Council. The         authority for registration       • The Charter of the LLC.      • Foreign tax registration
create a Board of Directors,                                   Executive Body is responsible   of legal entities in Russia                                       certificate of founders
for example, the General       • assign supplemental           for all matters which do not    to the local bodies of the       • A copy of the passport         (to be provided to a bank).
Participants’ Meeting may        rights and duties to the      fall within the authority of    Federal Tax Service of the         of the proposed General
nonetheless only delegate        participants in the LLC,      either the Board of Directors   Russian Federation. As a           Director of the LLC.         • Bank letter of good
a limited number of                                            or the General Participants’    result, activities connected                                      credit standing of a
matters to the Board.          • approve the annual            Meeting. The General            with the state registration of   • Power(s) of Attorney           foreign legal entity.
                                 financial report and the      Participants’ Meeting may       legal entities and with their      issued by the founder(s)
The General Participants’        distribution of profits,      choose to delegate the          registration as taxpayers are      for establishment of         • Confirmation of the
Meeting has the exclusive                                      powers of the Executive         now under the auspices of          the LLC.                       foreign legal entity’s
right to:                      • alter the amount of the       Body to an external             the local tax inspectorates.                                      contribution to the
                                 charter capital of the LLC,   commercial organisation                                          • Power(s) of Attorney           charter capital of the LLC.
• amend the charter,                                           or to an individual manager     The following documents            issued by the founder(s)
                               • approve regulations           on a contractual basis.         are required for registration      for filing the application   Any Russian founder
• amend the foundation           governing the internal                                        purposes:                          for the state registration   participating in an
  agreement,                     activities of the LLC, and                                                                       of the LLC.                  LLC must also provide
                                                                                               • An application.                                               additional documentation.
• define the basic goals and   • reorganise or liquidate                                                                        • Confirmation of the legal    All documents from a
  directions of the LLC,         the LLC, appoint a                                            • The foundation                   status of the founder(s)     foreign legal entity must
                                 liquidation commission,                                         agreement of the LLC (if         (eg extract from the trade   be notarised and apostilled/
                                 and approve the                                                 the LLC has more than            register or certificate of   legalised in the country of
                                 liquidation balance sheet                                       one founder/participant).        good standing).              preparation. Any document
                                 of the LLC.                                                                                                                   supplied in a language other
                                                                                                                                                               than Russian must be
                                                                                                                                                               accompanied by a Russian
                                                                                                                                                               translation which has a
                                                                                                                                                               notarised certification.


66                                                                                                                                                                                          67
BEST PRACTICE AND RISK MANAGEMENT
JOINT STOCK COMPANIES


             Types of joint                      A JSC is a legal entity which       An open JSC may have            Shareholders in an open
             stock companies                     issues shares in order to           an unlimited number of          JSC also have a pre-emptive
             A significant number of             raise capital for its activities.   shareholders. Shareholders      right to acquire newly
             commercial organisations            A shareholder of a JSC is           in an open JSC are entitled     issued shares that are
             have been established since         not generally liable for the        to freely dispose of their      to be publicly placed, in
             the JSC Law came into force         obligations of the JSC, and         shares. The number of           proportion to their existing
             on 1 January 1996. While the        bears the risk of any such          shareholders in a closed        shareholdings, but do not
             adoption of the LLC Law             loss only in the amount             JSC may not exceed 50,          have a right of first refusal
             in 1998 introduced another          paid by it for the shares.          and the JSC must be             to acquire shares sold to
             option for investors seeking to                                         transformed into an open        third parties.
             establish a corporate entity,       Two types of joint stock            JSC within one year should
             the JSC Law represented one         companies exist in Russia:          the number of shareholders      All JSCs are required to
             of the most significant pieces                                          ever exceed this amount.        maintain a shareholders’
             of civil legislation of the post-   • closed joint stock                As with participants in         register. The register includes
             Soviet era, and JSCs remain           companies, and                    an LLC, shareholders in         information about each
             among the most important                                                a closed JSC have a right       registered shareholder
             commercial corporate forms          • open joint stock                  of first refusal to acquire     including the number,
             and structures for doing              companies.                        shares sold by other            category and classes of
             business in Russia.                                                     shareholders to third           shares held. A JSC with more
                                                                                     parties, at the price           than 50 shareholders must
                                                                                     offered to the third parties.   delegate the maintenance
                                                                                     Shareholders in both open       and keeping of the
                                                                                     and closed JSCs have a          shareholders’ register
                                                                                     pre-emptive right to acquire    to a licensed registrar.
                                                                                     newly issued shares that
                                                                                     are to be privately placed,
                                                                                     in proportion to their
                                                                                     existing shareholdings.




68                                                                                                                                                     69
BEST PRACTICE AND RISK MANAGEMENT
JOINT STOCK COMPANIES (CONTINUED)


             Formation of a joint             • the procedure for              Charter capital                 Shares and other                The concept of a “fractional
             stock company                      preparing for and holding      The charter capital of an       types of securities             share” was introduced on
             Individuals and legal entities     the General Shareholders       open JSC may not be less        A JSC can issue securities in   1 January 2002. A fractional
             may be the founders of a           Meetings, including a list     than 1,000 times the Russian    the form of shares, bonds,      share is a share representing
             JSC. A company’s                   of issues requiring either     statutory monthly minimum       and issuer’s options. In        a portion of a whole share,
             foundation document,               unanimous consent or a         wage (the monthly minimum       either case, such securities    which can come into
             ie its charter, must include:      resolution adopted by a        wage used for the purposes      must be registered with the     existence when it is not
                                                qualified majority of votes,   of calculating the minimum      Federal Service for the         possible to acquire the
             • the name, address, and                                          charter capital of the JSC is   Financial Markets of the        whole share during the
               type of the JSC (ie open       • information on branches        currently 100 rubles).          Russian Federation (the         consolidation of shares,
               or closed),                      and representative offices,    Currently, using an             FSFM), which replaced the       when a shareholder
                                                                               exchange rate of                former Federal Commission       exercises their pre-emptive
             • the size of the JSC            • information on the             approximately 24.7              for the Securities Market       right, or in the course of
               charter capital,                 existence of any special       rubles/USD, the minimum         (the FCSM) in March 2004.       acquiring additional shares.
                                                right of participation in      charter capital for an open     A JSC can issue common          A fractional share grants its
             • the quantity, nominal            the management of the          JSC is approximately            shares and/or several classes   owner the same rights that
               value and categories             company (a “golden             US$4,050. A closed joint        of preferred shares. The        are granted by the whole
               (common or preferred)            share”) vested in the          stock company must have         total value of a JSC’s          share of the corresponding
               of shares, as well as            Russian Federation, a          a minimum charter capital       preferred shares may not        category or class, on a pro
               the classes of preferred         constituent entity of          equivalent to at least          exceed 25 per cent of its       rata basis.
               shares issued and                the Russian Federation,        100 times the minimum           charter capital.
               distributed by the JSC,          or a municipality of the       monthly wage – currently
                                                Russian Federation, and        approximately US$405.
             • the rights of the holders
               of shares of each category,    • other provisions required      In contrast to LLC founders,
                                                by law.                        the founders of a JSC must
             • the structure and                                               pay 50 per cent of the JSC
               competence of the              The charter may include          charter capital within three
               governing bodies of the        other provisions, so long        months following its state
               JSC, and their decision-       as these comply with             registration, with the
               making procedures,             applicable Russian               balance payable in full
                                              legislation.                     within the first year.




70                                                                                                                                                                       71
BEST PRACTICE AND RISK MANAGEMENT
JOINT STOCK COMPANIES (CONTINUED)


             Management structure          In addition to the foregoing   The daily management of          Meeting. The General          Registration
             Both open and closed JSCs     governing bodies, a JSC        a JSC is the responsibility      Shareholders Meeting          Effective as of 1 July 2002,
             must maintain two             must either establish an       of the Executive Body,           may (by a majority vote),     the procedure for state
             governing bodies: the         Internal Auditing              which may comprise of            choose to delegate the        registration described
             General Shareholders          Commission or elect an         one person (the General          powers of the Executive       above in respect of LLCs
             Meeting and the Executive     Internal Auditor to oversee    Director) or may consist of      Body to an external           is also applicable to JSCs.
             Body. An open JSC with        its financial and economic     both the General Director        commercial organisation       The only additional
             more than 50 shareholders     activities, members of which   and the Management               or to an individual manager   requirement in respect of
             must also have a Board of     must be elected by the         Council. The Executive Body      on a contractual basis;       JSCs is the registration of
             Directors (also called a      shareholders.                  is responsible for all matters   however, this decision may    the issuance of the JSC
             Supervisory Board). An                                       which do not fall within the     be taken only pursuant to a   shares with the FSFM,
             open JSC with less than 50    The General Shareholders       authority of either the          proposal from the Board of    which is obligatory at
             shareholders and all closed   Meeting is the highest         Board of Directors or the        Directors (if the company     the establishment of
             JSCs may appoint a Board      governing body overseeing      General Shareholders             has a Board of Directors).    the company.
             of Directors, although this   the activities of a JSC.
             is not a requirement. The     Its authority is outlined
             authority of the Board of     in the JSC Law and cannot
             Directors is defined by the   be altered. Each common
             charter of the JSC and, if    share carries one vote at
             a Board is not provided       the General Shareholders
             for in the charter, the       Meeting (except for cases
             corresponding authority       of cumulative voting where
             must be vested with the       provided for in the JSC
             JSC’s General Shareholders    Law), and most decisions
             Meeting.                      are made by a simple
                                           majority vote, although
                                           for certain key decisions
                                           a supermajority of
                                           75 per cent is required.




72                                                                                                                                                                73
BEST PRACTICE AND RISK MANAGEMENT
TAXATION


THIS SECTION (PAGES 74-95)   For nearly 10 years, Russia     The provisions of Part two       The remaining chapter         Types of tax                       There are four types of
IS KINDLY PROVIDED BY        has been engaged in a           of the Tax Code regarding        of the Tax Code still under   The Tax Code sets forth            special tax regimes that
BAKER & MCKENZIE – CIS,      significant reform of its       excise taxes, VAT, individual    review covers the property    three levels of taxation:          may be applicable to
LIMITED                      tax system, which has           income tax, and the unified      tax on individuals, which     federal, regional and local.       certain activities and/or
                             been implemented phase-         social tax came into force in    is currently governed by      Currently, federal taxes           categories of taxpayers:
                             by-phase. This reform has       2001, followed by the profits    the corresponding 1991        include VAT, excise taxes,         single agriculture tax,
                             improved procedural rules       tax and mineral extraction       legislation. In 2006 the      profits tax, unified social tax,   simplified system of
                             and made them more              tax provisions of the Tax        inheritance and gift tax      personal income tax, mineral       taxation, single tax on
                             favourable to taxpayers,        Code in 2002. In 2003,           that had been in existence    extraction tax, state duty,        imputed income from
                             has reduced the overall         further amendments               since 1991 was repealed.      special tax regimes, and           certain kinds of activity,
                             number of taxes, and has        introduced a simplified          In addition, over the last    several other taxes. Regional      and taxation of production
                             reduced the overall tax         system of taxation, a single     several years, various        taxes include corporate            sharing agreements. These
                             burden in the country.          tax on imputed income, a         amendments to these new       property tax, transport            special tax regimes have the
                                                             new chapter on transport         Tax Code provisions have      tax, and gambling tax,             status of a federal tax and
                             Part one of the Tax Code        tax, and established a special   been amended, with a          while local taxes include          may provide exemptions
                             of the Russian Federation       tax regime for production        recent introduction of        land tax and individual            from certain federal,
                             (the Tax Code) came             sharing agreements in            a dividends participation     property tax.                      regional, and local taxes.
                             into effect in 1999, dealing    Russia. A chapter on             regime and recent proposals
                             largely with administrative     corporate property tax           to further modify the
                             and procedural rules. The       came into effect as of           provisions governing
                             latest significant amendments   1 January 2004. In 2005          transfer pricing and tax
                             to Part one clarified certain   the water tax, land tax, and     consolidation for certain
                             administrative and              state duty chapters came         groups of taxpayers. Thus,
                             procedural issues raised by     into effect. Most of these       tax reform continues to
                             over seven years of practice    chapters of the Tax Code         be an ongoing process.
                             of application of Part one      replaced and significantly
                             of the Tax Code.                updated or improved
                                                             individual tax laws that
                                                             initially were enacted as
                                                             far back as 1991.




74                                                                                                                                                                                      75
BEST PRACTICE AND RISK MANAGEMENT
TAXATION (CONTINUED)


             Tax audits                       during a repeat tax audit the   violations, although
             The Russian tax authorities      tax authorities would find an   according to a position
             may conduct off-site or          underpayment that was not       taken in Constitutional
             on-site tax audits of            found during a previous tax     Court Ruling No 9-P,
             taxpayers.                       audit, the fine for such        dated 14 July 2005, this
                                              underpayment would not          type of defence could be
             Amendments that came             be applied to the taxpayer,     rejected by the court if
             into effect from 1 January       except for cases where the      the taxpayer impeded
             2007 introduced more             undetected violation resulted   the tax audit by the tax
             detailed regulation for both     from a conspiracy between       authorities. Also, the tax
             types of tax audits. Tax         the taxpayer and the tax        authorities may levy for
             authorities may audit            authorities. In exceptional     outstanding taxes and late
             several different taxes          cases provided by the Tax       payment interest unilaterally
             simultaneously as part of        Code, the Russian tax           without a court decision.
             on-site tax audits. However,     authorities may suspend an
             except in cases of a             on-site tax audit. However,     The imposition of penalties
             liquidation or reorganisation,   the overall term of             larger than 5,000 rubles in
             when a higher tax authority      suspension in any case may      the case of individuals and
             inspects the activities of a     not exceed nine months.         50,000 rubles in the case
             lower tax authority that                                         of legal entities for a given
             conducted an on-site audit,      The results of a tax audit      tax period requires a court
             or when a taxpayer files         relating to reviewed taxes      decision. Starting from
             adjustment tax return            may only be reconsidered        1 January 2007, in certain
             claiming reduced taxation,       by supervising tax              circumstances the amount
             a tax for a given period may     authorities. In any case,       of tax that was not duly
             only be audited once.            however, tax authorities        paid during the three months
                                              may only audit the three        period may be collected from
             The taxpayer may also be         calendar years preceding        the companies affiliated with
             repeatedly inspected in          the year of the tax audit.      the taxpayer if such affiliated
             the same tax period upon         As a general rule, a three-     companies receive payments
             the decision of the Head         year statute of limitations     from the taxpayer for goods,
             of the Federal Tax Service       applies to the imposition       works or services provided
             of Russia. In the case that      of penalties for tax            by them .



76                                                                                                              77
BEST PRACTICE AND RISK MANAGEMENT
TAXATION (CONTINUED)


EFFECTIVE 1 JANUARY     Corporate profits tax           In the course of ongoing        (2) The recipient of the         After these amendments to       to 2002, deductions were
2008, THE TAX RATE ON   Prior to 2002 the               reforms significant changes         dividends owns not less      Chapter 25, the following       limited and were subject to
DIVIDENDS RECEIVED      maximum profits tax rate        were recently introduced to         than 50 per cent of          tax rates apply to dividends:   substantial restrictions, as of
FROM FOREIGN            for most businesses was         dividends taxation. Effective       shares in the company                                        1 January 2002 many of
COMPANIES DECREASED     35 per cent, while a slightly   1 January 2008, the tax             paying the dividends.        • 0 per cent withholding        those expense limitations
FROM 15 PER CENT TO     higher maximum tax rate         rate on dividends received                                         tax on dividends payable      disappeared under the new
9 PER CENT TO MATCH     of 38 per cent applied to       from foreign companies          (3) The shareholder’s cost         by Russian and foreign        profits tax provisions of the
THE RATE APPLICABLE     banks and insurance and         decreased from 15 per cent          of acquisition of shares       companies qualifying as       Tax Code. Under the current
BETWEEN RUSSIAN         intermediary companies.         to 9 per cent to match the          or participation in the        “strategic investments”.      rules a taxpayer is generally
ENTITIES.               Pursuant to the profits         rate applicable between             charter capital of the                                       permitted to deduct all
                        tax provisions of Chapter 25    Russian entities. Also, to          company paying               • 9 per cent withholding        necessary and documented
                        of the Tax Code, as of          promote Russian holding             dividends exceeds              tax on dividends payable      business expenses.
                        1 January 2002 the              companies, starting from            500 million rubles             by Russian and foreign
                        maximum tax rate for all        1 January 2008, dividends           (approximately                 companies to Russian          Deduction of certain types
                        companies was reduced           payable by foreign and              US$20 million).                shareholders in all other     of expenses is subject
                        to 24 per cent, which is        Russian entities qualifying                                        cases.                        to restrictions (eg certain
                        currently payable at a rate     as “strategic investments” to   (4) The company paying                                           advertising costs and
                        of 6.5 per cent to the          Russian companies are               dividends is not located     • 15 per cent on dividends      representational [including
                        federal budget and              exempt from profits tax.            in a jurisdiction              received by Russian           business entertainment] and
                        17.5 per cent to regional       The exemption applies               included in a “black           companies from foreign        travel costs). More recently,
                        budgets. The regional           provided on the day the             list” of offshore              legal entities.               the tax authorities have
                        authorities may, at their       corporate decision to pay           jurisdictions adopted                                        taken a more aggressive
                        discretion, reduce their        the dividends is taken, the         by the Order No 108n         Chapter 25 also introduced      approach to the economic
                        regional profits tax rate       following four tests are met:       of the Russian Ministry      special tax rates on income     justification of expenses
                        to as low as 13.5 per cent.                                         of Finance, dated            earned from Russian state       that in some instances has
                        Thus, the overall tax rate      (1) The recipient of the            13 November 2007             securities and on the           appeared to be an indirect
                        can vary from 20 per cent           dividends has held              (the “black list” includes   profits of the Russian          way of reintroducing some
                        to 24 per cent.                     shares continuously for         most of the offshore         Central Bank.                   of the old law restrictions.
                                                            not less than 365 days.         low-tax jurisdictions                                        In some instances,
                                                                                            and territories,             Taxable profit is defined       unfortunately, the courts
                                                                                            including Cyprus).           as income less deductible       have supported this position
                                                                                                                         expenses. Although, prior       of the tax authorities.




78                                                                                                                                                                                   79
BEST PRACTICE AND RISK MANAGEMENT
TAXATION (CONTINUED)


             Interest deductibility and         In addition, there is a specific   Asset depreciation and          Under Chapter 25, taxpayers     Losses may be carried
             thin capitalisation rules          provision with respect to          carrying forward losses         are able to choose between      forward for ten years.
             Generally, under the Tax           “thin capitalisation”. The         Assets with a value             a straight-line method          Also, there is no requirement
             Code, interest is deductible       Tax Code introduces a 12.5:1       exceeding 20,000 rubles –       (somewhat similar to the old    to spread the loss over the
             as long as it does not deviate     debt-to-equity ratio limit for     approximately US$800 –          method of asset depreciation)   entire carry-forward term.
             by more than 20 per cent           banks and leasing companies,       (10,000 rubles prior to         and a new, accelerated          Starting from 1January
             from market interest rates         and a 3:1 ratio limit for all      1 January 2008) and a           method. Land, subsoil, and      2007, the limitation on the
             paid on comparable loans           other companies. If the ratio      useful life of more than        natural resource assets are     amount of taxable profit
             in the same calendar               of the Russian borrower            12 months are subject to        not subject to depreciation     that could be reduced by
             quarter. Any excessive part        company’s internal capital         depreciation. Chapter 25        and hence do not reduce the     a loss carry-forward in a
             of the interest will not be        to its outstanding                 allows taxpayers to split       tax base of the profits tax.    particular year was
             deductible. If no such             debt owed to a foreign             assets into ten groups,                                         eliminated. In addition,
             comparable loans exist,            shareholder holding more           depending on the type           Starting from 1 January         capital losses may be offset
             interest is deducted within        than a 20 per cent interest        of asset and its useful life,   2006, a lump-sum                against operating income;
             certain limits: for ruble loans,   in the Russian borrower            and to apply accelerated        deduction in the amount         this deduction, however,
             the deductible interest may        company (including debt            depreciation rates. For         of 10 per cent of the initial   must be evenly spread over
             not exceed 110 per cent of         owed to a Russian affiliate        example, the useful life for    book value of newly             the residual useful life of
             the Central Bank refinancing       of the foreign shareholder         buildings under the new         acquired fixed assets is        the capital asset for which
             rate, and for loans                and debt guaranteed by the         rules is 30 years, whereas      allowed to be made for          the loss was incurred.
             denominated in a foreign           foreign shareholder or its         under the old rules (before     profits tax purposes in
             currency the deduction is          Russian affiliate) exceeds         1 January 2002) the period      the period when the
             limited to 15 per cent             these limits, the Tax Code         was 80-90 years.                fixed assets are acquired.
             per annum.                         restricts the deductibility of                                     This effectively works
                                                interest paid on the excess                                        as a special investment
                                                debt. Non-deductible interest                                      incentive.
                                                is also considered to be a
                                                dividend payment to the
                                                foreign shareholder and
                                                hence is subject to a
                                                15 per cent withholding
                                                tax, unless the latter is
                                                reduced or eliminated by
                                                an applicable tax treaty.



80                                                                                                                                                                           81
BEST PRACTICE AND RISK MANAGEMENT
TAXATION (CONTINUED)


             Investment benefits           Presently, regional and         Transfer pricing rules          If a transaction falls under   The transfer pricing rules
             Russian companies enjoyed     local legislative bodies        The Tax Code contains           one of the above four          are currently being revised
             various regional and local    are no longer authorised        several rules related to        categories, the tax            by the Russian authorities.
             tax concessions under the     to provide tax concessions,     transfer pricing.               authorities can adjust the     Recent proposals to amend
             1991 Corporate Profits Tax    except for regional             Specifically, it sets forth     contract price based on the    the transfer pricing rules
             Law, and under the relevant   authorities, which may          the presumption that the        market value and impute        provide for the following
             regional and/or local laws    reduce their regional profits   contractual price agreed on     additional taxes, penalties,   significant changes: an
             of several territories        tax rate by 4 per cent and      by the parties is the “market   and late payment interest      extended scope of
             (particularly Chukotka,       thus reduce the overall         price”. At the same time, in    accordingly.                   controlled transactions, new
             Kalmykia, Mordovia, and       tax rate to 20 per cent.        any of the following four                                      methods for determining
             Evenkia). Chapter 25 of the   However, the effective tax      exceptional circumstances,      Finally, Chapter 25 requires   market prices, transfer
             Tax Code abolished all tax    rate could be even lower        the tax authorities may         taxpayers to maintain a        pricing documentation
             incentives, including the     under the special tax           exercise control over           completely separate set        requirements, and the
             capital investment            regimes or under the special    contractual prices:             of books for the purpose       introduction of advanced
             allowance. Some types         economic zone regime.                                           of calculating the tax base    pricing agreements.
             of tax benefits (including                                    • a transaction between         for profits tax.
             investment benefits) were     In 2005, Federal Law              affiliated parties,                                          There is no exact
             grandfathered, although       No 116-FZ On Special                                            Traditionally, profits tax     information on when
             they ceased to be effective   Economic Zones in the           • a barter transaction,         had been calculated based      these rules will be adopted.
             as of 1 January 2004.         Russian Federation, dated                                       on book profit adjusted        However, any new transfer
                                           22 July 2005 was passed.        • a foreign trade               for tax purposes. However,     pricing rules most likely will
                                           It introduced a new               transaction, or               from 1 January 2002,           not be adopted and come
                                           concept for the provision                                       the tax base must be           into effect prior to 2009,
                                           of investment benefits.         • a transaction involving       calculated from tax            but more probably
                                                                             significant variations in     accounting ledgers;            sometime after 2009.
                                                                             prices (ie a fluctuation of   statutory accounting
                                                                             more than 20 per cent)        records are no longer
                                                                             for identical goods or        the primary source of
                                                                             services within a short       information for profits
                                                                             period of time (in            tax calculations.
                                                                             practice, this term is
                                                                             interpreted as 30 days
                                                                             immediately preceding
                                                                             the date in question).


82                                                                                                                                                                   83
BEST PRACTICE AND RISK MANAGEMENT
TAXATION (CONTINUED)


             Taxation of foreign             Chapter 25 sets forth a          income from freight and            on dividends payable to all     refund where the tax was
             companies                       limited list of Russian source   lease of transportation            other Cypriot shareholders.     actually withheld would
             Russian legislation taxes       income not connected with        vehicles), subject to any          Cypriot shareholders may        require the filing of the
             profits derived from a          a permanent establishment        reduction available under          also offset taxes payable to    relevant forms with the
             “permanent establishment”       in Russia that is subject to     a double taxation treaty.          the Russian federal budget      Russian tax authorities.
             in Russia, as well as certain   Russian withholding tax.                                            against similar taxes paid
             other types of income           The list includes mainly         Russia is now a party to           in Cyprus. Many other           The profits tax is payable
             derived without a               passive types of income,         68 double taxation treaties,       tax treaties provide for        on a quarterly basis. The
             permanent establishment in      such as royalties, interest,     which can provide for the          similar rates.                  annual tax return and a
             Russia. Importantly, whether    dividend income, and rentals.    reduction of the withholding                                       report on a foreign legal
             a permanent establishment       Other income received by         tax rate on dividend income        Chapter 25 includes a           entity’s activity in the
             exists under Russian law is     non-Russian residents            to as low as 5 per cent and        provision that explicitly       Russian Federation must
             unrelated to whether a          that is not specified in         generally provide for a            states that, in the event of    be submitted to the tax
             foreign company’s office has    the list is not subject          0 per cent withholding             a conflict, double taxation     authorities by 28 March
             been registered in Russia.      to any withholding tax.          rate on other income (eg           treaties override the Tax       of the year following the
             A permanent establishment                                        interest, royalties and capital    Code. Chapter 25 contains       close of the taxable year.
             may exist even if the office    Unless an applicable             gains). For example, the           more beneficial rules than
             is not registered, and the      double taxation treaty           1998 Russia-Cyprus Double          had existed under previous
             existence of a registered       provides for a lower rate,       Taxation Treaty provides           laws governing tax treaty
             office may not necessarily      dividends payable by             for a 0 per cent withholding       relief for a foreign legal
             give rise to a taxable          Russian companies to             tax rate on interest, royalties,   entity. Under the new
             permanent establishment.        foreign shareholders are         capital gains and other            rules, taxpayers should
             Profit derived by foreign       subject to a 15 per cent         income not related to a            be allowed to obtain
             legal entities from their       withholding tax. Other           permanent establishment;           preliminary tax treaty relief
             having a permanent              listed income received by        a 5 per cent withholding           from tax-withholding in
             establishment in Russia is      foreign legal entities from      tax rate on dividends payable      Russia without any filings
             generally taxed at the same     Russian sources is subject       to Cypriot shareholders who        with the Russian tax
             profits tax rates applicable    to either a 20 per cent          have contributed over              authorities, by presenting
             to Russian taxpayers.           withholding tax (for most        US$100,000 to the charter          documents evidencing
                                             categories of income,            capital of a Russian               the tax residency status
                                             including royalties and          subsidiary responsible for         of the taxpayer to the
                                             most types of interest)          paying out these dividends;        tax-withholding agent
                                             or a 10 per cent                 and a 10 per cent                  (usually the Russian payer).
                                             withholding tax (for             withholding tax rate               However, obtaining a tax


84                                                                                                                                                                        85
BEST PRACTICE AND RISK MANAGEMENT
TAXATION (CONTINUED)


             Value added tax (“VAT”)          As of 1 January 2008 the        In capital construction the   costs was used for the          reporting on a company
             VAT is imposed on all            list of VAT exemptions will     input VAT paid to suppliers   production of goods or the      level, and notify its
             goods imported into Russia       also include:                   of goods, work and services   provision of services subject   decision to the local tax
             and is also applied to the                                       may be offset under a         to VAT, the corresponding       authorities responsible for
             sale of goods, work and          • the assignment of             general procedure as the      input VAT may be offset         each representative office
             services. Starting from            exclusive IP rights (eg       construction progresses       only on a pro rata basis.       and branch registered
             1 January 2008, the period         patents, licences, know-      (prior to 2006, such input    Careful planning will           in Russia.
             for VAT for all taxpayers and      how), with the exception      VAT could be offset only      therefore be required to
             tax agents is the calendar         of trademarks, and rights     when the constructed assets   maintain full recovery if       A Russian customer of a
             quarter (previously for most       to use the results of         are recorded on the           part of a newly constructed     foreign company that is
             taxpayers the tax period was       these IP rights (eg           taxpayer’s balance sheet).    building is to be directly      not registered with the tax
             a monthly period). Current         software) based on                                          leased to representative        authorities and is active
             legislation imposes a VAT          licences (including           An enterprise ends up         offices or branches of          (making sales or rendering
             rate of 18 per cent on the         non-exclusive licences),      transferring to the state     foreign legal entities          services) in Russia, must
             sale of most goods. A fixed                                      only the difference between   accredited in Russia.           withhold either 9.09 per
             10 per cent rate is applied to   • certain research and          VAT paid and VAT collected.                                   cent or 15.25 per cent
             limited types of goods, such       development services, and     As a general rule, however,   Starting from 2006, foreign     reverse charge VAT
             as pharmaceuticals, medical                                      a taxpayer may not offset     legal entities having more      (depending on the
             equipment and certain food       • assignment of loan            input VAT if such VAT is      than one representative         applicable underlying VAT
             products and periodicals.          agreements.                   incurred on goods, works      office and/or branch            rate of 10 per cent or 18
                                                                              or services used by the       registered in various           per cent, respectively) from
             The export of goods is           Generally, VAT paid on the      taxpayer for the sale of      locations in Russia             the amounts transferred to
             subject to 0 per cent VAT.       acquisition of goods, work      goods or the provision of     may consolidate all VAT         the foreign company and
             In addition, certain types       and services may be offset      services that are exempt      accruals and offsets on         must itself remit such VAT
             of goods, work, and              against VAT collected from      from VAT.                     a company level (prior to       directly to the state budget.
             services are exempt from         customers. In order to claim                                  2006, each representative
             VAT (for example, land           a refund of input VAT paid      In this case, the taxpayer    office and/or branch was
             plots, dwelling houses           in relation to goods that       will be required to include   regarded as a separate VAT
             and apartments, lease of         subsequently were exported      such input VAT into their     payer). For that purpose a
             office space to accredited       and subject to 0 per cent       production costs and will     foreign legal entity must
             representative offices and       VAT, the taxpayer is required   effectively lose this input   choose a particular
             branches of foreign legal        to file various supporting      VAT for future recovery. In   representative office or
             entities, certain medical        documents with the Russian      those cases where only a      branch that would be
             goods and services, etc).        tax authorities.                portion of certain input      responsible for VAT


86                                                                                                                                                                    87
BEST PRACTICE AND RISK MANAGEMENT
TAXATION (CONTINUED)


             Mineral extraction tax        Subsoil users are now             The mineral extraction tax      17.5 per cent for gas            The mineral extraction
             Prior to 2002, licensed       required to make subsoil-         is generally calculated as      condensate, and 147 rubles       tax with respect to oil is
             subsoil users had to pay,     use payments provided that        the value of the mineral        (approximately US$3.69) per      determined by the quantity
             inter alia, a tax on the      they conduct at least:            resources extracted from the    1,000 cubic metres of gas.       of extracted oil multiplied
             restoration of the mineral                                      subsoil based on the prices                                      by the tax rate. The basic
             resource base and subsoil-    • prospecting and                 (excluding VAT and excise       Subsoil users having             tax rate is adjusted quarterly
             use payments. The tax base      valuation,                      taxes) at which the extracted   prospected and explored an       by a multiplier reflecting
             was calculated as a                                             minerals were sold, subject     oilfield at their own expense    changes in world prices
             percentage of the value       • exploration of subsoil          to the transfer pricing         are required to pay 70 per       for Urals crude.
             of the minerals actually        deposits, or                    provisions of the Tax Code,     cent of the tax normally
             extracted. Chapter 26 of                                        and effectively not lower       due for the natural resources    This multiplier is
             the Tax Code introduced       • construction works on           than the market price.          extracted from the respective    determined under the
             a new mineral extraction        an extraction site (not         Taxpayers are required          licensed oilfield. Subsoil       following formula:
             tax, which came into effect     connected with mineral          to calculate the tax base       users include the mineral        M = (P - 9) x E / 261
             on 1 January 2002. The          extraction).                    separately for each type        extraction tax paid to the       where P is the average
             mineral extraction tax has                                      of mineral resource             state budget in their            price for Urals crude in
             replaced the tax on           The law has set the               extracted and pay it on a       deductible expenses,             US dollars per barrel
             restoration of the mineral    minimum and maximum               monthly basis. In particular,   decreasing the taxable base      and E is the average
             resource base and the         rates with respect to each        Chapter 26 sets out a tax       of the corporate profits tax     RUB/US$ exchange rate
             subsoil-use tax payable       type of activity, depending       rate of 6 per cent for gold,    due. Chapter 26 does not         of the Central Bank of
             on the value of minerals      on the territory used within      6.5 per cent for silver,        provide for any special          Russia for a given
             extracted.                    the subsoil activity, rather      16.5 per cent for oil,          concessions for subsoil users.   calendar quarter.
                                           than on the value of minerals
                                           extracted (as was the case
                                           prior to 2002). Regional
                                           state executive bodies set
                                           specific rates within these
                                           limits, which will be reflected
                                           in corresponding licences.




88                                                                                                                                                                       89
BEST PRACTICE AND RISK MANAGEMENT
TAXATION (CONTINUED)


                           Taxation under production       property tax, and the           Corporate property tax         Chapter 30 of the Tax
                           sharing agreements              transport tax, the latter       As of 1 January 2004,          Code further exempts from
                           Pursuant to Chapter 26.4        with respect to fixed assets    Chapter 30 of the Tax          taxation certain categories of
                           of the Tax Code, effective as   and vehicles used directly      Code (covering the             property, such as assets used
                           of 10 June 2003, companies      for the purposes of oil and     corporate property tax)        by religious organisations to
                           extracting minerals under       gas extraction under the PSA.   came into effect, replacing    maintain religious activities.
                           production sharing                                              the former 1991 Corporate      Furthermore, when imposing
                           agreements (“Investors”) are    In addition, depending on       Property Tax Law. The          property tax, Russian
                           subject to a special (and, in   the conditions of the PSA,      property tax is a regional     Federation Regional
                           comparison with the mineral     investors may secure a          tax, ie its imposition is      Governments may fix lower
                           extraction tax, entirely        further refund of VAT, the      regulated by the legislation   or differentiated rates for
                           different) tax regime. For      unified social tax, subsoil-    of the relevant region, to a   different categories of payers
                           instance, an investor pays      use payments and water          maximum rate of 2.2 per        and/or types of taxable
                           50 per cent of the mineral      tax, state duties, customs      cent. The tax base includes    property. Corporate property
                           extraction rate for oil and     fees and duties, the land       movable and/or immovable       tax is payable on an annual
                           gas condensate until it         tax, the excise tax, and the    fixed assets owned by the      basis, with advances due
                           reaches a certain limit of      ecological tax previously       taxpayer in Russia, and is     every quarter. However,
                           commercial production,          paid to the budget within       calculated based on the        Russian Federation Regional
                           specified in the Production     the terms of the PSA.           depreciated book value of      Governments may excuse
                           Sharing Agreement (PSA).                                        those assets. Taxable assets   certain categories of payers,
                           Once an investor has            The PSA taxation regime         no longer include any          including both Russian and
                           reached such a limit,           introduced by Chapter           costs or intangible assets     foreign organisations, from
                           however, they pay the full      26.4 of the Tax Code has        recorded on the taxpayer’s     the obligation to assess and
                           mineral extraction rate for     increased the number of tax     balance sheet, nor land        make such advance
                           oil and gas condensate.         law requirements for, and       and water objects, and         payments.
                                                           taxes payable by, investors.    such items are not subject
                           At the same time, investors     These amendments are            to the property tax either.
                           may be exempted from            unlikely to make PSAs
                           regional and local taxes        an attractive proposition
                           (given the respective           to investors.
                           decisions of the regional
                           and local legislative
                           branches), the corporate



90                                                                                                                                                   91
BEST PRACTICE AND RISK MANAGEMENT
TAXATION (CONTINUED)


             Unified social tax             In the past, the salaries of
             Effective 1 January 2001,      foreign citizens employed
             one Unified Social Tax         or acting as individual
             replaced employers’            entrepreneurs in Russia were
             contributions to four          exempt from the Unified
             separate social benefit        Social Tax, provided that
             funds (the Pension Fund,       under Russian legislation
             the Social Security Fund,      or the relevant employment/
             the Mandatory Medical          service contract those
             Insurance Fund, and the        expatriates were not eligible
             Employment Fund). The          for Russian state pensions,
             Unified Social Tax is paid     social benefits and state-
             centrally and is afterwards    subsidised medical treatment.
             distributed among these        However, from 1 January
             three funds (the Employment    2003 this tax exemption
             Fund having been abolished).   has ceased to exist, and
             The Unified Social Tax has     the salaries of expatriates
             a regressive tax scale from    working in Russia have
             26 per cent to 2 per cent of   become subject to the
             an employee’s salary, with     Unified Social Tax pursuant
             the lowest rate applicable     to the rules outlined above.
             to the portion of an
             employee’s annual salary in    The salaries of foreign
             excess of 600,000 rubles       personnel employed by
             (approximately US$21,430).     foreign branches of Russian
             The tax period is one year,    companies and/or of foreign
             and the tax is paid on a       personnel working abroad
             monthly basis.                 are specifically exempt from
                                            the Unified Social Tax under
                                            amendments to the Tax
                                            Code effective from
                                            1 January 2008.




92                                                                          93
BEST PRACTICE AND RISK MANAGEMENT
TAXATION (CONTINUED)


             Personal income tax             From 1 January 2001 Russia       By 30 April of the             Regional and local taxes
             Individuals who are defined     has enacted various income       following year, a taxpayer     Regional and local
             as “Russian tax residents,”     tax rates, including:            must file a tax return         legislative bodies may, at
             ie those who have been in       • a 13 per cent flat rate        based on his/her actual        their discretion, introduce
             the country for 183 days or       applicable to most types       income for the previous        various tax incentives and
             more during any 12                of income,                     year, and settle tax           credits with regard to
             consecutive months, are                                          obligations for that year.     regional and local taxes.
             subject to personal income      • a 9 per cent rate              Foreign individuals are        Regional taxes currently
             tax on all their income, both     applicable to dividend         required to file annual        include corporate property
             that earned in Russia and         income,                        tax returns with the tax       tax, transport tax and
             that earned elsewhere.                                           authorities by 30 April        gambling tax. Local taxes
             Individuals who do not meet     • a 35 per cent rate             of the year following the      currently include property
             this criterion are subject to     applicable to income           reporting year only if they    tax on individuals and land
             tax on any income received        from gambling, lottery         receive income from non-       tax. Although these taxes
             from Russian sources.             prizes, deemed income          Russian sources, or income     are set regionally and
                                               from low-interest or           where no income tax was        locally, the federal
                                               interest-free loans            withheld at the source of      legislature has enacted
                                               (except loans directed         payment. Those foreign         limits on their overall rates.
                                               at new construction or         individuals who leave the
                                               dwelling acquisition) and      country during a calendar
                                               excessive bank interest, and   year should file a tax
                                                                              declaration for the relevant
                                             • a 30 per cent rate             taxable period no later
                                               applicable to Russian-         than one month prior
                                               source income received         to leaving Russia.
                                               by non-residents.




94                                                                                                                                            95
BEST PRACTICE AND RISK MANAGEMENT
CURRENCY REGULATIONS


THIS SECTION (PAGES 96-99)   The Civil Code states that     Currency operations
IS KINDLY PROVIDED BY        the ruble is the national      The Currency Law regulates
BAKER & MCKENZIE – CIS,      currency of the Russian        a broad range of currency
LIMITED                      Federation. Although           operations including:
                             agreements may refer to
                             the ruble value equivalent     • payments made in
                             of foreign currency, all         a foreign currency,
                             transactions conducted
                             inside the Russian             • transfer of foreign
                             Federation must, as a            securities,
                                                                                             Resident vs                      Governments of the
                             general rule, be settled
                                                                                             non-resident status              Russian Federation,
                             in rubles. The Civil Code,     • ruble transfers between
                                                                                             The Currency Law divides         constituent entities of
                             however, permits the use         a Russian resident and a
                                                                                             individuals and legal            the Russian Federation,
                             of foreign currency in           non-resident or between
                                                                                             entities into two classes:       and municipal units.
                             cases provided for by law.       two non-residents,
                             Federal Law No 173-FZ
                                                                                             • residents, and               Non-residents are defined as:
                             On Currency Regulations        • transfer of domestic
                             and Currency Control,            securities between
                                                                                             • non-residents.               • individuals whose
                             dated 10 December 2003,          a resident and a non-
                                                                                                                              permanent place of
                             as amended, (the Currency        resident or between
                                                                                             Residents include:               residence is located
                             Law) establishes the basic       two non-residents,
                                                                                                                              outside Russia
                             rules of currency regulation
                                                                                             • Russian citizens and
                             and control.                   • the import and export
                                                                                               other individuals whose      • legal entities incorporated
                                                              of rubles and securities,
                                                                                               permanent place of             outside Russia,
                                                                                               residence is the Russian
                                                            • transfer of funds and
                                                                                               Federation,                  • enterprises/organisations
                                                              securities from the overseas
                                                                                             • legal entities established     that are not legal
                                                              account of a resident into
                                                                                               in accordance with             entities, organised and
                                                              a domestic account, and
                                                                                               Russian legislation,           located outside the
                                                              vice versa, and
                                                                                                                              Russian Federation, and
                                                                                             • representative offices
                                                            • transfer of rubles and
                                                                                               (branches) of Russian        • representative offices
                                                              securities between the
                                                                                               legal entities outside         (branches) of foreign
                                                              domestic accounts of
                                                                                               Russia, and the                legal entities in Russia.
                                                              a non-resident.

96                                                                                                                                                          97
BEST PRACTICE AND RISK MANAGEMENT
CURRENCY REGULATIONS (CONTINUED)


             Special currency                  • the purchase and sale        Liability for violation         including authorised banks,      imposed on individuals, legal
             control rules                       of foreign currency          The Currency Law has            professional participants of     entities, and company
             As of 1 January 2007                may only be performed        reproduced the system of        the securities market, and       executives.
             most currency control               at authorised Russian        state agencies which are        governmental agencies.
             limitations have been               banks,                       responsible for the execution                                    The amount of a fine may
             eliminated. However,                                             of currency control. This       Violation of Russian currency    be as high as the entire value
             certain requirements still        • cash exports are subject     includes the CBR, the           control requirements may         of a transaction performed
             apply to Russian residents:         to restrictions,             Government and the              entail civil, administrative,    in violation of the currency
                                                                              federal agencies authorised     or criminal liability.           control requirements.
             • Russian companies must          • when a Russian company       by the Government.                                               Other sanctions include
               hold all foreign currency         or individual opens an                                       Administrative penalties for     the revocation of licences
               export proceeds in their          overseas bank account        Currency control is executed    violation of Russia’s currency   (primarily applicable to
               Russian bank account(s)           in OECD/FATF member          through agents of the           control requirements include     banks), and imprisonment.
               (“repatriation of currency        countries they must          currency control regime,        various fines, which may be
               proceeds”),                       notify the tax authorities
                                                 and present regular
             • “transaction passports”           reports on the cash flow
               are required for certain          in such accounts, and
                                                                              ALL THE INFORMATION INCLUDED IN THIS DOCUMENT IS FOR INFORMATIONAL PURPOSES ONLY,
               transactions (external trade,
                                                                              AND MAY NOT REFLECT THE MOST CURRENT LEGAL DEVELOPMENTS, JUDGMENTS, OR
               loans) at Russian banks,        • the operation of an
                                                                              SETTLEMENTS. THIS INFORMATION IS NOT OFFERED AS LEGAL OR ANY OTHER ADVICE ON ANY
                                                 overseas bank account
             • most Russian residents            by a Russian resident        PARTICULAR MATTER. THE FIRM AND THE CONTRIBUTING AUTHORS EXPRESSLY DISCLAIM ALL
               are prohibited from               is subject to certain        LIABILITY TO ANY PERSON IN RESPECT OF ANYTHING, AND IN RESPECT OF THE CONSEQUENCES
               performing foreign                restrictions.                OF ANYTHING, DONE OR NOT DONE WHOLLY OR PARTLY IN RELIANCE UPON THE WHOLE OR ANY
               currency transactions (the                                     PART OF THE CONTENTS OF BAKER & MCKENZIE’S “DOING BUSINESS IN RUSSIA” BROCHURE.
               Currency Law provides                                          NO CLIENT OR OTHER READER SHOULD ACT OR REFRAIN FROM ACTING ON THE BASIS OF ANY
               some exceptions),                                              MATTER CONTAINED IN THIS DOCUMENT WITHOUT FIRST SEEKING THE APPROPRIATE LEGAL
                                                                              OR OTHER PROFESSIONAL ADVICE ON THE PARTICULAR FACTS AND CIRCUMSTANCES.

                                                                              BAKER & MCKENZIE – CIS, LIMITED IS A MEMBER OF BAKER & MCKENZIE INTERNATIONAL,
                                                                              A SWISS VEREIN WITH MEMBER LAW FIRMS AROUND THE WORLD. IN ACCORDANCE WITH
                                                                              THE COMMON TERMINOLOGY USED IN PROFESSIONAL SERVICE ORGANISATIONS, REFERENCE
                                                                              TO A “PARTNER” MEANS A PERSON WHO IS A PARTNER, OR EQUIVALENT, IN SUCH A LAW
                                                                              FIRM. SIMILARLY, REFERENCE TO AN “OFFICE” MEANS AN OFFICE OF ANY SUCH LAW FIRM.


98                                                                                                                                                                        99
ADDITIONAL INFORMATION
OTHER SOURCES OF INFORMATION


                               UK Trade & Investment           Useful websites                British Standards             Business libraries
                               offers UK businesses the        British Chambers               Institute (BSI)               The Wall Street Journal:
                               information and advice          of Commerce (BCC)              www.bsi-global.com            www.wsj.com
                               they need to increase           www.britishchambers.org.uk/    Tel: +44 (0)20 8996 9000
                               their overseas sales and        exportzone/emrs                Advice on how to meet         BusinessWeek Magazine:
                               investments. Please go to       BCC delivers an Export         technical standards and       www.businessweek.com
                               www.uktradeinvest.gov.uk        Marketing Research service     approvals procedures.
                               to discover Websites for        on behalf of UK Trade &                                      Entrepreneur Magazine:
                               Exporters, our searchable       Investment. Companies          Export Credits Guarantee      www.entrepreneur.com
                               database of the free            with fewer than 500            Department (ECGD)
                               information that is available   employees may be eligible      www.ecgd.gov.uk               Company information
                               on the web and details on       for a grant of up to           Tel: +44 (0)20 7512 7000      Security and
                               our UK Sales Leads and          50 per cent.                   Help with credit insurance    Exchange Commission
                               UK Suppliers database.                                         for projects, capital goods   Edgar Database:
                                                               Sitpro Ltd                     and services.                 www.sec.gov
                                                               www.sitpro.org.uk
                                                               Tel: +44 (0)20 7467 7280       HM Revenue & Customs          Nasdaq quoted companies:
                                                               Help with export               www.hmrc.gov.uk               www.nasdaq.com
                                                               procedures and                 Tel: +44 (0)29 2050 1261
                                                               documentation.                 Help with customs             Dun and Bradstreet:
                                                                                              procedures, regulations       www.dnb.com
                                                               Department for Business,       and cost of compliance.
                                                               Enterprise & Regulatory                                      Yellow Pages:
                                                               Reform (BERR)                                                www.bigyellow.com
                                                               www.berr.gov.uk
                                                               Tel: +44 (0)20 7215 5000                                     Foreign exchange rates,
                                                               Export Control Organisation.                                 current and historical:
                                                               Information on export                                        www.oanda.com
                                                               controls and the licensing
                                                               of defence-related goods
                                                               and technology.




100                                                                                                                                               101
102
DEVELOPING YOUR INTERNATIONAL TRADE POTENTIAL




A range of UK Government support is available from a portfolio of initiatives
called Solutions for Business. The “solutions” are available to qualifying
businesses, and cover everything from investment and grants through to
specialist advice, collaborations and partnerships.
UK Trade & Investment is the government organisation that helps UK-based
companies succeed in the global economy, and is responsible for the delivery of
the two SfB products “Developing Your International Trade Potential” and
“Accessing International Markets”.
We also help overseas companies bring their high-quality investment to the
UK’s dynamic economy – acknowledged as Europe’s best place from which to
succeed in global business.
UK Trade & Investment offers expertise and contacts through its extensive
network of specialists in the UK, and in British embassies and other diplomatic
offices around the world. We provide companies with the tools they require to
be competitive on the world stage.
For further information please visit www.uktradeinvest.gov.uk
or telephone +44 (0)20 7215 8000.



Whereas every effort has been made to ensure that the information given in this document is accurate,
neither UK Trade & Investment nor its parent Departments (the Department for Business, Enterprise
& Regulatory Reform, and the Foreign & Commonwealth Office) accept liability for any errors, omissions
or misleading statements, and no warranty is given or responsibility accepted as to the standing of any
individual, firm, company or other organisation mentioned.

The paper in this document is made from 50 per cent recycled waste pulp with 50 per cent pulp from
well-managed forests. This is a combination of Totally Chlorine Free and Elemental Chlorine Free.
The inks are vegetable oil-based and contain resins from plants/trees and the laminate on the cover is
sustainable, compostable and can be recycled.

Published May 2009 by UK Trade & Investment
©Crown Copyright
URN 09/783
                                                                                                                                                                                                                                                                                                                                                                                                  CHUKCHI
                                N O R T H AT L A N T I C                                                                                                                                                                                                                                                                                                                                            SEA
                                        OCEAN
                                                                                                                                                                                                                                                                                                                                                                                                                                    Provideniya
                                                                                                                                                       Svalbard
                                                                                                                                                     (NORWAY)
                                                                                                                                                                                                                        ARCTIC OCEAN                                                                                                                                          Wrangel
                                                                                                                                                                                                                                                                                                                                                                               Island
                                                                                                                                                                                                                                                                                                                                                                                                                                                              BERING
                                                                                                                  NORWEGIAN                                                                                                                                                                                                                                                                                                                                    SEA
                                                                                                                                                                                                                                                                                                                                                                                                Pevek                         Anadyr'
                                                                                                                     SEA                                                                                  Franz Josef
                        U.K.                                                                                                                                                                                 Land                                                                                                                               EAST SIBERIAN                                            CHUKOTSKIY AOk

                                   NORTH                                                                                                                                                                                                                                                                                  New                        SEA
                                                                                                                                                                                                                                                                                                                      Siberian
                                                                                                                                                                                                                                                                 Severnaya                                             Islands
                                    SEA                 NORWAY                                                                                                                                                                                                   Zemlya
                         Amsterdam
                                                                                                                                                          BARENTS
                                                             Oslo
                                                                                           SWEDEN                                                           SEA                                                                                                                                     LAPTEV                                                                                                                                                                        U.S.
                        NETH.
                                                                                                                                                                                         Novaya                               KARA
                                                                                                                                                                                         Zemlya                                                                                                       SEA




                                                                                                                                                                                                                                                                                                                                                                                    Koly
                                               Copenhagen                                                                                                                                                                      SEA
                                                                                     GULF OF BOTHNIA                                          Murmansk




                                                                                                                                                                                                                                                                                                                                                                                     ma
                        GERMANY
                          Berlin                                     Stockholm                     FINLAND                                                                                                                                                                                                                                                                                                                                                                  NORTH
                                                                                                                                                                                                                                                                                                                             Tiksi
                                                                                           Helsinki
                                                                                                                                                                                                                                                                                                                                                                                                                                                                           PA C I F I C
                                                  BALTIC SEA               Tallinn
                                    POLAND                                                                                                                                                                                                                                                                                                                                                                                                    KAMCHATKA
                                                                                                                                                                                                                                                                                                                                                                                                                                                                            OCEAN
RUSSIA BUSINESS GUIDE




                                                                                                                                                                                                                                    Dikson
                           Prague                                   Riga                                                                                                                                                                                                                                                         YA K U T I YA ( S A K H A )
                          CZ.         Kaliningrad
                                                                               EST.              St. Petersburg                                                                                                                                                                                                                                                                                                                                                 Petropavlovsk-
                                                                                                                                                                                                                                                                                                                                                                                                                                                                Kamchatskiy
                         REP.                                LITH. LAT.                     LENINGRAD                   Lake              Arkhangel'sk                Nar'yan-
                                                                                                                                                                                                                                                                                                                                                                                                                    Magadan



                                                                                                                                                             ora
                        SLOV.      Warsaw                                      Pskov              Velikiy                                                             Mar NENETSKIY


                                                                                                                                                            ch
                                                                                                                        Onega




                                                                                                                                                                                                                                                                                                                               Le
                                                                                                                                                          Pe
                                                                 Vilnius




                                                                                                                                                                                                                                                                                                                                 na
                                                                                                  Novgorod                                                                     AOk                                                                 Noril'sk
                                                                                                                             Konosha
                                                                                                                                                                                                                                                                                                                                                                                               Okhotsk                        SEA
                                                                                                                                                                               Vorkuta
                        HUNG.                           Minsk
                                                                                                    Tver'                                          KOMI
                                                                                                                                                            Pechora
                                                                                                                                                                                              Salekhard                                                                                                                                                                                                                        OF
                                                        BELARUS                                       Vologda         Kotlas                                                                                        Novyy
                                                                                                                                                                                                                                                Igarka
                                                                    Smolensk                                                                                                                                                                                                                                                                      Yakutsk
                                    UKRAINE                                      Moscow        Yaroslavl'                                                                                       Nadym
                                                                                                                                                                                                                    Urengoy                                                                                                 Vilyuysk                                                                                        OKHOTSK                                 Kuril
                                                Kyiv                Bryansk Kaluga                   Kostroma
                                                                                                                                                                                                                                                                                                                                     y
                                                                                                                                                                                                                                                                                                                                                                                                                                                                 Islands
                        ROMANIA                                                      Tula
                                                                                                   Ivanovo
                                                                                                                                                                               '
                                                                                                                                                                              Ob
                                                                                                                                                                                                     YAMALO-NENETSKIY AOk                                                                                                     Vi
                                                                                                                                                                                                                                                                                                                                 lyu                                                                                        Okha
                                                                                                Vladimir
                        Bucharest                                        Orel                                        Kirov                                               KHANTY-MANSIYSKIY                                                                                                                                                   na                     an                                                             Sakhalin           Occupied by
                                                                                                      Nizhniy                                                               AOk-YUGRA                                                                                                                                                      Le                  Ald
                                       Chisinau                                          Ryazan'                                                                                                                                                                                                                                                                                                                                   Island         Soviet Union in 1945
                                                                               Lipetsk                Novgorod                                                                                                                                                                                                                                              Aldan                                                                                Administered by Russia,
                                                                       Kursk                                                                                                                                                                                                                                                Lensk
                                                                                                             11        12                                                                                                                                                                                                                                                                                          Amur                            claimed by Japan
                                                                                        Tambov                      Izhevsk                         Perm'                                       Surgut                                                   K R A S N O YA R S K
                                              Dnieper                     Voronezh                 9 10                                                               Khanty-Mansiysk                                                                                                                                                                                                                KHABAROVSK
                                                                                                            Kazan                                           SVERDLOVSK                                         Nizhnevartovsk                                                                                                                                Neryungri
                                                                                          Penza                                                                                                                                                                                                                                                                                                                        Sovetskaya                  Yuzhno-
                                                                                                         Ul'yanovsk                                Ekaterinburg                                                                                                                                                                                                                                      Berezovyy
                                                                                                                                                                                                                                                                                                                                                                                                                           Gavan’                  Sakhalinsk




                                                                                                                                                                                                                                                      Yen
                                                                                                       Saratov                                                                                                          Ob
                                                                                                                             Samara                                                Tobol'sk
                                                                                  Do




                                                                                                                                                                                                                                                          i
                                                                                                                                                                                                                                                         sey
                                                                                                                                             Ufa                                                                          '                                                                                                                                          Tynda                                            Komsomol'sk
                                                                                     n




                                                                                                              Volga                                                                                                                                                                 ara
                                                                       Rostov                                                                                            Tyumen'                                                                                                Ang            Ust'-                                                                  Never         AMUR
                                 BLACK SEA                                               Volgograd                                          Chelyabinsk                                Irty                                                                     Lesosibirsk                    Ilimsk                                                                                                      Urgal
                                                         1                                                                         BASHKORTOSTAN                      Kurgan               sh                                                                                                            Ust'-Kut                                                                                                         Khabarovsk
                                                                                                                                                                                                                                                                                                                                                                          Am
                          Ankara                                                                                                                                                                                                                                                                                    Nizhneangarsk                                              ur                   Birobidzhan
                                                                                                                                        Orenburg                                                                                    Tomsk                                             Bratsk
                                              Sochi 3                                                                                                                                 Omsk                                                                        Kansk                                                 BURYATIYA
                                                                             KALMYKIYA                                                                                                                                                                                                                                                   ZABAYKAL'SKIY         Blagoveshchensk
                                                                                                                                                                                                          Novosibirsk                     Kemerovo               Krasnoyarsk
                                                                                                                                                                                                                                                                                                                      Lake                                                                                                    PRIMORSKIY
                                                             4         2                        Astrakhan'                                                                                                                                                                                                            Baikal
                                                                                                                                                                                                                                                                                                                                                                                                                              [MARITIME]
                                                                                                                                                                                                                                                                                                                                         Chita                                          YEVREYSKAYA AO                                           SEA
                                                              5
                           TURKEY                   GEO.        6 7
                                                                                                                                                                                                                                         Novokuznetsk                                                               Ulan-
                                                                                                                                                                                                                                                                                                                    Ude
                                                                                                                                                                                                                                                                                                                                                    Borzya
                                                                                                                                                                                                                                                                                                                                                                                                                                                  OF
                                                                                                                                                                                                                                                               Abakan                          Irkutsk
                                                                                                                                                                                                                        Barnaul                                         Yenisey
                                                         T'bilisi 8                                                                                                                                                                             KHAKASIYA
                                                                                                                                                                                                                                                                                                                                                                                                                                                JAPAN
                                                                       DAGESTAN
                                             Yerevan
                                                        ARM.                                                                                                                                                            ALTAYSKIY                                                                                                                                                                                              Vladivostok
                                                                                                                                                                                                                                                                                                                                                                                                                                                     JAPAN
                                                                                                                                Aral                                                                                                                          TYVA      Kyzyl
                                                                                                                                Sea                KAZAKHSTAN                                                                           ALTAY                                                                                                                                                                                 Khasan

                         SYRIA                                   AZERBAIJAN                                                                                                                                                                                                                                             MONGOLIA                                                      CHINA                                  N. KOREA
                                                                      Baku                                                                                                                                                                                                                                                                                                                                                                                                    Tokyo
                                                                                                   British Embassy,                                                                      Lake
                                                                                                                                                                                                                                  THE RUSSIAN FEDERATION
                                                                                                                                                                                                             Key
                                                                                         Investment Offices
                                                                                                UK Trade &




                                                                                                                                                                                         Balkhash
                                                                                                   Trade & Investment Office, Moscow
                                                                        Caspian                                                                                                                                                                                                                                                                                                            1     KRASNODAR                  7 INGUSHETIYA*
                                                                          Sea                      Tel: +7 (495) 956 7459
                                                                                                             UZBEKISTAN                                                                                                                     City with UK Trade & Investment Office                                                                                                         2     STAVROPOL'                 8 CHECHNYA*
                                                                                                   Fax: +7 (495) 956 7480
                         Baghdad                                                              TURKMENISTAN                                                                                                                                 NATIONAL CAPITAL                                                         International Boundary                                                 3     ADYGEYA                    9 MORDOVIYA
                                                         Tehran
                                                                                                   Website: www.ukinrussia.fco.gov.uk/en                                                                                                                                                                                                                                                   4     KARACHAYEVO-CHERKESIYA 10 CHUVASHIYA
                                                                                                                  Ashgabat                         Tashkent                                                                                Administrative centre                                                    Rivers
                         IRAQ                                                                                   British Consulate-General, St. Petersburg
                                                                                                                                                   Bishkek                                                                                                                                                                                                                                 5     KABARDINO-BALKARIYA       11 MARIY EL
                                                                                                                              Am




                                                                                                                Tel: +7 (812) 320 3200        KYRGYZSTAN                                                                                    Major city                                                              Republic, Oblast, or Kray Boundary                                     6     SEVERNAYA OSETIYA-ALANIYA 12 UDMURTIYA
                                                                                                                                uD




                                                                                                                Fax: +7 (812) 320 3222
                                                                                                                                  ary




                                                                                                                                                                                                                                           Foreign National Capital                                                 Autonomous okrug (AOk) or                                                  * a Boundary between Chechenia and Ingushetiya
                                                                 IRAN
                                                                                                                                   a




                                                                                                                                                                                                                                                                                                                                                                                                has not been established.
                               KUWAIT                                                                           British                  Dushanbe
                                                                                                                         Consulate-General, Ekaterinburg                                                                                                                                                            autonomous oblast (AO) Boundary                                             An oblast is named only when its name differs from that of its
                                                                                                                                                                                                                                    0           250            500        750 Kilometres
                                    Kuwait                                                                      Tel: +7 (343) 379 4931                            TAJ.                                     CHINA                                                                                                                                                                                administrative centre, not all administrive centres are shown.
                        SAUDI                                                                                                                                                                                                                            250                  500                 750 Miles
                                                                                                                                                                                                                                                                                                                                                                                                Moscow and St. Petersburg are federal cities having
                                    PERSIAN                                                                     Fax: +7 (343) 359 2901                                                                                              0                                                                                                                                                           oblast-level status.
                        ARABIA        GULF
                                                                                                                           AFGHANISTAN