Q&A: Foreign companies expanding into Russia
- Author: Vladislav Zabrodin
- Date: 04.06.2012
The American Lawyer, Focus Europe, An ALM Supplement, Summer 2012
Vladislav Zabrodin, Managing Partner of Capital Legal Services
Vladislav Zabrodin, Managing Partner of Capital Legal Services International, discusses investment into Russia, important competition and antitrust concerns for clients, and how to approach the most common real estate and corporate law issues facing foreign companies.
What are the most significant competition and antitrust issues for new businesses expanding into Russia? Which are the most common pitfalls?
New companies opening in the Russian market should bear in mind that they face some obstacles here in terms of antitrust legislation. The effective Russian antitrust legislation sets out rather tough statutory restrictions in relation to establishment, sale and reorganization of businesses in Russia in cases where the assets and revenue of the companies involved exceeds set thresholds, for example when the aggregate book value of acquirer’s assets exceeds $230m.
Also it should be noted that the Russian antitrust legislation changes frequently; the main antitrust legislative act (The Federal Law on Protection of Competition) was adopted in 2006 and has already been significantly amended three times since then. The most significant amendments include the increase of thresholds for merger control, the liberalization for intra-group restructurings together with the reinforcement of cartels suppression and new leniency rules. Basically Russian legislation follows the EU pattern but in a rather irregular way: some directions meet the EU approach while others (such as in the automotive sector) go far beyond the limitations set in the EU. The other particular feature of Russian competition law is how broadly it is worded.
This creates a lot of room for state discretion, making the application of law unpredictable sometimes. Such frequent changes in regulation result in a situation where companies have to adjust their business to the newly adopted laws, and penalties are very high.
The Russian antitrust authorities pay special attention to socially important spheres of economics, such as pharmaceutical, telecommunications, oil and gas. They are also very media savvy. All transactions under their control, such as company violations and claims filed against them to antitrust authorities, always become available to the public via internet resources which might influence the company’s reputation.
How has the corporate/M&A market in Russia evolved to the advantage of foreign businesses?
The changes are ongoing, quite extensive and do cover both the legal and business environment. They affect both foreign and Russian business. With regard to foreign business, the efforts of the state to encourage investment include limitation of the list of strategic industries. In the current economic environment the main requirement is transparency: if the investor is open there are usually no state obstacles.
In terms of economics Russia is, and shall remain, a high profit earning capacity country, although the risks are also high. Russian business welcomes foreign investments and has already adjusted to certain requirements they may have, such as restructuring or disclosure of additional data. But as attractive targets, Russian companies already know their worth. That is why the key challenge for foreign investors willing to work in the Russian M&A market is the ability to compromise and find effective solutions.
What are the most common problems facing foreign companies looking to invest in Russia?
The market is imperfect, frequently changing and features contradictive Russian legislation. As an example, competition legislation changes often and civil
legislation which has been in place for around 15 years is already to be changed substantially.
Foreign companies should also be ready for administrative barriers, such as long-term procedures involved in obtaining all the required permissions and licenses, which are often issued for a short-term period (3-5 years), as well as tax and customs implications.
However, there is nothing that cannot be legally tackled if you really want to work in Russia.
What kind of new business is Russia seeing at the moment?
Currently, the Russian Federation is transforming into a country with highly-developed innovations and technologies. The Russian government provides different opportunities and benefits for those who invest into the development of innovations. For example, the Skolkovo Innovation Centre was created to stimulate the development of break-through projects and technologies. The Skolkovo Innovation Centre includes five clusters (information, biomedical, energy efficiency, nuclear and space technologies), which are aimed at the development of businesses in the respective areas.
In addition, pharmaceutical clusters were created in different regions of the Russian Federation (St. Petersburg, Kaluga, Yaroslavl). These provide opportunities for the development of businesses related to production of medical equipment and services, and performing scientific research.
Another fast developing sector is the automobile industry. An automobile cluster was created in St. Petersburg, which led to an increase of investment into the construction of new automobile manufacturing facilities (the total investment in the sphere in St. Petersburg currently amounts to about USD 1.3bn). Companies here include Toyota, GM, Nissan, Hyundai and Scania.
Which areas are foreign investors most interested in at the moment?
Russia’s aim is to switch from a commodity-based to an innovation-driven economy. Key goals are technical and infrastructure modernization, effective use of resources and energy efficiency. The legislation is geared towards concentrating resources on the country’s most important areas of development. Industries such as retail, pharmaceuticals and production of car components are quickly developing and demonstrating high profits.
Foreign investors are particularly interested in participation in major infrastructure projects such as the construction of roads, airports, and waste treatment facilities. These projects are mostly implemented on the basis of public-private partnership (PPP) mechanism and involve the use of Russian and English law. St. Petersburg was the first city in Russia to experience the positive results of PPP with the minvolvement of foreign investors. The most significant was the construction of a new terminal at Pulkovo airport, which is currently carried out by a foreign investor (Fraport AG). We are proud that our firm was among the legal firms advising on that project, which has received an award from the British Infrastructure Journal for The Deal of the Year 2010.
Examples of recent infrastructure projects with the involvement of a foreign contractor include the construction of the Western High Speed Diameter road in St. Petersburg and the reconstruction and modernization of St. Petersburg water supply station (Neva Water Project). Infrastructure projects based on PPP schemes are of special interest to foreign investors as they provide them with necessary transparency as well as a guaranteed income over a relatively long period of time.
How far are foreign real estate clients still investing in the Russian murket, and which assets are currently most popular?
Despite rumours about economic decline and withdrawal of foreign investments, the Russian real estate sector remains only slightly affected. There have
been multiple major transactions on the market, including Morgan Stanley Real Estate Fund’s highprofile b1.1bn acquisition of the Galereya Shopping Center in St. Petersburg. Investments into the Russian real estate market in 2011 totalled $8bn.
To encourage business, rules on the acquisition, use and disposal of land are being constantly revised and construction requirements are being eased. While these areas of legal regulation are far from harmonized, market analysts predict that 2012 will match last year’s investment levels.
Over the course of our 12 years of experience in advising on real estate matters, most the foreign investors prefer to deal with Moscow-based real estate assets. According to current market research, Moscow and St. Petersburg are among the leading European cities for real estate investments, just behind London and Paris. Investors are currently interested in retail, followed by warehouses and office buildings. Real estate in Moscow is being followed by investments into retail assets in other major Russian cities.
There, is a widespread opinion that the level of investment in Russian real estate will remain steady as economic profitability and political stability in the country post-parliamentary and presidential elections grows. However prices for real estate are quite high and this slows down the development and redevelopment that is already required for a lot of commercial and office premises.