South AfricaBusinessGuide

RussiaBusinessGuide

DEVELOPING YOUR INTERNATIONAL TRADE POTENTIAL

British Trade Offices in RussiaBritish Embassy Trade and Investment OfficeMoscowTel: +7 (495) 956 7486Fax: +7 (495) 956 7480Website: www.ukinrussia.fco.gov.uk/en

British Consulate-General, St PetersburgTel: +7 (812) 320 3200Fax: +7 (812) 320 3222

British Consulate-General, EkaterinburgTel: +7 (343) 379 4931Fax: +7 (343) 359 2901

UK Trade & InvestmentEnquiry ServiceTelephone: +44 (0)20 7215 8000Email: enquiries@uktradeinvest.gov.uk Website: www.uktradeinvest.gov.uk

UK TRADE & INVESTMENT CONTACT DETAILSIN RUSSIA

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RussiaBusinessGuide

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CONTENTS

INTRODUCTION Why Russia? 6How to use this guide 8

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

MARKET ENTRY AND Distribution and sales channels 18START-UP CONSIDERATIONS Using an agent or distributor 20

Franchising 22Direct marketing 24Electronic commerce 25Advertising and trade promotion 28

BEST PRACTICE Due diligence 30AND RISK MANAGEMENT Local professional services 31

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

ADDITIONAL INFORMATION Other sources of information 100

Russia is the largestcountry in the world in both total area andgeographic extent,constituting more thanone-ninth of the world'sland surface. It has an areaof 10,672,000 sq miles(17,075,200 sq km) and apopulation of 142 millionpeople. It extends acrossthe whole of northern Asiaand 40 per cent of Europe,spanning 11 time zonesand incorporating a greatrange of environments and landforms.

The country possesses awide array of mineral andenergy resources includingmajor deposits of oil, coal,natural gas, iron ore,manganese, chromium,nickel, platinum, titanium,copper, tin, lead, tungsten,diamonds, phosphates andgold. The forests of Siberiacontain an estimated one-fifth of the world's timber.

The Russian coastal zoneof 23,533 miles (37,653km) along the Arctic andPacific Oceans, the Baltic,Black and Caspian Seas,holds significant reservesof fish and energyresources on the sea shelf.

Most of the country'sterritory is dominated bythe strongly continentaland subarctic climate,which is prevalent inEuropean and Asian Russiaexcept for the tundra andthe extreme Southeast.Only a small part of BlackSea coast around Sochi hasa subtropical climate.

INTRODUCTIONWHY RUSSIA?

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In Moscow, the cold startsto set in during Octoberwith snow andtemperatures below zerobeginning and continuinguntil March or April.Average Januarytemperatures are around -15°C but can drop to -30°C. This is not as bad asit sounds, as this is a “dry”cold, in contrast to thechilly dampness of theaverage UK winter. Insummer, temperaturesaverage around 24°C with the occasionalthunderstorm.

Winters in St Petersburgare moderated by(relatively) warm airblowing in from theAtlantic Ocean. In summer,temperatures are slightlycooler than in Moscow.

In Ekaterinburg and theUrals region, winters aregenerally colder andsummers are generallywarmer than in Moscow.You can expect to havesnow on the ground anytime from October to May,and even longer in thenorthern parts of theTyumen region (the main oil and gas area).

For more information onthe Russian climate seewww.bbc.co.uk/weather/world/country_guides

Russia's geographic extent,severe climate andremoteness from major sea lanes impede eveneconomic and socialdevelopment of thecountry's territories, withlarge parts of the countryhaving almost nopopulation anddevelopment.

Russia is a middle-incomecountry. It is the eighth-largest retail market in theworld - having surpassedBrazil, Mexico, Spain andItaly in recent years - andthe fourth-largest marketin Europe, behind only theUK, Germany and France.

UK-Russia economicrelations remain strong.Russia is now the UK'stwelfth largest exportmarket.

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This guide should be used in conjunction with the UK Trade &Investment website:www.uktradeinvest.gov.uk. The guide will take youthrough the process ofdoing business with Russia,while the website willprovide registered userswith regularly updatedmarket and sectorinformation, businessopportunities and detailsof further contacts.

Who is this guide for?This guide is aimed atcompanies experienced in overseas trade that are new to doing businesswith Russia. Your companymay be an exporterlooking to sell directly to Russian customers or through an agent ordistributor in Russia.Alternatively, you may be planning to set up a representative office,joint venture or other form of permanentpresence in Russia.

What does this guide aim to do?This guide aims to providea route map of the wayahead, together withsignposts to sources ofhelp. It identifies the mainissues associated with initialresearch, market entry, riskmanagement and culturalmatters. It also includesquestions you should ask at the beginning of yourresearch into Russia.

We do not pretend toprovide all the answers inthis guide. It will not coverall the provinces of Russiain any detail, current sectoropportunities, legal,taxation or accountingaspects of setting up apermanent presence inRussia – but it will pointyou in the direction of thepeople, organisations andpublications that will beable to answer these andmany other questions. For help with currentinformation on the marketplease see the section“Where to start” on page 12.

The objective of this guide is to steer companiesthrough the initial researchand preparation stages ofentering the Russianmarket. It is far better to spend time and moneyin carrying out thoroughresearch and preparationbefore entering the marketthan to enter Russia in ahurry, not wishing to missthe boat, only to discoverthat you have made a verycostly mistake.

INTRODUCTIONHOW TO USE THIS GUIDE

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Often, new exporters willfeel a bit overwhelmedabout trading with Russia.Much consideration andplanning will need to go into deciding on thecompany type, delivery of products and services,marketing strategies andlocal conditions. Beforemaking these big decisionsexporters and investorsshould spend some time thinking about business objectives.

The questions listedopposite should help youto focus your thoughts.Your answers to them willhighlight areas for furtherresearch and also suggest a way forward that is rightfor your company.

You may then want to use this as a basis fordeveloping a formalstrategy, although this will not be necessary or appropriate for all companies.

RESEARCHING THE MARKETTAKING THE STRATEGIC APPROACH

YOUR AIMS:DO YOU WISH TO SELL TO RUSSIA?

DO YOU WISH TO ESTABLISH YOUR OWN COMPANYPRESENCE IN RUSSIA, FOR EXAMPLE THROUGH AREPRESENTATIVE OFFICE OR LIMITED LIABILITY COMPANY?

DO YOU NEED TO BE INVOLVED IN RUSSIA AT ALL?

YOUR COMPANY:WHAT ARE THE UNIQUE SELLING POINTS (FEATURES AND BENEFITS) FOR YOUR PRODUCT OR SERVICE?

DO YOU KNOW IF THERE IS A MARKET FOR YOUR PRODUCT OR SERVICE IN RUSSIA?

DO YOU KNOW IF YOU CAN BE COMPETITIVE IN RUSSIA?

DO YOU HAVE THE TIME AND RESOURCES TO HANDLE THE DEMANDS OF COMMUNICATION, TRAVEL, PRODUCTDELIVERY AND AFTER-SALES SERVICE?

YOUR KNOWLEDGE:DO YOU KNOW HOW TO SECURE PAYMENT FOR YOURPRODUCTS OR SERVICE?

DO YOU KNOW WHERE IN RUSSIA YOU SHOULD START?

DO YOU KNOW HOW TO LOCATE AND SCREEN POTENTIALPARTNERS, AGENTS OR DISTRIBUTORS?

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UK Trade & Investment -international trade teamsIn England, UK Trade & Investment providessupport for UK companiesthrough a network ofinternational trade teams(ITTs) based in the Englishregions. UK Trade &Investment services aredelivered in Scotland,Wales and Northern Irelandin co-operation with therespective nationaldevelopment agencies.

The ITTs also organiseroadshows, seminars and events that highlightRussia.

To find your nearestInternational Trade Advisercall +44 (0)20 7215 8000or use the database atwww.uktradeinvest.gov.uk

RESEARCHING THE MARKETSOURCES OF INFORMATION

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International trade contacts inScotland, Wales and Northern Ireland

Scottish Enterprise150 BroomielawAtlantic QuayGlasgow G2 8LUTel: +44 (0)141 248 2700Fax: +44 (0)141 221 3217Website: www.scottish-enterprise.com

International Business WalesWelsh Assembly GovernmentTrafalgar House5 Fitzalan PlaceCardiff CF24 0EDTel: +44 (0)1443 845500Fax: +44 (0)29 2044 2696Website: www.ibwales.com

Invest Northern IrelandBedford SquareBedford StreetBelfast BT2 7ESTel: +44 (0)28 9023 9090Fax: +44 (0)28 9043 6536Website: www.investni.com

British Trade Offices in RussiaBritish Embassy, Trade and Investment Office,MoscowTel: +7 (495) 956 7486Fax: +7 (495) 956 7480Website: www.ukinrussia.fco.gov.uk/en

British Consulate-General,St. PetersburgTel: +7 (812) 320 3220,Fax: +7 (812) 320 3222

British Consulate-General,EkaterinburgTel: +7 (343) 379 4931Fax: +7 (343) 359 2901

Research of publishedinformation (desk research)to scope a market isbecoming increasinglycommon as a means ofcarrying out marketintelligence.

The Russia pages of the UK Trade & Investmentwebsitewww.uktradeinvest.gov.ukare a practical tool tosearch for generic market information and advice on:

• setting up and contactinformation,

• selling andcommunications,

• tariffs and regulations,

• visiting and socialcustoms, and

• background andgeography.

General statistical data onRussia, eg gross domesticproduct, industrialproduction figures,consumption rates andinternational trade datacan be found in businesslibraries or on the internet.Check publications such ascountry supplementsproduced by the FinancialTimes www.ft.com, theRussia Factsheet publishedby the Economist IntelligenceUnit www.eiu.com andother relevant publications.

For Russian news, see The Moscow Timeswww.themoscowtimes.coman English languagenewspaper and itscompanion paper The St Petersburg Timeswww.sptimesrussia.com

Market and sector researchUK Trade & Investmentoffers two principalservices to UK-basedcompanies looking to makethose initial approachesinto new overseas markets:

RESEARCHING THE MARKETWHERE TO START

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“I’M THINKINGOF DOINGBUSINESS IN RUSSIA… BUT DON’TKNOW WHERETO BEGIN!”

Overseas MarketIntroduction Service(OMIS)OMIS puts you directly in touch with staff in our three offices in Russia(Moscow, St Petersburg andEkaterinburg), who are able to give you accessto the best country - andsector-specific businessadvice, as well as offeringsupport during your visitsto Russia. They can adviseon local business conditionsand provide tailoredinformation specific to your needs.

OMIS is delivered online,giving you a direct link to local experts, with fastaccess to reports andadvice, and allowing you to keep in touchwherever you are. For general enquiries aboutdoing business overseasand for further informationabout commissioningOMIS, please contact your local InternationalTrade Team or UKTI Russia directly at +7 (495) 956 7458

Export MarketingResearch Scheme (EMRS)EMRS is the systematiccollection, analysis andinterpretation of informationabout an overseas market.An export marketingresearch project typicallyinvolves the collection ofinformation such as:

• the size of the market,

• how it is segmentedbetween different typesof customers,

• an explanation of thevarious distributionchannels, and

• competitor activity- their strategy andperformance, etc.

To check on eligibilityplease contact:British Chambers of Commerceenquiry@britishchambers.org.uk Tel: +44 (0)24 7669 4484Fax: +44 (0)24 7669 5844www.britishchambers.org.uk/6798219243281114437/what-is-the-export-marketing-research-scheme.html

Industry summariesSector market summariesare available on the UK Trade & Investmentwebsite:www.uktradeinvest.gov.uk

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RESEARCHING THE MARKETMARKET CHALLENGES AND OPPORTUNITIES

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Market challenges• European (German, Italian)

and Asian companiesremain tough competitorsfor UK firms, due to theirproximity to the Russianmarket and their long-standing relations withRussian organisations and companies.

• Bureaucracy, poorlyestablished rule of lawand corruption affectsuch areas as establishinga business, tax collection,dispute settlement, propertyrights, product certificationand standards, as well asRussian Customs clearance.

MARKET OPPORTUNITIESUK TRADE & INVESTMENT HAS IDENTIFIED FIVEMAJOR SECTORS FOR UK COMPANIES IN RUSSIA:

ADVANCED ENGINEERINGFINANCIAL SERVICESICTPOWER/ENERGY ANDSPORTS AND LEISUREINFRASTRUCTURE

OPPORTUNITIES HAVE ALSO BEEN IDENTIFIED IN THE FOLLOWING SECTORS:

AIRPORTSCONSTRUCTIONCREATIVE INDUSTRIESRAIL ANDWATER/PORTS

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• Adequate financialresources for Russiansmall- and medium-sizedcompanies still remain aproblem, but it is not asacute as it was in yearspast. More foreign banksare operating in Russiaand more cash iscirculating within theeconomy due to theRussian oil and gas boom.

• Increasingly highoverhead costs cansometimes out outweighhigh profit margins.

• Finding qualified localpartners and Russianemployees has becomemore difficult and salariesfor local employees haverisen significantly,especially in Moscow and St Petersburg. Thepool of managers whounderstand Westernaccounting and businesspractices remains limited,as do those qualified,experienced Russiansproficient in English. As a result, this groupcirculates among majorcompanies, bidding upsalaries. Recently, Russianauthorities have takensteps to encourageinternational companiesto rely more on localtalent by tightening visa regulations forforeign workers.

• The Russian Governmentcontinues to use its oiland gas resources toincrease state ownershipin strategic industriesand companies. Foreigncompanies can find itunclear as to whichsectors are open toinvestment withoutRussian majority partners.Legislation definingstrategic sectors remainsunder discussion in theDuma, the Russianparliament.

• One of the major barriers to the Russian marketremains its differingbusiness etiquette and culture.

Reducing the market to bite-size pieces Russia is quite a challengingmarket for UK companiesnew to exporting, as itrequires serious time andfinancial commitment. The majority of exportingcompanies experienceproblems with lack ofmanagement time andresources. It is importanttherefore to concentrateefforts where there is thehighest degree of successprobability. If you are not a web-based business,Russia is best broken downto economic regions, egCentral Russia, North Westof Russia, Siberia, etc.

A concentrated effort ofsales, technical support and executive staff is to be directed at the selectedregion or regions. Regionalsuccess correspondingly will allow expansion out in diverging rings from this initial base.

Research and initial planning Maintain a long-term timeframe to implement plansand achieve positiveresults.

Remember that collectionand analysis of informationabout the market, majorplayers, potential partnersand clients, local rules andregulations are essential forinformed business decisionmaking.

In-depth and focusedmarket research isinvaluable in makingdecisions across marketentry strategy formulationand local partner selection.

Establish a local presenceor select a local partner for effective marketing and distribution of yourproducts in Russia. Duediligence is a must.

RESEARCHING THE MARKETSUGGESTED APPROACH TO THE MARKET

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Use the experience ofother, successful UKcompanies in the market.The Russo-British Chamberof Commercewww.rbcc.comis a valuable resource.

Another useful source ofinformation is the websiteSmall Business in Russia www.business-in-russia.com

There are thousands ofRussian trade associations.Many are very professionaland are an excellent sourceof industry informationand practice.

Associations' directoriespresent a useful marketresearch tool. Consider the associate members ofthese associations as well,including distributors,lawyers, accountants,consultants, etc as oneshaving useful industryintelligence as you move further down the export road.

Provided that you have UK customers with Russianconnections, request fromthem details of theirequivalent Russianoperations and names ofsuitable contacts therein.With good research, andconfidence in that research,a sound businessjudgement can be made as to whether there issufficient opportunity to proceed, and where.

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MARKET ENTRY AND START-UP CONSIDERATIONSDISTRIBUTION AND SALES CHANNELS

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Local presence is essentialfor the success of foreignfirms in the Russianmarket. This is especiallytrue when considering the fact that businessrelationships in Russia arebuilt upon personal tiesand social introductions,and that much of themajor competition is only a few flight-hours away. In addition, for sectors that involve any type ofgovernment procurement,an entity must beregistered with the Russian Government in order to bid on theprocurement projects.Hence, many Western firmsenter into a consortiumwith a Russian company orenter into a representativeagreement, especially forthe purposes of marketentry. Finally, the languagebarrier and establishedsocial/business circles make it extremely difficultto enter the Russianmarket without a qualifiedRussian representative.

Methods of distributionand the number andfunctions of intermediariesvary widely by product areaand local conditions. Themarket for most consumerproducts is concentrated inmajor cities. There aremany large-scale retailstores in the major cities,especially in Moscow, St Petersburg and theoutlying suburbs. Largeshopping malls haveopened up on the ringroad circling Moscow.However, much distributionand retailing in some ofthe Russian regions takesplace through suchinformal channels as kiosksand open markets.

Foreign companies alsoexport directly to endusers, and this method isoften observed whereequipment is manufacturedon a one-off basis. Manylarge retail chains,including departmentstores and supermarkets,can purchase in bulk ratherthan using traditionalwholesale channels.

THE MARKETFOR MOSTCONSUMERPRODUCTS ISCONCENTRATEDIN MAJORCITIES.

However, these retail chainstend not to import andprefer to deal with localfirms.

The most common routesto Russia are by road orrail overland acrossWestern Europe, Poland,Belarus to Moscow, or bysea to St Petersburg orFinland and then road orrail through St Petersburgand to Moscow. Forsmaller consignments orgoods which are requiredurgently, air freight is aviable option and there is a good range of air-freightservices available to Russiafrom the UK.

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UK exporters have four basicoptions when choosing adistribution channel:

AgentsIt is not a commonpractice in Russia forforeign companies to relysolely upon the services of an agent, since agentsdo not provide productpromotion support.Distributors andrepresentative offices,however, often employagents in order to sell their products in remoteRussian regions.

DistributorsThe most common marketentry strategy is to select agood distributor or severaldistributors (depending onthe product).

A good distributor usually provides a widerange of logistical supportto an exporting partner,including customsclearance, warehousing,inventory management,etc. However, handlingpromotion and advertisingcampaigns exclusivelythrough independentdistributors can turn out to be inefficient. Russiandistributors normally handleproducts from multiplesuppliers and are notnecessarily dedicated to promoting a specificcompany’s product unlessthe supplier providessubstantial financialsupport for promotion and advertising.

MARKET ENTRY AND START-UP CONSIDERATIONSUSING AN AGENT OR DISTRIBUTOR

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Branch/representativeofficesSome foreign manufacturers,in addition to a distributorshipnetwork, operate their ownrepresentative office.

The main advantage ofopening a representativeoffice is a direct access tothe market/end-customersand control over thepromotion and distributionof their products. However,such offices cannot bedirectly involved incommercial activity, having no right to operatecommercial accounts underthe Russian law. Instead,they typically oversee anetwork of distributorsand/or agents who aredirectly engaged in tradeactivity. Operation througha representative officeensures an exporter's greater control over thedistribution channels andhelps to reduce risks.

Foreign subsidiariesSome foreign manufacturers,particularly in the cosmetics,pharmaceuticals, consumerelectronics, durables andother industrial productssectors, register their wholly owned subsidiaries inRussia. Registered-in-Russiasubsidiaries import productsfrom their parent companyand then resell the productsto local wholesale traders or retailers.

This export arrangementprovides for even morestringent control of thesupplier over distributionand helps to further reduce possible risks of false invoicing and otherpotential fraud committedby independent importersand distributors. For moreinformation on registering a company in Russia pleaserefer to the “Establishing alegal presence” section onpage 55.

MARKET ENTRY AND START-UP CONSIDERATIONSFRANCHISING

The franchise concept firstentered the Russian marketin the early years of the1990s, when it wasintroduced by foreignfranchisers. The first andforemost franchise pioneerswere such brands as PizzaHut, KFC, Subway, andAlphaGraphics. The secondwave of market entries cameat the beginning of the newmillennium, when economicreforms initiated by a newGovernment led to gradualimprovement of the businessenvironment, and Russiajoined the list of the world'sfastest-growing economies.

Franchising legislation inRussia was formally adoptedin 1994 by the Russian CivilCode, specifically in Chapter54 where franchising isdefined as a “CommercialConcession.” In addition, a number of provisions inthe Tax Code, intellectualproperty, competition and consumer protectionlegislation refer to, or areapplicable to franchisingrelationships in Russia.

The development offranchising in Russia isdifficult to estimate becauseno reliable statistics areavailable. The franchisersand franchisees prefer toregister franchise agreementsunder various legal formssuch as licensing agreementsor sales contracts, makingthe compilation of statisticsimpossible. The RussianFranchise Associationestimates 400 franchisesystems; a private firm,Newbridge Group, estimatesit as 165; another sourceclaims it’s 200. The numberof franchisees is estimatedby some at 6,000, by othersat half that number. Aninteresting feature of theRussian franchise scene is the composition offranchisers here: Newbridgeestimates 68 per cent areestablished domestically, 20 per cent are brought to Russia by Europeanfranchisers, and 12 per cent are Americanfranchise concepts.

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THE REGIONALCITIES MAYREPRESENTSIGNIFICANTBUSINESSOPPORTUNITIESFOR FOREIGNFRANCHISERS.

There is no dispute that thenumbers are increasing. Oneestimate is that the numberof systems grew 19 per centin 2008 and the number ofnewly signed deals 20 percent. A recent publicationsuggested that the numberof franchisees will rise to60,000 in a few years.

The Russian franchisingsector has developed mainlyin customer-orientedsegments, such as restaurantsand fast food, educationand training, recreation andentertainment, automotiveand retail, travel andlodging. Franchising inbusiness-oriented services is also gaining momentum.Good examples of thebusiness-to-business (B2B)segments where franchisemodels work successfully are cleaning services andmaintenance, transportation,logistics, express mailservices, managementtraining, and consulting.

The majority of franchisersprefer to establishpartnerships with franchisepartners in Moscow or St Petersburg. However,markets in Moscow and St Petersburg no longerrepresent an easy opportunityfor entry due to increasedcompetition and high costs.There are a number ofchallenges to be aware of, such as access to goodlocations, increasingcompetition from local and international serviceproviders, necessity of anaggressive promotionalcampaign and a significantmarketing budget.

The regional cities mayrepresent significant businessopportunities for foreignfranchisers. Several regionalcities have populationsexceeding one million people.These areas have educatedworkforces, entrepreneurswith excellent experience,good relationships with localadministrations and access tofine locations. The demandfor well-known brands andhigh-quality services in theregions is very strong.

There are several associationsin Russia promotingfranchising. The RussianFranchise Association,(RFA) www.rarf.ru wasestablished in 1997 as anon-profit organisation.The RFA promotesfranchising as a businessconcept and lobbies for the amendment of the Civil Code. Associationmembers includefranchisers, franchisees, and government agencies,business supportorganisations, non-government funds, banks, accounting firms and consultants.

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Direct marketing wasintroduced to the Russianeconomy in 1991-1993.The approach is beingpractised via telemarketing,broadcast media planningand extensive promotions.The privatisation of statecompanies and the expansionof industries have alsocontributed to the use ofdirect marketing in business.

Direct marketing in Russiais growing rapidly as achannel. The DM industry isgrowing by 40-70 per centevery year – at a quicker ratethan advertising generally –

and more direct marketersand mail-order companiesfrom around the world areentering Russia. As far asB2B is concerned, responserates are usually higherthan in Western Europe,but undeliverable mailingsare also higher. Person-to-person direct marketingworks well, for example withhealth and beauty products.

For more information on the direct marketingindustry in Russia, visit theRussian Direct MarketingAssociation website at:www.rdsa.ru

MARKET ENTRY AND START-UP CONSIDERATIONSDIRECT MARKETING

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Russia was placed fifty-ninthin the 2008 EconomistIntelligence Unit’s E-readiness rankings report of64 countries, using a systemof over one hundred criteriameasuring infrastructure,available services and e-skills,and the highest among thefour countries in the 2006study report. Russia’s overallscore was 4.42 (up from 4.3in 2006), scoring highest inbusiness environment andlowest in consumer andbusiness adoption.

Rosstat estimates that only24.9 per cent of Russianbusinesses had their ownwebsites at the beginning of2008. This is an extremelylow figure in comparison withthe EU where the figure ison average 62 per cent.Such a small proportion ofcompanies with websitesrepresents a considerableobstacle to e-commercedevelopment, as productmarketing, electronic sales

and subsequent clientsupport via companies’websites are limited.Russian internet storeshave also adopted little ofthe best practiceswitnessed on American orEuropean sites; there islimited product informationand the catalogue structuresnavigation can be difficult.

Nevertheless, sales throughthese channels are expected togrow rapidly in the comingyears. Russian e-commercerevenue is set to increaseninefold in the coming year,according to a new studyfrom International DataCorporation (IDC). Accordingto it the total volume of e-commerce has increasedby 2.5 times and reachedUS$10.1 billion (1 per centof GDP). The largestsegment of e-commerce in Russia became B2B trade,which mounted to aboutUS$b6.15 billion (growth by 4.7 times). The rate

of internet connection inRussia has grown rapidlyover the past two years.The Russian Ministry ofInformation Technologiesand Communicationsforecasts that 50 millionRussians will be connectedto the web by 2010. TheRussian online advertisingmarket is projected to reachUS$685 million in 2008,after doubling in 2007 toUS$369 million, accordingto Mindshare Interaction.

According to Rambler’s Top100, there were 3,510 onlinenews and mass media sites(out of a total of 169,000websites registered .ru sites)as of 16 May 2008 and,according to the samesource, about 3,888 Russianonline shops. According tothe National Association ofthe Participants of e-Trade(NAUET) 18.6 per cent ofinternet users made at least one online purchaseduring 2008.

MARKET ENTRY AND START-UP CONSIDERATIONSELECTRONIC COMMERCE

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E-commerce in Russia is dominated by smallspecialised companies. The most popular productssold online are books,video cassettes, DVDs, CDs,computers and computersoftware, airline tickets andprepaid telephone cards.There are also a growingnumber of e-commercecompanies in the grocerytrade in Moscow and St Petersburg. Somesupermarkets, including the Sedmoi Kontinentchain, now offer onlineordering. But overallbusiness-to-consumer(B2C) e-commerce inRussia is limited, mainlybecause of low internetpenetration rates,consumers’ restrictedpurchasing power andlimited use of credit cards.

The overwhelming majorityof internet shoppers pay incash upon home delivery.Online debit – and credit –card transactions remainlimited because Russiansgenerally distrust retailbanking. However, retailbanking services are rapidlydeveloping with the arrivalof several major foreignplayers in the market.Although there are around30 million plastic cards inRussia, only 300,000 ofthese are credit cards (therest—the vast majority—aredebit cards), and thisrestricts the growth ofonline sales.

MARKET ENTRY AND START-UP CONSIDERATIONSELECTRONIC COMMERCE (CONTINUED)

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Other, less common, formsof online payment includedirect bank transfers, pre-payment cards and digitalmoney. A number of“virtual wallet” sites havebeen established to addressinternet payment needs.These sites receive banktransfers from Sberbankand other retail banks, andthen hold the cash ondeposit to be spentelsewhere on the internet.

Business-to-business B2Be-commerce consists ofdistributors’ outlets,marketplaces for small- andmedium-size enterprisesand the first onlinemarketplaces for industrialcommodities. Computerand office equipment salesdominate the first twocategories. Industry-basedmarketplaces have recentlybegun to develop, notablyin the metals sector. B2Btrading consists of one-to-one transactions ratherthan online marketplaces.

The “electronic Russia (also known as e-Russia)Plan” was launched in 2000,as a ten-year programmeto improve Russia’s ICTinfrastructure, improve thelegislative framework andimprove publicly availabledatabases. Total investmentfor the project is estimatedat 77,179 million RUB(2.24 billion euro), with 2.6billion RUB allocated to thefirst stage, 25.5 billion RUBfor the second stage and49 billion RUB for the third stage.

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Advertising in Russia plays a very important role inmarketing as elsewhere inthe world, according toRussian buyers and industrysources. For consumergoods, traditional advertisingmedia are well establishedin Russia. Television, printmedia, outdoor billboards,magazines, point-of-salepromotions and displays,and free samples are widelyused. Foreign products facetough competition againstRussian products. There is aneed to "Russify" advertisingto suit Russian culture.

Most major westernadvertising agencies areactive in Russia; domesticagencies are growing andtheir professionalismcontinues to improve.Advertising tax is levied at 5 per cent on all direct and indirect advertisingexpenses, excluding VAT.Tax is paid in full to thelocal budgets. Localauthorities may decreasethe tax rate but in Moscowand St Petersburg themaximum rate of 5 percent applies. Advertisingtax is deductible for profitstax purposes.

For industrial goods, tradeshows and trade magazinesare effective advertisingmethods.

MARKET ENTRY AND START-UP CONSIDERATIONSADVERTISING AND TRADE PROMOTION

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Industry publications,which are widely read byindustry managers andspecialists, are among themost effective places toadvertise. In addition toseminars and exhibitions,industry professionals relyupon them as key sourceson industry developmentand technology. Advertisingin such publications buildsname recognition andproduct awareness in theprofessional community.

There are general-interestnewspapers in Russia, severalof which have nationalcirculation; some aredistributed for free anddepend entirely on adrevenue. In Moscow and St Petersburg, there arehigh-quality English andGerman language daily orweekly newspapers thatreach the high-incomeforeign business andgovernment communities.For contact and priceinformation on localnewspapers and magazinesplease contact the UK

Trade & Investment offices.Trade shows are an importantpart of marketing in Russia.Russians prefer to shop at theshows because they canlearn from the variety oftechnical experts andcompany displays. The high participation rate of European companies inRussian shows is a source of their success in thismarket. Around 90 per centof all foreign companiesparticipating in Russiantrade shows are European,and their market share of industrial equipment is about 70 per cent.Representatives of regionalgovernments and stateenterprises from remoteareas often visit exhibitionsin major cities to purchasegoods.

Promotional seminars arealso effective in increasingawareness of the equipmentand brand names in theRussian business community.Often companies sponsor a seminar for specialists at a scientific and researchinstitute under the auspicesof the Ministry of Industryand Energy or othergovernmental agencies.Such seminars are verypopular among industryspecialists. During theseminars the company tells the specialists abouttechnologies where itsequipment can be used.Usually, such seminarsreceive very good presscoverage in industrypublications.

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Before entering any newmarket it is vitally importantto assess risk using provenbusiness intelligence toolsand due diligence checks.This will include ananalysis which examinesthe political, economic,social, technological andlegislative environment(often referred to as PEST).In Russia, standards ofcorporate governance,transparency andintellectual propertyprotection are evolving,but are often lower than in US or EU markets.

It is equally important tocarry out due diligence andcheck the integrity of theproposed business partnerand examine theirrelationship to the localbusiness environment.Consider the accuracy of anyclaims relating to reputationand business performance,and review the companyculture with an analysis ofthe ethics of key executives.In the extreme this couldmean uncovering links toorganised crime, corruptionor money laundering.

BEST PRACTICE AND RISK MANAGEMENTDUE DILIGENCE

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UK Trade & Investmentoffices in Russia offer arange of assistance to UK firms interested in developing marketopportunities or increasingtheir business in Russia. If company-specificinformation is needed ordetailed research would berequired, a fee would apply.

As Russian commerciallegislation, and taxlegislation in particular,contains provisions whichcan be interpreted in morethan one way, they oftenoverlap or conflict. Earlyadvice on tax and legalissues is highly recommended.Furthermore, Russianaccounting practices differfrom Western standards.Moscow and St Petersburghave large offices of major

Western accounting, legaland consulting firms.Competent smaller firmsalso operate under Russianor Western management.

UK Trade & Investmentoffices throughout Russiamaintain lists of localattorneys and accountingfirms. The Russo-BritishChamber of Commerce in Russia is also a good source.

BEST PRACTICE AND RISK MANAGEMENTLOCAL PROFESSIONAL SERVICES

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Tips for exporters• Generally, under exports

and imports between a foreign company and a Russian company, theRussian company isresponsible for thecustoms procedures.

• In order to import goodsinto Russia and clearthem through customs,an importer has to makeall customs paymentsdue in accordance withthe chosen customsregime and comply withother requirementsestablished by customslegislation (eg certificationrequirements).

• Importation of certaingoods (eg pharmaceuticals,meat, etc) requireslicences.

• Russia has several specialeconomic zones thatoffer customs benefits.

Customs policyRussia’s customs policy has seen several key areasof development:

• lowering of customs dutyon imports of technicalequipment,

• simplification of thecustoms clearance process,

• tighter customs controlafter customs clearanceof goods, and

• further development ofcustoms integration inthe Commonwealth ofIndependent States (CIS).

Import restrictionsCertain imports to Russiarequire permission andcertificates (eg of conformity,sanitation), licences andother approvals. Theyshould be submitted to the customs authorities for clearance. The RussianFederation imposes ananti-dumping duty oncertain goods (ie metalpipes from Ukraine).

BEST PRACTICE AND RISK MANAGEMENTIMPORTING AND EXPORTING

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THIS SECTION (PAGES 32-37) IS KINDLY PROVIDED BYPRICEWATERHOUSECOOPERS

Classification of goodsThe Russian tariffclassification system isbased on the internationallyadopted HarmonizedCommodity Descriptionand Coding System.

Valuation rulesThe customs valuationprocedure is established in line with GATT/WTOprinciples and is generallyequivalent to theDAF/Russian bordertransaction value of the goods concerned.

RatesImport duty applies tomost goods. The majorityof customs duty rates inRussia are ad valorem(ie a percentage of thegoods’ customs value).There are also specificduties for certain types of imports, calculated byvolume, weight or quantity.Some duties have a combinedrate incorporating theabove two types of dutyand, therefore, the tax base may vary.

Base customs duty rates varywidely, from 100 per centon spirits to 0 per cent forsome printed matter andsome other priority imports.Zero duty applies, forexample, to a wide rangeof equipment andmachinery. On average,duty rates fall between 5 per cent and 20 per centof the goods’ customs value.The base rates specified in the legislation apply tocountries that have beengranted Most FavouredNation status. Some goodsfrom “developing” and “leastdeveloped” countries may beimported at 75 per cent ofthe base rates or zero rates,respectively. However, theseare limited to raw materialsand handmade goods.Goods originating in othercountries will be subject toduty at double the base rates.

The following are exemptfrom customs duty:

• transit goods,

• cultural valuables,

• goods imported byindividuals for personaluse (worth not morethan approximatelyUS$2,500 and weighingless than 35kg),

• means of transportinvolved in theinternational movement ofgoods and passengers, and

• humanitarian aid andsome others.

Free trade agreementsRussia has adopted free trade agreements with countries of theCommonwealth ofIndependent States (CIS).Goods originating from CIScountries (eg Ukraine) areexempt from customs dutyfor import to Russia (subjectto certain conditions).Russia, Belarus, Kazakhstan,Kyrgyzstan and Tajikistanform a Customs Union, and goods originating from these countries are not subject to customs duty within it.

BEST PRACTICE AND RISK MANAGEMENTCUSTOMS DUTIES

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Certain categories of goodsare subject to excise tax for import to Russia (eg alcoholic beverages,cigarettes, cars, motorcycleswith a capacity of over 150 horsepower, etc).Generally, the excise taxrates are specific (ie therates are based on thevolume, weight or othercharacteristics of the goods).

Import VATFor most goods, the importVAT rate is 18 per cent ofthe customs value, inclusiveof customs duty and excise(if any). Food, a certainrange of children’s goodsand a limited range of othergoods may be subject to 10per cent or 0 per cent VAT.

Customs processing feesCustoms processing fees areestablished as a flat fee andvary from approximately[15 to [3,000 per customsdeclaration, depending onthe customs value ofimported goods.

PaymentsCustoms payments aregenerally paid before orwhen submitting customsdeclarations to customs.

Temporary import reliefGoods may be importedunder a temporary importcustoms regime, normallyfor a period of up to twoyears. Generally, goods arepermitted for temporaryimportation if it is possibleto identify them upon theirre-export. Temporaryimportation requirespermission from the customsauthorities. Upon expiry ofthe period for temporaryimportation, goods shall be moved out of Russia or placed under anothercustoms regime (eg releasefor free circulation).Temporary importationrequires periodic customspayments of 3 per cent permonth of the total customspayments due had thegoods been imported forfree circulation. Upon export

of the goods, these customspayments are not refunded.Customs has the right torequire security for customspayments (eg a deposit,pledge, bank guarantee, etc).

Goods which qualify asfixed assets for productionpurposes may be admittedand be subject to a 3 percent monthly customspayment for a temporaryimport period of 34 monthsif the Russian user doesnot yet have propertyrights (eg for leasing).After this period the goodsare considered released forhome use. In theseinstances, the interest oncustoms duty and taxes isnot payable by instalments.

Temporarily imported goodscan only be used by aperson who has obtainedcustoms’ permission fortheir temporary importation.

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Charter capitalcontributionsFixed production assetsimported as a chartercapital contribution by aforeign investor are freefrom customs duty. Thegoods must not beexcisable and should beimported within the timeframe established for theformation of the chartercapital. Customs authoritiescan check to ensure thecorrect use and furtherdisposal of goods exemptedfrom customs duty. A VATexemption is also availablefor technical equipmentimported as a chartercapital contribution.

TollingGoods imported intoRussia for processing maybe placed under an inwardprocessing relief (IPR)procedure (subject to certainconditions). Under IPR,goods (eg raw materials)imported for processing areeligible for full exemptionfrom customs duty andimport VAT, provided theprocessed/finished goodsare subsequently movedout of Russia within adeadline agreed on withcustoms. No export customsduty is charged upon theexport of finished goodsfrom Russia. IPRs must be authorised by customs.Only a Russian companymay apply for an IPR.

Special economic eonesA number of specialeconomic zones (SEZ) witha free customs regime havebeen established in Russia.Imports to SEZs are free ofduty and VAT, ie foreigngoods are delivered to andused within the SEZ free ofimport customs duty andVAT. When foreign goods orproducts of their processingare subsequently releasedinto free circulation to the rest of Russia, importcustoms duty and VAT are payable. If the goodsmanufactured in a particularSEZ are exported to foreigncountries, they will besubject to export duty, if applicable.

Foreign goods which wereimported into the SEZ butnot processed may be re-exported without paymentof export customs duty.

BEST PRACTICE AND RISK MANAGEMENTCUSTOMS DUTIES INCENTIVES

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Registration of importersand exportersThere is no establishedprocedure for registeringimporters/exporters withcustoms. However, inpractice certain documentsmay be required by customsprior to importation (charterdocuments, tax registrationcertificate, etc).

DocumentationRussian customs regulationsestablish a comprehensivelist of documents requiredfor customs clearancepurposes. In practice, theset of documents to besubmitted to the customsauthorities may varydepending on the characterof imported/exportedcommodities, conditions of the transaction, etc.

Declaration of thecustoms valueThe customs value should beproperly confirmed by theappropriate documents. Thelist of such documents mayvary depending on the termsof a particular transaction.While the Russian customsregulations set a general listof documents required forconfirmation of the customsvalue, the list is notexhaustive.

If the customs authoritiesdisagree with the customsvalue declared by an importer,they may adjust it. If thecustoms authorities disagreewith the customs valuedeclared by an importer theymay seek to negotiate withthe importer an adjustmentof the customs value.Should the importer refuseto adjust the customs value,the customs authorities mayadjust the customs valuethemselves.

BEST PRACTICE AND RISK MANAGEMENTDOCUMENTATION AND PROCEDURES

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Warehousing and storageGoods which are subject to customs control (egimported goods, which have not yet cleared throughcustoms) can be temporarilystored at special warehousesbefore they are released bycustoms. The period forstorage should not exceedtwo months, but animporter can ask thecustoms authorities toextend it to up to four

months. Warehouses fortemporary storage areusually located near customs offices.

Re-exportsGoods which have beenimported into Russia maybe re-exported provided theyhaven’t been released forfree circulation in Russia.They are re-exportedwithout payment of export customs duty.

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THIS GUIDE HAS BEEN PREPARED FOR GENERAL GUIDANCE ON MATTERS OF INTEREST ONLY, AND DOES NOT CONSTITUTE PROFESSIONAL ADVICE. YOU SHOULDNOT ACT UPON THE INFORMATION CONTAINED IN THIS GUIDE WITHOUT OBTAININGSPECIFIC PROFESSIONAL ADVICE. NO REPRESENTATION OR WARRANTY (EXPRESS OR IMPLIED) IS GIVEN AS TO THE ACCURACY, TIMELINESS OR COMPLETENESS OF THE INFORMATION CONTAINED IN THIS GUIDE, AND, TO THE EXTENT PERMITTED BY LAW, PRICEWATERHOUSECOOPERS, ITS MEMBERS, EMPLOYEES AND AGENTSACCEPT NO LIABILITY, AND DISCLAIM ALL RESPONSIBILITY, FOR THE CONSEQUENCESOF YOU OR ANYONE ELSE ACTING, OR REFRAINING TO ACT, IN RELIANCE ON THEINFORMATION CONTAINED IN THIS GUIDE OR FOR ANY DECISION BASED ON IT.

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.

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General terms of sale (GTS)It is normally advisable fora UK exporter to have alawyer prepare GTS suitablefor the Russian market andin accordance with Russianlaw and practice. If usedproperly, either for directexports (without a Russiandistributor) or by the UKcompany's Russiansubsidiary or joint venturecompany, they offer distinctadvantages for ensuringpayment, recovering interestand costs of collection, andfor reducing risks.

A properly prepared GTStailored to the Russianmarket should normallycontain, among others, the following provisions:

• A clause providing forinterest on late paymentsat a specified currentinterest rate. Withoutsuch a clause, onlyinterest at the legal ratecan be recovered in all or nearly all the courts of Russia.

• A clause allowing theseller to recover theircosts of collection,including the seller'sreasonable attorney'sfees.

• Clauses limiting thewarranties that the sellermakes. These can belimited but only ifproperly drafted.

• An arbitration clausestating that all disputeswill be resolved byarbitration in adesignated city.Arbitration is usuallycheaper and faster thana suit in the courts.

UK companies frequently failto adapt their GTS to theRussian market. Instead, theyuse their customary formwhich contains a clausestating that the courts inthe UK will have exclusivejurisdiction over all disputesbetween the manufacturerand the distributor/agent.Unless it can be said thatthe buyer has truly“accepted” this clause, a judgement against the Russian buyer may notbe enforceable in Russia.

BEST PRACTICE AND RISK MANAGEMENTCONTRACT AND TERMS OF SALE

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The distribution or sales agency agreementThere is no question that awritten distribution or salesagency agreement preparedby a Russian lawyer isnecessary. A non-Russianstyle distribution or agencyagreement is not satisfactoryfor the Russian market.

Some critical contractualpoints to be negotiated are:

• territory,

• exclusive or non-exclusivedistributorship,

• scope of products,including whether laterdeveloped products areautomatically included,

• non-competition clause(caveat: anti-trust law),

• sales outside territory andexports by distributor(caveat: anti-trust law),

• minimum purchase orminimum sales obligationsof distributor, particularlyif exclusivity for all or partof Russia is granted,

• promotional expenses,

• prior approval by supplierof distributor's advertising/promotional material,

• terms of sale, prices,discounts, price changes,payment, currency, etc,

• security interest clause,

• clauses as to productliability risk, insurance, etc,

• terms of contract,renewal, terminationclauses, consequences of termination,

• clauses protectingsupplier's trademark(s)and other intellectualproperty rights, and

• arbitration and applicable law.

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Most of the points listedabove for a distributorshipagreement apply likewise to the sales representativeor sales agency agreement,with appropriateadaptations. Like theirEuropean counterparts,sales representatives andcommercial agents normallyonly provide a supplier withcustomer prospects andobtain orders for goodssubject to the supplier'sacceptance.

Other points of importance are:

• commission rate and basis;– when the agent is

entitled to receive hiscommission,

– advances againstcommission, etc,

• scope of the agent'sfunction generally, and

• overlap of two or moreagents with respect to aparticular order, splittingof commissions, etc.

Terms and conditions ofshipment and deliveryRussian businesses aregenerally familiar withinternational terms andconditions of trade(Incoterms). However,unless the sales contract orpurchase order specificallyaddresses shipment anddelivery, disputes may ariseleading to misunderstandings,customer relations problemsand, even worse, delay in payment.

The sales contract or purchase order should specify:

• whether the price includesshipment and delivery,

• the mode of transport:sea, land, air or special,

• the destination, and

• when title and risk of losspass from supplier topurchaser.

If the goods require anyspecial handling, eitherbecause they are fragile,perishable or containdangerous or hazardousmaterials, the UK suppliershould take special care toinform the customer aboutappropriate shipping andhandling methods.

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Dispute resolutionThe best method of resolvingdisputes is by avoiding them.Careful drafting andcommunications will avoid most, if not all, the potential disputes.Occasionally somethinghappens which will requiredispute resolution.

Although there arenumerous alternativedispute resolutionmechanisms available, theUK exporter should insistupon arbitration in allcircumstances. In any event,careful consideration shouldbe given to the provision ofthe sales contract or GTSthat spells out arbitrationprocedures. Again, the UKexporter should consult a legal expert beforepreparing or agreeing to any arbitration clause or provision.

FreightThere are a number ofroutes that can be used forshipping goods into Russia.The most common waysare by road or rail overlandacross Western Europe,Poland, Belarus and toMoscow, or by sea toFinland and then roadthrough St Petersburg andto Moscow. Each routepresents different benefits in terms of cost and timeand the mode of transportto be used. Most freightforwarders will have routesthat they prefer and usemost of the time. It is veryimportant to use a reputablefreight forwarder that hasexperience of shippinggoods to Russia andpreferably has representationin Russia.

BEST PRACTICE AND RISK MANAGEMENTCONTRACT AND TERMS OF SALE(CONTINUED)

Use of a customs brokerMost international tradetransactions could not becompleted efficiently withoutthe use of a reputable andcompetent customs broker.Customs brokers performalmost all the work at pointof entry, have experience indealing with local customsofficials and generally havea wealth of knowledge whichthey can bring to bear inavoiding problems associatedwith classification andvaluation. Since classificationis not always a cut-and-driedissue, a customs broker willbe of valuable assistance inproviding information onhow customs inspectors in aparticular customs territorymay handle certain cases.

Customs brokers areindividuals or firmslicensed by the customsauthorities to act as agentsfor importers. Dependingon the role that customsbrokers play and the extentof the services rendered,their fees will vary.

A list of brokers is availableon the website of the RussianState Customs Committee,www.customs.ru or a websitefor National Customs Brokerswww.customsbrokers.ru – note that this site is inRussian only. Examples ofdocuments, recent changesin legislation and samplesof paperwork are available atwww.vch.ru/index_eng.htmlor www.tks.ru/ (Russian only).

The Association ofEuropean Businesseswww.ebc.ru is in regularcontact with the RussianState Customs Committee,and their Customs andTransport Committee cangive practical advice onvarious customs issues

There are 370 authorisedcustoms brokers in Russia,which provide variousservices to their clients.

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Russian bank accountsWhen exporting to Russianormal commercial rulesshould be followed, andyou should discuss thearrangements for securityof payment with theinternational departmentof your UK bank, the UKoffices of Russian banks or UK-based banks thathave offices in Russia. UK-based banks offer currencyaccounts but may be a littleinflexible for receiving largenumbers of small payments.A domestic account with abank in Russia that offerstelephone banking canoften be a better solutionfor receiving cheques,electronic transfers, creditcard and other US dollar-based payments.

When choosing an overseasbank it is important that ithas the capability to makeand receive internationalpayments. Generally, it isadvisable to avoid the hugemoney centre banks becauseyou are likely to be toosmall to be of interest to them. It is also best toavoid the “mutual” banks(similar to our own buildingsocieties) as they tend notto be able to makeinternational payments.Utilise the services of yourown UK bank to help make your choice of a Russian bank.

All cash transactions inRussia must now be made inrubles, even though invoicesoften quote dollar prices.In certain circumstancesbank transfers can be done in hard currencies.

BEST PRACTICE AND RISK MANAGEMENTGETTING PAID AND MANAGING CREDIT RISK

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Recommended methods of paymentThe lowest-risk form oftransaction for the exportingUK company is cash paid inadvance, a form of paymentused most often in marketswhere there is likely to be ahigh risk attached or wherethe purchaser is being verygenerous!

If you are a first-timeexporter to Russia thestandard method ofreceiving payment for yourgoods is by documentaryletter of credit. However,credit is not always availableand it is wise to consultyour bank in that event.Even if credit is forthcoming,not all Russian banks' lettersof credit will be acceptableto and therefore confirmedby a UK bank. The openingof the documentary letterof credit is based on thecontract signed between the Russian buyer and the foreign seller, and it is important to agree theprice and for documentsassociated with thetransaction to be correct.

Open Account and Bills forCollection are other paymentmethods commonly usedbetween UK exporters andRussian importers when a trustworthy relationshipbetween the two partieshas been developed. Majorexports and those requiringlong-term finance willrequire specialist paymentand financing.

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Knowledge of your customerand/or business partnersSooner or later in theexporting process, it will benecessary either to appointothers to act on your behalfsuch as shipping agents,distributors, warehouseoperators, etc and/or to deal directly with customers,where payment in advancecannot be achieved. It isessential to know yourprospects.

Credit information isavailable in a variety of forms, ranging fromimpersonal (third-partyreports) to experience-basedreports. Several UK firmscan help with informationon a prospect's credit andpayment history. A morecomprehensive perspectivecan be obtained by addingto this information theexperiences of othercompanies that have hadrecent financial dealingswith a prospect company.This type of information isavailable through membershipof a credit informationinterchange group. If thedecision is to expand orrestrict an existing line ofcredit, the best informationto rely on is, of course, the credit manager's own experience with the customer.

BEST PRACTICE AND RISK MANAGEMENTGETTING PAID AND MANAGING CREDIT RISK(CONTINUED)

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It can be useful for credit managers to have arudimentary understandingof their customer's business,in order to anticipatepotential paymentdifficulties which resultfrom, for example, seasonalfluctuations in business.

In these cases, a goodcustomer relationship canbe maintained through thecustomer's demonstrationof his/her ability to makesome level of “on account”payments. Lack of co-operation in setting upsuch an arrangement,however, should act as awarning that this may be a more serious collectionproblem.

To be aware that acustomer could be apotential collectionproblem, credit managersshould keep in mind thefollowing warning signals:

• pledging of accountsreceivables to a bank,

• collection claims, suits,judgements obtained byother suppliers,

• refusing to sharefinancial information,

• abrupt and frequentchange of banks,

• partial and erraticpayments on accounts,

• excess irritation on creditand collection contacts,

• refusal to respond tocollection demands,

• purchases out of normalneeds,

• slowdown of paymentswith a pattern of excuses,and

• reduced mercantileagency rating.

If any of these warningsigns is noticed, it may be necessary to seriouslyconsider whether to extendcredit to a prospect or toturn an existing customeraccount over to acollection agency.

Financial information and statementsAnother means ofascertaining both thecurrent financial conditionas well as the medium-termfinancial stability of aprospect is to requestfinancial statements. It is a good policy torequest statements fromthe previous three years.Taking this three-yearperspective allows the credit manager to observe

a pattern of growth,stagnation or decline.

Whenever possible, thecredit manager shouldinsist that these financialstatements be audited by a Certified PublicAccountant. This isparticularly important when dealing internationallyas it offers the creditmanager an assurance of the data contained inthe financial statements.

BEST PRACTICE AND RISK MANAGEMENTGETTING PAID AND MANAGING CREDIT RISK(CONTINUED)

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Credit insuranceOne option open tocompanies wishing to extendcredit to UK companies isbusiness credit insurance.However, it is important to note that the use of a credit insurer should beonly one component in acomprehensive credit policy.

A credit insurer is acompany which assumespart of the risk (often up to90 per cent) associated withgranting credit to a foreigncompany. However, creditinsurance is not a panacea.Even when a company hastaken out credit insuranceagainst possible default, theinsurer will usually requirethat its client companypursues recovery of thedebt prior to validation of the claim by the insurer.In most cases, once theclaim has been validated,the insurer will share in the costs associated withcollection through acollection agency or even through litigation.

Credit is scarce in Russia.Many importers, however,prefer to pay for goods on 30 or 60 days terms. This could be consideredonce an exporter hasestablished a goodrelationship with a Russian company.

Credit insurance forconsumer goods and otherbusiness normally transactedon credit terms of less thantwo years is regarded as a function of the privatesector. The private sectorprovides credit insurance forexports of consumer goods,raw materials and othersimilar goods. Speak to yourbanker or insurance brokerfor more information, orcontact the British InsuranceBrokers’ Association (BIBA)for impartial advice. Itsdetails are as follows:British Insurance Brokers’ Association 14 Bevis MarksLondon EC3A 7NTTel: +44 (0)870 950 1790Fax: +44 (0)20 7626 9676Email: enquiries@biba.org.ukWebsite: www.biba.org.uk

However, private sectorinsurance has somelimitations, particularly for sales of capital goods,major services andconstruction projects that require longer creditpackages or are in riskiermarkets. The Export CreditsGuarantee Department(ECGD), a separategovernment departmentthat reports to the Secretaryof State for Business,Enterprise & RegulatoryReform, provides a rangeof products for exportersof such goods and services. Its details are as follows:Export Credits Guarantee Department PO Box 22002 Exchange TowerHarbour Exchange SquareLondon E14 9GSTel: +44 (0)20 7512 7000Fax: +44 (0)20 7512 7649Email: help@ecgd.gsi.gov.ukWebsite: www.ecgd.gov.uk

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Letters of creditA letter of credit is a form ofcontract between two banks.A bank will make paymentprovided that the documentssubmitted to it are in strictcompliance with theconditions of the letter of credit. This is regardlessof the purchase contract.To prevent the possibilityof a payment being madeif the terms of the purchasecontract are not met, theseller should check the letterof credit against the termsof the purchase contract andrequest amendments fromthe buyer. The Russian bankwill make payment providedthat the requirements of theletter of credit are met. • Further information on

securing payment anddispute resolution can beobtained from:www.uktradeinvest.gov.uk

Tips for the UK exporter: • Take control of the

process. You, as theexporter, will probablyneed to tell your customerthe requirements.

• Utilise the services of your own bank.

• Read the letter of creditissued in your favour andmake sure you complywith the terms. If youcannot, tell your buyer to have it amended beforeyou ship.

• When you ship, carefullyprepare all documentsrequired so that theycomply exactly with theletter of credit. Usuallyyour freight forwarderwill prepare some of the documents. If youprovide a copy of theletter of credit, the freightforwarder will then knowthe requirements.

• Specify your bank'srespondent UK bank for payment.

BEST PRACTICE AND RISK MANAGEMENTGETTING PAID AND MANAGING CREDIT RISK(CONTINUED)

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Credit management/control policiesIt is essential for anexporting company to have a clear-cut creditpolicy and to communicatethat policy to its customers.If the exporter does notclearly demonstrate to itscustomers that it is importantto make timely payments,then the customers will notrespect the policy. The keyto an effective credit policyis to gather as muchinformation about acustomer before thedecision to grant credit is reached.

A good credit applicationshould solicit the followinginformation: • the length of time the

company has been inbusiness,

• other suppliers withwhom the potentialcustomer has donebusiness,

• the legal structure of thepotential customer (soleproprietor, partnership,corporation, etc), and

• general bankinginformation.

Once the creditor hasdeveloped a comprehensivepicture of the potentialcustomer by gathering theinformation indicated above,an initial line of credit mustbe determined. It is veryimportant that the line ofcredit not be automatic –rather, it should bedetermined on an individualbasis, taking into accountall the information obtained.Likewise, it is of the utmostimportance that the line ofcredit be monitored closely,and that it not beautomatically expandedwithout review.

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Standards organisationsThe current authority forstandardisation, metrologyand certification matters in Russia is the FederalAgency on TechnicalRegulating and Metrology.

Federal Agency onTechnical Regulating and Metrology9 Leninsky Prospekt Street119991 MoscowV-49, GSP-1RussiaTel: +7 (495) 236 0300Fax: +7 (495) 236 6231/

237 6032Email: info@gost.ruwww.gost.ru/wps/portal/pages.en.Main (in English)

The list of authorisedcertification bodies isavailable at www.gost.ru

The Federal Agency onTechnical Regulating andMetrology and its authorisedagents is the mainauthority for certificationin Russia. However, otheragencies are involved incertification of certain

BEST PRACTICE AND RISK MANAGEMENTCERTIFICATION

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PRODUCTS IMPORTED TO RUSSIA MUST HAVE THE GOST-R CERTIFICATE OF CONFORMITY. THIS IS A DOCUMENT CERTIFYING THAT THE PRODUCTCONFORMS TO GOST STANDARDS (RUSSIAN STATE STANDARDS OR GOSSTANDART).

EUROPEAN CERTIFICATES OF QUALITY ARE NOTVALID IN RUSSIA FOR IMPORT. RUSSIA CONTINUESTO RELY ON PRODUCT TESTING AS A KEY ELEMENT OF THE PRODUCT APPROVAL PROCESS. OTHER TYPESOF PRODUCT SAFETY ASSURANCE, SUCH AS PLANTAUDITING, QUALITY SYSTEMS, AND POST MARKET VIGILANCE, ARE UNDERDEVELOPED.

RUSSIA CONTINUES TO ADHERE TO THE PRACTICESOF FURTHER TESTING OF INTERNATIONALLY ACCEPTEDCERTIFIED PRODUCTS, WHICH CAN DELAY ENTRY OFA VARIETY OF PRODUCTS INTO THE COUNTRY. BEPREPARED TO SPEND QUITE A LOT OF TIME ON THE CERTIFICATION PROCESS.

BE PATIENT.

products, including theMinistry of Agriculture(food products), the Ministryof Health (medical devicesand pharmaceuticals), theState CommunicationsCommittee(telecommunicationsequipment and services),the State Mining andIndustrial Inspectorate[Gosgortechnadzor](equipment for mining, oil and gas industries), theFederal Security Service(security equipment andsystems), and others.

Russia’s time-consumingsystem of certification maybecome a challenge to UKcompanies attempting tocertify products withoutappropriate legal advice orassistance from experienceddistributors or consultants.

UK companies arerecommended to work with reliable partners and consulting companieson registration andcertification issues.

Conformity assessmentMany products importedfor sale into the RussianFederation are required to have a certificate ofconformity issued by The Federal Agency onTechnical Regulating and Metrology .

GOST-R Certificate ofConformity should beobtained from anorganisation authorised by the Agency. The list ofthe authorised bodies isavailable at the websitewww.gost.ru. One of thosebodies outside Russia isSGS United Kingdom Ltd(www.uk.sgs.com). SGS is the only Gosstandart-accredited certificationbody in Great Britain thathas the authority to issueGOST-R Certificates ofConformity.

The Certificate normallytravels with the goods. It is presented to theRussian customs at thepoint of entry and shouldbe available on demand bythe authorities as evidenceof certification. Goodswithout a valid Certificateof Conformity can beimpounded, thus incurringdemurrage and storagecharges.

The Certificate ofConformity can be obtainedby the exporter or by theRussian partner/agent.

Textiles and clothing aresubjects for mandatorycertification, raw materialsare optional. However,companies are advised toclarify with their partner inRussia which products oftheir range should have aCertificate of Conformity, as it is certainly required atthe point of sale. In mostcases, it is recommendedthat this is done by theRussian partner.

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Certificate typesOver 100 certification typesexist in Russia, some 20 ofwhich are mandatory, therest are optional. Majormandatory certificationtypes include: • GOST-R,• Hygienic Certificate, and• Fire Safety Certificate.

The products subject tomandatory certification are listed in Decree N64 of 30 July 2002 issued by Gosstandart. If theproducts are not listed in this document theircertification is optional,and a confirming letterfrom an accreditedcertification organisationmay be required forexporting the product to Russia. Since it is noteasy to understand thesystem, we recommend youto seek professional advice.

Labelling and markingrequirementsLabels on food items must feature the followinginformation in the Russianlanguage:

• type and name of theproduct,

• legal address of theproducer (which may begiven in Latin letters),

• weight or volume of theproduct (if a food item is preserved in liquid –weight without the liquid mass),

• food contents (name of basic ingredients andadditives listed by weightin decreasing order),

• nutritional value(calories, vitamins if theircontent is significant orif the product is intendedfor children or formedical or dietary use),

• conditions of storage;expiration date (orproduction date andperiod of storage),

• directions of preparation of semi-finished goods or children’s foodstuffs,

• warning information onany restrictions and sideeffects, and

• terms and conditions of use.

Labels on non-food itemsmust include the name ofthe product, the country oforigin and the name of themanufacturer (which maybe given in Latin letters),usage instructions, the maincharacteristics, rules andconditions for effective and safe use of the product,and other informationdetermined by the stateregulation body.

BEST PRACTICE AND RISK MANAGEMENTCERTIFICATION (CONTINUED)

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In Russia, foreign investors may:

• establish a representativeoffice or a branch of aforeign legal entity,

• establish a Russian legalentity in the form of anenterprise with foreigninvestment, which is either

(a) entirely foreign-owned, or

(b) co-owned with aRussian partner(s), or

• act directly as a pureforeign investor.

BEST PRACTICE AND RISK MANAGEMENTESTABLISHING A LEGAL PRESENCE

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UK TRADE & INVESTMENTSECTIONS CAN PROVIDEINITIAL ADVICE ONREGISTRATIONREQUIREMENTS ANDPROCEDURES. HOWEVER,IT IS STRONGLYRECOMMENDED THATINTERESTED UKCOMPANIES SEEK LEGALADVICE ON BUSINESSREGISTRATION.

UK TRADE & INVESTMENTSTAFF CAN PROVIDECONTACT INFORMATIONFOR UK AND RUSSIANCONSULTING FIRMS THATOFFER PROFESSIONALLEGAL ADVICE IN THIS AREA.

THIS SECTION (PAGES 53-71) IS KINDLY PROVIDED BYBAKER & MCKENZIE – CIS,LIMITED

Legal statusA representative office or a branch of a foreign legalentity is not considered tobe a Russian legal entity, butrather a body representingthe interests of a foreignlegal entity in Russia.

A representative office isentitled to carry out liaisonand ancillary functions inorder to promote thebusiness of its foreignfounder. Representativeoffices are not permittedto engage in commercialactivities in Russia.Consequently, mostrepresentative offices are notsubject to profits tax, unlesstheir activities give rise to a“permanent establishment”for tax purposes, ie when a foreign legal entityengages in regularcommercial activity throughits representative office (forexample, the sale of goodsor the provision of services).

A branch is a subdivision ofa foreign legal entity, whichmay fulfil all or part of thefunctions of its foreignfounder. These functionsinclude the repatriation of management fees earned in foreign currency,contracting with Russianentities with payments inforeign currency and rubles,and the appointment of asales force.

The obligations imposed ona branch may include thesame obligations as thoseimposed on a representativeoffice. However, a branchhas less flexibility in selectingan accrediting authority in Russia compared to a representative office. This can sometimes affectcertain areas such as theeffectiveness of visa support.

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RegistrationAn appropriate accreditingbody must approverepresentative offices. Thereare numerous accreditingbodies authorised to grantsuch accreditation, includingthose responsible for theaccreditation of representativeoffices in a particularindustry – representativeoffices of foreign banks, forexample – are accredited by the Central Bank of the Russian Federation. The bodies most frequentlycharged with theaccreditation of foreignentities are the Chamber of Commerce and Industryof the Russian Federation(the CCI) and the StateRegistration Chamber atthe Ministry of Justice of the Russian Federation(the SRC).

All documents from a foreign legal entity must be notarised andapostilled/legalised in thecountry of execution, andany document supplied in alanguage other than Russianmust be accompanied by a translation which has a notarised certification.Accreditation is usuallygranted for a period of upto three years, with the rightto extension. An applicationletter for the accreditationof a representative officeshould be submitted to theappropriate accrediting bodyand must be accompaniedby the following documents:

• the Charter or Articles ofIncorporation (articles ofassociation, or equivalent)of the foreign legal entity,

• the registrationcertificate, Certificate ofIncorporation, or extractfrom the trade register ofthe foreign legal entitycertifying that the parent is a validly existing legalentity under the legislationof its home country,

• the resolution of theforeign legal entityresolving to establish the representative office in the Russian Federationand to appoint the chiefrepresentative(s),

• the regulations whichwill govern the operationof the representative office,

• a bank letter confirmingthe good credit standingof the foreign legal entity,

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• a document confirmingco-ordination with theregional authorities ofthe Russian Federationon the establishment ofa representative office(not required forrepresentative offices tobe located in Moscow),

• General Power ofAttorney issued to thechief representative(s),

• Power of Attorney forfiling the application foraccreditation on behalf ofthe foreign legal entity,

• the Accreditation Cardcontaining information onthe representative office,filled out in accordancewith a sample form of aparticular accrediting body and signed by anauthorised representativeof the foreign legal entity,

• certification from the taxauthorities in the countryof the foreign legal entity’sincorporation confirmingthat the foreign legalentity is registered as a taxpayer and specifying the taxpayeridentification code,

• two letters ofrecommendation from Russian tradingpartners (preferablygovernment bodies,social organisations, or 100 per cent Russian-owned entities) on theofficial letterhead of the recommendingorganisation, and

• a copy of a leaseagreement or landlordguarantee letter, togetherwith confirmation of thelandlord’s right to theproperty to be leased bythe representative office.

Branch offices must beaccredited by the SRC inaccordance with the 1999Federal Law on ForeignInvestments. An applicationletter for the accreditationof a branch should besubmitted to the SRC andshould be accompanied bythe following documents:

• the Charter or Articles of Incorporation (articles of association, or equivalent) of theforeign legal entity,

• the registration certificate, Certificate ofIncorporation, or excerptfrom the trade register of the foreign legal entitycertifying that the parentis a validly existing legalentity under the legislationof its home country,

BEST PRACTICE AND RISK MANAGEMENTREPRESENTATIVE OFFICE AND BRANCH(CONTINUED)

• the resolution of theforeign legal entity toestablish the branchoffice in the RussianFederation,

• the regulation which willgovern the operation ofthe branch office,

• a bank letter confirmingthe good credit standingof the foreign legal entity,

• a document confirmingco-ordination with theregional authorities ofthe Russian Federationon establishment of abranch office (notrequired for branches tobe located in Moscow),

• a General Power ofAttorney issued to theDirector of a branchoffice,

• a Power of Attorney forfiling the application foraccreditation on behalf ofthe foreign legal entity,

• the Accreditation Cardcontaining informationon the branch officefilled out in accordancewith a sample form of aparticular accreditingbody and signed by arepresentative of theforeign legal entity,

• Certification from the taxauthorities in the countryof the foreign legal entity’sincorporation confirmingthat the foreign legalentity is registered as ataxpayer and specifyingthe taxpayer identificationcode,

• expert opinions from therespective ministries ofthe Russian Federation(the Ministry of Energy,the Ministry of NaturalResources, etc) as requiredby the statutes of theRussian Federation forcertain types of activities, and

• documentation ofpayment of theregistration fee.

All documents from aforeign legal entity must be notarised and apostilled/legalised in the country ofexecution. Any documentsupplied in a languageother than Russian must be accompanied by atranslation which has anotarised certification.

Following accreditation,the representative office or branch office must carry out a number ofpost-accreditationprocedures before itbecomes fully operative,including registration with the State StatisticsCommittee, with the taxauthorities, and with theRussian social benefitsfunds.

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BEST PRACTICE AND RISK MANAGEMENTFORMING A RUSSIAN LEGAL ENTITY

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The Civil Code of theRussian Federationrecognises, among others,the following types ofcommercial legal entities:

• general partnerships,

• limited partnerships,

• limited liabilitycompanies,

• additional liabilitycompanies, and

• joint stock companies.

Moreover, additionallegislation has been passedgoverning the establishmentof limited liability companies(LLC) and joint stockcompanies (JSC), notablythe Federal Law No. 14-FZOn Limited LiabilityCompanies dated 8 February1998 (as amended), (theLLC Law) and the FederalLaw No. 208-FZ On JointStock Companies dated 26 December 1995 (asamended), (the JSC Law).Since these two forms ofcorporate structure are themost popular with theforeign investors, theprovisions of the LLC Law and the JSC Law are examined below.

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Choosing between an LLC and a JSCIn choosing between an LLCand a JSC in establishing awholly owned subsidiary,LLCs appear to be morepopular than JSCs, due tothe various establishmentconsiderations discussedbelow. Generally speaking,the main general corporatebenefit of an LLC incomparison with a JSC is that the procedure forthe establishment and the operation of an LLC is significantly lessburdensome and time-consuming, since there is no legal requirement thatan LLC must issue shares or perform the proceduralsteps required in connectionwith its issuance (eg theestablishment andmaintenance of a securitiesregister, etc). The absence of necessity to issue sharesin an LLC makes this formof legal entity more mobileand flexible when it isnecessary for participants ofthe LLC to change (increaseor decrease) the chartercapital of the company.

Still, a JSC may bepreferable for a jointventure in Russia betweenunrelated parties. This ismainly due to the followingreasons. In an LLC, eachparticipant is entitled toleave the company at anytime and for no reason,irrespective of the consentof the other participants.This right entitles theparticipant to receive fromthe LLC an amountcorresponding to itsproportionate share of thevalue of the LLC’s property,determined by reference toits proportionate share in thecharter capital of the LLC.

Also, participants in an LLCwho either individually orcollectively hold at least a10 per cent interest in thecompany’s charter capitalcan apply to a courtseeking the expulsion of another participant. In order to actually excludea participant from the LLC,the other participant(s)must prove that theparticipant substantiallyhindered the company’soperations or materiallybreached its obligations.

Further, in contrast to the JSC Law, the LLC Law contemplates a largenumber of issues whichrequire a unanimous votingdecision of all the LLCparticipants, that may be unfavourable for a jointventure partner who is a majority participant inthe LLC.

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Number of participantsAn LLC may be establishedby one or more persons or legal entities (the“participants”). However, ifthe number of participantsexceeds 50, the entity mustbe reorganised into an openjoint stock company or aproduction co-operativewithin one year.Furthermore, an LLC may not have as its soleparticipant another businessentity consisting of a singleperson. The charter capitalof the LLC is divided intoparticipation interests heldby its participants, as setforth in the charter.

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Rights of participantsThe participants in an LLC have the right to:

• participate in themanagement of the LLC in accordance withprocedures established bythe LLC Law and the LLCfoundation documents,

• obtain informationconcerning the activitiesof the LLC and haveaccess to its accountingand other documents inaccordance with theprocedures establishedby the LLC foundationdocuments,

• participate in thedistribution of profits,

• sell or otherwise assigntheir participation interestsin the LLC charter capital,or a part thereof, to oneor more of the participantsin the LLC in accordancewith the procedureestablished by the LLCLaw and LLC charter,

• withdraw from the LLCwithout first seeking theapproval of the otherparticipants, and

• receive a portion of theassets left after settlementwith creditors in the caseof the liquidation of the LLC.

The participants in an LLCalso have other rights asprovided by the LLC Law,and may have additionalrights set forth in the LLCcharter or foundationdocuments during theestablishment of the LLC, orwhich are granted at a laterdate by a decision of theLLC’s General Participants’Meeting. The followingpoints should be noted with regard to granting of additional rights to LLC participants:

• Where additional rightsare granted by thedecision of the LLC’sGeneral Participants’Meeting, this decisionmust be unanimous.

• Additional rights grantedto a particular participantin the LLC do not transferto any party acquiring all(or a part) of suchparticipant’s ownershipinterest if it is transferred.

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Obligations of participantsThe participants in an LLCare required to:

• make contributions tothe charter capital asspecified in the LLC Law and the LLCfoundation documents(or in the decision on the establishment of theLLC, if there is only oneparticipant in the LLC)and within the timeperiods specified in the LLC Law, and

• keep confidential allinformation concerningthe activities of the LLC.

Participants in an LLC alsohave other obligations asprovided for by the LLC Law,and may have additionalobligations set forth duringthe establishment of the LLCin the LLC charter, or whichare imposed on them at alater time by a decision ofthe LLC’s GeneralParticipants’ Meeting.

The following issues shouldbe considered when imposingadditional obligations onparticipants of an LLC:

• When additionalobligations are imposedby the decision of theLLC’s GeneralParticipants’ Meeting on all LLC participants,this decision must bemade unanimously.

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• If additional obligationsare imposed by thedecision of the LLCGeneral Participants’Meeting on a particularLLC participant, suchdecision must be madeby a two-thirds majorityvote of the total numberof votes held by the LLCparticipants, providedthat the LLC participanton whom such additionalobligations are imposedvoted in favour of suchdecision or consented to it in writing.

• Additional obligationsimposed on a particularparticipant(s) in the LLCdo not pass to any partyacquiring all (or part) ofsuch participant’sownership interest incase it is transferred.

Charter capitalThe charter capital of an LLC consists ofcontributions made by itsparticipants. The initialcharter capital may not beless than an amount equalto 100 times the statutorymonthly minimum wage,currently 100 RUB. As atthe date of publication, the minimum requiredcharter capital for an LLCis approximately US$405.

At least 50 per cent of the charter capital amountmust be paid by the dateof the LLC’s registration,and the balance must bepaid in full within the first year of its operation.Contributions may bemade in cash or in kind,and certain customsbenefits may be availablefor in-kind contributionsmade by foreign investors.The charter capital may beincreased only after theoriginal charter capital hasbeen paid in full.

Participation interestsA participation interest (ie an ownership share) in an LLC is not considereda security under currentRussian legislation. Therefore,in contrast to the shares ofa joint stock company, LLCparticipation interests donot need to be registered.

Participation interests in an LLC may be sold to thirdparties, but they are subjectto the right of first refusalof other participants topurchase the participationinterests at the priceoffered to the third parties.The participants in an LLCalso have a unilateral rightto withdraw from the LLCand to be compensated fortheir participation interests.

Finally, a participant(participants) with more than a 10 per cent ownershipinterest in an LLC maydemand the expulsion of any participant who grosslyviolates his obligations as aparticipant, or whose actions(or lack thereof) substantiallyhinder the LLC or make itsactivity impossible.

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Management structureThe General Participants’Meeting is the highestgoverning body of the LLC, and almost all mattersfall within its exclusivecompetence. Should theLLC participants choose tocreate a Board of Directors,for example, the GeneralParticipants’ Meeting maynonetheless only delegate a limited number ofmatters to the Board.

The General Participants’Meeting has the exclusiveright to:

• amend the charter,

• amend the foundationagreement,

• define the basic goals anddirections of the LLC,

• delegate to a commercialorganisation or to anindividual entrepreneurthe authority reserved tothe LLC executive andapprove the conditions ofthe agreements with suchorganisations or persons,

• assign supplementalrights and duties to theparticipants in the LLC,

• approve the annualfinancial report and thedistribution of profits,

• alter the amount of thecharter capital of the LLC,

• approve regulationsgoverning the internalactivities of the LLC, and

• reorganise or liquidatethe LLC, appoint aliquidation commission,and approve theliquidation balance sheetof the LLC.

The daily management ofthe LLC is the responsibilityof the Executive Body, whichmay comprise of oneperson (the General Director)or may consist of both theGeneral Director and theManagement Council. TheExecutive Body is responsiblefor all matters which do notfall within the authority ofeither the Board of Directorsor the General Participants’Meeting. The GeneralParticipants’ Meeting maychoose to delegate thepowers of the ExecutiveBody to an externalcommercial organisation or to an individual manageron a contractual basis.

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RegistrationWith effect from 1 July2002, the new Federal Law On State Registrationof Legal Entities (theRegistration Law) enteredinto force, transferringauthority for registration of legal entities in Russiato the local bodies of theFederal Tax Service of theRussian Federation. As aresult, activities connectedwith the state registration oflegal entities and with theirregistration as taxpayers arenow under the auspices ofthe local tax inspectorates.

The following documentsare required for registrationpurposes:

• An application.

• The foundationagreement of the LLC (ifthe LLC has more thanone founder/participant).

• The protocol of thefounders’ meeting or, if the LLC has only onefounder, the resolutionof the founder on theestablishment of the LLC.

• The Charter of the LLC.

• A copy of the passport of the proposed GeneralDirector of the LLC.

• Power(s) of Attorneyissued by the founder(s)for establishment of the LLC.

• Power(s) of Attorneyissued by the founder(s)for filing the applicationfor the state registrationof the LLC.

• Confirmation of the legalstatus of the founder(s)(eg extract from the traderegister or certificate ofgood standing).

• The Charter (Articles ofAssociation, Bylaws) ofany foreign legal entities.

• Confirmation of paymentof the state registration fee.

• Foreign tax registrationcertificate of founders (to be provided to a bank).

• Bank letter of goodcredit standing of aforeign legal entity.

• Confirmation of theforeign legal entity’scontribution to thecharter capital of the LLC.

Any Russian founderparticipating in an LLC must also provideadditional documentation.All documents from aforeign legal entity must be notarised and apostilled/legalised in the country ofpreparation. Any documentsupplied in a language otherthan Russian must beaccompanied by a Russiantranslation which has anotarised certification.

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Types of joint stock companiesA significant number ofcommercial organisationshave been established sincethe JSC Law came into forceon 1 January 1996. While theadoption of the LLC Law in 1998 introduced anotheroption for investors seeking toestablish a corporate entity,the JSC Law represented oneof the most significant piecesof civil legislation of the post-Soviet era, and JSCs remainamong the most importantcommercial corporate formsand structures for doingbusiness in Russia.

A JSC is a legal entity whichissues shares in order toraise capital for its activities.A shareholder of a JSC isnot generally liable for theobligations of the JSC, andbears the risk of any suchloss only in the amountpaid by it for the shares.

Two types of joint stockcompanies exist in Russia:

• closed joint stockcompanies, and

• open joint stockcompanies.

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An open JSC may have an unlimited number ofshareholders. Shareholdersin an open JSC are entitledto freely dispose of theirshares. The number ofshareholders in a closedJSC may not exceed 50,and the JSC must betransformed into an openJSC within one year shouldthe number of shareholdersever exceed this amount.As with participants in an LLC, shareholders in a closed JSC have a rightof first refusal to acquireshares sold by othershareholders to thirdparties, at the price offered to the third parties.Shareholders in both openand closed JSCs have apre-emptive right to acquirenewly issued shares thatare to be privately placed,in proportion to theirexisting shareholdings.

Shareholders in an open JSC also have a pre-emptiveright to acquire newlyissued shares that are to be publicly placed, inproportion to their existingshareholdings, but do nothave a right of first refusalto acquire shares sold tothird parties.

All JSCs are required tomaintain a shareholders’register. The register includesinformation about eachregistered shareholderincluding the number,category and classes ofshares held. A JSC with morethan 50 shareholders mustdelegate the maintenanceand keeping of theshareholders’ register to a licensed registrar.

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Formation of a joint stock companyIndividuals and legal entitiesmay be the founders of aJSC. A company’sfoundation document, ie its charter, must include:

• the name, address, andtype of the JSC (ie openor closed),

• the size of the JSCcharter capital,

• the quantity, nominalvalue and categories(common or preferred) of shares, as well as the classes of preferredshares issued anddistributed by the JSC,

• the rights of the holdersof shares of each category,

• the structure andcompetence of thegoverning bodies of theJSC, and their decision-making procedures,

• the procedure forpreparing for and holdingthe General ShareholdersMeetings, including a listof issues requiring eitherunanimous consent or aresolution adopted by aqualified majority of votes,

• information on branchesand representative offices,

• information on theexistence of any specialright of participation inthe management of thecompany (a “goldenshare”) vested in theRussian Federation, aconstituent entity of the Russian Federation,or a municipality of theRussian Federation, and

• other provisions requiredby law.

The charter may includeother provisions, so long as these comply withapplicable Russianlegislation.

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Charter capitalThe charter capital of anopen JSC may not be lessthan 1,000 times the Russianstatutory monthly minimumwage (the monthly minimumwage used for the purposesof calculating the minimumcharter capital of the JSC iscurrently 100 rubles).Currently, using anexchange rate ofapproximately 24.7rubles/USD, the minimumcharter capital for an openJSC is approximatelyUS$4,050. A closed jointstock company must havea minimum charter capitalequivalent to at least 100 times the minimummonthly wage – currentlyapproximately US$405.

In contrast to LLC founders,the founders of a JSC mustpay 50 per cent of the JSCcharter capital within threemonths following its stateregistration, with thebalance payable in fullwithin the first year.

Shares and other types of securitiesA JSC can issue securities inthe form of shares, bonds,and issuer’s options. Ineither case, such securitiesmust be registered with theFederal Service for theFinancial Markets of theRussian Federation (theFSFM), which replaced theformer Federal Commissionfor the Securities Market(the FCSM) in March 2004.A JSC can issue commonshares and/or several classesof preferred shares. Thetotal value of a JSC’spreferred shares may notexceed 25 per cent of itscharter capital.

The concept of a “fractionalshare” was introduced on 1 January 2002. A fractionalshare is a share representinga portion of a whole share,which can come intoexistence when it is notpossible to acquire thewhole share during theconsolidation of shares,when a shareholderexercises their pre-emptiveright, or in the course ofacquiring additional shares.A fractional share grants itsowner the same rights thatare granted by the wholeshare of the correspondingcategory or class, on a prorata basis.

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Management structureBoth open and closed JSCsmust maintain twogoverning bodies: theGeneral ShareholdersMeeting and the ExecutiveBody. An open JSC withmore than 50 shareholdersmust also have a Board ofDirectors (also called aSupervisory Board). Anopen JSC with less than 50shareholders and all closedJSCs may appoint a Boardof Directors, although thisis not a requirement. Theauthority of the Board ofDirectors is defined by thecharter of the JSC and, if a Board is not provided for in the charter, thecorresponding authoritymust be vested with theJSC’s General ShareholdersMeeting.

In addition to the foregoinggoverning bodies, a JSCmust either establish anInternal AuditingCommission or elect anInternal Auditor to overseeits financial and economicactivities, members of whichmust be elected by theshareholders.

The General ShareholdersMeeting is the highestgoverning body overseeingthe activities of a JSC. Its authority is outlined in the JSC Law and cannotbe altered. Each commonshare carries one vote atthe General ShareholdersMeeting (except for casesof cumulative voting whereprovided for in the JSCLaw), and most decisionsare made by a simplemajority vote, although for certain key decisions a supermajority of 75 per cent is required.

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The daily management of a JSC is the responsibility of the Executive Body,which may comprise of one person (the GeneralDirector) or may consist ofboth the General Directorand the ManagementCouncil. The Executive Bodyis responsible for all matterswhich do not fall within theauthority of either theBoard of Directors or theGeneral Shareholders

Meeting. The GeneralShareholders Meeting may (by a majority vote),choose to delegate thepowers of the ExecutiveBody to an externalcommercial organisation or to an individual manageron a contractual basis;however, this decision maybe taken only pursuant to aproposal from the Board ofDirectors (if the companyhas a Board of Directors).

RegistrationEffective as of 1 July 2002,the procedure for stateregistration describedabove in respect of LLCs is also applicable to JSCs.The only additionalrequirement in respect ofJSCs is the registration ofthe issuance of the JSCshares with the FSFM,which is obligatory at the establishment of the company.

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For nearly 10 years, Russiahas been engaged in asignificant reform of its tax system, which has been implemented phase-by-phase. This reform hasimproved procedural rulesand made them morefavourable to taxpayers,has reduced the overallnumber of taxes, and hasreduced the overall taxburden in the country.

Part one of the Tax Codeof the Russian Federation (the Tax Code) came into effect in 1999, dealinglargely with administrativeand procedural rules. Thelatest significant amendmentsto Part one clarified certainadministrative andprocedural issues raised byover seven years of practiceof application of Part one of the Tax Code.

The provisions of Part two of the Tax Code regardingexcise taxes, VAT, individualincome tax, and the unifiedsocial tax came into force in2001, followed by the profitstax and mineral extractiontax provisions of the TaxCode in 2002. In 2003,further amendmentsintroduced a simplifiedsystem of taxation, a singletax on imputed income, anew chapter on transporttax, and established a specialtax regime for productionsharing agreements inRussia. A chapter oncorporate property taxcame into effect as of 1 January 2004. In 2005the water tax, land tax, andstate duty chapters cameinto effect. Most of thesechapters of the Tax Codereplaced and significantlyupdated or improvedindividual tax laws thatinitially were enacted as far back as 1991.

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THIS SECTION (PAGES 74-95) IS KINDLY PROVIDED BYBAKER & MCKENZIE – CIS,LIMITED

The remaining chapter of the Tax Code still underreview covers the propertytax on individuals, which is currently governed bythe corresponding 1991legislation. In 2006 theinheritance and gift taxthat had been in existencesince 1991 was repealed. In addition, over the lastseveral years, variousamendments to these newTax Code provisions havebeen amended, with arecent introduction of a dividends participationregime and recent proposalsto further modify theprovisions governingtransfer pricing and taxconsolidation for certaingroups of taxpayers. Thus,tax reform continues to be an ongoing process.

Types of taxThe Tax Code sets forththree levels of taxation:federal, regional and local.Currently, federal taxesinclude VAT, excise taxes,profits tax, unified social tax,personal income tax, mineralextraction tax, state duty,special tax regimes, andseveral other taxes. Regionaltaxes include corporateproperty tax, transport tax, and gambling tax,while local taxes includeland tax and individualproperty tax.

There are four types ofspecial tax regimes thatmay be applicable tocertain activities and/orcategories of taxpayers:single agriculture tax,simplified system oftaxation, single tax onimputed income fromcertain kinds of activity,and taxation of productionsharing agreements. Thesespecial tax regimes have thestatus of a federal tax andmay provide exemptionsfrom certain federal,regional, and local taxes.

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Tax auditsThe Russian tax authoritiesmay conduct off-site oron-site tax audits oftaxpayers.

Amendments that came into effect from 1 January2007 introduced moredetailed regulation for bothtypes of tax audits. Taxauthorities may auditseveral different taxessimultaneously as part ofon-site tax audits. However,except in cases of aliquidation or reorganisation,when a higher tax authorityinspects the activities of alower tax authority thatconducted an on-site audit,or when a taxpayer filesadjustment tax returnclaiming reduced taxation, a tax for a given period mayonly be audited once.

The taxpayer may also berepeatedly inspected in the same tax period uponthe decision of the Head of the Federal Tax Serviceof Russia. In the case that

during a repeat tax audit thetax authorities would find anunderpayment that was notfound during a previous taxaudit, the fine for suchunderpayment would notbe applied to the taxpayer,except for cases where theundetected violation resultedfrom a conspiracy betweenthe taxpayer and the taxauthorities. In exceptionalcases provided by the TaxCode, the Russian taxauthorities may suspend anon-site tax audit. However,the overall term ofsuspension in any case maynot exceed nine months.

The results of a tax auditrelating to reviewed taxesmay only be reconsideredby supervising taxauthorities. In any case,however, tax authoritiesmay only audit the threecalendar years precedingthe year of the tax audit.As a general rule, a three-year statute of limitationsapplies to the impositionof penalties for tax

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violations, althoughaccording to a positiontaken in ConstitutionalCourt Ruling No 9-P, dated 14 July 2005, thistype of defence could berejected by the court if the taxpayer impeded the tax audit by the taxauthorities. Also, the taxauthorities may levy foroutstanding taxes and latepayment interest unilaterallywithout a court decision.

The imposition of penaltieslarger than 5,000 rubles inthe case of individuals and50,000 rubles in the caseof legal entities for a giventax period requires a courtdecision. Starting from 1 January 2007, in certaincircumstances the amountof tax that was not dulypaid during the three monthsperiod may be collected fromthe companies affiliated withthe taxpayer if such affiliatedcompanies receive paymentsfrom the taxpayer for goods,works or services provided by them .

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Corporate profits taxPrior to 2002 the maximum profits tax ratefor most businesses was 35 per cent, while a slightlyhigher maximum tax rate of 38 per cent applied tobanks and insurance andintermediary companies.Pursuant to the profits tax provisions of Chapter 25of the Tax Code, as of 1 January 2002 themaximum tax rate for allcompanies was reduced to 24 per cent, which iscurrently payable at a rateof 6.5 per cent to thefederal budget and 17.5 per cent to regionalbudgets. The regionalauthorities may, at theirdiscretion, reduce theirregional profits tax rate to as low as 13.5 per cent.Thus, the overall tax ratecan vary from 20 per centto 24 per cent.

In the course of ongoingreforms significant changeswere recently introduced todividends taxation. Effective1 January 2008, the taxrate on dividends receivedfrom foreign companiesdecreased from 15 per centto 9 per cent to match therate applicable betweenRussian entities. Also, topromote Russian holdingcompanies, starting from 1 January 2008, dividendspayable by foreign andRussian entities qualifyingas “strategic investments” toRussian companies areexempt from profits tax.The exemption appliesprovided on the day thecorporate decision to paythe dividends is taken, thefollowing four tests are met:

(1) The recipient of thedividends has heldshares continuously fornot less than 365 days.

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EFFECTIVE 1 JANUARY 2008, THE TAX RATE ONDIVIDENDS RECEIVEDFROM FOREIGNCOMPANIES DECREASEDFROM 15 PER CENT TO 9 PER CENT TO MATCH THE RATE APPLICABLEBETWEEN RUSSIANENTITIES.

(2) The recipient of thedividends owns not lessthan 50 per cent ofshares in the companypaying the dividends.

(3) The shareholder’s costof acquisition of sharesor participation in thecharter capital of thecompany payingdividends exceeds 500 million rubles(approximately US$20 million).

(4) The company payingdividends is not locatedin a jurisdictionincluded in a “blacklist” of offshorejurisdictions adopted by the Order No 108nof the Russian Ministryof Finance, dated 13 November 2007 (the “black list” includesmost of the offshorelow-tax jurisdictionsand territories,including Cyprus).

After these amendments toChapter 25, the followingtax rates apply to dividends:

• 0 per cent withholdingtax on dividends payableby Russian and foreigncompanies qualifying as“strategic investments”.

• 9 per cent withholdingtax on dividends payableby Russian and foreigncompanies to Russianshareholders in all othercases.

• 15 per cent on dividendsreceived by Russiancompanies from foreignlegal entities.

Chapter 25 also introducedspecial tax rates on incomeearned from Russian statesecurities and on theprofits of the RussianCentral Bank.

Taxable profit is defined as income less deductibleexpenses. Although, prior

to 2002, deductions werelimited and were subject tosubstantial restrictions, as of1 January 2002 many ofthose expense limitationsdisappeared under the newprofits tax provisions of theTax Code. Under the currentrules a taxpayer is generallypermitted to deduct allnecessary and documentedbusiness expenses.

Deduction of certain typesof expenses is subject to restrictions (eg certainadvertising costs andrepresentational [includingbusiness entertainment] andtravel costs). More recently,the tax authorities havetaken a more aggressiveapproach to the economicjustification of expensesthat in some instances hasappeared to be an indirectway of reintroducing someof the old law restrictions.In some instances,unfortunately, the courtshave supported this positionof the tax authorities.

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Interest deductibility andthin capitalisation rulesGenerally, under the TaxCode, interest is deductible as long as it does not deviateby more than 20 per centfrom market interest ratespaid on comparable loansin the same calendarquarter. Any excessive partof the interest will not bedeductible. If no suchcomparable loans exist,interest is deducted withincertain limits: for ruble loans,the deductible interest maynot exceed 110 per cent ofthe Central Bank refinancingrate, and for loansdenominated in a foreigncurrency the deduction islimited to 15 per cent per annum.

In addition, there is a specificprovision with respect to“thin capitalisation”. The Tax Code introduces a 12.5:1debt-to-equity ratio limit forbanks and leasing companies,and a 3:1 ratio limit for allother companies. If the ratioof the Russian borrowercompany’s internal capitalto its outstanding debt owed to a foreignshareholder holding morethan a 20 per cent interestin the Russian borrowercompany (including debtowed to a Russian affiliate of the foreign shareholderand debt guaranteed by theforeign shareholder or itsRussian affiliate) exceedsthese limits, the Tax Coderestricts the deductibility ofinterest paid on the excessdebt. Non-deductible interestis also considered to be adividend payment to theforeign shareholder andhence is subject to a 15 per cent withholdingtax, unless the latter isreduced or eliminated byan applicable tax treaty.

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Asset depreciation andcarrying forward lossesAssets with a value exceeding 20,000 rubles –approximately US$800 –(10,000 rubles prior to 1 January 2008) and auseful life of more than 12 months are subject todepreciation. Chapter 25allows taxpayers to splitassets into ten groups,depending on the type of asset and its useful life,and to apply accelerateddepreciation rates. Forexample, the useful life forbuildings under the newrules is 30 years, whereasunder the old rules (before1 January 2002) the periodwas 80-90 years.

Under Chapter 25, taxpayersare able to choose betweena straight-line method(somewhat similar to the oldmethod of asset depreciation)and a new, acceleratedmethod. Land, subsoil, andnatural resource assets arenot subject to depreciationand hence do not reduce thetax base of the profits tax.

Starting from 1 January2006, a lump-sumdeduction in the amountof 10 per cent of the initialbook value of newlyacquired fixed assets isallowed to be made forprofits tax purposes in the period when the fixed assets are acquired.This effectively works as a special investmentincentive.

Losses may be carriedforward for ten years. Also, there is no requirementto spread the loss over theentire carry-forward term.Starting from 1January2007, the limitation on theamount of taxable profitthat could be reduced by a loss carry-forward in aparticular year waseliminated. In addition,capital losses may be offsetagainst operating income;this deduction, however,must be evenly spread overthe residual useful life ofthe capital asset for whichthe loss was incurred.

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Investment benefitsRussian companies enjoyedvarious regional and localtax concessions under the1991 Corporate Profits TaxLaw, and under the relevantregional and/or local lawsof several territories(particularly Chukotka,Kalmykia, Mordovia, andEvenkia). Chapter 25 of theTax Code abolished all taxincentives, including thecapital investmentallowance. Some types of tax benefits (includinginvestment benefits) weregrandfathered, althoughthey ceased to be effectiveas of 1 January 2004.

Presently, regional and local legislative bodies are no longer authorised to provide tax concessions,except for regionalauthorities, which mayreduce their regional profitstax rate by 4 per cent andthus reduce the overall tax rate to 20 per cent.However, the effective taxrate could be even lowerunder the special taxregimes or under the specialeconomic zone regime.

In 2005, Federal Law No 116-FZ On SpecialEconomic Zones in theRussian Federation, dated22 July 2005 was passed.It introduced a newconcept for the provisionof investment benefits.

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Transfer pricing rulesThe Tax Code containsseveral rules related totransfer pricing.Specifically, it sets forth the presumption that thecontractual price agreed onby the parties is the “marketprice”. At the same time, inany of the following fourexceptional circumstances,the tax authorities mayexercise control overcontractual prices:

• a transaction betweenaffiliated parties,

• a barter transaction,

• a foreign tradetransaction, or

• a transaction involvingsignificant variations inprices (ie a fluctuation ofmore than 20 per cent)for identical goods orservices within a shortperiod of time (inpractice, this term isinterpreted as 30 daysimmediately precedingthe date in question).

If a transaction falls underone of the above fourcategories, the taxauthorities can adjust thecontract price based on themarket value and imputeadditional taxes, penalties,and late payment interestaccordingly.

Finally, Chapter 25 requirestaxpayers to maintain acompletely separate set of books for the purposeof calculating the tax basefor profits tax.

Traditionally, profits taxhad been calculated basedon book profit adjusted for tax purposes. However,from 1 January 2002, the tax base must becalculated from taxaccounting ledgers;statutory accountingrecords are no longer the primary source ofinformation for profits tax calculations.

The transfer pricing rulesare currently being revisedby the Russian authorities.Recent proposals to amendthe transfer pricing rulesprovide for the followingsignificant changes: anextended scope ofcontrolled transactions, newmethods for determiningmarket prices, transferpricing documentationrequirements, and theintroduction of advancedpricing agreements.

There is no exactinformation on when these rules will be adopted.However, any new transferpricing rules most likely willnot be adopted and comeinto effect prior to 2009,but more probablysometime after 2009.

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Taxation of foreigncompaniesRussian legislation taxesprofits derived from a“permanent establishment”in Russia, as well as certainother types of incomederived without apermanent establishment inRussia. Importantly, whethera permanent establishmentexists under Russian law isunrelated to whether aforeign company’s office hasbeen registered in Russia. A permanent establishmentmay exist even if the officeis not registered, and theexistence of a registeredoffice may not necessarilygive rise to a taxablepermanent establishment.Profit derived by foreignlegal entities from theirhaving a permanentestablishment in Russia isgenerally taxed at the sameprofits tax rates applicableto Russian taxpayers.

Chapter 25 sets forth alimited list of Russian sourceincome not connected witha permanent establishmentin Russia that is subject toRussian withholding tax. The list includes mainlypassive types of income,such as royalties, interest,dividend income, and rentals.Other income received bynon-Russian residents that is not specified in the list is not subject to any withholding tax.

Unless an applicabledouble taxation treatyprovides for a lower rate,dividends payable byRussian companies toforeign shareholders aresubject to a 15 per centwithholding tax. Otherlisted income received byforeign legal entities fromRussian sources is subjectto either a 20 per centwithholding tax (for mostcategories of income,including royalties andmost types of interest) or a 10 per centwithholding tax (for

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income from freight andlease of transportationvehicles), subject to anyreduction available under a double taxation treaty.

Russia is now a party to 68 double taxation treaties,which can provide for thereduction of the withholdingtax rate on dividend incometo as low as 5 per cent andgenerally provide for a 0 per cent withholding rate on other income (eginterest, royalties and capitalgains). For example, the1998 Russia-Cyprus DoubleTaxation Treaty provides for a 0 per cent withholdingtax rate on interest, royalties,capital gains and otherincome not related to apermanent establishment; a 5 per cent withholding tax rate on dividends payableto Cypriot shareholders whohave contributed overUS$100,000 to the chartercapital of a Russiansubsidiary responsible forpaying out these dividends;and a 10 per centwithholding tax rate

on dividends payable to allother Cypriot shareholders.Cypriot shareholders mayalso offset taxes payable tothe Russian federal budgetagainst similar taxes paidin Cyprus. Many other tax treaties provide forsimilar rates.

Chapter 25 includes aprovision that explicitlystates that, in the event ofa conflict, double taxationtreaties override the TaxCode. Chapter 25 containsmore beneficial rules thanhad existed under previouslaws governing tax treatyrelief for a foreign legalentity. Under the newrules, taxpayers should be allowed to obtainpreliminary tax treaty relieffrom tax-withholding inRussia without any filingswith the Russian taxauthorities, by presentingdocuments evidencing the tax residency status of the taxpayer to the tax-withholding agent(usually the Russian payer).However, obtaining a tax

refund where the tax wasactually withheld wouldrequire the filing of therelevant forms with theRussian tax authorities.

The profits tax is payableon a quarterly basis. Theannual tax return and areport on a foreign legalentity’s activity in theRussian Federation must be submitted to the taxauthorities by 28 March of the year following theclose of the taxable year.

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Value added tax (“VAT”)VAT is imposed on allgoods imported into Russiaand is also applied to thesale of goods, work andservices. Starting from1 January 2008, the periodfor VAT for all taxpayers andtax agents is the calendarquarter (previously for mosttaxpayers the tax period wasa monthly period). Currentlegislation imposes a VATrate of 18 per cent on thesale of most goods. A fixed10 per cent rate is applied tolimited types of goods, suchas pharmaceuticals, medicalequipment and certain foodproducts and periodicals.

The export of goods issubject to 0 per cent VAT. In addition, certain typesof goods, work, andservices are exempt fromVAT (for example, landplots, dwelling houses and apartments, lease ofoffice space to accreditedrepresentative offices andbranches of foreign legalentities, certain medicalgoods and services, etc).

As of 1 January 2008 thelist of VAT exemptions willalso include:

• the assignment ofexclusive IP rights (egpatents, licences, know-how), with the exceptionof trademarks, and rightsto use the results ofthese IP rights (egsoftware) based onlicences (including non-exclusive licences),

• certain research anddevelopment services, and

• assignment of loanagreements.

Generally, VAT paid on theacquisition of goods, workand services may be offsetagainst VAT collected fromcustomers. In order to claima refund of input VAT paidin relation to goods thatsubsequently were exportedand subject to 0 per centVAT, the taxpayer is requiredto file various supportingdocuments with the Russiantax authorities.

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In capital construction theinput VAT paid to suppliersof goods, work and servicesmay be offset under ageneral procedure as theconstruction progresses(prior to 2006, such inputVAT could be offset onlywhen the constructed assetsare recorded on thetaxpayer’s balance sheet).

An enterprise ends uptransferring to the stateonly the difference betweenVAT paid and VAT collected.As a general rule, however,a taxpayer may not offsetinput VAT if such VAT isincurred on goods, works or services used by thetaxpayer for the sale ofgoods or the provision ofservices that are exemptfrom VAT.

In this case, the taxpayerwill be required to includesuch input VAT into theirproduction costs and willeffectively lose this inputVAT for future recovery. Inthose cases where only aportion of certain input

costs was used for theproduction of goods or theprovision of services subjectto VAT, the correspondinginput VAT may be offsetonly on a pro rata basis.Careful planning willtherefore be required tomaintain full recovery ifpart of a newly constructedbuilding is to be directlyleased to representativeoffices or branches offoreign legal entitiesaccredited in Russia.

Starting from 2006, foreignlegal entities having morethan one representativeoffice and/or branchregistered in variouslocations in Russia may consolidate all VATaccruals and offsets on a company level (prior to2006, each representativeoffice and/or branch wasregarded as a separate VATpayer). For that purpose aforeign legal entity mustchoose a particularrepresentative office orbranch that would beresponsible for VAT

reporting on a companylevel, and notify itsdecision to the local taxauthorities responsible foreach representative officeand branch registered in Russia.

A Russian customer of aforeign company that isnot registered with the taxauthorities and is active(making sales or renderingservices) in Russia, mustwithhold either 9.09 percent or 15.25 per centreverse charge VAT(depending on theapplicable underlying VATrate of 10 per cent or 18per cent, respectively) fromthe amounts transferred tothe foreign company andmust itself remit such VATdirectly to the state budget.

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Mineral extraction taxPrior to 2002, licensedsubsoil users had to pay,inter alia, a tax on therestoration of the mineralresource base and subsoil-use payments. The tax basewas calculated as apercentage of the value of the minerals actuallyextracted. Chapter 26 ofthe Tax Code introduced a new mineral extractiontax, which came into effecton 1 January 2002. Themineral extraction tax hasreplaced the tax onrestoration of the mineralresource base and thesubsoil-use tax payable on the value of mineralsextracted.

Subsoil users are nowrequired to make subsoil-use payments provided thatthey conduct at least:

• prospecting andvaluation,

• exploration of subsoildeposits, or

• construction works on an extraction site (notconnected with mineralextraction).

The law has set theminimum and maximumrates with respect to eachtype of activity, dependingon the territory used withinthe subsoil activity, ratherthan on the value of mineralsextracted (as was the caseprior to 2002). Regionalstate executive bodies setspecific rates within theselimits, which will be reflectedin corresponding licences.

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The mineral extraction tax is generally calculated as the value of the mineralresources extracted from thesubsoil based on the prices(excluding VAT and excisetaxes) at which the extractedminerals were sold, subjectto the transfer pricingprovisions of the Tax Code,and effectively not lowerthan the market price.Taxpayers are required to calculate the tax baseseparately for each type of mineral resourceextracted and pay it on amonthly basis. In particular,Chapter 26 sets out a taxrate of 6 per cent for gold,6.5 per cent for silver, 16.5 per cent for oil,

17.5 per cent for gascondensate, and 147 rubles(approximately US$3.69) per1,000 cubic metres of gas.

Subsoil users havingprospected and explored anoilfield at their own expenseare required to pay 70 percent of the tax normally due for the natural resourcesextracted from the respectivelicensed oilfield. Subsoilusers include the mineralextraction tax paid to thestate budget in theirdeductible expenses,decreasing the taxable baseof the corporate profits taxdue. Chapter 26 does notprovide for any specialconcessions for subsoil users.

The mineral extraction tax with respect to oil isdetermined by the quantityof extracted oil multiplied by the tax rate. The basic tax rate is adjusted quarterlyby a multiplier reflectingchanges in world prices for Urals crude.

This multiplier isdetermined under thefollowing formula:M = (P - 9) x E / 261where P is the averageprice for Urals crude in US dollars per barrel and E is the averageRUB/US$ exchange rate of the Central Bank ofRussia for a given calendar quarter.

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Taxation under productionsharing agreementsPursuant to Chapter 26.4 of the Tax Code, effective asof 10 June 2003, companiesextracting minerals underproduction sharingagreements (“Investors”) aresubject to a special (and, incomparison with the mineralextraction tax, entirelydifferent) tax regime. Forinstance, an investor pays50 per cent of the mineralextraction rate for oil andgas condensate until itreaches a certain limit ofcommercial production,specified in the ProductionSharing Agreement (PSA).Once an investor hasreached such a limit,however, they pay the fullmineral extraction rate foroil and gas condensate.

At the same time, investorsmay be exempted fromregional and local taxes(given the respectivedecisions of the regionaland local legislativebranches), the corporate

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property tax, and thetransport tax, the latterwith respect to fixed assetsand vehicles used directlyfor the purposes of oil andgas extraction under the PSA.

In addition, depending onthe conditions of the PSA,investors may secure afurther refund of VAT, theunified social tax, subsoil-use payments and watertax, state duties, customsfees and duties, the landtax, the excise tax, and theecological tax previouslypaid to the budget withinthe terms of the PSA.

The PSA taxation regimeintroduced by Chapter 26.4 of the Tax Code hasincreased the number of taxlaw requirements for, andtaxes payable by, investors.These amendments areunlikely to make PSAs an attractive proposition to investors.

Corporate property taxAs of 1 January 2004,Chapter 30 of the TaxCode (covering thecorporate property tax)came into effect, replacingthe former 1991 CorporateProperty Tax Law. Theproperty tax is a regionaltax, ie its imposition isregulated by the legislationof the relevant region, to amaximum rate of 2.2 percent. The tax base includesmovable and/or immovablefixed assets owned by thetaxpayer in Russia, and iscalculated based on thedepreciated book value ofthose assets. Taxable assetsno longer include anycosts or intangible assetsrecorded on the taxpayer’sbalance sheet, nor landand water objects, andsuch items are not subjectto the property tax either.

Chapter 30 of the Tax Code further exempts fromtaxation certain categories ofproperty, such as assets usedby religious organisations tomaintain religious activities.Furthermore, when imposingproperty tax, RussianFederation RegionalGovernments may fix loweror differentiated rates fordifferent categories of payersand/or types of taxableproperty. Corporate propertytax is payable on an annualbasis, with advances dueevery quarter. However,Russian Federation RegionalGovernments may excusecertain categories of payers,including both Russian andforeign organisations, fromthe obligation to assess andmake such advancepayments.

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Unified social taxEffective 1 January 2001,one Unified Social Taxreplaced employers’contributions to fourseparate social benefitfunds (the Pension Fund,the Social Security Fund,the Mandatory MedicalInsurance Fund, and theEmployment Fund). TheUnified Social Tax is paidcentrally and is afterwardsdistributed among thesethree funds (the EmploymentFund having been abolished).The Unified Social Tax hasa regressive tax scale from26 per cent to 2 per cent ofan employee’s salary, withthe lowest rate applicableto the portion of anemployee’s annual salary inexcess of 600,000 rubles(approximately US$21,430).The tax period is one year,and the tax is paid on amonthly basis.

In the past, the salaries offoreign citizens employed or acting as individualentrepreneurs in Russia wereexempt from the UnifiedSocial Tax, provided thatunder Russian legislation or the relevant employment/service contract thoseexpatriates were not eligiblefor Russian state pensions,social benefits and state-subsidised medical treatment.However, from 1 January2003 this tax exemption has ceased to exist, and the salaries of expatriatesworking in Russia havebecome subject to theUnified Social Tax pursuantto the rules outlined above.

The salaries of foreignpersonnel employed byforeign branches of Russiancompanies and/or of foreignpersonnel working abroadare specifically exempt fromthe Unified Social Tax underamendments to the TaxCode effective from 1 January 2008.

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Personal income taxIndividuals who are definedas “Russian tax residents,”ie those who have been inthe country for 183 days ormore during any 12consecutive months, aresubject to personal incometax on all their income, boththat earned in Russia andthat earned elsewhere.Individuals who do not meetthis criterion are subject totax on any income receivedfrom Russian sources.

From 1 January 2001 Russiahas enacted various incometax rates, including: • a 13 per cent flat rate

applicable to most typesof income,

• a 9 per cent rateapplicable to dividendincome,

• a 35 per cent rateapplicable to incomefrom gambling, lotteryprizes, deemed incomefrom low-interest orinterest-free loans(except loans directed at new construction ordwelling acquisition) andexcessive bank interest, and

• a 30 per cent rateapplicable to Russian-source income receivedby non-residents.

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By 30 April of thefollowing year, a taxpayermust file a tax returnbased on his/her actualincome for the previousyear, and settle taxobligations for that year.Foreign individuals arerequired to file annual tax returns with the taxauthorities by 30 April of the year following thereporting year only if theyreceive income from non-Russian sources, or incomewhere no income tax waswithheld at the source ofpayment. Those foreignindividuals who leave thecountry during a calendaryear should file a taxdeclaration for the relevanttaxable period no laterthan one month prior to leaving Russia.

Regional and local taxesRegional and locallegislative bodies may, attheir discretion, introducevarious tax incentives andcredits with regard toregional and local taxes.Regional taxes currentlyinclude corporate propertytax, transport tax andgambling tax. Local taxescurrently include propertytax on individuals and landtax. Although these taxesare set regionally andlocally, the federallegislature has enactedlimits on their overall rates.

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The Civil Code states thatthe ruble is the nationalcurrency of the RussianFederation. Althoughagreements may refer tothe ruble value equivalentof foreign currency, alltransactions conductedinside the RussianFederation must, as ageneral rule, be settled in rubles. The Civil Code,however, permits the use of foreign currency in cases provided for by law.Federal Law No 173-FZ On Currency Regulationsand Currency Control,dated 10 December 2003,as amended, (the CurrencyLaw) establishes the basicrules of currency regulationand control.

Currency operationsThe Currency Law regulatesa broad range of currencyoperations including:

• payments made in a foreign currency,

• transfer of foreignsecurities,

• ruble transfers between a Russian resident and anon-resident or betweentwo non-residents,

• transfer of domesticsecurities between a resident and a non-resident or between two non-residents,

• the import and export of rubles and securities,

• transfer of funds andsecurities from the overseasaccount of a resident intoa domestic account, andvice versa, and

• transfer of rubles andsecurities between thedomestic accounts of a non-resident.

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THIS SECTION (PAGES 96-99) IS KINDLY PROVIDED BYBAKER & MCKENZIE – CIS,LIMITED

Resident vs non-resident statusThe Currency Law dividesindividuals and legalentities into two classes:

• residents, and

• non-residents.

Residents include:

• Russian citizens andother individuals whosepermanent place ofresidence is the RussianFederation,

• legal entities establishedin accordance withRussian legislation,

• representative offices(branches) of Russianlegal entities outside Russia, and the

Governments of theRussian Federation,constituent entities ofthe Russian Federation,and municipal units.

Non-residents are defined as:

• individuals whosepermanent place ofresidence is locatedoutside Russia

• legal entities incorporatedoutside Russia,

• enterprises/organisationsthat are not legalentities, organised andlocated outside theRussian Federation, and

• representative offices(branches) of foreignlegal entities in Russia.

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Special currency control rulesAs of 1 January 2007 most currency controllimitations have beeneliminated. However,certain requirements stillapply to Russian residents:

• Russian companies musthold all foreign currencyexport proceeds in theirRussian bank account(s)(“repatriation of currencyproceeds”),

• “transaction passports”are required for certaintransactions (external trade,loans) at Russian banks,

• most Russian residentsare prohibited fromperforming foreigncurrency transactions (theCurrency Law providessome exceptions),

• the purchase and sale of foreign currency may only be performedat authorised Russianbanks,

• cash exports are subjectto restrictions,

• when a Russian companyor individual opens anoverseas bank account in OECD/FATF membercountries they mustnotify the tax authoritiesand present regularreports on the cash flowin such accounts, and

• the operation of anoverseas bank account by a Russian resident is subject to certainrestrictions.

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Liability for violationThe Currency Law hasreproduced the system ofstate agencies which areresponsible for the executionof currency control. Thisincludes the CBR, theGovernment and thefederal agencies authorisedby the Government.

Currency control is executedthrough agents of thecurrency control regime,

including authorised banks,professional participants ofthe securities market, andgovernmental agencies.

Violation of Russian currencycontrol requirements mayentail civil, administrative, or criminal liability.

Administrative penalties forviolation of Russia’s currencycontrol requirements includevarious fines, which may be

imposed on individuals, legalentities, and companyexecutives.

The amount of a fine maybe as high as the entire valueof a transaction performed in violation of the currencycontrol requirements. Other sanctions include the revocation of licences(primarily applicable tobanks), and imprisonment.

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ALL THE INFORMATION INCLUDED IN THIS DOCUMENT IS FOR INFORMATIONAL PURPOSES ONLY,AND MAY NOT REFLECT THE MOST CURRENT LEGAL DEVELOPMENTS, JUDGMENTS, ORSETTLEMENTS. THIS INFORMATION IS NOT OFFERED AS LEGAL OR ANY OTHER ADVICE ON ANYPARTICULAR MATTER. THE FIRM AND THE CONTRIBUTING AUTHORS EXPRESSLY DISCLAIM ALLLIABILITY TO ANY PERSON IN RESPECT OF ANYTHING, AND IN RESPECT OF THE CONSEQUENCESOF ANYTHING, DONE OR NOT DONE WHOLLY OR PARTLY IN RELIANCE UPON THE WHOLE OR ANYPART OF THE CONTENTS OF BAKER & MCKENZIE’S “DOING BUSINESS IN RUSSIA” BROCHURE. NO CLIENT OR OTHER READER SHOULD ACT OR REFRAIN FROM ACTING ON THE BASIS OF ANYMATTER 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.

UK Trade & Investmentoffers UK businesses theinformation and advice they need to increase their overseas sales andinvestments. Please go towww.uktradeinvest.gov.ukto discover Websites forExporters, our searchabledatabase of the freeinformation that is availableon the web and details onour UK Sales Leads and UK Suppliers database.

ADDITIONAL INFORMATIONOTHER SOURCES OF INFORMATION

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Useful websitesBritish Chambers of Commerce (BCC)www.britishchambers.org.uk/exportzone/emrsBCC delivers an ExportMarketing Research serviceon behalf of UK Trade &Investment. Companieswith fewer than 500employees may be eligiblefor a grant of up to 50 per cent.

Sitpro Ltdwww.sitpro.org.ukTel: +44 (0)20 7467 7280Help with exportprocedures anddocumentation.

Department for Business,Enterprise & RegulatoryReform (BERR)www.berr.gov.ukTel: +44 (0)20 7215 5000Export Control Organisation.Information on exportcontrols and the licensingof defence-related goodsand technology.

British Standards Institute (BSI)www.bsi-global.comTel: +44 (0)20 8996 9000Advice on how to meettechnical standards andapprovals procedures.

Export Credits GuaranteeDepartment (ECGD)www.ecgd.gov.ukTel: +44 (0)20 7512 7000Help with credit insurancefor projects, capital goodsand services.

HM Revenue & Customs www.hmrc.gov.ukTel: +44 (0)29 2050 1261Help with customsprocedures, regulations and cost of compliance.

Business librariesThe Wall Street Journal:www.wsj.com

BusinessWeek Magazine:www.businessweek.com

Entrepreneur Magazine:www.entrepreneur.com

Company informationSecurity and Exchange CommissionEdgar Database:www.sec.gov

Nasdaq quoted companies:www.nasdaq.com

Dun and Bradstreet:www.dnb.com

Yellow Pages:www.bigyellow.com

Foreign exchange rates,current and historical:www.oanda.com

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MAP HERE

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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, omissionsor misleading statements, and no warranty is given or responsibility accepted as to the standing of anyindividual, 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 fromwell-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 issustainable, compostable and can be recycled.

Published May 2009 by UK Trade & Investment©Crown CopyrightURN 09/783

A range of UK Government support is available from a portfolio of initiativescalled 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 ofthe two SfB products “Developing Your International Trade Potential” and“Accessing International Markets”.

We also help overseas companies bring their high-quality investment to theUK’s dynamic economy – acknowledged as Europe’s best place from which tosucceed in global business.

UK Trade & Investment offers expertise and contacts through its extensivenetwork of specialists in the UK, and in British embassies and other diplomaticoffices around the world. We provide companies with the tools they require tobe competitive on the world stage.

For further information please visit www.uktradeinvest.gov.ukor telephone +44 (0)20 7215 8000.

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