Doing Business In Russia

Legal Advice

GSL Law & Consulting specializes in legal services, corporation and tax law, registration, reorganization and liquidation of legal entities, representation in court and arbitration, FSFR and securities market, real estate support, labor law and personnel audit, structuring of individual property, family law and inheritance planning, solutions for issues related to fiduciary management and fiduciary services.

Introduction

According to article 1 of its Constitution, the Russian Federation (Russian Federation and Russia are equivalents) is a democratic federal law-bound state with a republican form of government.

The Constitution of the Russian Federation lays a strong legal foundation and provides firm guarantees for entrepreneurial activity and sets out that in Russia:

•     Guarantees are provided for the integrity of economic space, a free flow of goods, services and financial resources, support for competition, and the freedom of economic activity (article 8, paragraph 1);

•     Recognition and equal protection are given to the private, state, municipal and other forms of ownership (article 8, paragraph 2);

•     Everyone has the right to a free use of his abilities and property for entrepreneurial and economic activities not prohibited by law (article 34, paragraph 1);

•     Economic activity aimed at monopolization and unfair competition is disallowed (article 34, paragraph 2);

•     Right of private property is protected by law (article 35, paragraph 1);

•     Everyone is entitled to have property, possess, use and dispose of it both individually and jointly with other people (article 35, paragraph 2);

•     No one may be deprived of property otherwise than by a court decision. Forced confiscation of property for state needs may be carried out only on the proviso of preliminary and complete compensation (article 35, paragraph 3); and

•     Right of inheritance is guaranteed (article 35, paragraph 4).

By the end of 2000, Russia had taken major steps towards practical implementation of a constitutional model of a law-bound state and market economy. Various spheres of social and economic life saw enactments filling the gaps in legal regulation. A number of branches of law were codified. The main enactments regulating entrepreneurial activity in Russia are as follows:

•     Civil Code of the Russian Federation, Parts 1, 2, 3, and 4 (Part 4 entered into force on 1 January 2008);

•     Tax Code of the Russian Federation, Parts 1 and 2 (Part 2 entered into force on 1 January 2001);

•     Federal Law on Joint-Stock Companies (entered into force on 1 January 1996);

•     Federal Law on Limited-Liability Companies (entered into force on 1 March 1998);

•     Federal Law on Protection of Competition (entered into force on 28 October 2006);

•     Federal Law on Exchange Regulation and Exchange Control (entered into force on 15 June 2004);

•     Federal Law on Securities Market (entered into force on 22 April 1996); and

•     Federal Law on Commercial Secrets (entered into force on 15 August 2004).

Russia is party to most of the important international treaties and conventions governing international trade, taxation, protection of intellectual property, and information exchange. According to article 15 of the Constitution and the Federal Law on International Treaties of the Russian Federation, the universally acknowledged principles and norms of international law and international treaties of the Russian Federation form an integral part of its system of law. If an international treaty of the Russian Federation contains rules different from those set out in law, the rules of such international treaty apply.

Another key source of legal regulation is judicial practice, especially accumulated by the Supreme Arbitration Court, Arbitration Courts of federal districts, as well as by the Russian Federation Constitutional Court.

In accordance with chapter 3, article 62, of the Constitution of Russia, foreign nationals and stateless persons enjoy in Russia the same rights and bear the same obligations as Russian citizens. This article lays down the national treatment principle traditional for Russian law. Implementation of this constitutional article is secured by article 2 of the Civil Code of Russia, stating that the civil law rules apply to the relations involving foreign citizens, stateless persons and foreign legal entities. Russian legislation gives a number of guarantees for protection of rights of foreign investors.

Acquisition of Enterprises

In General

In Russia, there are two main methods of acquiring an enterprise, ie, acquisition of enterprise as a single property unit and acquisition of shares/participations in the charter capital of a company.

Acquisition of Enterprise as a Single Property Unit

In General

This method of acquisition of enterprise is not commonly used in the Russian Federation for a number of reasons, in particular:

•     Value-added tax (VAT) chargeable on the purchase and sale of an enterprise;

•     Difficulties in including the purchase and sale of an enterprise on the accounting records and tax reporting; and

•     A simpler method of acquiring rights to an enterprise by purchasing shares/participations in a legal entity, which method does not attract VAT and has a clearer legal regulation.

In accordance with article 132 of the Civil Code, an enterprise as object of a right means a property complex used for carrying out entrepreneurial activity. The enterprise in whole as a property complex is regarded as immovable property. The enterprise in whole or in part can be subject to:

•     Purchase and sale;

•     Pledge;

•     Lease; and

•     Other transactions.

The enterprise as a property complex comprises all types of property designated for its activity, including:

•     Land plots;

•     Buildings, constructions, equipment, inventory, materials and products;

•     Right of claim, debts; and

•     Rights to the signs or indicators individualizing the enterprise, its products, works and services (trade name, trade marks and service marks), and other exclusive rights.

The specific features of acquisition of enterprise as a single object are laid down in articles 559–566 of the Civil Code. Under an enterprise sale agreement, the seller will transfer to the buyer the title to the enterprise in whole as a property complex, excluding rights and obligations which are not transferable. Exclusive rights to the means of individualization of the enterprise, products, works and services of the seller (trade name, trade marks and service marks), as well as rights for use of such means of individualization granted by license agreements, will pass to the buyer, unless otherwise provided by the agreement.

The rights of the seller received by him on the basis of a permission (license) to carry out the relevant activity is not transferable to the buyer of the enterprise, unless otherwise stated by law or other legal instruments. The enterprise sale agreement must be in writing, drawn as a single document and signed by the parties; failure to comply with the prescribed form of enterprise sale agreement renders it invalid. The enterprise sale agreement is subject to state registration and is deemed to be made from the date of such registration.

The composition and value of the enterprise to be sold is determined in the enterprise sale agreement based on full inventory check conducted in accordance with the rules established for such checks. The enterprise is regarded as transferred to the buyer from the date of signing of the transfer deed by both parties. From this date, the buyer will bear the risk of accidental loss of or accidental damage to the property transferred as part of the enterprise.

Creditors’ Rights at the Sale of Enterprise

Creditors on obligations included in the composition of the enterprise must be, before transfer to the buyer, notified in writing of the sale by one of the parties to the enterprise sale agreement.

A creditor who has not given the seller or the buyer his written consent to the transfer of debt is entitled within three months from receipt of the notice of sale of enterprise to demand either termination or early performance of the obligation and compensation by the seller of the losses thus caused or, alternatively, recognition of the enterprise sale agreement as invalid fully or in the relevant part. A creditor who has not been notified of the sale of enterprise may file a lawsuit to get his above claims satisfied within two years from the date when he learned or should have learned of the transfer of enterprise from the seller to the buyer.

Transfer of Title to Enterprise

The title to the enterprise passes to the buyer from the date of state registration of such title. Unless otherwise stated in the enterprise sale agreement, the title to the enterprise passes to the buyer and becomes subject to state registration immediately upon transfer of the enterprise to the buyer.

The agreement may provide for retention by the seller of title to the enterprise transferred to the buyer until payment for the enterprise or occurrence of other events; in this case, the buyer is entitled, until transfer to him of the title, to manage the property and rights included in the composition of the transferred enterprise to the extent necessary for the purposes of acquisition of such enterprise.

Consequences of Transfer and Acceptance of the Enterprise with Defects

The buyer may demand reduction of the purchase price in the event of transfer to him, in the composition of the enterprise, of the seller’s debts which have not been specified in the enterprise sale agreement or deed of transfer, unless the seller proves that the buyer was aware of such debts at the time of entering into the agreement and transfer of the enterprise.

The buyer may in court demand amendment or termination of the enterprise sale agreement or return of what has been performed by the parties under the agreement, if it is ascertained that because of defects for which the seller is responsible the enterprise is unsuitable for the purposes set forth in the agreement, and such defects have not been eliminated by the seller.

Specific Features of Amendment or Termination of Agreement

The Civil Code rules on consequences of invalidity of transactions and on amendment or termination of the sale agreement, which provide for return or in-kind recovery of what has been received under the agreement from one or both parties, will apply to the enterprise sale agreement if such consequences do not substantially infringe the rights protected by law and interests of the seller's and buyer's creditors and other parties and do not contradict public interests.

Acquisition of Enterprise by Purchase of Shares or Participations in Its Capital

In General

Purchase of shares or participations in a commercial organization generally does not require consent of any state authorities and represents the most commonly used method of acquisition of enterprise in the Russian Federation. This method of acquisition of enterprise does not attract VAT (transactions with securities and participations are VAT exempt) and is generally executed by conclusion of purchase and sale agreement in uncertified written form, as well as by making relevant entries in the register of shareholders (in the case of shares in joint-stock company) or state register of legal entities (in the case of participations in limited-liability companies). The specific features of purchase of participations are:

•     Disposal (sale) of a participation in the capital of a company must be certified by a notary public. If not done before a notary public, the transaction is invalid;

•     The law provides for a number of exemptions from notarial certification;

•     The participation or part thereof in the charter capital passes to the purchaser from the date of notarial certification of disposal of such participation or its part or, where no notarial certification is required, from the date of entry in the uniform state register of legal entities of the relevant changes, based on the documents of title;

•     The company keeps the register of its members, which contains the details of each member, value of his participation and its payment, and value of participations held by the company, dates when such participations passed to or were purchased by the company;

•     The details of members are also available on the public state register;

•     A company member generally has the right to sell or otherwise dispose of his participation or part thereof in the capital; and

•     Company members have a pre-emption right in purchase of participations over third parties; besides, the sale of participation may be restricted by the company's charter, which helps keep the board of company members unchanged.

The main specific features of purchase of shares are:

•     The shareholders in the closed joint-stock company have a pre-emption right of purchase of shares being sold by other shareholders of the company;

•     The sale of shares must be made in uncertified written form;

•     The title to the shares is deemed to be transferred from the date of record made in the register of shareholders maintained by either a special registrar or by the entity itself; and

•     There is a special procedure for purchasing 30 (50, 75) per cent of shares which provides for a mandatory (voluntary) offer.

Antimonopoly Requirements at Acquisition of Enterprise

According to article 28 of the Federal Law on Protection of Competition, transactions with shares, participations and property of commercial entities, as well as with rights to commercial entities, require prior consent of the antimonopoly authority where the aggregate value of assets as shown in the latest accounts of persons (group of persons) purchasing the shares, participations, rights and/or property, and of a person (group of persons) whose shares, participations, rights, and/or property is being purchased is more than RUB 7-billion or where their aggregate sales in the last calendar year are more than RUB 10-billion and the value of assets, as shown in the latest accounts of a person (group of persons) whose shares, participations, rights and/or property is being purchased, is more than RUB 250-million, or if one of the said persons is included in the register of business entities who have more than 35 per cent share in a particular product market or have a dominant position in a particular product market.

According to article 29 of the Federal Law on Protection of Competition, transactions with shares, participations and assets of financial entities, as well as with rights to financial entities, require prior consent of the antimonopoly authority where the value of assets as shown in the latest accounts of the financial entity is more than determined by the Government of the Russian Federation (for transactions with shares, participations, assets of and rights to credit institutions, this figure is determined by the Government of the Russian Federation and agreed with the Central Bank of the Russian Federation).

According to article 30 of the Federal Law on Protection of Competition, a number of transactions must be notified to the antimonopoly authority (ie, no consent is required, but notice must be given). Normally, these are cases analogous to those requiring consent, but with smaller assets and sales.

Article 34 of the Federal Law on Protection of Competition sets out the following the consequences of infringement of the requirement to obtain prior consent of the antimonopoly authority to transactions and of the requirement to notify the antimonopoly authority of transactions:

•     Transactions made without prior consent of the antimonopoly authority are recognized as invalid through court proceedings initiated by the antimonopoly authority, if such transactions have led or may lead to restriction of competition, in particular as a result of arising or strengthening of dominant position; and

•     Transactions made with infringement of the requirement to notify the antimonopoly authority are recognized as invalid through court proceedings initiated by the antimonopoly authority, if such transactions or other actions have led or may lead to restriction of competition, in particular as a result of arising or strengthening of dominant position. There is administrative and criminal liability for infringement of antimonopoly laws.

Investing in Strategic Sectors

The Federal Law on Foreign Investments in Legal Entities of Strategic Importance to the National Defence and State Security restricts access of foreign capital to a number of economic branches, with access to be granted upon approval by the government commission. The Law covers such activities as:

•     Placement, construction, use and decommissioning of nuclear installations, sources of radiation and storages of nuclear materials, radioactive substances, and radioactive waste;

•     Development of armaments and military equipment;

•     Production of aviation equipment;

•     Geological study of subsoil and/or exploration and extraction of natural resources from the subsoil areas of federal importance; and

•     Extraction (catching) of water biological resources.

Acquisition of Real Estate

In General

The rules of immovable property acquisition in the Russian Federation are provided by the Russian Federation Civil Code (articles 549–558), as well as by the Federal Law on State Registration of Immovable Property Rights and Transactions.

Some peculiarities of immovable property transactions are set forth by the Land Code, Housing (Residential) Code, the Federal Law on Subsoil and a number of other federal laws. As mentioned above, immovable property also can include an enterprise as a property complex, acquisition of which is subject to a separate legal regulation.

Generally, foreign individuals and companies can freely purchase immovable property in Russia. There are restrictions which relate to agricultural lands, property in near-border areas and property of strategic significance for the state.

Immovable Property

In General

According to article 130 of the Civil Code, immovable things comprise land plots, subsoil plots and everything closely connected to soil, ie, the objects which cannot be moved without disproportionate damage to their functions, including buildings, structures, and objects under construction. Immovable things also include aircraft and sea vessels which are subject to state registration, inland waterway vessels and space objects. Other property may qualify as immovable things under the law.

Pursuant to article 113 of the Civil Code, the right of ownership and other proprietary rights to immovable property, their restrictions, creation, transfer and termination are subject to state registration in the Uniform State Register by a government agency conducting state registration of immovable property rights and transactions (this being the Federal Registration Service).The following rights are subject to registration:

•     Right of ownership;

•     Right of economic management;

•     Right of operative administration;

•     Right of lifetime inheritable possession;

•     Right of permanent use;

•     Mortgage;

•     Servitudes;

•     Tenancy for the term of more than one year; and

•     Other rights as stipulated by law.

A refusal of state registration of immovable property rights or transactions or avoidance by a relevant agency to register the same can be appealed against in court. The agency responsible for state registration of immovable property rights and transactions must at the request of the rightholder certify the fact of the registration by issuing a relevant document evidencing the registered right or transaction (certificate) or endorsing the document delivered for registration. The agency responsible for state registration of immovable property rights and transactions must disclose to any person the information on the registration conducted and the rights registered (ie, the immovable property register is open to the public). This information is available at any agency engaged in an immovable property registration, regardless of the actual place of the registration.

Immovable Property Purchase and Sale Contract

Under an immovable property purchase and sale contract, the seller undertakes to transfer into the buyer's ownership a land plot, building, structure, apartment or other immovable property. An immovable property sale contract muse be made in writing as a single document signed by both parties.

Non-observance of the form of the contract renders it invalid. Transfer of the ownership right to the buyer under the immovable property sale contract is subject to state registration. The making by the parties of an immovable property sale contract before state registration will not be the ground for any changes in their relationship with third parties.

Where one of the parties avoids the registration of the ownership right transfer, the court may at the request of the other party, or, in cases stipulated by enforcement laws of the Russian Federation, also at the request of a bailiff or executor of justice, deliver a judgment to carry out a state registration of the ownership right. The party unreasonably avoiding state registration of the ownership right must reimburse the other party for any losses incurred through the delay in registration. Under a contract of sale of a building, structure or other immovable property, the buyer, together with the ownership right to the immovable property, will simultaneously receive the ownership to the land plot occupied by such immovable property and essential for its proper use (the principle of unity of land plots and objects durably connected therewith).

Where the seller is the owner of the land on which the immovable property under sale is situated, the ownership of the land plot occupied by such immovable property and required for the property use is transferred to the buyer, unless the law provides otherwise. The immovable property above the land plot not owned by the seller can be sold without the consent of the owner of the land plot under such immovable property, provided such sale would not contradict the terms of use of such land plot as set out by the law or the contract. When such property is sold, the buyer acquires the right to use the relevant land plot on the same terms as the seller of the immovable property.

Subject of the Immovable Property Sale Contract

An immovable property sale contract must contain the particulars allowing to identify the immovable property which is transferred to the buyer under the contract, including those determining either the location of the immovable property on the land plot or its position as part of other immovable property.

Failure to include such information in the contract will mean that the conditions of the transfer have not been agreed by the parties and the corresponding contract will not be deemed made.

Price

An immovable property sale contract must stipulate the price of such immovable property. Failure to include the provision on the immovable property price agreed by the parties in the written form makes the immovable property sale contract unconcluded.

Unless it is otherwise provided by law or the immovable property sale contract, the price of the building, structure or other immovable property specified in the contract will include the price of the corresponding part of the land plot under such immovable property or the rights hereto transferred to the buyer together with the property. When the property price in the immovable property sale contract is based on the unit of area or other indicator of its size, the total price of such immovable property will be determined according to the actual size of the property transferred to the buyer.

Transfer

The transfer of immovable property by the seller and its acceptance by the buyer must be carried out according to the transfer deed signed by the parties or according to any other transfer document. Unless otherwise provided by the law or the contract, the seller is deemed to have fulfilled its obligation to transfer the immovable property to the buyer after the conveyance of the immovable property to the buyer and the signing of the relevant transfer document.

Failure of one of the parties to sign the immovable property transfer document on conditions stipulated by the contract will be considered as refusal of the seller to transfer and of the buyer to accept the said property. The fact that the buyer accepted the immovable property which does not conform to the terms of the immovable property sale contract, even when such nonconformity has been indicated in the transfer document, will not release the seller from the responsibility for improper fulfilment of the contract.

Specific Features of Selling Residential Premises

An essential condition under the contract of sale of a residential building, apartment, part of a residential building, or apartment dwelled in by the persons who by law retain the right to use such premises after acquisition by the buyer, is the making of the list of such persons and their rights to use the premises under sale.

The sale contract for a residential building, apartment, part of the residential building, or apartment is subject to state registration and will be deemed made from the date of such registration.

Customs Regulation

The customs regulation recently has undergone and still undergoes substantial changes:

•     As of 1 January 2010, the Customs Union of Belarus, Kazakhstan and Russia effectively started operating. Single customs tariff of the Customs Union and Agreement on non-tariff regulation came into force;

•     As of 1 July 2010, single Customs Code of the Customs Union and a number of key international treaties became effective, which continued to actively form the single customs legislation of the Eurasian Economic Community;

•     The Russian Federation Customs Code (except for a number of provisions) was repealed. Effectively it was replaced by international documents mentioned above and the Federal Law Number 311-FZ of  27 November 2010 on Customs Regulations in the Russian Federation; and

•     The customs control is expected to move to the external boundary of the Customs Union, which will signify the formation of single customs territory of the Customs Union, it is also planned to have the Single Economic Space within the Customs Union.

Currency Regulation, Capital and Profit Transfer, Investment Incentives

Exchange Regulation

The most significant enactment on exchange regulation and exchange control is the Federal Law on Exchange Regulation and Exchange Control (the ‘Law on Exchange Regulation’). It establishes the legal base and principles of exchange regulation and exchange control in the Russian Federation, powers of exchange regulation authorities, rights and obligations of residents and non-residents in relation to possession, use, and disposition of currency valuables, rights and obligations of non-residents in relation to possession, use, and disposition of Russian Federation currency and domestic securities, and rights and obligations of exchange regulation authorities and exchange regulation agents. Other principal laws containing provisions on exchange regulation and control are:

•     The Civil Code of the Russian Federation, which determines general rules of use of currency as a means of payment in the Russian Federation;

•     The Tax Code of the Russian Federation, which establishes that payment of taxes in the Russian Federation be made in the currency of the Russian Federation and sets forth other provisions;

•     The Customs Code of the Russian Federation, which establishes rules of conveyance of currency and currency valuables across the customs border of the Russian Federation and sets forth other provisions;

•     The Labour Code of the Russian Federation, which establishes the obligation to pay salary in the currency of the Russian Federation; and

•     The Federal Law on Fundamentals of State Regulation of Foreign Trade Activity, which indicates possible restrictions on foreign trade of goods, works and intellectual property which relate to exchange regulation measures.

A number of provisions on exchange regulation and control are contained in subordinate acts of the Government of the Russian Federation, the Central Bank of the Russian Federation, and other government authorities. Liability for infringement of exchange legislation is established by the Administrative Offences Code of the Russian Federation and the Criminal Code of the Russian Federation.

The exchange legislation presently in force in Russia determines two major directions of state regulation in this area of financial relations, these being exchange regulation and exchange control. The policy for liberalization of Russian exchange legislation has primarily affected exchange control, which aims at ensuring that exchange legislation is complied with in exchange transactions.

Exchange legislation (based on the Law on Exchange Regulation and Control) presumes that exchange control in Russia is exercised by the Government of the Russian Federation and exchange control authorities and agents. The exchange control authorities are the Central Bank of Russia and a federal executive authority designated by the Russian Federation President (Federal Financial and Budgetary Inspection Service — Rosfinnadzor).

Capital Movement Operations and Exchange Transactions

In General

As regards exchange regulation, from 1 January 2007 there have been major changes affecting the rights and obligations of individuals and companies which arise in connection with exchange transactions. There has been eliminated the concept of a special account for exchange transactions. A number of provisions of the Law on Exchange Regulation and Control have been repealed and therefore made the Central Bank of Russia unable to regulate capital movement operations.

No longer is in force the provision of the Law which required that all payments and transfers relating to credits and loans granted by residents to non-residents in Russian currency be made only to the non-resident's bank account opened in Russian currency with an authorized bank. Payments between residents and non-residents in the transactions with domestic and foreign securities can at their choice be made in either Russian or foreign currency. Prior registration of the account or deposit or notice of its closure is no longer required.

There has been abolished the article of the Law that provided for obligatory sale of currency revenue in the internal Russian market. This amendment undoubtedly reflects the fact that the financial situation in Russia has generally become healthier and its national currency stronger. Generally, there are no restrictions on exchange transactions between non-residents, as well as between residents and non-residents. By contrast, exchange transactions between residents are generally prohibited.

A foreign investor planning to do business in Russia should bear in mind that currency residence does not coincide with tax residence. Thus, for example, a branch of a foreign company is a currency non-resident of Russia, but acquires the status of taxpayer (tax resident) for corporate profits tax purposes if it meets certain criteria (for instance, if it carries on entrepreneurial activity in Russia during at least 30 days through a place of business in Russia).

In the Russian Federation, non-residents can open bank accounts (bank deposits) with Russian banks in foreign or Russian currency. The opening and operation by non-residents of bank accounts (bank deposits) in the Russian Federation is generally governed by the Russian Central Bank. In pursuance of this provision of the Law on exchange regulation, the Central Bank has adopted:

•     Regulation Number 269-P of 4 May 2005 on Opening by Bank of Russia and Operation of Bank Accounts of Non-residents in Russian Federation Currency; and

•     Instruction Number 28-I of 14 September 2006 on Opening and Closing of Bank Accounts and Deposit Accounts.

Stages of Opening an Account for a Non-Resident Legal Entity with an Authorized Bank

The steps in opening an account for a non-resident legal entity with an authorized bank are:

•     Registration with tax authorities in the Russian Federation (at the place of business of permanent establishment, location of immovable property or vehicle or, in the case of absence of these, in connection with account opening) and obtaining of Certificate of tax registration;

•     Obtaining of necessary permissions and licenses;

•     Provision of necessary documents to the authorized bank; and

•     Decision by the bank to open an account and making of a bank account agreement.

Competition Law

In General

The principal enactment on antimonopoly regulation is Federal Law Number 135-FZ of 26 July 2006 on Protection of Competition (hereinafter the Law), which marked a new stage in the development of Russian competition law. Protection from unfair competition in the advertising field is provided by Federal Law Number 38-FZ of 13 March 2006 on Advertising.

The main goals of the antimonopoly policy of the state are formation of an integral economic and legal space, provision of economic freedom of entrepreneurial activity, and creation of a competitive environment on commodity and financial markets.

The Law establishes organizational and legal foundations for protection of competition, particularly for prevention and restraint of monopolistic practices and unfair competition; prevention, restriction and elimination of competition by federal executive authorities, government authorities of the Russian Federation subjects, local authorities and other relevant authorities or organizations, as well as by the state extra-budgetary funds and Central Bank of the Russian Federation.

Types of Monopolistic Practices

Antimonopoly legislation prohibits such monopolistic activity as abuse by undertakings of their dominant position in the market. The dominant position is a position of an undertaking (group of persons) or several undertakings (groups of persons) in the market of a particular product which enables such undertaking (group of persons) or undertakings (groups of persons) to exercise decisive influence upon general conditions of circulation of the product in the relevant market and/or remove from same other undertakings, and/or hinder the access to such product market of other undertakings.

The dominant position is defined as a position of an undertaking (except financial institution) whose market share is above 50 per cent, unless in the course of proceedings on antimonopoly infringement or in the course of exercise of government control over economic concentration it is established that, despite being above this threshold, the position of the undertaking in the product market is not dominant.

Also as dominance can be recognized a position where the market share is below 50 per cent, if the dominant position of such undertaking is detected by the antimonopoly authority based on the possibility of access to this market of new competitors or based on other criteria characterizing the product market. The position cannot be recognized as dominant if the share of an undertaking in a particular product market (except financial institution) does not exceed 35 per cent. However, federal laws can provide for exceptions where dominance of an undertaking is recognized even in the cases of market share being less than 35 per cent.

Criteria for a dominant position of a financial institution (except credit institutions) are set by the Government of the Russian Federation in coordination with the Central Bank of Russia. The position of a financial institution cannot be recognized as dominant if such financial institution has less than 10 per cent share in a product market which is exclusive in Russia or less than 20 per cent in the product market in case the goods in question also circulate on other product markets in the Russian Federation.

Antimonopoly legislation prohibits such acts as withdrawal from circulation of goods, if such withdrawal results in increase of the goods’ price; imposition on a contracting party of unfavorable terms or terms unrelated to the subject of the contract; economically and technologically unjustified reduction or termination of production of goods, if such goods are in demand; and setting by a financial institution of an unreasonably high or low price for a financial service.

The law prohibits agreements between undertakings or their concerted actions restricting competition if these may lead to setting or maintenance of prices (tariffs), discounts and mark-ups; increase, reduction or maintenance of prices at auctions; territorial division of the market; hindering of the access to the market of other undertakings; and reduction or termination of production of goods which are in demand (article 11 of Law Number 135-FZ). Apart from monopolistic practices, infringements include unfair competition which is committed by way of:

•     Distribution of false, inaccurate or distorted information that may cause losses to the undertaking or damage its business reputation;

•     Giving misleading information about the nature, method and place of production, properties, quantity, and quality of the goods, or about its manufacturer;

•     Incorrect comparison by a undertaking of own produced or sold goods with the goods produced or sold by other undertakings;

•     Sale, exchange, or other introduction of the goods into turnover, if it involved illegal use of intellectual property or means of individualization of the legal entity, or means of individualization of products, works, and services which are equated with intellectual property; and

•     Illegal receipt, use, and disclosure of information which constitutes trade, official or other secret protected by law.

The Law does not allow for unfair competition related to purchase and use of exclusive rights to means of individualization of the legal entity, or means of individualization of products, works and services. The Law also prohibits competition-restricting acts and actions (omissions) of federal executive authorities, government authorities of the Russian Federation subjects, local authorities, state extra-budgetary funds and the Central Bank of Russia.

Antimonopoly Requirements for Auctions

At the conduct of an auction, the Law prohibits any actions which result or may result in prevention, restriction or elimination of competition, including:

•     Coordination by auction organizers or orderers of activity of the participants in the auction;

•     Creation for one or several participants in the auction of preferential terms of participation, in particular by means of access to the information, unless otherwise stipulated in the federal law; and

•     Breach of procedure of determining the winner(s) of the auction.

Functions and Powers of the Antimonopoly Authority

The antimonopoly authority, the Federal Antimonopoly Service of Russia, has the power to:

•     Initiate and examine cases of antimonopoly law infringement;

•     Issue binding orders to undertakings, where stipulated in the Law;

•     Issue binding orders to federal executive authorities, government authorities of the Russian Federation subjects, local authorities, other authorities or organizations performing the same functions, state extra-budgetary funds and their officials, except cases specified in article 23, part 1, paragraph 4;

•     Make liable for antimonopoly law infringement any commercial or non-commercial organizations, their officials, officials of federal executive authorities, executive authorities of Russian Federation subjects, local authorities, other authorities or organizations performing the same functions, state extra-budgetary funds, and individuals, including individual entrepreneurs, in cases and in the manner established by the laws of the Russian Federation;

•     Apply to arbitration court with claims and statements on antimonopoly law infringements; and

•     Maintain the register of undertakings having a share of above 35 per cent in the market of any particular product.

The Federal Antimonopoly Service of Russia also is entrusted with functions of state control over economic concentration. A number of transactions require prior consent of the antimonopoly authority. A number of transactions must be notified by undertakings to the antimonopoly authority.

Liability for Antimonopoly Law Infringement

Commercial and non-commercial organizations (their officials), federal executive authorities (their officials), executive authorities of Russian Federation subjects (their officials), local authorities (their officials), other authorities or organizations performing the same functions (their officials), as well as state extra-budgetary funds (their officials) and individuals, including individual entrepreneurs, are obligated to comply with the orders of the antimonopoly authority within the time stipulated in such decisions and orders, failing which they carry civil, administrative or criminal liability in accordance with the laws of the Russian Federation.

In the case of systematic monopolistic activity of a dominating commercial organization or of a non-commercial organization deriving profit from its activity, the court, upon claim by the antimonopoly authority (in the case of a credit institution, upon claim by the antimonopoly authority in coordination with the Central Bank of Russia), can issue a judgment on forced division of such organization.

Intellectual Property Protection

By the end of 2006, Russian intellectual property law had been codified. Numerous federal laws on intellectual property were replaced by Part IV of the Civil Code of Russia (in force 1 January 2008), this now being the main enactment regulating and protecting intellectual property in the Russian Federation.

In the Russian Federation, the results of intellectual activity also are protected by other branches of law. They are covered by constitutional, administrative, tax, budget, employment, and criminal laws. The Civil Law defines general conditions of protection (relevance in law) of intellectual activity results, legal constructions with different degrees of freedom of use of such results, ways of access to these intangible benefits by interested persons, and means of prevention of illegal access to the results of intellectual activity. The following items are protected in the Russian Federation:

•     Works of art, literature, and science;

•     Computer software;

•     Databases;

•     Performances;

•     Phonograms;

•     Over-the-air or cable broadcasting of radio and television programs (broadcast of over-the-air or cable casting organizations);

•     Inventions;

•     Utility models;

•     Industrial designs;

•     Achievements in artificial selection;

•     Topography of integrated circuits;

•     Production secrets (know-how);

•     Trade names;

•     Trade marks and service marks;

•     Names of places of goods origin; and

•     Brands.

International treaties of the Russian Federation constitute an integral part of its legal framework, and whenever an international treaty to which Russia is a party sets forth different rules, the rules of this international treaty should apply. A number of provisions contained in international treaties are not codified in the Russian legislation. At present, Russia is party to the following multilateral international treaties governing intellectual property matters:

•     Convention establishing the World Intellectual Property Organization (Stockholm, 14 July 1967, as revised on 2 October 1979; joined by the USSR on 26 April 1970);

•     Berne Convention for the Protection of Literary and Artistic Works (Berne, 9 September 1886; in force in Russia from 13 March 1995);

•     Universal Copyright Convention (Geneva, 6 September 1952; revised at Paris, 24 July 1971; took effect in the USSR on 27 May 1973);

•     International Convention for the Protection of Performers, Producers of Phonograms and Broadcasting Organizations (Rome, 26 October 1961; took effect in Russia on 26 May 2003);

•     Convention for the Protection of Producers of Phonograms against Unauthorized Duplication of Their Phonograms (Geneva, 29 October 1971; entered into force in Russia on 13 March 1995);

•     Paris Convention for the Protection of Industrial Property (20 March 1883; the Convention entered into force in the USSR on 1 July 1965);

•     Strasbourg Agreement Concerning the International Patent Classification of 24 March 1971 (entered into force in the USSR on 7 October 1975);

•     Trade Mark Law Treaty (Geneva, 27 October 1994; entered into force in the Russian Federation on 11 May 1998);

•     Agreement of Cooperation on Suppression of Offenses against Intellectual Property (Moscow, 6 March 1998; the Agreement entered into force in the Russian Federation on 12 November 2001);

•     Eurasian Patent Convention (Moscow, 9 September 1994; the Convention entered into force in the Russian Federation on 27 September 1995);

•     Budapest Treaty on the International Recognition of the Deposit of Microorganisms for the Purposes of Patent Procedure (Budapest, 28 April 1977; entered into force for the USSR on 22 April 1981);

•     Patent Cooperation Treaty (Washington, 19 June 1970; entered into force for the USSR on 29 March 1978);

•     Locarno Agreement Establishing an International Classification for Industrial Designs of 8 October 1968 (entered into force for the USSR on 15 December 1972);

•     Nice Agreement Concerning the International Classification of Goods and Services for the Purposes of the Registration of Marks of 15 June 1957, as revised at Stockholm on 14 July 1967, and at Geneva on 13 May 1977 (entered into force in the Russian Federation on 26 July 1971);

•     Madrid Agreement Concerning the International Registration of Marks of 14 April 1891 (as revised at Brussels on 14 December 1900, at Washington on 2 June 1911, at the Hague on 6 November 1925, at London on 2 June 1934, at Nice on 15 June 1957, and at Stockholm on 14 July 1967; entered into force on 1 July 1976); and

•     Protocol to the Madrid Agreement Concerning the International Registration of Marks (Madrid, 27 June 1989; the Russian Federation adopted this Protocol by Russian Federation Government Regulation No 1503 of 19 December 1996).

On 6 May 2009, the State Duma ratified the Singapore Treaty on the Law of Trade Marks. The Singapore Treaty on the Law of Trade Marks, signed on 26 March 2007 in Singapore, is yet another stage in the process of harmonization of national trade mark legislations where they concern administrative procedures. The Treaty provides for additional benefits for applicants and rightholders, which were not stipulated in the Trade Mark Law Treaty of 1994, entered into by the Russian Federation on 11 May 1998.

This document contains such unified provisions as the procedure of making and filing a trade mark and service mark application, details of making changes to applications, license agreements, and other documents pertaining to trade marks and service marks, duration of the trade mark registration, renewal of the registration, and other provisions.

For Russia, the participation in the Treaty will provide equal rights both to the Russian applicants going through the trade mark registration procedure abroad, and to the foreign applicants registering their trade marks in the Russian Federation.

The Russian Federation is the first country to adopt as basis a unified model of the legal regulation of turnover of intellectual products and means of individualization of persons and results of their activity in the civil turnover. The legislators have adopted the idea of a uniform technical solution by providing legal regulations common to all results of intellectual activity and individualization means, and combining them in Chapter 69 of Part IV of the Civil Code under the title General Provisions. In Part IV of the Civil Code, the legal regulation model chosen for Russia is referred to as intellectual property.

Part IV of the Civil Code applies to legal relations arising after its coming into force. As for the relations which arose before its coming into force, Part IV of the Civil Code will only be applicable to the rights and obligations which will arise after its enactment. The rights to the results of intellectual activity and individualization means equivalent to them, which have been protected at the date of enactment of Part IV of the Civil Code, will continue to be protected in accordance with its provisions.

The rules of Part IV of the Civil Code governing the conclusion, form and state registration of contracts will apply to contracts made after the enactment of Part IV of the Civil Code, including contracts offered before, but made after, 1 January 2008. Part IV of the Civil Code stipulates better protection of rights to intellectual products and more effective sanctions for breach of such rights, it harmonizes Russian legislation with international obligations of the Russian Federation, and, above all, it aims to strike the balance between the interests of the author, the investor and the user, which is generally considered as the key to effective legal regulation in this area of civil relationships.

Employment Law

The main enactment in the domain of employment law is the Labour Code adopted on 30 December 2001 to replace the Soviet Code of Labour Laws. Rules of employment law also can be found in a number separate laws and of subordinate acts, and namely in Government decrees governing the employment issues related to particular categories of employees (those working in the Far North or under harmful/heavy conditions). Other sources of employment law are:

•     Collective agreements, which are legal acts governing social and employment relations within the organization or with the self-employed entrepreneur, and made between an employee and the employer's representatives;

•     Collective arrangements, which are legal acts governing social and employment relations and setting general principles of regulation of the corresponding economic relations, are made between the authorized representatives of employers and employees on a federal, interregional, regional, industry (inter-industry) and territorial level of social partnership, within their authority; and

•     Local acts, which are legal acts adopted by the employer and regulating the relations inside the organization. Collective agreements and collective arrangements may require consent of an employee's representatives to adoption of local acts.

The general principle to be pursued in collective agreements, collective arrangements and local acts is a non-deterioration principle, which means that any deviations in the said legal acts from employment law rules can only be made towards improvement of the employee’s position.

The most common way to document the employer-employee relations is the employment contract which is made in writing. One copy of the employment contract is given to the employee; the other copy is kept by the employer. The employee must confirm the receipt of his own copy by signing the employer's copy of the employment contract. The employment contract which is not made in writing will be deemed made if the start of employment was known to or was instructed by the employer or its representative. If the employee has in fact been admitted to work, the employer must make with him a written employment contract within three working days from the date of the actual start of work.

The employment contract can be made both for a particular term (up to five years), and for an unlimited period. It is of great importance in case of termination of employment because, upon expiry of the term of the contract, employment is terminated automatically (provided a number of conditions have been met). Where a contract is made for an unlimited period, the employer will have very few legal grounds to dismiss the employee without the consent of the latter or in the absence of any breach on his part (for instance, there is a redundancy option which implies a strict observance of the procedure and payment of three monthly salaries as compensation). However, if an employee does not object, he may resign or be dismissed by agreement with the employer. That is why the employer's right to make a fixed-term employment contract is limited. It can be made in particular:

•     For the period of performing of duties of an absent employee who retains his workplace in accordance with the employment law or other employment regulations, collective agreements or arrangements, local acts or employment contract;

•     For the period of performing temporary works (up to two months);

•     For the period of seasonal work when, because of natural conditions, the work can only be done in a particular period of time (season);

•     With employees being sent to work abroad;

•     For the execution of works falling outside the scope of usual activities of the employer (refurbishment, installation, start-up and other works), and the works related to the temporary expansion of production or services (up to one year);

•     With anybody employed for performing the work specified in advance, if the date of such work's termination cannot be fixed; and

•     For the period of the employee's internship and professional training.

An employment contract may be terminated on the following grounds:

•     Agreement of the parties;

•     Expiration of the employment contract, unless the employment actually continues and neither party has demanded its termination;

•     On the initiative of the employee (the employee may cancel the employment contract at any time, having given to the employer at least a 14 days' notice);

•     On the initiative of the employer (in the limited number of cases);

•     Employee's transfer, at his request or upon his consent, to another employer or his transition to an elective job (office);

•     Employee's refusal to continue employment due to the changes in the company's ownership, jurisdiction (subordinacy) or its restructuring;

•     Employee's refusal to continue employment due to the changes in the terms of employment contract;

•     Employee's refusal to transfer to another job, which transfer is prescribed to him by a medical report issued in accordance with the federal laws and other regulations of the Russian Federation, or the employer's inability to offer such job;

•     Employee's refusal to relocate together with the employer;

•     Circumstances beyond the control of the parties; and

•     Breach of rules set forth by the Labour Code or any other federal law on making of an employment contract, in case such breach makes it impossible to continue work.

For certain categories of employees, there are special grounds for termination of employment contracts. For example, the chief executive officer of a company may be at any time removed from his office, provided he is paid the compensation of at least three monthly salaries. Normally, there will be 40 working hours a week.

The employer and the employee may agree, either at the date of hiring or afterwards, on half-day (shift) or non-full working week employment. The working day (or shift) which immediately precedes a public holiday may be one hour shorter.

In the case of continuously operating organizations and particular jobs where working hours cannot be shortened on a pre-holiday day, the overtime work should be compensated to an employee by additional time off or, upon the employee's consent, by payment at the rates fixed for overtime work. On the day before holidays, working hours in case of a six-day working week may not be longer than five hours. The employer may, pursuant to the procedure set forth by the Labour Code, engage an employee to work extra hours beyond working time fixed for this employee, in the following cases:

•     For overtime jobs; and

•     If the employee works on the terms of irregular working hours.

Any work outside normal weekly working hours should be rewarded by higher pay or grant of additional days off. Salary should be paid in monay, in the currency of the Russian Federation (in roubles). The employee's salary will be fixed by the employment contract in accordance with the remuneration system adopted by the employer.

The employer and/or its duly authorized representatives will be held liable for any delay in payment of the employees’ salary and for other violations of remuneration regulations, in accordance with the Labour Code and other federal laws. The Labour Code and separate normative acts contain specific provisions on employment of certain categories of employees, namely:

•     Chief executive officers and members of the organization's collegial executive body;

•     Employees under age;

•     Women and persons with family duties; and

•     Athletes and coaches.

Banking Law

The main enactments relating to banking regulation are as follows:

•     The Federal Law on Banking and Banks;

•     The Federal Law on the Central Bank of the Russian Federation;

•     The Federal Law on Insurance of Deposits of Individuals at the Banks of the Russian Federation;

•     The Federal Law on Bankruptcy of Credit Institutions; and

•     The Civil Code (Part Two).

Of great significance also are the enactments issued by the Central Bank of the Russian Federation, the regulator of the Russian banking system. Traditionally, the Russian banking system has a two-tier structure. The power center organizing the main management processes in the banking system of Russia has always been with the Central Bank of the Russian Federation (Bank of Russia), which represents the executive authority in the banking sector.

Together with the Central Bank, the so-called first level of the banking system embraces the Deposit Insurance Agency (DIA) and the two largest banking associations of Russia — the Association of Russian Banks and the Association of Regional Banks — both having coordinating powers. The DIA is not a governmental authority and has two main functions. Firstly, it is an insurer which secures the functioning of the system of compulsory insurance of individual deposits, and, secondly, it acts as liquidator of credit institutions in the cases stipulated by law.

The second level of the banking system is taken by its principal and secondary participants — credit institutions, including representative offices of foreign banks, banking groups and holdings, and the credit reference bureaus. In the Russian Federation, it is allowed to establish both banks and non-banking credit organizations which may carry out particular banking transactions. The scope of permissible banking operations to be carried out by non-banking credit organizations is determined by the Central Bank of Russia. Banking transactions are subject to licensing by the Bank of Russia. The banking license is issued for an indefinite period.

To ensure financial reliability, a credit organization must create reserves (funds), including those for depreciation of securities, subject to the instructions of the Central Bank as to their creation and use. The Central Bank sets up the minimum amount of such reserves (funds), whereas the amount of allocations to the reserves (funds) out of income before tax is stipulated by the federal tax laws.

Any bank must comply with the regulations on mandatory depositing of reserves in the Bank of Russia, including regulations on the terms, amounts and type of the funds raised. The depositing procedure is established by the Bank of Russia. Any bank must maintain an account with the Bank of Russia for depositing required reserves. The procedure of opening and operating of such account is established by the Bank of Russia.

Any credit organization, the Bank of Russia or any deposit insurance organization guarantees the confidentiality of transactions, accounts and deposits of its customers and correspondents. No officers of a credit organization may disclose any information about transactions, accounts or deposits of its customers and correspondents, as well as any other information specified by the credit organization, unless he is required to do so by a federal law. Any information which constitutes a banking secret can only be disclosed pursuant to a federal law.

Credit and deposit interest rates and operational fees are set by a credit organization per the agreement with customers, unless otherwise stipulated by a federal law. A credit organization may not unilaterally change credit and deposit interest rates, operational fees and the duration of the corresponding agreements with customers, except where otherwise provided by a federal law or a customer agreement.

According to a bank deposit agreement, where the deposit will be repaid to the client after the expiry of a particular term or upon occurrence of the circumstances stipulated by the agreement, the bank may not unilaterally reduce the term of this agreement or amount of interest, or increase or charge operational fees, except where otherwise provided by a federal law or a customer agreement.

Deposits from individuals can only be attracted by the banks which are licensed by the Bank of Russia, participate in the deposit insurance system and are registered with the deposit insurance organization. Banks ensure the safety of deposits and timely fulfilment of their obligations to depositors. The making of a deposit must be confirmed by a written agreement signed in two copies; one of the copies should be given to the depositor.

The right to raise funds through attraction of personal deposits may be granted to the state registered banks after at least two years from such registration. In the case of a merger of banks, this period will be calculated from the earliest state registration date. In the case of a bank's reorganization, the said period should not be interrupted for calculation purposes.

The accounts of a credit organization are subject to the annual audit by an audit firm licensed to conduct such audit in accordance with the laws of the Russian Federation. The accounts of banking groups and banking holdings are subject to the annual audit by an audit firm licensed in accordance with the laws of the Russian Federation to conduct audits of credit organizations and having conducted audits of credit organizations for at least two years. Credit organization audit licenses are issued in compliance with federal laws to the companies which have been engaged in audit business for at least two years. There are two ways a foreign investor may be involved in banking activities in Russia, namely:

•     Opening (or acquisition) of a Russian bank; or

•     Establishing a representative office of a foreign bank in Russia. In this case, the representative office of a foreign bank is not allowed to carry out banking operations or engage in any other entrepreneurial activities.

Accreditation to establish representations is issued for the term of three years. For establishing a bank with foreign participation, a prior permission of the Central Bank is required, however, this permission is issued for an indefinite term (provided the bank abides by the laws of the Russian Federation).

There used to be a limitation on foreign capital in the banking system of the Russian Federation, whereby Russian authorities had the right to introduce a quota for foreign participation. The quota fixed the maximum amount of foreign participation in the banking sector. It was calculated as the ratio of the total non-resident share in the charter capital of entities with foreign investments to the aggregate charter capital of entities registered in Russia and operating in this sector.

The 12 per cent quota on banking was cancelled in 2002. It should be noted that this quota has never really applied in practice since throughout its existence the share of foreign capital in banking was below 12 per cent. The abolishment of this formal limitation highlighted the opening of the banking services market for foreign investors.