Finance-Leasing Deals Get a Foot in the Door

Fourteen months after the entry into force of Part 1 of the Russian Civil Code (sometimes erroneously referred to as the Russian "Commercial Code"), the parliament and the president have approved Part 2 of the Code, which is no less important to the foreign investor. The president signed this second section into law Jan. 26.

Part 2 regulates, among others, the following: the purchase and sale of goods; the sale of immovables; the sale of enterprises; barter; gifts; finance leasing; independent contractors; transport; loans, credit and other financing arrangements; bank deposits; letters of credit; custody arrangements; insurance, commission agency; concession contracts (franchising); general partnerships; and public competitions.

Of potentially revolutionary significance for foreign investment is Chapter 34 on leasing, which included for the first time in the history of the Russian Civil Code provisions on finance leasing (Arts. 665-670). With the appropriate supplementary legislation, this could vastly enlarge the internal leasing market in, for example, agricultural machinery, rolling stock, and computer technology.

The Civil Code sets the basic elements of a finance lease contract. The lessee must acquire the leased property in ownership at some point during the contractual relationship; the property must be used for entrepreneurial purposes; and the lessee may by agreement choose the supplier of the property to be leased.

Only physical things may be finance leased, which excludes land and other "natural objects," together with rights and other intangibles.

Finance leasing has been used in Russia since the 1970s, and there have been a number of foreign finance-lease transactions in recent years, mostly effected on the basis of a special governmental decree.

Special treatment in the form of government decrees or assurances has normally been required because of concern that customs, accounting and taxation aspects of a finance-lease transaction would not necessarily be recognized by the relevant state agencies. Without recognition of its necessarily privileged position vis-a-vis normal installment purchases, finance leasing will collapse.

Several groups in Russia have been laboring for more than 18 months on draft finance-lease legislation. Now that the Civil Law foundations for finance leasing have been laid, the time is ripe for expeditious action in the form of a federal law on finance leasing to create the necessary fiscal prerequisites for leasing to flourish.

Professor W.E. Butler, a partner at White & Case, has been practicing CIS law since 1965. Maryann Gashi-Butler is a resident partner at White & Case's Moscow office. She has been practicing law in Russia since 1991.