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. Last Updated: 07/27/2016

Russia's Legal Labyrinth: Not Always by the Book

Sooner or later, everyone doing business in Russia says it: "Why should I worry about what the laws are here, since no one follows them anyway? " But if Russia is to attract large-scale investment and the necessary accompanying financing, its legal system must be taken seriously.


Unfortunately, there is an element of truth in the above statement. For instance, the Law on Foreign Investments provides that Russian companies that are more than 30 percent foreign held may keep all of the foreign currency they earn. However, even wholly foreign-owned entities are subject to the same compulsory sale of 50 percent of their export earnings as Russian firms.


Foreign investors find that Russian companies often do not have all the paperwork in order, and Russian officials do not make clear what needs to be done to conform with the rules. Legal uncertainties regularly force lawyers to qualify their advice. They often recommend obtaining a high-level ruling to bless a business transaction.


The problems with Russian law begin with knowing what it is. For example, a key provision regulating foreign currency sales takes the form of a telegram from the Central Bank. The provision is not disseminated in any official publication, but has to be tracked down. What is more, it is not clear whether it has the force of law.


Russian laws by and large retain the form of Soviet laws. They speak in broad terms and prohibit more than they permit. Much is left to the ministries.


There is supposed to be a procedure at the Ministry of Foreign Economic Relations which Russian companies are to follow when establishing subsidiaries overseas. Another at the Central Bank is also supposed to direct them on opening bank accounts abroad. Neither procedure exists, so the companies must rely on a case-by-case approach.


Much depends on the discretion of officials to grant exemptions from laws. Thus, oil companies find the combination of royalties, export duties and taxes too daunting and are compelled to seek exceptions. The issue then arises whether the exceptions themselves are legal.


But the very shortcomings of the legal system demonstrate that there is a system. Even when comers are cut, most business conforms with rules and follows procedures.


The legal system is developing and improving. There are more laws with fewer inconsistencies and greater efforts to comply.


Russian laws tell foreign investors more than what they can and cannot do. They show how far the country is from stability and predictability.


Alexander Papachristou has practiced law in Moscow for nearly four years.