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. Last Updated: 07/27/2016

Foreigners, Vouchers: An Uneasy Mixture

Foreign investors wishing to buy shares in large Russian companies being privatized must ask whether they may buy and use vouchers for this purpose. The answer is not as simple as expected and reveals that Russian law continues to hinder foreign investment".


Russian law now requires that at least 80 percent of the shares of large Russian companies be sold in exchange for vouchers. Every Russian citizen receives one voucher for free and may buy other vouchers freely at whatever price is agreed with the seller.


Vouchers are an attractive means of buying shares because they currently sell for considerably less than their face value of 10, 000 rubles. This discrepancy presumably results from the lack of interest or confidence in Russian companies among voucher sellers.


Foreign investors also may not always want to buy into Russian companies, but those that do have been frustrated for some time. The preparation and implementation of privatization prevented foreign investors from forming joint ventures or concluding other contracts with Russian companies.


Nothing in the various laws governing privatization seems to prevent foreign investors from participating in the auctions by which shares are sold for vouchers. Similarly, privatization laws do not prohibit foreign investors from buying vouchers.


Nevertheless, other Russian laws appear to present practical obstacles to foreign investors who want to buy vouchers. The Law on Foreign Investments, enacted long before vouchers came into existence, requires the Finance Ministry to permit foreign investors to buy government securities, but there is no clear procedure for obtaining permission. Vouchers are government securities.


Similar problems arise from the complex rules regarding the use of foreign currency in Russia, as well as the use of rubles by foreigners. Russian individuals are not allowed to sell anything in Russia for foreign currency and foreign investors are not allowed to spend rubles other than for running their offices, unless they earned the rubles from investments. and purchases of securities for hard currency require a license from the Central Bank.


Again, these rules predate the use of vouchers and in fact come, in part, from laws of the former Soviet Union. For this reason, it is not certain that the Russian authorities intended to prevent foreigners from buying vouchers. However, they also did not clearly permit them to do so.


Foreign investors do have the option of buying vouchers through a Russian company that they may own partly or entirely. This mechanism however is unnecessarily complex and presents tax problems as well.


Permitting foreigners to participate in privatization involves revising many Russian laws. These tasks have only just begun.