Federation makes EU's 'market economy' list
European Union includes Russian Federation on market economy list

In November, the European Union amended its antidumping laws to recognize the Russian Federation as having a market economy, reports Vladislav Talantsev, of Russin Vecchi’s Moscow office. This change will put Russia on a par with other countries in E.U. investigations related to accusations of unfair dumping and subsidies.

“In general, the E.U. procedure for determination of dumping provides that the normal value should be based on the prices paid or payable, in the ordinary course of trade, by independent customers in the exporting country,” Mr. Talantsev explains. With the Russian Federation’s removal from the list of non-market economies, E.U. investigations must use Russian companies' actual costs and prices, rather than costs and prices in developed nations.

News agencies reported that, at the start of 2002, the E.U. had applied antidumping measures to 11 Russian products. Some observers predict that E.U. protectionist measures against Russian exports now will be more difficult to enact.

Immigration rules stiffen for workers, employers
New laws increase burdens on employers, foreign employees

Significant changes to regulation of foreign labor went into effect in November 2002, reports Rinat Alfatovich Zakirov-Ziev, of Russin & Vecchi's office in Moscow. Changes that supersede Soviet-era laws include institution of temporary entrance and temporary residences permits and of migration cards, he notes. Now, both employers and their foreign employees must obtain work permits.

“The overall effect of these new developments appears to increase burdens on Russian companies (including subsidiaries of international corporations) employing foreign individuals. Russian immigration law also now seems to be more demanding on foreign persons traveling in Russia than it was previously,” Zakirov-Ziev comments. The new laws:

• establish a quota (530,000) and procedures for non-citizen work permits in 2003;

Cabinet OKs currency control reforms
Cabinet approves bill to greatly reduce currency controls

The Russian Federation’s Cabinet has approved a measure to significantly reduce currency controls - and eliminate them altogether by 2007, reports Zhanna Radmaeva, of Russin Vecchi's Vladivostok office. The Cabinet was to submit the bill it approved Nov. 28, 2002, to the State Duma by year’s end. Ms. Radmaeva notes that, “according to the Russian vice minister, Mr. Kasyanov, the bill is of ‘absolute importance for the country’s economic development.’”

“The bill would abolish the requirement of obtaining the Central Bank’s permission for currency operations,” she reports. “It would establish a procedure for notifying the Central Bank of currency transfers to and from abroad. It also would simplify the procedure for Russian citizens to open bank accounts abroad, and would require only registration with currency control bodies.”

As of Jan. 1, 2007, the bill would end compulsory conversion into rubles of all currency transaction proceeds, she observes. It also would reduce the conversion requirement from the current 50 percent to 30 percent until January 1, 2007. The Central Bank and Russian Government would retain some options to regulate currency until 2007, she adds.

Deposit insurance expansion nears
Bill to introduce compulsory private deposit insurance nears enactment

As 2003 began, legislation to provide deposit insurance for individuals' accounts in privately owned Russian banks was moving steadily toward enactment. The Cabinet had approved it and passed it on to the State Duma, which was expected to pass it during its spring session, reports Zhanna Radmaeva, of Russin Vecchi's Vladivostok office.

The bill would require all banks that want to provide deposit accounts to private individuals to join a system that would insure deposits for losses due to a bank’s bankruptcy or loss of its license, Ms. Radmaeva explains. It also would require such banks to provide financial documents to the Central Bank of the Russian Federation and to the Agency on Restructuring of Credit Organizations, she notes.

The Central Bank reportedly was preparing criteria for banks’ admission to the deposit insurance system. Ms. Radmaeva cautions that the head of the Ministry of Economic Development and Trade has found many of those criteria “unclear and impossible to evaluate, thus providing grounds for corruption.”

Deposit insurance would cover 100 percent of a depositor’s loss up to 20,000 rubles (US$630), and partially cover greater losses - to a maximum of 95,000 rubles (US$2,990), Ms. Radmaeva reports. In state-owned Sberbank (which now provides 70 percent of such accounts) deposit insurance would cover a depositor's loss up to US$2,290 and the rest would be covered by the state until 2007 .

Change laws, Far East oil investors urge
Foreign investors in Far East oil projects press for legal changes

As 2002 drew to a close, the Russian government was receiving intense pressure from foreign investors to adhere to its promises for legal amendments essential for those investors' participation in development of petroleum resources in Russia's Far East.

News agencies reported that Steve McVeigh, CEO of Sakhalin Energy Investment Company Ltd., had warned that the future of the Sakhalin-2 oil project hinged on whether Russia would fulfill its pledge under a 1994 agreement to amend laws that contradicted the project's production-sharing agreements (PSA). Those laws include the gas supply law, the antimonopoly law and provisions of the tax code. McVeigh warned that those amendments must come by the first quarter of 2003, according to news reports.

Meanwhile, other news reports quoted foreign oil executives who stressed that constantly changing tariffs and tax structures in Russia's Far East will prevent their companies' future participation in developing petroleum resources in the region. They strongly urged Russia to stabilize the situation by the start of 2003. They also advocated streamlining of the application process for a PSA - which now require approval of 28 separate commissions.

Top issue in joint ventures: Who controls?
Control Issues among biggest concerns for foreign-Russian joint ventures

One of the prime issues foreign businesses must confront when participating in a joint venture in Russia is that of control and direction of the joint venture company, Jonathan Russin, managing partner of Russin & Vecchi LLC, stresses. Under Russia’s law regulating production sharing agreements, Russian legal entities get priority in bidding - and a firm must be at least 50 percent Russian-owned to qualify as a Russian legal entity, he explained to participants at a recent London conference on Sakhalin oil and gas projects.

A limited liability company (LLC) is the most common corporate form for complying with the 50 percent requirement, Mr. Russin notes. LLCs take three main approaches regarding control and direction, he says: mutual sharing of control; use of management agreements for disproportionate control; and undivided control through two-tiered structures.

Where contributions to the joint venture by both Russian and foreign parties are equal, mutual control - governed by detailed, strict Russian law on LLCs - is most suitable, Mr. Russin observes. He cautions, “The type of shareholders agreement often used in the United States and England . . . has frequently been found by Russian courts to be unenforceable.” When foreign and Russian contributions are not equal, the other approaches are more suitable, he suggests.

In his presentation on “Doing Business on Sakhalin,” Mr. Russin closely examined the three approaches and shared further observations on Russian law regarding cost overrun provisions, dispute resolution, employment law and contracts, overtime work, “extreme North” conditions, and income taxes for expatriate employees.

R&V News

Russin & Vecchi LLP is pleased to announce the additon of Alexander Podolsky to the Moscow office and Rita Hoffmann to the Yuzhno-Sakhalinsk office. Alexander Podolsky founded the firm’s Russian practice with Jonathan Russin in 1991 and managed it for several years. He is a 1982 graduate of the Law Faculty at Moscow State University, and his experience includes work for the Moscow City Prosecutor and as an advocate in the Moscow City College of Advocates. From 1994 to 1997 he managed the tax and legal department of Deloitte & Touche in Moscow. Prior to returning to Russin & Vecchi, he was a partner in Landwell and PricewaterhouseCoopers.

Mr. Podolsky has over 15 years experience in assisting foreign investors in Russia starting from advising and setting up early Soviet joint venture companies in the Perestroika era to complex legal and tax strategies for international and Russian companies investing in Russia and CIS countries. A specialist in Russian civil and corporate law, as well as in litigation and dispute resolution, Mr. Podolsky is an expert on mergers and acquisitions, corporate reorganizations and restructuring, currency exchange law, labor law and cross-border transactions.

Ms. Hoffmann specializes in corporate and commercial law, oil & gas, international business law and public utility regulatory law. She earned her J.D. from American University, Washington College of Law in 1999 and is admitted in Alaska. Prior to joining Russin & Vecchi, Ms. Hoffmann practiced with Dorsey & Whitney LLP in Anchorage for three years and represented primarily telecommunications clients before the Regulatory Commission of Alaska. Prior to her legal career, Ms. Hoffmann administered educational exchange programs in Ukraine and Russia for the American Council of Teachers of Russian.