Frequent Legal Issues for Contractors on
Sakhalin Oil and Gas Projects
(Appearing soon in the Russian Energy Law Journal)

XVI. An Overview of the Major Aspects of Licensing Procedure

Presented by Sergei L. Lazarev, Partner of the firm’s Russian Practice Group and Executive Director of the firm’s Moscow office.

Basic Principles of Licensing

The Federal Law “On Licensing Certain Types of Activities,” (“Law On Licensing”) (173) sets forth the general requirements of licensing procedures in Russia (174) . The Law on Licensing defines relevant terms associated with licensing, provides a list of activities, which are subject to licensing, and regulates relations arising between State authorities and legal entities (or entrepreneurs) that apply for licenses..

Pursuant to the Law on Licensing, the basic principles of licensing include: 1) uniformity with respect to the economic environment throughout the territory of the Russian Federation, the types of activities subject to licensing and licensing procedures; 2) statutes establishing the specific types of activities subject to licensing containing licensing requirements and conditions; 3) public awareness and access to information regarding licensing; and 4) the observance of licensing laws. (175)

Criteria for Determining Activities Subject to Licensing

In determining whether an activity should be subject to licensing, legislators should consider the following: threat of damage to the rights, lawful interests and health of citizens, to the defense and security of the state, to the cultural heritage of nations of the Russian Federation, and whether such activity may be regulated by methods other than licensing. (176) When an activity is determined to meet these criteria, it should be included in the list of activities subject to licensing established by the Law on Licensing, if necessary, by amendment.

Licensing Authority

The Law on Licensing authorizes the Russian Government to approve statutes on licensing specific activities, determine which federal executive bodies should be responsible for licensing specific activities, and establish the types of activities which should be licensed by Regional executive bodies. The list of activities subject to licensing by federal executive bodies (177) as well as by Regional executive bodies is established in Government Enactment No. 135, dated November 02, 2002.

The licensing agencies are authorized to perform the following: issue licenses, re-execute documents confirming the availability of licenses, suspend the validity of licenses, renew licenses, annul licenses, maintain the license registry, and enforce licensee observance of licensing requirements and conditions while performing licensed activities subsequent to license issuance. (178)

Validity of a License

There are territorial and other limitations to the validity of licenses. According to the Law on Licensing, licenses issued by federal licensing agencies are valid throughout the Russian Federation, while licenses issued by regional agencies require prior notification of the licensing agencies of a different region if a licensee intends to perform licensed activity in that region.(179) In addition, each type of activity listed in Article 17 of the Law on Licensing requires the receipt of a separate license, and only the legal entity or entrepreneur to whom the license has been issued may perform the particular licensed activity. In other words, a license cannot be assigned or otherwise transferred by one legal entity to another.

Licenses are issued for a term of validity of at least five years, unless the applicant requests a shorter term in the license application. (180)

Documents Accompanying a License Application

Article 9 of the Law on Licensing provides that an applicant for a license (a legal entity) must submit the following documents, common to all license types, to the licensing agency in order to obtain a license:

a. an application indicating:
i. the name, the legal form and location of the legal entity;
ii. licensed activity an applicant intends to perform;
b. a copy of foundation documents and certificate on state registration of an applicant in its capacity as a legal entity;
c. a copy of the applicant’s certificate of registration with the tax body;
d. a document confirming payment of fees for application review (approximately $10);
e. copies of documents confirming the corresponding qualifications of the legal entity’s employees for licensing requirements.

Copies of documents indicated in sub-points “b” and “c” above, not certified by a notary, should be presented with an original.

Term of Review

The licensing body must render a decision issuing or refusing to issue a license within 60 days from the date that the application, with all necessary attachments, is received.

In addition to the documents listed above, statutes on licensing specific types of activities may require submission of other documents, as mandated by regulations governing the performance of such activities.

Upon receipt and acceptance of documents by the licensing agency, the agency should provide the applicant with a list of documents accepted, indicating the date of their receipt. (181) An applicant for a license bears responsibility under Russian law for the submission of unreliable or distorted data. (182)

Grounds for Refusal

The licensing authority may deny a license application if the documents submitted by the applicant contain unreliable or distorted information, or if an applicant does not meet the licensing requirements and conditions. (183)

License Annulment and Suspension

Licenses may be annulled in the following events: (184)

- liquidation of the legal entity or termination of its activity as a result of its reorganization, except for transformation (change of its legal form).

- non-payment by the licensee of the license issuance fee within three months from receipt of the licensing agency decision granting the license.

- Licensee’s infringement of license requirements and conditions, which entail infliction of damage to the rights, lawful interests, health of citizens, defense and security of the state, cultural heritage of nations of the Russian Federation, and (or) in the event a licensee has not eliminated the infringements within the period of time established by the license agency.

Licensing agencies have the right to suspend the effect of a license if they become aware of a licensee’s repeated or gross infringements of the license requirements and conditions. In such event, the licensing agency establishes a period of time for the elimination of such infringements and the license is suspended for this period of time. (185) This period cannot exceed six months. (186) After this period of time, if the licensee has not eliminated these infringements, the licensing agency should apply to a court for annulment of the license. If the licensee has eliminated the infringements, it should notify the licensing agency in written form. Within three days of receipt of such notice, the licensing agency should verify that the infringement has been eliminated in fact and make a decision on renewal of the license and inform the licensee. No payment is levied for the renewal of the license. The period of validity of the license is not extended as a result of the period of suspension. (187)

The licensing agency must inform the licensee if it suspends, annuls, or files an application with the court to annul, a license, in written form, with justification of its decision within three days of its adoption. Such decision may be appealed by the licensee in accordance with the procedure established by Russian law.

Content of a License

The Law on Licensing provides that the license should indicate the following:
- Name of the licensing agency;
- Name, legal form and address of the licensee;
- Licensed type of activity;
- Term of validity of the license;
- Taxpayer Identification number;
- License number;
- Date of issuance of the license.

Construction Contractors and GOSSTROI Registration

Russian law establishes specific standards for construction, referred to as the State Standard (GOST). (188) These standards are used to categorize buildings and other construction projects into three separate levels based on the degree of responsibility required for their construction. This is determined by the economic, social and ecological impact of the construction.

For instance, the first level of responsibility applies to buildings and structures, the failure of which is highly likely to lead to significant economic, social and ecological damage. These include oil tanks with a capacity of 10,000 cubic meters or more, pipelines, industrial buildings with heights equal or greater than 100 meters, telecommunication towers of 100 meters or more, and buildings and structures that are considered unique in some way.

The second level of responsibility applies to buildings and construction projects of a massive, or complex nature such as residential complexes, and public, industrial, and agricultural buildings. The third and lowest level of responsibility applies to constructions that have seasonal and auxiliary functions, such as hotbeds, hothouses, summer pavilions, small warehouses and similar constructions.

Only the design and construction of hotbeds, hothouses, summer pavilions and similar constructions, the failure of which would not create economic, social or ecological hardships, do not require licensing.

Design, construction and engineering works for the construction of buildings and installations of the first and second levels of responsibility in accordance with the State Standard are subject to licensing.(189) A Government Decree provides the list of federal executive bodies that perform licensing procedures. (190) Regulations establish the procedure for application and issuance of licenses for each type of activity (design, construction, engineering). (191) In addition, further guidance for construction license applicants is provided by methodical recommendations issued by Gosstroi, which include a list of documents that must be submitted with the application, model forms of the application, and some supporting documentation. (192)

Types of Construction Subject to Licensing

A regulation referred to as the Model Classifier provides a comprehensive list of activities in the construction area, which are subject to licensing. (193) A license application must contain the specific types of activities that an applicant intends to undertake, as they are indicated in the Model Classifier.

For example, the Model Classifier lists the following activities, among others, as requiring a license under the heading “General Construction Works”:

1 Geodesic work carried out on construction sites

- Geodesic marking basis for construction;
- Marking work in the process of construction;
- Geodesic control of the accuracy of the geometric parameters of buildings (structures);
- Executive geodesic survey;
- Geodesic measurements of deformations of grounds, construction of buildings (structures) in whole or part.

2 Site preparation

- Clearing of territories and preparing them for construction;
- Stripping and dismantling buildings and structures;
- Construction of temporary roads, engineering utilities and structures;
- Laying tracks.

3 Earth work

- Excavating, vertical planning;
- Earth compaction and laying out ground cushions;
- Land work in collapsible and heaving soils;
- Land work in special conditions (in bogs, poor soil, salt soil, active sand, landslide slopes).

4 Stone works

5 Precasting of concrete and ferroconcrete units

- Construction of formwork and rebar placement;
- Precasting of solid concrete and ferroconcrete units.

6 Assembling of concrete and ferroconcrete units

- Assembling of foundations and walls of underground portions of buildings;
- Assembling elements of structures of above-ground portions of buildings (columns, frames, girth rails, girders, beams, slabs, wall panels);
- Assembling of ventilation blocks, module lift shafts and trash chutes, utility blocks.

7 Assembling of wood structures

- Site assembly of structures;
- Assembling of factory-made wood (block) buildings and structures.

8 Assembling of light weight enclosed structures

- Metal structures;
- Enclosed structures made from extrusion panels and slabs;
- Framed partitions;
- Walls made from “sandwich” type panels;
- Walls and structures made from glass blocks and shaped glass;
- Window and door blocks, modules made of aluminum, PVX, fiberglass, other polymers and combined materials.

9 Insulation work

- Arrangement of insulation from rolled bituminous materials, hot asphalt mixtures, bituminous pearlite and bituminous ceramzit;
- Arrangement of insulation from polymers of rolled and sheet materials;
- Arrangement of insulation from cement mortar;
- Arrangement of insulation from polymers and emulsified mastic compounds;
- Arrangement of insulation from metal sheets;
- Arrangement of heat insulation using soft, hard and semi-hard fibrous wares and arrangement of insulation coverings made of hard materials;
- Arrangement of heat insulation from slabs and fill materials.

10 Roofing work

- Arrangement of roofs from rolled materials;
- Roofs made from polymers and emulsified bituminous make up;
- Arrangement of roofs made from pieced units;
- Arrangement of details of roofs made from metal sheets.

11 Territory Improvement

- Arrangement of access, walkways and grounds;
- Arrangement of open sports structures;
- Planting.

The Model Classifier also requires the licensing of what it refers to as “Specialized Works” which include, among others, the following types of activity:
· Erecting special structures for intersectoral economy.
· Arrangement of external engineering networks and communications.
· Arrangement of internal engineering systems and equipment.

Many other aspects of construction require licensing pursuant to the Model Classifier. To cover all activities in the confines of this article is impossible. Contractors are encouraged to refer to the Model Classifier with regard to each activity they intend to perform.

Licensing Requirements

Contractors seeking to perform licensed activities should keep in mind the following requirements, which must be satisfied: (194)

· Qualification of Workers;
a) The legal entity must have managers and specialists with higher or mid-professional education for the profile of work. No less than 50% of managers and specialists on the staff of the legal entity must have higher professional education and work experience of no less than three years for specialists with higher professional education, and no less than five years for specialists with mid professional education;
b) No less than once every five years, a legal entity’s workers who construct buildings and structures must attend continuing professional education courses to improve and refresh their skills;

· Sufficient Technical Means for performing the licensed type of works;
c) The legal entity must have under right of ownership or on some other legal basis buildings, structures, construction vehicles, transport means, mechanical and hand instruments, technological rigging, mobile energy devices, means for guaranteeing safety, means of control and survey;

· Observance of the Law;
d) Performance of licensed activity in accordance with the requirements of the laws of the Russian Federation, corresponding state standards and norms of technical documents for construction;

· Secure Quality Control;
e) System of quality control for completed work and finished products.

Special List of Documents for Applications of Branch or Representative Offices

Gosstroi has developed the following special list of documents that must accompany license applications of non-Russian entities, which have established a branch or representative offices in Russia:

1. Application indicating the name, the legal form and location of the legal entity and licensed activity, its substance and time frame during which it shall be carried out.

2. Copy of foundation documents, translated into Russian, notarized and legalized by Russian Federation consulate authorities abroad or apostilled (for signatory countries of the Hague Convention of 1961):

- charter;
- certificate by the tax body of the foreign country on the registration of the foreign organization as a taxpayer in the country of incorporation, indicating the taxpayer identification number;
- an excerpt from the trade register or certificate of incorporation or other analogous document, which contains information on the body which registered the foreign organization, the registration number, date and location of registration;
- excerpt from the bank register or a bank reference;
- a decision by an authorized body of the foreign organization on the founding of a department in the Russian Federation (branch or Representative office);
- powers of attorney issued by the foreign organization to the head (manager) of the Russian department.

3. Permission to open a Representative office on the territory of the Russian Federation, issued by the State registration chamber under the Russian Federation Ministry of Justice.

4. A certification on the entry into the State register of representative offices of foreign companies, which have been accredited on the territory of the Russian Federation, issued by the State registration chamber under the Russian Federation Ministry of Justice.

5. A certificate on registration in the tax body of the Russian Federation, indicating INN [tax-payer identification number].

6. Charter of the branch (Representative office) of the foreign legal entity, indicating:

- name of the branch and its founding organization;
- legal form of the founding organization; location of the branch (Representative office) on the territory of the Russian Federation and registered address of its founding organization;
- purpose of founding and types of activity of the branch (Representative office);
- composition, volume and terms of investments of capital in the fixed assets of the branch (Representative office) of the foreign legal entity on the territory of the Russian Federation.

7 Copies of documents confirming the corresponding qualifications of the legal entity’s workers for licensing requirements.

8 Information evidencing applicant’s right of ownership or other legal right to the buildings and structures necessary to carry out the licensed activity, indicating the title and other requisites of the documents.

9 Documents confirming payment of licensing fees.

An extremely important issue for foreign entities to consider is that foreign legal entities, which have not established a branch or a representative office in Russia, are not entitled to apply for a Russian license and as a result, cannot perform licensed activities in Russia.

(173) Federal Law No. 128-FL “On Licensing Certain Types of Activities,” August 8, 2001, last amended March 11, 2003.
(174) A revised version of the law will enter into force in January 2004. The only substantial change is that as of 2004, the sale of electrical power to the population is a licensed activity.
(175) Law on Licensing, Article 3.
(176) Law on Licensing, Article 4.
(177) Law on Licensing, Article 5.
(178) Law on Licensing, Article 6.
(179) Law on Licensing, Article 7, Point 2.
(180) Law on Licensing, Article 8.
(181) Law on Licensing, Article 9, Point 1.
(182) Law on Licensing, Article 9, Point 1.
(183) Law on Licensing, Article 9, Point 3.
(184) Law on Licensing, Article 13, Points 2, 3, and 4.
(185) Law on Licensing, Article 13, Point 1.
(186)Law on Licensing, Article 13, Point 1.
(187) Law on Licensing, Article 13, Point 1.
(188) State Standard (GOST) No. 27751-88 "Reliability of Constructions and Foundations. Principal Rules of Calculations," July 1, 1988.
Law on Licensing, Article 17.
(189) Russian Federation Government Decree No. 135, February 11, 2002.
(190) Regulation on “Licensing of Design Activity of Buildings and Installations of the First and Second Levels of the Responsibility in Accordance with State Standard," approved by Government Decree No. 174 of the Russian Federation, March 21, 2002 ("Regulation on Licensing").
(191) Methodical Recommendations on Preparing Documents Necessary for Obtaining a License by an Applicant, approved by Gosstroi Order No. 93, June 3, 2002 (“Methodical Recommendations”).
(192) Composition of the Types of Activity for Design, Construction and Engineering Survey Licensing Referred to the Authority of Gosstroi (the Russian Federation Ministry for Construction), approved by the Chairman of Gosstroi of Russia Mr. A.Zh. Shamuzafarov, October 7, 2002, enacted by Gosstroi Order No. 720, October 8, 2002.
(193) Regulation on Licensing, Item 4.
(194) Law on Licensing, Article 13, Point 1.