Russia: Challenges and Advantages for Foreign Direct Investment

Russia: Challenges and Advantages for Foreign Direct Investment

Foreign Direct Investment (FDI) in the Russian Federation has increased over the last years thanks to its tremendous natural resources, growing domestic market and skilled work force. Besides that, Russia’s new status as WTO member also helped to attract more foreign investments. Global demand restrains, commodities prices decrease, inflation, lack of major infrastructure investments are the key factors that may affect FDI in Russia in the coming years. Another important challenge is the Russian legal framework for FDI, as it is still being developed. Russian legislation on FDI is based on several federal and local laws and regulations. Despite the constant evolution of FDI laws in Russia, some basic concepts shall not be changed in the near future.

For instance, there is no discrimination between foreign investors and local investors in Russia. Expropriation of foreign investment is prohibited by Russian legislation, except in cases of public interest. And, there are no specific legal restrictions on the repatriation of capital by foreign investors or remittance of profits abroad.

Restrictions and limitations to FDI in Russia are established by federal laws, in particular for strategic entities (42 sectors are considered of strategic importance). There are other restrictions to FDI based on the protection of the Russian constitutional system, the morality, the health and rights of individuals or to guarantee state security and defense.

Russian legislation makes a clear distinction between public and private foreign investor. For example, prior authorization is required – or in certain cases post-transaction approval – for foreign private investors carrying out transactions in a strategic entity. Regardless if it is a strategic or non-strategic entity, prior government approval is required for public foreign investor carrying out transactions to acquire over 25 per cent of a Russian legal entity or to block decisions of the governing bodies of a Russian company. In addition, any foreign investment – public or private – of over 50 million rubles and ∕ or the acquisition of 50 per cent of a Russian entity require previous government approval. Foreign investments in the financial sector and in non-commercial organizations such as charities, scientific and religious associations are subject to specific legislation.

In brief, any transaction executed in breach of federal or local laws of the Russian Federation is deemed null and void. If the status quo is not possible to be obtained, the foreign investor will lose all voting rights related to the transaction deemed null and void. It is clear that Russia and its current legal framework still present challenges for foreign investors but the country also shows great opportunities to invest.