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18 - 20.09.2018, IEC Crocus Expo, Moscow

14.03.2018 Doing Business in Russia

Vladislav Zabrodin, Managing Partner of Capital Legal Services:

Economy and investment climate

The Russian market, with population just under 147 million (as of beginning of 2018) and low competition in textiles manufacture and trade compared to European, American and Asian markets, is indeed quite attractive for exporting textile goods.

In the recent year, the Russian economy has stabilized, the currency exchange rate is not experiencing serious fluctuations and oil prices have evened out. The GDP is showing small but stable growth. The Russian government’s anti-crisis measures taken should, in President Vladimir Putin’s opinion, support growth of the economy at a rate exceeding that of the “global economies,” i.e. in excess of 4%. In the Russian statistics authority’s initial assessment, the country showed 1.7% growth in GDP in 2017.

The consumer market is slowly coming to life. In the social and economic part of his annual address to the Russian Federal Assembly on February 2, 2018, the President stated the goal of increasing the GDP per capita by 50% by year 2024.

Although in the last few years the Russian government has provided support to the national textile industry, analytical research shows that the trend of importing finished textile goods, as well as interior textiles, will remain. The production capacities inside the country do not allow satisfying the current demand. In large cities, people are showing interest in furnishing their apartments and renewing textile goods in the course of renovation works. Since Russian textiles are of low quality, there is increased demand for quality textiles. We believe this trend will continue, especially if taking into account the forecast growth in housing construction in Russia from the current 80 million sq.m to 120 million sq.m per annum. The main tool for implementing this idea is support for the starting housing mortgage boom.

An additional factor causing the increased textile sales in Russia, besides internal demand, is the development of tourism. According to the Russian travel industry authority Rostourism, in 2017, a total of 21.5 million tourists visited Moscow (a 31% increase compared to 2014), 16 million tourists visited Krasnodar Krai (a 16% increase compared to 2014), and 7.5 million people visited St. Petersburg (a 19% increase). The influx of tourists is causing new hotels and mini hotels to be built, increasing the demand for textile goods in the HoReCa segment.

Russia’s investment climate has improved significantly due to the government measures aimed at making life for business simpler. In his annual address to the Russian Federal Assembly, the President noted the need to complete the state sector reforms started in 2015-2017 (digital state sector and creation of digital government, reforms of the Federal Tax Service and customs, as well as reform of the supervisory authorities).

In the last 5 years, Russia has climbed from spot number 120 to 35 in the Doing Business-2018 rating prepared annually by the World Bank. For the third year in a row, Russia is ahead of all BRICS countries, and this year became the leader among the Eurasian Economic Community (EurAsEC). The Task before the government is to be number 20 on this list. We believe the trend will continue, since the government is taking all measures necessary to improve the investment climate, although one should not expect any giant leaps at the current level.

The success of these measures has been confirmed by an improved Standard & Poor's rating up to investment level (BBB-) with a stable forecast. According to S&P’s release, “The rating act reflects reasonable policy that allowed the Russian economy to adapt to lower raw goods prices and international sanctions.” In addition, the agency noted the actions by the Bank of Russia, which, regardless of the cleansing of the banking system, allowed to maintain financial stability.

Fitch, in turn, notes the “strong sovereign balance, reliable external factors and improvement in the economic policy as to macroeconomic indicators.” Fitch is forecasting a 2% growth in the economy in 2018-2019 as uncertainty eases, monetary policy is softened and oil prices stabilize. Russia has achieved stabilization of economic growth, low inflation, drop in the budget deficit and that “the economy has become more flexible thanks to devaluation of the rule and introduction of a new, clearer budget rule.” Russia has dealt with the shock tied to sanctions and continued to develop in the new economic reality.

Main legal issues tied to doing business

Many companies when entering the Russian market ask themselves the question regarding the appropriate form of incorporation. Most companies start by working with distributors in order to ensure a more comfortable and safe market entry. At the next stage, they usually open a branch or representative office through which they arrange sales and import of goods, acting independently and in their own name.

The most common form is the Russian limited liability company, which can be founded independently or with a Russian partner. We recommend creating a joint venture with a Russian partner only if there is an objective need to do business together, if you know your partner well and can interact with them effectively.

The sanctions issue is an important one. No sanctions are in effect for textiles; however, you should be careful in monitoring the Russian companies with which you do business and do a preliminary check in this respect, as there is a risk of violating sanctions if you work with a company that is subject to sanctions.

There are some issues in relations with banks, but these exist in practically all countries, since banks are very conservative and formal in their work. The problem of opening a bank account in Russia is indeed on the table, but it is not among the most vital ones that foreign business encounters.

Textile goods are classified into several categories (goods groups). Depending on the category, different customs duty rates apply to goods being imported, ranging from 5% to 15%.

Russia is a party to double tax treaties with approximately 60 countries. This is an important aspect to consider when doing tax planning and choosing the jurisdiction for the parent company.

Russia is a member of the Eurasian Economic Community (EurAsEC), which brings together mainly former CIS states, with the number of member states constantly increasing. Within the EurAsEC the Customs Union is in effect with the aim of creating a single customs territory using a unified customs tariff, as well as other unified measures for doing trade with third countries. This allows to not only export goods to Russia, but also through Russia to Customs Union countries and vice versa. Therefore, the scheme for importing goods can vary greatly.

We should note that within the Eurasian Customs Union there is a customs regime of “temporary import (access)” that allows foreign goods to be used, for example, in an exhibition, with only partial pay of the import customs duty and taxes and without paying special, anti-dumping and compensation duties, or without paying import customs duty and taxes and without paying special, anti-dumping and compensation duties. Such goods retain the status of foreign goods. As a rule, the duration of such customs regime cannot exceed 2 years.
 

Main taxes in Russia: corporate taxes

Corporate profit tax 20%
Annual property tax  up to 2.2%
VAT 18% (10% or 0% in certain cases)
Sales Tax  n/a
Tax Free System limited introduction from 2018
Knitwear for children 10% VAT rate 

There is no sales tax, and duty free is gradually being introduced.

A particularly beneficial aspect of Russia is the very low rate of 13% for personal income tax, with foreigners being taxed at 30% until they have lived in the country for over 183 days, at which point the rate changes to 13%.

A foreigner who spends at least 183 calendar days within 12 consecutive months in Russia is a Russian tax resident.

In Russia, as opposed to other countries, a simplified employment system is in effect for foreigners. If a foreigner is a highly qualified worker and their monthly salary exceeds RUB 167,000 (roughly EUR 2,400), they can obtain a work permit within a mere 14 days.

The qualification level of Russian workers is rather high. If the right approach is taken to hiring and needed training is provided, one can expect a very high level of efficiency, although searching for personnel will not be easy.

As of today, the main issues for foreign business in Russia are antitrust regulations and protection of competition, intellectual property, personal data protection and corruption risks.

What to expect and how to work on the Russian market

We expect new sanctions, though not in respect to import and trade of textiles, although sanctions are an important aspect of the interaction, and the issue should be taken seriously.

So how should one act when doing business in Russia?

  • Follow local laws
  • Do not compromise your ethical standards and do establish strong corporate culture
  • Build proper relations with government officials (use simple, but effective measures), relations should be respectful, but should not be in breach or relations ethics
  • Support your position in court
  • Apply and follow compliance programs
  • Personnel training is essential
  • Introduce a clear decision-making system
  • Explain the risk of personal liability for workers violating the law
  • Do check your partners
  • Mind the cultural differences

Very often foreign businessmen who made the decision to enter the Russian market ask the question of whether it is possible to build an effective and legitimate business in Russia.

In our opinion, based on twenty years of doing business in Russia and consulting foreign clients, this is possible. On one hand, this depends on you and on the business you plan to build, and on the other, there are restrictions and particular aspects of the market and the mentality, which you should note when working in Russia. Once you understand these particulars, you can build an effective, successful and legitimate business, as hundreds of our clients, public and private, have proven.

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