The regulatory conditions for foreign investments in Russia
The Constitution and the Civil Code of the Russian Federation, as well as laws on joint stock and limited liability companies and securities markets, provide the general legal framework for investment in Russia.
Foreign investments are regulated by Federal Law No. 160-FZ “On Foreign Investments in the Russian Federation” dated 9 July 1999 (the “Foreign Investments Law”).
The Foreign Investments Law defines foreign investors as:
• Foreign entities not controlled by Russian entities and individuals; and
• Foreign individuals unless they are also Russian citizens; and
• Foreign states and international organizations, as well as entities under their control.
The Strategic Companies Law expands this definition by extending it to:
• Entities (including those registered in Russia) under the control of foreign investors; and
• Russian citizens with foreign citizenship.
The Foreign Investments Law guarantees
The Foreign Investments Law guarantees foreign investors the right to invest and to receive revenues and profits from such investments, and sets forth the general terms for foreign investors’ business activity in Russia.
By virtue of this law, foreign investors shall be treated no less favorably than domestic investors, with certain exceptions. These exceptions may be introduced to protect the Russian constitutional system, public morals, health and rights of persons, or for state security and defense purposes. Foreign investments may only be nationalized following the adoption of a federal law and for compensation.
The tax stabilization clause
The Foreign Investments Law sets forth a tax stabilization clause (“Grandfather Clause”). The Grandfather Clause prohibits increasing the rates of certain federal taxes until initial investments have been recouped (up to a maximum of seven years, unless this period is extended by the Russian government).
This clause applies to (i) foreign investors that are implementing priority investment projects; (ii) Russian companies with more than 25% foreign equity ownership; and (iii) Russian companies with foreign participation that are implementing priority investment projects, regardless of the percentage of foreign participation in the company.
According to the Foreign Investments Law, a priority investment project is a project where the amount of foreign investment exceeds RUB 1 billion (approximately USD 12.5 million) or where a foreign investor has purchased an equity interest worth more than RUB 100 million (approximately USD 1.25 million). In both cases, the investment project must be included in a list of projects approved by the Russian government.
Key exceptions to the Grandfather Clause are established for excise tax, VAT on domestic goods and pension fund payments. There is also a potentially broad exception for laws protecting public or state interests. Despite these exceptions and qualifications, it remains unclear whether the Grandfather Clause brings any real benefit to foreign investors.
Limitations on foreign investment in Russia
The Foreign Investments Law permits foreign investment in most sectors of the Russian economy: government securities, stocks and bonds, direct investment in new businesses, the acquisition of existing Russian-owned enterprises, joint ventures, etc. Importantly, the Foreign Investments Law does not apply to the investment of foreign capital in banks and other credit organizations, insurance companies, mass media outlets, broadcasting organizations, and air carriers, as well as non-commercial organizations. Foreign investments in these entities are subject to specific Russian legislation.
Certain restrictions on foreign investments are imposed by Federal Law No. 57-FZ “On the Procedures for Foreign Investments in Companies of Strategic Significance for National Defense and Security,” dated 29 April 2008 (the “Strategic Companies Law”). The Strategic Companies Law is designed to regulate the acquisition of control over Russian strategic companies by foreign investors or “groups of persons” that include a foreign investor.
Whenever a foreign investor intends to acquire control over a Russian company engaged in a strategic activity, the acquisition, depending on the level of such control, requires preliminary approval from the Russian government and/or post-transaction notification of the Federal Anti- monopoly Service of the Russian Federation (FAS). Importantly, the notion of “control” for these purposes implies not only a certain minimum shareholding, but also rights to appoint governing bodies and otherwise determine the target company’s activity.
The competent authorities are the Government Commission on Control over Foreign Investments in the Russian Federation (regarding preliminary transaction approval) (“Government Commission”) and the FAS (regarding both preliminary transaction approval and post-transaction notifications).
The Strategic Companies Law provides a list of more than 40 activities that constitute strategic activities in Russia. Accordingly, any company engaged in such activities is viewed as a strategic company.
From the standpoint of foreign investment, it is crucial to verify all activities the target company is engaged in (particularly licensed to engage in) to assess whether it qualifies as strategic and would, therefore, be subject to the restrictions outlined above. Strategic activities include, among others, the following:
• Operations affecting geophysical processes, as well as hydrometeorological processes and events;
• Activities involving the use of infectious agents;
• Activities related to the nuclear industry;
• Activities related to encryption (cryptography);
• Activities related to the detection of electronic bugging devices (unless performed for a legal entity’s internal purposes) and to the manufacture and sale of such devices by commercial entities;
• Activities involving military weapons and equipment, including components and ammunition;
• Manufacture and sale of explosive materials for industrial purposes;
• Activities related to aviation equipment and security;
• Space activities;
Activities involving television or radio broadcasting on a territory where more than half of a Russian constituent entity’s population resides;
• Services provided by natural monopolies (excluding generally accessible telecommunications and postal services, services for heat energy and power transmission via distribution systems, and harbor services);
• Subsoil exploration and extraction activities involving strategic deposits (see Section “Natural Resources (Oil and Gas/Mining)“);
• Extraction of aquatic biological resources;
• Commercial printing, provided that the monthly output exceeds 200 million printed sheets;
• Activities performed by editorial boards and publishers, provided that the annual circulation of publications exceeds certain thresholds specified by law depending on publication frequency; and
• Other activities set out in the Strategic Companies Law.
In July 2017, Russia enacted new rules strengthening government control over transactions involving foreign investors with respect to Russian companies. Starting from 30 July 2017, any acquisitions by foreign investors of shares in any Russian company (not only companies engaged in the above strategic activities) may require the prior approval of the Government Commission if the chair of the Government Commission (i.e. the prime minister of Russia) decides that such transaction may threaten national defense and state security. In this case, FAS, within three days from the date of receiving such decision of the prime minister, will notify the foreign investor that it must submit an application for preliminary approval of the transaction by the Government Commission.
The following transactions and other actions involving the acquisition of control over strategic companies require the preliminary approval of the Russian government:
• With respect to the strategic companies engaged in strategic activities other than the use of strategic subsoil plots — transactions where a foreign investor or group of persons acquires:
o Direct or indirect control over more than 50% of the total number of votes attached to voting shares;
o The right to appoint (i) the chief executive officer, and/or (ii) more than 50% of the members of a collegial executive body (i.e. management board) of a strategic company; or
o The unconditional ability to elect more than 50% of the members of the board of directors (supervisory council) or other collegial governing body of a strategic company;
• With respect to the strategic companies using strategic subsoil plots — transactions where a foreign investor or group of persons acquires:
o Direct or indirect control over 25% or more of the total number of votes attached to voting shares;
o The right to appoint (i) the chief executive officer, and/or (ii) 25% or more of the members of a collegial executive body of a strategic company; or
The unconditional ability to elect 25% or more of the members of the board of directors (supervisory council) or other collegial governing body of a strategic company; • With respect to the strategic companies using strategic subsoil plots — transactions aimed at a foreign investor’s acquisition of direct or indirect control over shares (participation interests) if the foreign investor already has direct or indirect control over more than 25% but less than 75% of the total number of votes attached to voting shares (except for a foreign investor’s acquisition of shares (participation interests) which does not lead to an increase in the foreign investor’s equity interest);
• Transactions pursuant to which a foreign investor assumes the role of an external manager or external managing company of a strategic company or obtains the possibility to otherwise determine its corporate decisions, including those regarding the business of such strategic company;
• Transactions pursuant to which a foreign investor or a group of persons acquire control with respect to a strategic company as a result of: (i) any transactions with respect to third parties controlling, directly or indirectly, a strategic company; (ii) other cases of the acquisition of shares (participation interests), including, but not limited to, the buy-out of shares of a Russian public joint-stock company as a result of making a mandatory offer to other shareholders following the acquisition of more than 30% of voting shares in such company; and (iii) change in the ratio of votes attributable to voting shares (participation interests) of a strategic company;
• Transactions aimed at the acquisition by a foreign state, international organization and a foreign investor who fails to disclose information about its beneficial owners and controlling persons to FAS, or entity under their control, of the right to directly or indirectly control more than:
o 25% of the total number of votes attached to voting shares or other means of blocking decisions of the governing bodies in companies engaged in strategic activities other than the use of strategic subsoil plots; or
o 5% of the total number of votes attached to voting shares in companies using strategic subsoil plots; and
• Transactions aimed at a foreign investor’s acquisition of a strategic company’s main production facilities if their value is equal to or exceeds 25% of the company’s book asset value.
The foreign investor is responsible for securing transaction approval.
A foreign investor must submit an application for preliminary approval to FAS, which checks the application’s compliance with the formal requirements. The application represents a standard form supported by a number of documents relating to both the foreign investor and the strategic company, including a description of their groups, corporate documents and a draft business plan for the strategic company.
During the preliminary review, FAS requests the Federal Security Service and the Ministry of Defense to provide their conclusions as to whether the proposed transaction threatens national defense or any other security interest. FAS may also request additional information from the applicants, state bodies, organizations and individuals.
After the formal check is completed, FAS submits an application for preliminary approval to the Government Commission. The Government Commission, in turn, decides whether to approve the application and whether any additional conditions established by the Strategic Companies Law will apply to such approval.
After a foreign investor submits the application, FAS and the Government Commission have a maximum of three months to issue a final written decision. The Government Commission may extend the review period by another three months (six months in total). In practice, however, the approval process might take longer and there are no official fast-track options.
While FAS’s review of a foreign investor’s application focuses on compliance with the formal requirements, the Government Commission has full discretion to approve or reject the proposed transaction and is not obliged to explain or substantiate its decision.
By virtue of Russian law, the decision of the Government Commission may be challenged in the Supreme Court of the Russian Federation. In practice, such challenge is very difficult (if not impossible), as the Government Commission takes decisions at its own discretion and is not obliged to explain or substantiate them.
The Strategic Companies Law sets forth a duty to provide post-transaction notifications to FAS in case of:
• Acquisition of at least 5% of the shares (whether voting or not) in any strategic company; and
• Completion of the transactions and other actions for which a preliminary approval has been obtained.
The Strategic Companies Law does not apply, among other things, to:
• Acquisitions of strategic companies by entities under the control of the Russian Federation, its constituent territories or citizens of the Russian Federation that qualify as Russian tax residents21 (except for individuals with double citizenship) (so-called “Russian UBOs exemption”);
• Investments in a strategic company (other than those using strategic subsoil plots) by a foreign investor, provided that: (i) such foreign investor already directly or indirectly controls more than 50% of votes attached to the voting shares in that strategic company; and/or (ii) such foreign investor and such strategic company are controlled by the same person (so-called “intragroup exemption”); and
• Investments in a strategic company using strategic subsoil plots by a foreign investor if the Russian Federation had a right to control over more than 50% of voting shares in such strategic company before the transaction and such a right still remains with the Russian Federation after the transaction is closed.
Transactions executed in breach of the Strategic Companies Law are deemed void. The court may hold that the parties to a void transaction will return everything received under such transaction. If it is impossible to reverse a deal, or if a foreign investor fails to provide post-transaction notification to FAS in case of acquisition, directly or indirectly, of 5% or more of shares of a strategic company, a court may rule to deprive the foreign investor of voting rights at the shareholders’ meeting of a strategic company.
Violation of the Strategic Companies Law is also considered an administrative offense and is subject to the following penalties:
• Failure to obtain a preliminary transaction approval, submission of misleading information to FAS or breach of the terms and procedures of application filing may lead to a fine of up to RUB 1 million (approximately USD 12,500) for a legal entity, up to RUB 50,000 (approximately USD 625) for an executive officer of the infringing legal entity and up to RUB 5,000 (approximately USD 62.5) for an individual;
• Failure to submit a post-transaction notification (information) to FAS, submission of a knowingly misleading post-transaction notification (information) or breach of the terms and procedures of submitting a post-transaction notification (information) may lead to a fine of up to RUB 500,000 (approximately USD 6,250) for a legal entity, up to RUB 30,000 (approximately USD 375) for anexecutive officer of the infringing legal entity and up to RUB 3,000 (approximately USD 37.5) for an individual;
• Failure to provide FAS with information required by law, including additionally requested information, may lead to a fine of up to RUB 1 million (approximately USD 12,500) for a legal entity, up to RUB 50,000 (approximately USD 625) for an executive officer of the infringing legal entity and up to RUB 5,000 (approximately USD 62.5) for an individual.
Investments of foreign states and international organizations, as well as of entities under their control, in any Russian company, whether strategic or not, are subject to additional clearance requirements under the Foreign Investments Law. Any transaction that gives the above person(s) the right to directly or indirectly control over more than 25% of the total number of votes attached to voting shares in any Russian company or otherwise block decisions of a Russian company’s governing bodies, requires preliminary clearance with the Russian government and FAS.
Furthermore, pursuant to the Strategic Companies Law, foreign states, international organizations and foreign investors who fail to disclose information about their beneficial owners and controlling persons to FAS as well as entities under their control (“Restricted Investors”) must obtain preliminary transaction approval when acquiring more than:
• 25% of the total number of votes attached to voting shares or other means of blocking decisions of the governing bodies for companies engaged in strategic activities other than the use of strategic subsoil plots; or
•5% of the total number of votes attached to voting shares of companies using strategic subsoil plots.
In addition, Restricted Investors are explicitly prohibited from establishing control over strategic companies, as this term is defined in the Strategic Companies Law. Under the Strategic Companies Law, “control over a strategic company” means:
• With respect to strategic companies engaged in strategic activities other than the use of strategic subsoil plots:
o Acquisition by a Restricted Investor of direct or indirect control over more than 50% of the total number of votes attached to voting shares;
o Acquisition by a Restricted Investor of the right to appoint (i) the chief executive officer, and/or (ii) more than 50% of the members of a collegial executive body of a strategic company;
o Acquisition by a Restricted Investor of the unconditional ability to elect more than 50% of the members of the board of directors (supervisory council) or other collegial governing body of a strategic company;
o Appointment of a Restricted Investor as an external managing company of a strategic company; or
o Acquisition by a Restricted Investor of the right to direct the management of a strategic company on the basis of a contract or otherwise;
•With respect to the strategic companies using strategic subsoil plots:
o Acquisition by a Restricted Investor of direct or indirect control over 25% or more of the total number of votes attached to voting shares;
o Acquisition by a Restricted Investor of the right to appoint (i) the chief executive officer, and/or (ii) 25% or more of the members of a collegial executive body of a strategic company;
o Acquisition by a Restricted Investor of the unconditional ability to elect 25% or more of the members of the board of directors (supervisory council) or other collegial governing body of a strategic company;
o Appointment of a Restricted Investor as an external managing company of a strategic company; or
o Acquisition by a Restricted Investor of the right to direct the management of a strategic company on the basis of a contract or otherwise.
Although there is no express provision permitting land ownership by foreign nationals (including stateless persons), the Land Code may be clearly interpreted as allowing such ownership, except in cases where it is specifically prohibited. In 2004, the Constitutional Court of the Russian Federation confirmed this liberal and pro-foreign national interpretation of the Land Code. Foreign nationals have the right to acquire into lease or ownership vacant land plots (for construction purposes) or land plots under existing buildings, subject to the following restrictions set out in the Land Code and other federal laws:
• Foreign nationals are specifically prohibited from owning land plots: (i) in border areas, a list of which was approved by the president on 9 January 2011 by Presidential Decree No. 26 (“Decree”) for the first time since the adoption of the Land Code in October 2001; and (ii) in other particular territories of the Russian Federation pursuant to other federal laws. Additionally, the president may establish a list of the types of buildings and other structures the foreign owners of which will not enjoy the pre-emptive right to buy out or lease land underlying such buildings and structures. In accordance with Federal Law No. 137- FZ “On the Entry into Effect of the Land Code of the Russian Federation” dated 25 October 2001, as amended (“Land Code Implementation Law”), before the adoption of the Decree, the border restrictions applied to all border areas.
• Foreign nationals are prohibited from owning agricultural land. Federal Law No. 101 “On Turnover of Agricultural Lands” dated 24 July 2002 further specifies that foreign nationals and foreign legal entities (and stateless persons) may only lease agricultural land plots. This restriction on foreign legal entities also extends to Russian legal entities in which the equity participation of foreign nationals, foreign legal entities and/or stateless persons exceeds 50%.
• Foreign nationals are prohibited from owning land plots located within the boundaries of seaports.
Under the Decree, border territories are defined to include municipal districts and cities (in their geographical entireties) adjacent to the border.
Among the border territories are the city of Sochi (and other near-shore municipalities in Krasnodarsky Krai), five districts in the Leningrad oblast (the Lomonosovsky, Kingiseppsky, Slantsevsky, Sosnovoborsky and Vyborgsky districts), the Kronshtadtsky district in St. Petersburg, a number of municipal districts in the Bryansk, Tyumen, Rostov, Voronezh and Belgorod oblasts, most of the municipalities in the Kaliningrad oblast, a great many municipal districts in the Far East, and others.
Pursuant to the Land Code, the prohibition of land ownership in border territories applies to foreign legal entities (including entities acting in Russia through branches or representative offices), foreign individuals and stateless persons, but, in contrast to agricultural land, does not apply to Russian legal entities wholly or partially owned by foreign investors.
The Decree neither provides a transitional period nor a clear indication as to what should be done with land plots within restricted border territories acquired by foreign nationals before the adoption of the Decree. Neither the Land Code nor the Land Code Implementation Law addresses these matters. Arguably, the lack of transitional or implementation rules in the Decree reflects the intention of its authors to prompt foreign owners of lawfully acquired land in border territories to dispose of such land in accordance with general principles envisaged in the Civil Code. In particular, according to Article 238 of the Civil Code, if an owner owns property that may not be owned by that owner by virtue of law, such property must be alienated by the owner within a year from the moment when the ownership right arose unless the law specifies another term for the alienation of the property. Court practice (which is very scarce as of the date of this guide) uses this general principle when considering disputes with regard to land plots owned by foreign owners or stateless persons in border areas.
In the context of other provisions of the Land Code, dealing with the concept of unity of title to land and facilities (buildings) built thereon, in the absence of any exemptions in the Decree for foreign owners of developed land plots, a foreign person will also have to dispose of all the facilities and buildings developed on all such land plots that it owns. As of the date of this guide, the law is silent on whether this concept will apply and whether a foreign owner should also dispose of the facilitiethere are court decision in which the court held that the foreign owner should also dispose of the facilities (buildings) located on the land plot.
Customs, Trade and WTO Aspects
Russia is a member of the Eurasian Economic Union and of the World Trade Organization and, thus, has committed to implement their treaties and regulations.
Russian customs legislation is based on the unified rules of the Eurasian Economic Union (EAEU). The EAEU was launched on 1 January 2015 and it includes Russia, Belarus, Kazakhstan, Armenia and Kyrgyzstan. All Russian foreign trade regulations, including customs tariff and non-tariff regulations, are primarily based on rules established at the supranational level of the EAEU (for more details on the EAEU, please refer to Section 9.5 below). The EAEU replaced the Customs Union of Russia, Belarus and Kazakhstan (CU). The CU commenced operation on 1 January 2010 and gained its main legislative framework on 1 July 2011.
World Trade Organization (WTO)
Russia officially became the 156th member of the WTO on 22 August 2012.
Russia’s commitments and obligations are established in the Protocol of Accession of Russia to the WTO dated 16 December 2011 (“WTO Accession Protocol”) and the Working Party Report on the Accession of Russia to the WTOdated17 November2011(“WTO Working Party Report”).TheWTO Accession Protocol includes Russia’s tariff and non-tariff obligations to gradually reduce and maintain rates of import and export customs duties and tariff quotas for specific types of goods, as well as “horizontal commitments” on market access to financial, insurance and other types of services. The WTO Working Party Report includes an overall description of Russia’s economic policies, foreign trade regime and conditions for foreign investments in all sectors of the national economy, including certain specific terms and commitments of Russia’s membership in the WTO.
The official documents on Russia’s accession to the WTO are publicly available on the WTO website: https://www.wto.org/english/thewto_e/acc_e/completeacc_e.htm.
Since Russia is a member of the EAEU, the EAEU regulations are based on the WTO rules.
In July 2015, Kazakhstan signed an agreement on accession to the WTO that was ratified in October 2015. From 30 November 2015, Kazakhstan became the 162nd member of the WTO. According to Kazakhstan’s WTO commitments, the average final legally binding tariff for imported products is 6.5% (10.2% for agricultural products and 5.6% for manufactured goods). The Unified Customs Tariff of the EAEU established higher average final rates that are based on Russia’s commitments within the WTO. In order to reach a balance in trading such products within the EAEU, Kazakhstan took a commitment toward the EAEU, whereby all products imported into Kazakhstan at lower import customs duty rates cannot be freely moved to other EAEU countries (the difference in tariffs must be compensated first). Relevant regulations, including the full list of all such products, were issued in October 2015. They came into force on 11 January 2016.
The EAEU has already started expanding its cooperation with other trade blocs. In May 2015, the EAEU signed a free trade agreement with Vietnam. In June 2019, the EAEU and the People’s Republic of China signed an agreement on the exchange of information on goods and international transport vehicles crossing the customs borders of the EAEU and China. A new temporary free trade zone agreement with Iran dated 17 May 2018 came into force on 27 October 2019. In the course of 2019, the EAEU signed free trade agreements with Serbia and Singapore, executed memorandums on cooperation with Indonesia and the African Union Commission. At the end of 2019, the EAEU executed a set of agreements on interregional and cross-border trade, and the promotion of cooperation, with Mongolia.
CIS Free Trade Agreement
On 18 October 2011, countries of the Commonwealth of Independent States (CIS) signed the Free Trade Agreement of the Commonwealth of Independent States (“CIS FTA”), which came into force for Russia, Belarus and Ukraine on 20 September 2012. By mid-December 2012, the CIS FTA was ratified and it came into force for Armenia, Kazakhstan and Moldova. Azerbaijan and Turkmenistan did not sign the CIS FTA. Uzbekistan did not sign the CIS FTA but, on 28 December 2013, Uzbekistan ratified the protocol “On Application of the CIS FTA” dated 18 October 2011 between the CIS FTA member states and the Republic of Uzbekistan” (“Protocol”). According to the Protocol, Uzbekistan and other member states of the CIS FTA that have ratified the Protocol are mutually bound by the general rules of the CIS FTA with certain significant exemptions set forth in the Protocol. As of November 2019, Russia, Kazakhstan, Uzbekistan, Belarus, Moldova, Ukraine, Armenia and Kyrgyzstan have ratified the Protocol.
In 2014 and 2015, Kyrgyzstan and Tajikistan ratified the CIS FTA, respectively.
The CIS FTA provides for the free movement of goods within the territory of the CIS, no import customs duties, non-discrimination, the gradual decrease of export customs duties and the abolishment of quantitative restrictions in mutual trade between the CIS FTA member states. The CIS FTA covers goods originating from the signee states and, among other points, provides that:
• Goods originating from the CIS FTA member states are not subject to import customs duties in the country of import except for certain cases (i.e., sugar originating from Ukraine);
• The CIS FTA fixes the maximum rates of export customs duties that, for Russia, primarily cover food products, raw materials, agricultural products and chemicals (i.e., 10% on cellulose, 6.5% on coal coke, oil and gas based on special formulas, etc.);
• The signees agree not to apply quantitative limitations in trade; and
• Free transit is established (an exception is made for pipeline transit, which should be separately agreed between the signees).
The CIS FTA establishes that the WTO rules will govern the customs transit of goods, application of special safeguard, anti-dumping and countervailing measures, technical barriers to trade and the provision of subsidies and other measures applied in trade between its signees.
Disputes between the member states of the CIS FTA should be settled through mutual consultation. Where such consultations do not lead to a settlement, a dispute may be referred to an expert commission (in accordance with the procedure envisaged by the CIS FTA) or to the Economic Court of the CIS. The Economic Court of the CIS issued a number of consultative conclusions and decisions on interpreting the CIS FTA. At the discretion of a member state, a dispute arising out of the WTO rules can also be settled under the WTO dispute settlement procedures.
It is expected that the member countries will resolve certain important mutual trade issues within the legal framework of the CIS FTA (i.e., transit of gas, export customs duties for certain products, access to government procurement, etc.).
The CIS FTA provides for certain exemptions, including import customs duty and withdrawal from national treatment for certain products, and allows subsidies in certain circumstances. In addition, the CIS FTA does not prevent the signees from applying non-tariff measures.
In 2014, two members of the CIS FTA — Moldova and Ukraine — ratified agreements of association with the EU. The statutory requirements of association with the EU could create certain collisions with the implementation by Moldova and Ukraine of the CIS FTA. In this regard, other member states of the CIS FTA could adjust the conditions of membership of Moldova and Ukraine in the CIS FTA.
From 1 January 2016, Russia has suspended the application of the CIS FTA with respect to Ukraine because Ukraine had entered into the association agreement with the EU providing Ukraine with access to the European single market in certain selected sectors. The agreement between the EU and Ukraine provisionally came into force on 1 January 2016 and entirely entered into force on 1 September 2017. According to the provisions of the CIS FTA, Ukraine cannot simultaneously participate in free trade zones with the EU and with CIS countries.
The EAEU and the CU
The EAEU, which was initially launched in 2010 by Russia, Belarus and Kazakhstan, established a unified customs territory with the free movement of goods, unified customs tariff and non-tariff regulations, and regulations on the application of indirect taxes. The main aim of the EAEU is economic, financial and geopolitical integration between some of the former republics of the USSR.
On 29 May 2014, Russia, Belarus and Kazakhstan signed the Treaty on the Eurasian Economic Union, according to which, from 1 January 2015, the CU was transformed into the EAEU. The CU and the CU regulations became an integral part of the EAEU. The EAEU establishes a unified set of rules governing the most important economic sectors that should cover all its member states by 2020. From 1 January 2015, the EAEU was composed of the territories of Russia, Belarus, Kazakhstan and Armenia. Kyrgyzstan joined the EAEU on 12 August 2015.
Armenia does not have a common border with other EAEU members (it is separated from the EAEU by the territories of Azerbaijan and Georgia). Thus, to freely trade in goods with Armenia the other EAEU countries need to apply the customs transit procedure across the territories of Azerbaijan and Georgia.
The EAEU has been developing a unified economic area. In addition to the unified customs territory, the EAEU provides for free trade in services, including market access to natural monopolies (e.g., railways and energy), access to financial services, including free movement of capital and workforce, unified competition laws, macroeconomic policy, and unified regulations for taxes and IP. This should also include unified regulations for the circulation of medicinal preparations and medical devices, etc. As the EAEU is the successor of the CU, below we refer to all regulations implemented at the CU level as the EAEU regulations.
The Supreme Eurasian Economic Council is the main regulatory body of the EAEU. The EAEU Commission has the status of executive body of the EAEU and it is authorized to issue implementing regulations of the EAEU.
Unified Tariff Regulations of the EAEU
The classification of goods for customs purposes in Russia is carried out in accordance with the Unified Customs Tariff of the EAEU, which is based on the International Convention on the Harmonized Commodity Description and Coding System dated 14 June 1983 (“Harmonized System”), providing that all goods crossing the customs territory of the EAEU are assigned customs classification codes (HS codes) determined in accordance with the general rules of interpretation of the Harmonized System. Customs authorities control the correctness of the classification of goods.
The Unified Customs Tariff of the EAEU has undergone periodic revision since 2011, with the rates of import customs duties set in accordance with Russia’s obligations within the WTO, which were outlined in the WTO Accession Protocol.
In 2015, members of the EAEU decided to adopt a new customs code of the EAEU, which would replace the Customs Code of the CU (effective from 2010). The new customs code resulted in the codification of some 17 supranational regulations of the EAEU, including the customs valuation rules, the importation and exportation of cash by individuals, international mail, etc. The EAEU Customs Code was finally issued on 12 April 2017.
The EAEU Customs Code came into force on 1 January 2018.
The EAEU Customs Code is structured into nine sections:
• General provisions;
• Customs payments, special safeguard, anti-dumping and countervailing measures;
• Customs formalities and parties engaged in activities in the customs sphere;
• Customs procedures;
• Peculiarities of the movement of certain types of goods across the Customs Border of the Union;
• Conducting customs control;
• Customs authorities;
• Activity in the customs sphere and the status of authorized economic operators (AEOs);
• Transition provisions.
The EAEU Customs Code also includes two annexes on: (i) the interaction between the customs authorities of the EAEU member states regarding the collection of customs payments when the customs transit procedure is applied; and (ii) the list of data for exchange between the customs authorities of the EAEU member states on a regular basis.
The EAEU Customs Code includes the following main innovations:
• All customs clearance procedures should be performed electronically (documents in hard copies will be allowed only in certain exceptional cases);
• Goods may be released automatically without the involvement of customs inspectors by the use of information systems of the customs authorities;
• Goods must be released by the customs authorities within four hours after registration of a customs declaration (currently, this process takes one day);
• No supporting documents are required to file import/export customs declarations unless the customs authorities specifically request any;
• The rights of AEOs should be extended and the process of acquiring this status should be simplified. Specifically, AEOs will: (i) be given priority to perform customs operations; (ii) not be obligated to provide security for paying customs duties and taxes in certain cases; (iii) have priority in developing pilot projects and participating in experiments performed by the customs, etc.; • Customs regulations would be established primarily on the supranational level of the EAEU. The EAEU Customs Code should include far fewer references to the national legislation of the EAEU member states than the Customs Code of the CU;
• The importers of record should apply a special procedure to preliminarily inform the customs authorities of the importation of goods; and
• A single point of contact between importers and customs authorities should be established, through which all procedures and formalities should be completed.
The New Federal Law “On Customs Regulation” in Russia
The new Federal Law “On Customs Regulation” was issued by the Russian parliament on 3 August 2018 and it came into force on 4 September 2018 (except for certain articles). The new federal law was adopted in accordance with the EAEU Customs Code, and has a structure similar to it and includes articles corresponding to it, but it also provides for other provisions.
The adoption of the new law was due to the fact that the EAEU Customs Code contains reference rules according to which the regulation of a number of issues, or the establishment of additional conditions, should be completed at the level of the national legislation of the EAEU member states.
The Russian Customs Authorities
The introduction of the CU/EAEU has not affected the internal structure of the Russian customs service, which remains as follows:
• The Federal Customs Service;
• Regional customs administration;
• Customs houses; and
• Clearing customs posts.
Importing and exporting
As in most countries, Russia/EAEU customs regulations established standard customs regimes of import and export, re-import and re- export as well as economic customs regimes designated for special/irregular situations (e.g., customs warehouse, temporary import, free customs zone, etc.). Goods may be placed under any of the applicable customs regimes (i.e., “customs procedures”) established by the Customs Code of the CU/EAEU that are based on the International Convention on Harmonized Commodity Description and Coding System. Below is a brief description of the most commonly used customs regimes.
Internal (Home) Consumption
The importation of goods for internal (home) consumption (usually, the synonymous term “release for free circulation” is used in practice) in Russian territory is the main customs regime for importation with the ensuing free circulation of goods in Russia without any further customs restrictions or post-clearance customs control, provided that all applicable customs duties and taxes have been paid.
Local branches and representative offices of foreign companies can release goods for internal consumption in Russia, subject to certain conditions.
Temporary import is considered a special economic customs regime, pursuant to which foreign goods are used for a certain period (the term of the temporary import) in Russian customs territory with full or partial exemption from import customs duties and taxes (i.e., import VAT and excise taxes, where applicable).
Temporarily imported goods must remain unchanged, except for changes due to natural wear and tear or natural loss given normal transportation, shipment, storage and use conditions. Russian importers are allowed to perform operations with temporarily imported goods required for their preservation, the maintenance of the consumer features of products and to keep the products in the condition they were in before they were cleared at customs for temporary importation into Russia.
Certain products (e.g., pallets and other types of returnable packaging for goods temporarily imported to further international trade, tourism, science, culture, cinema and sporting relations, etc.) may be temporarily imported with full exemption from import customs payments.
Where partial (rather than full) exemption from import customs payments is granted, the temporary import regime contemplates that 3% of the total amount of import customs payments (that would have been paid if the goods had been fully imported for free circulation) must be paid for each month the goods stay in Russia under this regime.
The generally permitted term for temporary import is only two years. There are some statutory requirements that should be met to be eligible for exemption from customs duties. In particular, temporarily imported goods may not be sold or otherwise transferred to any third party. The customs authorities can also request security for import customs payments (most likely a bank guarantee or cash deposit) from the importer of record before applying the temporary import regime.
Under the bonded warehouse customs regime, goods imported into the EAEU are stored at special places (bonded warehouses) under customs control without an obligation to pay import customs duties and taxes. Storage at a bonded warehouse is subject to regular non-refundable storage fees as contractually agreed with the bonded warehouse’s owner. Goods so imported and put under this customs regime (pursuant to the permission of the customs authorities) have the status of foreign goods.
The maximum term for the storage of imported goods at a bonded warehouse is three years, with an option to extend this term with the permission of customs. Goods with a shorter useful life and/or sale term must be assigned to other customs regimes and shipped from such bonded warehouses at least 180 days prior to the expiration of such term (except for products subject to accelerated deterioration with respect to which the term for storage at a bonded warehouse could be reduced).
The importer of record or other interested parties having placed imported goods in a bonded warehouse can sell or otherwise transfer them to third parties with the preservation of the same customs status and with the prior consent of the customs authorities, which is followed by the legal substitution of the importer of record by the third party that acquired these goods. Please note, however, that such sale or transfer might be subject to local Russian taxation because, apart from the special customs regime, a bonded warehouse is no different to any other warehouse located in Russian territory.
Goods placed in a bonded warehouse can be further exported and placed under another customs regime, including importation for internal (home) consumption. When sold to Russian customers for free circulation on the local market, such goods should be declared for the internal consumption customs regime with payment of the relevant import customs duties and taxes.
Under the customs transit regime, goods cross the customs border of the EAEU and are under customs control during their movement across Russian customs territory without an obligation to pay import customs duties and taxes. Only foreign goods can be subject to the customs regime, which is granted only based on the permission of the customs authorities. The regime is normally granted to either a carrier or an expediter if it is a Russian legal entity or an entity of the EAEU. The transit customs regime is terminated when the goods are shipped out of Russia. A special transit customs declaration is required for the declaration of the transit customs regime.
Security for payment of customs duties and taxes is usually required before the goods are placed under the customs transit procedure. However, TIR carnets are still accepted by Russian customs as an exemption from the obligation to provide such security. Notably, the use of TIR carnets was allowed until 28 February 2015 and then renewed on 22 January 2016.
Products with the status of foreign goods can be declared for destruction before the customs authorities, which would imply that such destruction must be completed under customs control and the importer would not be subject to import customs duties and taxes with respect to such destroyed products. However, the cost of destruction must be fully covered by the importer claiming the regime. Moreover, the waste generated as a result of such destruction would be subject to customs clearance requirements and import customs duties and taxes under general rules. Customs clearance requirements do not apply to waste that cannot be further used for commercial purposes or is subject to burial, neutralization, utilization or removal in another way. Such waste has the status of goods of the EAEU and is not subject to customs control.
Abandonment to the State
Foreign goods imported into Russia may be abandoned to the Russian state, which is a special customs regime that can be selected by the importer of record. Under this regime, the title to the imported goods is gratuitously transferred to the state without an obligation of the importer to pay any import customs duties and taxes, including the customs processing fee. Imported products may be cleared under this regime with a permit from the customs authorities. This regime may be a convenient way to avoid unreasonable customs clearance costs if they become applicable to goods for any reason (e.g., customs have classified the goods under a code entailing a substantially higher import duty than the importer is ready to pay, or customs request a permit/license that the importer does not possess and it is too costly/burdensome to ship the goods back from Russia).
Export of goods is the main customs regime for the definitive exportation of goods out of the customs territory of Russia. Export of certain types of goods is subject to export customs duties. Export of any goods is also subject to Russian VAT with a special 0% rate (see below).
Re-export is the customs regime when goods initially delivered into Russian territory may be taken out with the right to be exempted from customs duties, fees and taxes or refunded customs duties, fees and taxes (if paid). Generally, the re-export regime applies only to foreign goods, i.e., goods that were delivered into Russian territory but have not undergone the entire customs clearance procedure and have not been released under a particular customs regime.
Generally, the re-export customs regime is not applicable to goods imported into Russia and released for free circulation in Russia. The re- export regime can be applied to goods released into free circulation in relation to which it has been established that when they crossed the Russian customs border they had defects or in some other way did not conform to the provisions of the foreign trade contract in terms of quality, quantity, description or packaging, and for this reason were returned to the supplier or another nominated person. Such goods may be placed under the customs regime of re-export, if they: (i) have not been used or modified, except if such use or modification was required for the detection of defects; (ii) may be identified by the Russian customs authorities; (iii) have been re-exported within one year from the date of release into Russia; and (iv) have been supported with the required documents that confirm the existence of lawful grounds for such re-export and the observance of restrictions and prohibitions for the import of goods that are established by the legislation of Russia/the EAEU.
Re-import is the opposite of the re-export customs regime and is designed to exempt goods that were initially exported from the customs territory of Russia from the payment of import customs duties and taxes, without the application of any economic restrictions provided by Russian laws and the laws of the EAEU.
Customs regimes introduced by the new Customs Code of the EAEU
The EAEU Customs Code formalized three customs regimes that were previously established and regulated by the legislation of the EAEU member states, namely the special customs regime, free customs zone and free bonded warehouse regimes.
The special customs regime applies to certain types of foreign goods, i.e., goods that were imported into EAEU territory, located and/or used within/or outside the EAEU territory. Free bonded warehouse is a customs regime under which foreign goods and the goods originating from the EAEU are located and used in a free bonded warehouse without paying customspaymentsandwithoutobservinganti-dumping,countervailing and special safeguard measures. Under the free customs zone regime, foreign goods and the goods originating from the EAEU are located and used within a free economic zone. This customs regime allows the performance of such operations as local processing, manufacturing and repairing with respect to such goods within a certain period.
Under all the above customs regimes, the importers of record are exempt from paying customs payments and observing anti-dumping, countervailing and special safeguard measures (provided that all requirements of this regime are fulfilled and goods are used in accordance with the regime).
Goods that are moved into Russia through the territory of EAEU member states are placed under the transit customs regime at the external border of the EAEU and are finally released for free circulation by the Russian customs authorities. In Russia, imported goods are legally released for free circulation after the Russian customs authorities confirm this by notifying the declarant electronically that the goods have been released. Imported goods are normally cleared at customs before either their shipment to Russia or when the goods reach the designated customs house/post (and are placed in a special temporary customs warehouse if necessary).
Customs clearance is normally completed by the importer of record (or a customs representative acting on its behalf) filing the customs declaration (the main document) and the required set of documents. The list of documents required for customs clearance in each particular case depends on the type and characteristics of the goods and terms of their importation (e.g., the customs regime chosen). Notably, the EAEU Customs Code stipulates a general rule according to which importers/exporters are not required to enclose supportive documents with the customs declaration. The customs authorities may separately request any documents supporting the declared information. This move is aimed at simplifying customs declarations for the business community and eliminating burdensome responsibilities and formalities.
Under the EAEU Customs Code, the standard term of release of goods by the customs authorities was reduced to four hours (subject to certain conditions). However, in practice, the customs clearance process may take longer than the statutory term.
The legislation gives a customs inspector the right to extend that term by up to 10 business days at the discretion of the chief of a customs terminal. Under the EAEU Customs Code, the term can only be extended if a customs inspector requires additional supporting documentation for the imported goods or if a declarant decides to amend information provided in the customs declaration during customs clearance. Furthermore, the EAEU customs legislation also envisages the right of customs authorities to further extend the 10-business day term for customs clearance in exceptional cases (e.g., for the period of a customs expert examination if such period exceeds the 10-day limitation).
As of 1 January 2010, the Russian customs authorities have started to carry out customs clearance operations with the use of electronic declarations (e-declarations), which should significantly speed up customs clearance formalities for declarants and customs agents. Currently, customs clearance in Russia is performed electronically. From 1 January 2014, almost all customs declarations have been submitted in electronic form (i.e., without any documents in hard copies), except for certain cases, for example, goods sent by international mail. Customs posts are equipped with the technical facilities to perform e-declarations, which makes it possible to: (i) inform the customs authorities in advance over the internet; (ii) file a customs declaration and other supporting documents in electronic form; and (iii) electronically release the goods. E-declarations also make it possible for importers located far from clearing customs posts to perform customs clearance formalities and release goods at the Russian border remotely, i.e., without being physically present and without the need to provide documents in hard copies.
According to the EAEU Customs Code, almost all customs clearance formalities must be performed electronically. Hard copies are allowed only in the following exceptional cases: (i) customs transit of goods; (ii) importing/exporting goods designated for personal use by individuals; (iii) goods sent by international mail; (iv) declaration of international transportation vehicles; (v) the use of transport (carriage), commercial and/or other documents (including those envisaged under international treaties entered into between EAEU members and third parties) as a customs declaration; and (vi) other cases determined by the EAEU Commission.
In addition, pursuant to the EAEU Customs Code, the release of goods by the customs authorities should be performed automatically (currently, customs release is done by customs officers) and the relevant reports issued by customs should be sent by electronic mail.
The legal basis for the import licensing system is the EAEU legislation on non-tariff measures. The purpose of the licensing measures is to monitor and control the import and export of goods that are classified sensitive by EAEU member states or by the international community. Import/export licenses are required: (i) in the event of temporary quantitative restrictions on imports of certain types of goods; (ii) to regulate the importation of certain goods for reasons of national security, health, safety or environmental protection; (iii) to grant an exclusive right to import or export certain goods; or (iv) to carry out international obligations. A unified list of goods, to which import and export limitations and prohibitions are applied, was established at the EAEU level, based on which certain categories of goods (e.g., fertilizers, rare animals and plants, goods with a high level of cryptographic protection, hazardous waste, drugs, items of cultural value, precious stones and metals, etc.) require an import or export license for their movement across the EAEU border. In Russia, the Ministry of Industry and Trade issues licenses in accordance with the unified licensing rules of the EAEU. Products containing any cryptographic devices or functions not requiring an import license (which covers the majority of IT hardware and software goods, such as electronics, phones, computers, laptops, modems, software, etc.) are subject to mandatory notifications with the Russian Federal Security Service. A Russian licensee may import licensed goods into Russia only and it has the right to transit such goods through the territory of the other EAEU member states. In 2013, the EAEU Commission issued regulations on the procedure for providing licenses and notifications. In 2015, the EAEU Commission issued a decision on measures of non-tariff regulation, which clarifies certain aspects of the procedure for providing licenses and notifications.
In accordance with the WTO requirements on non-discrimination in foreign trade, the import licensing of medicinal preparations was abolished in the CU in 2011. The import licensing of alcohol products was also abolished automatically in the CU at the moment Russia became a member of the WTO.
On 14 June 2018, Russia adopted new rules of origin for products from developing and least-developed countries (goods for which tariff preferences are granted when imported into the territory of the EAEU). The new rules replaced the Agreement on the Rules of Origin of Goods from Developing and Least-Developed Countries of 12 December 2008. The general approach to determining the country of origin has not changed significantly. To obtain tariff preferences, it is necessary to observe a number of criteria, such as direct delivery, direct purchase, documented proven origin of the goods and sufficient processing.
On 13 July 2018, Russia also adopted non-preferential rules of origin intended for customs purposes (for example, for the application of anti- dumping duties, special protective, compensatory duties, etc.), not to provide tariff preferences. New non-preferential rules of origin replaced the Agreement on the Non-preferential Rules of Origin of 25 January 2008.
The new rules came into force in January 2019.
Importation of goods as an in-kind contribution into the charter capital of a Russian legal entity is duty free. After importing the goods, the importer of record is required to prove that the goods were recorded on its balance sheet and they were not discarded.
Goods imported with no import duty as in-kind contributions into charter capital are treated as conditionally released and, if the goods are alienated by the importer in any manner, the importer will be required to pay the import customs duties (and, in some cases, import VAT) together with applicable fines and late payment interest for the whole term during which the duty exemption applied to the goods.
The Treaty on the Eurasian Economic Union states that provisions on tariff preferences for in-kind contributions should be established at the level of the EAEU Commission (until this issue is regulated by the Resolution of the Council of the Customs Union issued in 2011 and in Russia at the local level by governmental decree).
There are currently four MECRs — five including the Nuclear Non- Proliferation Treaty Exporters Committee:
• The Zangger Committee complements the Treaty on the Non- Proliferation of Nuclear Weapons (“NPT”) by establishing guidelines for the practical implementation of export control provisions set forth in Article III. 2 of the NPT, according to which the International Atomic Energy Agency (IAEA) safeguards must be applied to nuclear exports;
The Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods and Technologies (“Wassenaar Arrangement”);
• The Nuclear Suppliers Group — for the control of nuclear-related technology;
• The Missile Technology Control Regime — for the control of rockets and other aerial vehicles capable of delivering weapons of mass destruction;
• The Australia Group — for the control of chemical and biological technology that could be weaponized. Russia is part of the first four above-listed MECRs, but it does not participate in the Australia Group.
Russia is party to the 1998 Wassenaar Arrangement, but still has certain peculiarities.
Russia established and currently maintains several lists of controlled items that are based on the Wassenaar Arrangement. The lists of controlled items are established by presidential decrees. Apart from the List of Dual-Use Items, there are relevant lists of controlled chemicals, nuclear-related items, military items, etc.
Should the products fall under the Russian lists of products subject to export control (the so-called Russian Dual-Use List), the exportation of such products out of Russia would be subject to special export control clearance, i.e., an export control license or permit issued by the Russian Federal Service for Technical and Export Control (FSTEC). In certain cases, the importation of dual-use products might be subject to export control requirements.
If a product by its HS code, description or designation may potentially fall under Russian export control regulations, it must undergo special export control identification and testing to determine whether special export control clearance is required (i.e., export control license, or permit, or end- use certificate issued by the FSTEC for the importation/exportation of the products). In certain cases, the Russian importers/exporters of record need to undergo independent identificationexport control testing performedby testing laboratories accredited by the FSTEC.
Currently, the members of the EAEU are considering establishing unified rules on export control at the supranational level. Draft regulations are already in place; however, the date of adoption at the EAEU level has not yet been selected.
The FSTEC performs inbound control and supervision in thes phere of the intangible transfer of controlled items (i.e., cross-border electronic downloads, etc.). The Federal Customs Service is responsible for supervising controlled items at the customs border.