How foreign companies operate in Russia: a current overview of 2022
Since March 2022, foreign companies and large corporations have begun to leave the Russian market. According to experts’ preliminary estimates, more than 250 companies have left the domestic business market. However, not everyone is leaving Russia. For many brands, our country remains a large and reliable market for their products and services. However, for some companies, the form of presence in our country is changing and transforming. In this article, we will explain in detail whether foreign companies are operating in Russia, and how this is structured?
Possible problems for foreign businesses in Russia
According to preliminary data, only part of the companies have been able to “survive” the half of the year without consequences. The other part, in spite of continuing to work in Russia, has encountered certain difficulties, the solution of which requires certain resources and time.
Among the most pressing problems are:
- Higher purchase prices for goods, components and raw materials imported from abroad.
- Reduced demand for goods and services in the domestic market.
- Logistical difficulties in supplying goods from abroad.
- Exit from the domestic market of a number of platforms and electronic systems used by businesses.
- Increased need to obtain new loans to continue operations.
- Reduction in the number of counterparties from Russian companies.
- Difficulties with foreign currency transactions: settlements of contracts, transfer of funds abroad.
Some corporations face problems in managing their business locally, but this problem seems to be the least difficult to solve. The times of crisis offer new variants of enterprise management in addition to the existing classical ways, which we will describe below.
Classic ways of operating in Russia for foreign companies
There are four traditional ways for foreign investors to start their own business in Russia. Each has its own characteristics, advantages and disadvantages, but they are perfectly legal for developing your business in our country. Among these forms of business organisation there are the following.
1. The opening of a Limited Liability Company (LLC) or a Joint Stock Company (JSC).
There are many similarities between a Limited Liability Company and a Joint Stock Company in Russia. In particular, both forms presuppose:
- The existence of a charter.
- Contribution of funds to the share capital of the company.
- The possibility of establishing several partners at the same time.
However, the most preferred and popular is the Limited Liability Company largely due to the low authorised capital – 10 thousand roubles, the lack of the need to issue shares and the lack of personal liability for the company’s debts.
Other advantages include the possibility to operate under the simplified taxation system (STS). This also applies to LLCs with foreign participation.
In order to open a LLC, a foreign investor must meet a number of criteria, among which are:
- To be legally present on the territory of Russia. To do this, it is necessary to have one of several documents – business visa, temporary residence permit (TRP) or residence permit (STN).
- Notarised and translated documents on foreign legal entity, if one of the founders is a foreign firm. A notarised translation of the passport will be required for a foreign founder.
- Obtaining a work permit in Russia for a foreign investor, if he plans to hold the position of director. The registration of such a document takes a certain amount of time – about a month. To save resources, a good solution would be to hire a Russian citizen as director.
2. Opening a joint venture.
A joint venture is a company operating in the domestic market with a foreign and a Russian founder. A joint venture will be considered either the opening of a new company or the acquisition of a share in the share capital of an existing LLC. This option is increasingly being chosen by foreign investors because of the opportunity to work with a partner who is well-versed in the local market.
To open a joint venture, a foreigner has to fulfil the same conditions as when opening a LLC or a JSC. The only nuance is that if the share capital is increased, the corresponding changes must be made in the Unified State Register of Legal Entities. The re-registration process takes about a week and is paid in the amount of the state duty of 800 RUR which does not include notary fees.
3. Opening a branch/representative office of a foreign company.
Such forms of business organisation are separate subdivisions which operate under the auspices of a foreign company and perform certain functions of the foreign company. However, there are certain differences between a branch and a representative office. In particular:
- A representative office is considered to be a representative body in a particular region of presence. According to Article 55 of the Russian Civil Code, a representative office cannot fully engage in entrepreneurial activities. As a rule, the scope of work of this form of company organisation includes – advertising and marketing, conclusion of contracts with local contractors and support of regional buyers.
- A branch, on the other hand, has the right to legally engage in commercial activities on behalf of and under the brand of the parent company, including the production and sale of goods, as well as the provision of services.
The opening of a branch or representative office of a foreign company in Russia rivals the opening of an LLC in terms of popularity. There are several advantages to this:
- A wide range of economic and legal opportunities.
- Ability to operate under a globally recognisable brand name.
- An opportunity to keep accounting separate from the parent company.
- There is no prospect of paying taxes in two countries, if there is a double taxation agreement between the states.
- A number of costs for branches and representative offices are not included in VAT.
- The provision of physical assets for the offices may come from the assets of the main firm. This applies to cash as well as tangible items.
In order for a foreign company to open a branch or representative office in Russia, it must fulfil one condition: to be accredited and pay a state duty of 120 thousand roubles for each branch or representative office.
4. Signing a contract with a distributor.
Distributors allow you to legally market the products of a foreign manufacturer without opening your own office and employing employees. This form of work is excellent for small foreign companies.
One of the advantages of this form of work is that there is no need to have assets in Russia, including an office and other material things. The main thing is to find a reliable distributor in Russia and to draw up a supply contract correctly.
Ways for foreign companies to work in Russia in times of crisis
In 2022, the list of classic ways of doing business in Russia has slightly expanded. This is due to the introduction of sanctions by foreign governments and the attempt of many foreign corporations to circumvent them. So, there are three ways of doing business in Russia while maintaining their global reputation.
1. Transfer of management to a top manager from Russia.
In this case, the economic and business activities of the foreign company are carried out as decided by the domestic specialist. However, the top manager has no authority to make his own decisions without the consent of the ultimate beneficiaries.
2. Trust management.
This year, for the first time in a long time, the Russian authorities have resorted to an external administration procedure in respect of foreign companies which have decided to leave Russia. In this case, the legal entity retains its brand, assets and workforce. However, financial and economic decisions will be made by a court-appointed external administration.
External administration can be implemented in several ways:
- Transfer of shares or shares in the share capital into trust management.
- The transfer of powers to the head of the company.
Trust management can be terminated by a foreign owner if he/she returns to the business or decides to sell or liquidate the company.
Recommendations on working in Russia for foreign companies
When conducting business with foreign participation in Russia it is important to take into account several rules:
- When switching to electronic document management, it is important to know that not all paperwork can be maintained exclusively in digital form. In Russian practice, unlike in the West, it is customary to have paper originals of all documents. The thing is that scanned copies do not always constitute evidence in case of court proceedings, neither do social media or messengers.
- Russian laws and regulations prescribe to maintain corporate document flow in Russian. However, international companies operating in Russia often have a foreign language as their official language. It is important to understand that the Labour Code does not stipulate that employees of foreign corporations must speak a foreign language.
- All occupational health and safety documents must first and foremost comply with domestic regulations.
In case of legal problems during registration of a foreign company in Russia or during its operation it is important to seek competent assistance. VALEN lawyers advise on a wide range of issues relating to the operation of foreign firms, including business risks and compliance with domestic law.