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Doing business in St. Petersburg 2012

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Get in-depth information about the city's economy, clusters, business solutions as well as details of doing business in St. Petersburg by reading fully-fledged English language guide designed …

Get in-depth information about the city's economy, clusters, business solutions as well as details of doing business in St. Petersburg by reading fully-fledged English language guide designed specially for exporters and importers, investors and start-ups.

This publication was developed by St. Petersburg Foundation for SME Development by the order of St. Petersburg Government - Committee for External Relations in collaboration with professional legal, human resources, certification, research and real estate firms with the aim of providing start-ups, potential exporters and investors with the relevant information on starting and running business in St. Petersburg.

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  • 1. Doing business in St. PetersburgSt. Petersburg Government - Committee for External Relations 1 St. Petersburg Foundation for SME Development
  • 2. Doing businessin St. PetersburgGuide for investors, exporters and start-upsThe current publication was developed by St. Petersburg Foundation for SME Development by theorder of the St. Petersburg Government - Committee for External Relations in collaboration with thefollowing international legal, certification, real estate and human resources firms: Baker & McKenzie,SGS Group, Adecco, Jones Lang LaSalle.© 2012 St. Petersburg Government - Committee for External Relations. St. Petersburg Foundationfor SME Development. All rights reserved. International copyright.Any use of materials of this publication is possible only after written agreement of St. PetersburgFoundation for SME Development and relevant contributing firms.Online version is available at: www.kvs.spb.ru and www.doingbusiness.ru Doing business in St. Petersburg2 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 3. Table of contents1. The city ....................................................................................................................... 6 1.1. Geography ............................................................................................................................. 6 1.2. Public holidays and business hours ....................................................................................... 7 1.3. Population ............................................................................................................................. 7 1.4. Political system...................................................................................................................... 8 1.5. Economy .............................................................................................................................. 11 1.6. Foreign trade ....................................................................................................................... 13 1.7. Foreign investment ............................................................................................................. 15 1.8. International cooperation ................................................................................................... 16 1.9. Culture ................................................................................................................................. 17 1.10. Science and education ........................................................................................................ 18 1.11. Transport infrastructure...................................................................................................... 192. Key industry sectors .................................................................................................. 20 2.1. Overview of St. Petersburg’s industry ................................................................................. 20 2.2. Transport machinery and equipment ................................................................................. 23 2.3. Electrical and optical equipment ........................................................................................ 26 2.4. Food and beverage production ........................................................................................... 303. Key business clusters ................................................................................................ 34 3.1. Automotive cluster .............................................................................................................. 34 3.2. Software and information technology services .................................................................. 37 3.3. Pharmaceutical cluster ........................................................................................................ 48 3.4. Shipbuilding cluster ............................................................................................................. 574. Business solutions..................................................................................................... 62 4.1. Headquarters ...................................................................................................................... 63 4.2. Research & Development ................................................................................................... 65 4.3. Production сenter ............................................................................................................... 68 4.4. Distribution сenter .............................................................................................................. 75 4.5. Test market ......................................................................................................................... 775. Doing business .......................................................................................................... 79 5.1. Russian Judicial System ....................................................................................................... 79 5.2. Promoting Foreign Investment in Russia ............................................................................ 85 5.3. Establishing a Legal Presence .............................................................................................. 89 5.4. Competition Protection Law ............................................................................................... 96 5.5. Corporate Compliance ...................................................................................................... 105 5.6. Taxation ............................................................................................................................. 109 5.7. Customs ............................................................................................................................. 130 5.8. Currency Regulations ........................................................................................................ 143 5.9. Employment ...................................................................................................................... 146 5.10. Property Rights .................................................................................................................. 153 5.11. Privatization ...................................................................................................................... 165 5.12. Language Policy ................................................................................................................. 167 5.13. Civil Legislation .................................................................................................................. 169 5.14. Intellectual Property ......................................................................................................... 171 5.15. Product conformity assurance in Russia ........................................................................... 175 5.16. Banking .............................................................................................................................. 181 Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 3 St. Petersburg Foundation for SME Development
  • 4. 6. Costs of doing business ........................................................................................... 187 6.1. Costs of starting a company .............................................................................................. 187 6.2. Human resources .............................................................................................................. 189 6.3. Office, retail and warehouse market ................................................................................ 195 6.4. Communication ................................................................................................................. 201 6.5. Utilities .............................................................................................................................. 2027. Contacts of business support infrastructure ............................................................ 204 7.1. Overview of the business support infrastructure in St. Petersburg................................. 204 7.2. Authorities......................................................................................................................... 204 7.3. Investment support ........................................................................................................... 207 7.4. SME business cooperation support................................................................................... 209 7.5. SME support ...................................................................................................................... 211 7.6. Financial support ............................................................................................................... 213 7.7. Techno parks and business incubators ............................................................................. 215 7.8. Educational programs and internships ............................................................................. 217 7.9. Chambers of commerce and industry ............................................................................... 218 7.10. Business associations ........................................................................................................ 218 7.11. Audit, tax and consulting firms ......................................................................................... 219 7.12. Banks ................................................................................................................................. 220 7.13. Certification and testing .................................................................................................... 220 7.14. Exhibitions ......................................................................................................................... 221 7.15. Law firms ........................................................................................................................... 221 7.16. Real estate ......................................................................................................................... 222 7.17. Recruitment....................................................................................................................... 222 7.18. Transport and logistics ...................................................................................................... 2238. Authors and contributors ........................................................................................ 224 Doing business in St. Petersburg4 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 5. Welcome to St. Petersburg I would like to welcome you to St. Petersburg, one of the largest centers of international cooperation in Russia and Europe. The city is a member of leading international and regional organizations and has bilateral cooperation agreements with 89 foreign cities and 27 foreign regions. Every year St. Petersburg hosts more than 200 international events, including the world’s famous St. Petersburg International Economic Forum. St. Petersburg has always been and remains an attractive location for foreign investors due to an established and effectively operating system aimed at supporting investment activity. In 2011 foreign trade turnover reached 53.2 billion US dollars. St. Petersburg has trade relations with 187 countries, including such major trade partners as China, Germany, Netherlands, Finland, Japan and USA. 1,192 large and medium-sized companies with participation of foreign capital operate in the city. The city has successfully implemented a number of large-scale international projects, including the construction of car manufacturing plants of the world car giants. Some of the actively developing clusters with participation of international companies include pharmaceutical cluster and information technologies cluster. St. Petersburg welcomes you and is ready for cooperation! Alexander Prokhorenko Member of St. Petersburg Government Chairman - Committee for External Relations Welcome to St. Petersburg, the city of enormous business opportunities and development potential. St. Petersburg is one of the largest economic, transport, academic, cultural and tourism centers in Russia as well as a growing economy with a thriving private sector and an attractive business environment. Favorable economic and geographical location in the European part of Russia, developed infrastructure, extensive scientific, research and educational potential, highly skilled workforce as well as broad market and competitive operating costs facilitate the development of efficient, safe and stable business. During the recent years many international companies, including Coca-Cola, Pepsi, Gillett, Wrigley, British American Tobacco, Bosch Siemens and many others, have already implemented investment projects in St. Petersburg. All of them considered the city as an ideal location for their business needs, whether it is an R&D center, test market, production center or distribution hub. We welcome you to St. Petersburg and will be glad to see you among our partners and clients! Maxim Balanev Executive director - St. Petersburg Foundation for SME Development Regional coordinator - Enterprise Europe Network, Gate2Rubin Consortium – Russia, Module A Branch - St. Petersburg Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 5 St. Petersburg Foundation for SME Development
  • 6. 1. The city1.1. GeographyCoordinates: Latitude: 59° 57 North Longitude: 30° 19 EastArea: 1,439 sq.km.Climate: Maritime, with warm damp summers and moderately cold long wintersAverage temperature: July: + 25 C January: - 2 CTime: MSK ( UTC+4)Dialing codes: International country code: + 7 (Russia) Area code: 812 Doing business in St. Petersburg6 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 7. 1.2. Public holidays and business hoursOfficial holidays:  January 1-5 - New Year holidays  January 7 - Russian Orthodox Christmas  February 23 - Armed Forces Day  March 8 - Women’s Day  May 1 - International Labor Day  May 9 - Victory Day  June 12 - Day of Russia  November 4 - National Unity DayBusiness hours:  Offices: Mondays through Fridays - 9.00-18.00 (9 a.m. till 6 p.m.), lunch break – 13.00-14.00 (1 p.m. till 2 p.m.)  Banks: Mondays through Fridays - 9.00-18.00 (9 a.m. till 6 p.m.)  Stores: Mondays through Saturdays - 10.00-19.00 (10 a.m. till 7 p.m.), most stores are also open on Sundays  Restaurants: Mondays through Sundays – 12.00-23.00 (12 p.m. till 11 p.m.), many restaurants and cafes are open 24 hours1.3. PopulationPopulation 4,953,200 people(01.01.2012):Economically active 2,677,000 peoplepopulation (2011):Unemployment rate 0.5%(to % of economicallyactive population, 2011):Population density 3,288.3 per sq. km.(2010):Gender ratio  male: 44.9%(2011):  female: 55.1%Population age Male and female (0-15) Male (16-59); Malecomposition: female (16-54) (60 and above);(2010): female (55 and above) 12.9% 61.6% 25.5%Median age  Total: 41.3 years(2010):  Male: 38.2 years  Female: 43.9 yearsBirth rate 11.6(per 1,000 people, 2011):Death rate 12.5(per 1,000 people, 2011):Official language: Russian Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 7 St. Petersburg Foundation for SME Development
  • 8. 1.4. Political systemCity day: May 27. The city was founded on May 27, 1703City name:  Conventional long form: Saint-Petersburg  Conventional short form: St. Petersburg  Local long form: Sankt-Peterburg | Санкт-Петербург  Local short form: С.-Петербург | Петербург  Former names: St.-Petersburg (1703-1914), Petrograd (1914-1924), Leningrad (1924-1991), St.-Petersburg (1991- till present)Administrative division: While the city is divided into 18 districts (rayons), each district is divided into municipal formations. At the moment there are 111 municipal formations (munitsipalnye obrazovaniya). 1. Admiralteysky District 10. Kurortny District 2. Vasileostrovsky District 11. Moskovsky District 3. Vyborgsky District 12. Nevsky District 4. Kalininsky District 13. Petrogradsky District 5. Kirovsky District 14. Petrodvortsovy District 6. Kolpinsky District 15. Primorsky District 7. Krasnogvardeysky District 16. Pavlovsky and Pushkinsky Districts 8. Krasnoselsky District 17. Frunzensky District 9. Kronshtadsky District 18. Central District Doing business in St. Petersburg8 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 9. Political system: Source: Business Support Structure in St. PetersburgExecutive branch: The City Administration (www.gov.spb.ru) is the superior executive body of St. Petersburg headed by the Governor. The St. Petersburg Administration is formed of the Governor, the Government, the Governors Chancellery, the city committees and the subordinate administrative-territorial departments of the Administration.Legislative branch: The Legislative Assembly of St. Petersburg (www.assembly.spb.ru) is the standing effective supreme and sole legislative (representative) body of the state authority in St. Petersburg.Judicial branch: Charter Court of St. Petersburg (www.spbustavsud.ru), Judges of the Peace of St. Petersburg (www.mirsud.spb.ru), City Court of St. Petersburg (http://sankt-peterburgsky.spb.sudrf.ru), Arbitration court of St. Petersburg and Leningrad region (www.spb.arbitr.ru) and Leningrad Military Circuit Tribunal (http://leningradskyovs.spb.sudrf.ru).Suffrage: 18 years of age; universal Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 9 St. Petersburg Foundation for SME Development
  • 10. Symbolsof St. Petersburg: Coat of arms FlagDiplomatic 55 consular offices are accredited in St. Petersburg, including:representations:  34 consulates,  1 embassy office,  3 honorary consuls general,  19 honorary consuls. Doing business in St. Petersburg10 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 11. 1.5. EconomyGRP ofSt. Petersburg(billion roubles): 2,137.9 1,917.4 1,673.7 1,431.8 1,473.3 1,119.7 825.1 666.4 2005 2006 2007 2008 2009 2010 2011E 2012E Source: Committee for Economic Development, Industrial Policy and TradeGRP per capitain St. Petersburg(thousand roubles): 428.9 389.2 343 310.6 321.5 245 180.3 145.2 2005 2006 2007 2008 2009 2010 2011E 2012E Source: Committee for Economic Development, Industrial Policy and TradeGRP sectoralcomposition 19% Industrial production 29%(2012E): Other 7% Real estate Transport, communications, tourism 10% Construction 17% Wholesale and retail trade 18% Source: Committee for Economic Development, Industrial Policy and Trade Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 11 St. Petersburg Foundation for SME Development
  • 12. City budget(billion roubles): 404 355.8 322.2 358.6 399.5 339.1 315.6 347 278.1 259.3 186.2 179.9 120.3 129.9 2005 2006 2007 2008 2009 2010 2011 Revenues Expenditures Source: Committee for Economic Development, Industrial Policy and TradeCity debt Total: 8,520.7 million roubles, including(01.01.2012): Share of internal debt: 100% Share of external debt: 0%Credit ratings : Long-term credit international scale ratings in foreign currency:  Standard&Poor’s – BBВ (May 2012), forecast – stable  Moody’s Investors Service – Baa1 (May 2011), forecast – stable  FitchRatings – BBВ (January 2012), forecast – stable Long-term credit national scale ratings:  Moodys Interfax – Aaa.ru (July 2005)  FitchRatings – AAA(rus) (January 2012), forecast – stableLeading industries: Machinery, vehicle and equipment manufacturing, electronic and optical equipment, food, including beverages and tobacco; metallurgy and metalworking; chemical production.Priority sectors/clusters: Automotive, pharmaceutical, shipbuilding, power plant engineering, information technology, radiology, electronic engineering. Doing business in St. Petersburg12 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 13. 1.6. Foreign trade Foreign trade turnover 32,656 (million USD): 25,734 23,643 24,524 20,685 20,577 17,786 17,839 14,177 12,658 13,437 11,817 10,116 4,914 2005 2006 2007 2008 2009 2010 2011 Export Import Source: Territorial branch of the Federal State Statistic Service (Petrostat); Northwestern Customs Directorate, Federal Customs Service Main trade partners (2011): Ukraine 2.8% South Korea 3.7% UK 3.9% Italy 4.1% USA 4.2% Japan 4.6% Finland 5.2% Netherlands 8.2% Germany 8.7% China 14.4% Source: Northwestern Customs Directorate, Federal Customs Service Currency (code): Russian rouble (RUB) Exchange rates:  RUB per EUR – 40.38 (2012)1, 40.28 (2011), 38.2 (2010), 43.35 (2009), 36.68 (2008), 34.63 (2007), 34.06 (2006)  RUB per USD – 31.69 (2012)1,27.9 (2011), 31.45 (2010), 30.91 (2009), 23.67 (2008), 26.04 (2007), 27.08 (2006) Source: Central Bank of the Russian Federation, Ministry of Finance of the Russian Federation Fiscal period: calendar year1 Official exchange rate as of November 16, 2012 (www.cbr.ru). Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 13 St. Petersburg Foundation for SME Development
  • 14. 1.6.1. ExportExport volume (2011): 20.6 billion USD (170% to the previous year)Largest exporters JSC Gazprom Neft, CJSC PNT-GSM, CJSC British American Tobacco-Spb,(2011): JSC Nevsky Mazut, JSC TransoilExport structure (2011): 2% 9% 3% Food products 7% Mineral products 2% Chemical products, natural 2% rubber Timber, pulp and paper products 75% Metal and metal products Machinery, equipment, vehicles Other Source: Northwestern Customs Directorate, Federal Customs Service1.6.2. ImportImport volume (2011): 32.6 billion USD (133,6% to the previous year)Largest importers LLC Nissan Manufacturing Rus, LLC Hyudai Motor Manufacturing Rus,(2011): LLC General Motors Auto , LLC Petro, LLC Toyota Motor Manufacturing RussiaImport structure (2011): Machinery, equipment, 6% vehicles 23% Metals and metal products Mineral products Timber, pulp and paper 43% products Chemical products, natural rubber Textiles, textile goods, 6% footwear Food products 11% 7% 3% Other 1% Source: Northwestern Customs Directorate, Federal Customs Service Doing business in St. Petersburg14 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 15. 1.7. Foreign investmentVolume of foreign 6,284 6,121investment 5,928(million USD): 5,525 5,255 5,231 1,171 1,417 1,160 881 696 985 706 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Territorial branch of the Federal State Statistic Service (Petrostat)Structure of foreigninvestments(million USD, 2011): 1,074 Foreign direct (18%) investment (FDI) 211 (3%) Foreign portfolio investment (FPI) Other foreign investment 4,836 (79%) Source: Territorial branch of the Federal State Statistic Service (Petrostat)Foreign investment by 5% Manufacturingsector of the economy 12%(2011): Wholesale and 5% retail trade 6% Transporation and communication 72% Real estate Other Source: Territorial branch of the Federal State Statistic Service (Petrostat) Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 15 St. Petersburg Foundation for SME Development
  • 16. Major investors 4%(2011): 3.5% UK 3.8% 17% South Korea 5% Cyprus 4.3% China Germany Austria 4.6% 9.5% Kazakhstan Switzerland 4.9% Sweden Belgium 5.1% 9.3% Finland Kyrgyzstan 6.8% 8.8% Belarus Source: Territorial branch of the Federal State Statistic Service (Petrostat)1.8. International cooperationBilateral cooperation  with 89 foreign cities and 27 foreign regionsdocuments:  with 41 regions and 3 cities in RussiaParticipation in  The Union of Baltic Citiesinternational and  The Conference of the Major Cities of the Baltic Sea "Balticregional organizations: Metropolis”  The Organizations for Sub-regional Cooperation of the Baltic Sea Countries  The Tourism Commission of the Baltic Sea CountriesCooperation with  The Council of the Baltic Sea Countriesintergovernmental  The Nordic Council of Ministersorganizations:  The Forum Regions of the Coast of Europe  The Baltic Development Forum  The Association of Chambers of Commerce and Industry in the Baltic regionMembership in  Associate member of the Association of European citiesinternational "EUROCITIES"associations:  Member of the International Congress and Convention Association Doing business in St. Petersburg16 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 17. 1.9. CultureCultural sites: 8,464 cultural sites located in the city, including 4,213 sites of federal significanceUNESCO World Cultural Historic Center of St. Petersburg and Related Group of MonumentsHeritage List:Museums: 182 museums , including:  41 (with branches) museums and local reserve museums;  24 (with branches) museums of federal jurisdiction;  31 departmental museums;  86 other museums.Libraries: 1,103 libraries, including:  2 libraries under federal jurisdiction;  1 library of the Academy of Sciences of Russia ;  196 local libraries;  904 libraries of institutions and organizations.Theatres: 82 theatres, including:  24 local theaters;  5 theaters under federal jurisdiction ;  3 theatres of regional subordination operating in the city;  50 non-state theaters.Concert organizations: 17 concert organizations, including:  15 local concert organizations;  2 concert organizations under federal jurisdiction.Cultural and leisure 52 cultural and leisure institutions, including:institutions:  26 local cultural and leisure institutions;  26 cultural and leisure institutions under the supervision of other agencies.Educational 71 educational institutions, including:institutions:  7 local secondary vocational schools;  63 music and art schools, local art schools;  1 music school under federal jurisdiction.Parks: 5 parks, including:  4 recreation and entertainment parks in the city network;  1 Zoo.Cinemas: 46 cinemas, including:  8 cinemas of the city network ( 6 - for children);  38 cinemas of non-state network. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 17 St. Petersburg Foundation for SME Development
  • 18. 1.10. Science and educationScientific organizations: 350 scientific organizations, including:  more than 70 organizations of the Russian Academy of Sciences and other state academies,  more than 250 governmental organizations involved in research and development,  10 state research centers.Scientific personnel 165,000 employees of research institutions and Universities, including:potential:  more than 9,000 Doctors of Science,  more than 26,000 Candidates of Science.State educational 1,909 educational institutions, including:institutions:  1,054 preschool educational institutions,  690 general educational institutions,  58 institutions of supplementary education for children,  18 childrens homes,  36 beginners vocational schools,  12 institutions of secondary professional education,  1 academy of postgraduate pedagogical education.Number of school 368,390 school children, including 187,791 school children enrolled in inchildren: preschool educational institutionsHigher and vocational  45 civil public institutions of higher education;education institutions:  6 branches of civil institutions of higher education;  43 private higher educational institutions;  45 public educational institutions of secondary vocational education;  30 state civil institutions of higher education offering training in secondary vocational education;  5 non-governmental educational institutions of secondary vocational education.Number of students: 493.1 thousand people, including:  400.9 thousand students enrolled in state and private civil institutions of higher education programs of higher education,  61,600 students enrolled in secondary vocational education.Teaching staff: 73,425 people working in educational institutions, including:  30,000 - in higher educational institutions,  5,100 - in educational institutions of secondary vocational education. Doing business in St. Petersburg18 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 19. 1.11. Transport infrastructureUrban passenger  Metro (5 lines);transport:  Ground electric transport (40 tram routes and 44 trolleybus routes);  Buses (677 bus routes);  Commuter rail transport (80 stations of the suburban passenger line);  Passenger taxis.Annual traffic of the About 2 billion trips (5 million trips a day):urban passenger  Metro - 41%;transport:  Coaches - 40%;  Ground electric transport - 16%;  Commuter rail transport - 3%.Transportation  12 radii of railroads;complex:  15 highways;  sea and river ports;  Airport;  5 railway stations.Large Port of Ranks 1st among the ports of the Russian Federation and the Baltic Sea inSt. Petersburg: container trans-shipment and 3d in Russia in terms of total cargo volume (60 mln. tons in 2011).Marine Passenger  Commissioned in 2011Terminal:  Port facilities include 7 berths and 4 stations  214 cruise ships and 113 ferries with about half a million passengers (2011)Rail transportation:  Mainly represented by "October Railways", a branch of OJSC "Russian Railways"  2d in volume of rail freight in Russia (following Moscow)  Includes 10 rail lines and connects Russia to Finland and EstoniaAir transport:  Pulkovo Airport is one of the largest airports in Russia and ranks 3d in passenger traffic (9.6 mln by end of 2011)  New terminal scheduled for completion in 2013 will increase the Airport’s capacity to up to 14 million peopleUrban water passenger  20 stopping pierstransportation:  4 city routes commissioned in 2010 Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 19 St. Petersburg Foundation for SME Development
  • 20. 2. Key industry sectors2.1. Overview of St. Petersburg’s industry2.1.1. Structure and main indicatorsSt. Petersburg is one of the largest industrial centers in Russia. The city ranks second in the volume ofmanufacturing shipments, thus providing 8% 0f the total production volume in the country.St. Petersburg’s industrial complex represents the basis of the regional economic growth, accountingfor the major source of budget.Efficient operation of the industrial complex significantly affects the development of other sectors ofthe economy, including transportation, construction, communication, trade and provides realopportunities for the solution of socio-economic goals of the city.Industrial complex of the city is represented by almost all industries. 730 large and medium enterprises,a number of which represent the leading industrial enterprises of the Russian Federation, constitute thebasis of the city’s industrial complex. More than 21 thousand small enterprises, includingmicroenterprises, also contribute to the development of the local economy.Number of large and medium-sized enterprises, 2011Manufacturing (total) 676Electronic equipment, electronic and optical equipment 148Machinery and equipment 96Food, including beverages and tobacco 84Metallurgy and metal products 65Pulp and paper, publishing and polygraphic products 62Motor vehicles and equipment 47Non-metallic mineral products 44Chemical products 37Rubber and plastics 24Textiles and clothing 17Timber processing and timber products 14Leather, leather and footwear products 6Petroleum coke and petroleum products 5Other 27Electricity, gas and water production and distribution 54Mineral resources extraction 2Source: Committee for Economic Development, Industrial Policy and Trade, 2012In 2011 industrial production growth of St. Petersburg (113.8%) significantly exceeded the similarindices of the Russian Federation and Northwestern Federal District.In 2011 the industry shipments of St. Petersburg’s enterprises constituted 1,966 billion roubles whichrepresents 135% to the level of 2010. Manufacturing enterprises determine operation of the localindustry. Such enterprises account for more than 90% of the total volume of industrial products Doing business in St. Petersburg20 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 21. produced in St. Petersburg (1,827 billion roubles). Machinery (138%) enterprises contributed the mostto the growth of production volumes.2Structure of the volume of industry shipments, 2011 Mineral resources extraction 0.4% Manufacturing 93% Electricity, gas and water production and distribution 6.6%Source: Committee for Economic Development, Industrial Policy and Trade, 20122.1.2. ProfitabilityIn 2011 industrial complex accounted for 349.8 billion roubles in profit, including 327.1 billion roublesfrom manufacturing industries. The share of profitable enterprises within the total number ofmanufacturing enterprises constituted 81.2% (79.6% in 2010). The most significant growth in profit incomparison with the previous year is reported in the production of motor vehicles and equipment (2.6times). In 2011 a high level of profitability remained in the production of food, beverages and tobacco(19.8%) as well as machinery and equipment (15.1%).3Profitability of manufacturing enterprises, 2011 Russian Federation 13.2% St. Petersburg 14.8%Source: Committee for Economic Development, Industrial Policy and Trade, 20122.1.3. Budget receiptsIn 2011 the tax revenues from industrial enterprises constituted 161 billion roubles (more than 36% ofthe total amount), including 149 billion roubles received from manufacturing enterprises. Food2 Committee for Economic Development, Industrial Policy and Trade, Government of St. Petersburg3 Committee for Economic Development, Industrial Policy and Trade, Government of St. Petersburg3 Committee for Economic Development, Industrial Policy and Trade, Government of St. Petersburg Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 21 St. Petersburg Foundation for SME Development
  • 22. production, including beverages and tobacco, motor vehicle and other types of equipment productionaccounted for approximately 80% of all budget receipts from the manufacturing sector.4Dynamics of receipts into the budget of the Russian Federation from St. Petersburgs industry,2010-2011 160.9 160 149.2 Industry in total billion roubles Including manufacturing 124.8 116.1 100 2010 2011Source: Committee for Economic Development, Industrial Policy and Trade, 20124 Committee for Economic Development, Industrial Policy and Trade, Government of St. Petersburg Doing business in St. Petersburg22 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 23. 2.2. Transport machinery and equipment2.2.1. General overviewMajor production sectors include power plant engineering, handling machinery, household appliancesmanufacturing, mining and construction equipment manufacturing.Characteristics of transport machinery and equipment industry, 2011Number of large and medium-sized enterprises, units 96Volume of shipped products, 70bln RUBNumber of employees, 34.2thousand peopleSource: Committee for Economic Development, Industrial Policy and Trade2.2.2. Industry in numbersThe products of power plant engineering, including steam, hydraulic and gas turbines, turbo and hydrogenerators and nuclear power plants equipment, represent a considerable share of transport machineryand equipment industry of the city. OJSC Silovye Mashiny, which unites the Leningrad Metal Plant,Electrosila, Turbine Blades Plant, accounts for the major share of production. These enterprises are theleading Russian manufacturers of equipment for hydraulic, thermal, gas-fired and nuclear power plants.OJSC Silovye Mashiny is ranked 4th in the world in terms of the volume of installed equipment and islisted among the five world’s leading energy companies. The company accounts for 80% of the energyequipment market in Russia and CIS. Currently, the company is engaged in construction of a newenergy machinery plant organized on a principle of integrated complex, one of the largest investmentprojects in St. Petersburg.Another leading enterprise, OJSC Izhorskie Plants, is a Russian leader in engineering, manufacturing,sales and servicing of nuclear power plant equipment and machinery. The company also manufacturesequipment for storage and transportation of used nuclear fuel.During the recent years St. Petersburg’s energy machinery enterprises supplied equipment forhydraulic, thermal and nuclear power plants in China, India, Vietnam, Iran, Mexico and Chili.2.2.3. CompaniesPower plant engineering Electrosila Established more than hundred years ago, today Electrosila is the largest manufacturer of generators in Russia. The plant manufactured more than 2.7 thousand turbine-generators and more than hydro-generators. It is the first plant in the world to manufacture hydro-generators with the capacity of more than 200 MW. Electrosila supplies its products in more than 57 countries in Europe, Asia, South and North America, Africa. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 23 St. Petersburg Foundation for SME Development
  • 24. Leningrad Metal Plant Established in 1857, Leningrad Metal Plant is one of the oldest enterprises of the city. The plant has manufactured more than 2.7 thousand steam turbines and more than 780 hydraulic turbines. Today, the plant is the largest Russian energy machinery enterprise engaged in design, manufacturing and servicing of steam, hydraulic and gas turbines of various capacities. In 2000 the plant was incorporated in OJSC Silovye Mashiny. Nevsky Zavod JSC Nevsky zavod (NZL) is one of the leading companies in Russia engaged in design and manufacturing of power engineering equipment, including gas and steam turbines, centrifugal and axial compressors, blowers. NZL® is the registered trade mark which belongs to the plant since 1965. The products of Nevsky Zavod are famous in 30 countries of the world. The largest customers abroad are National Iranian Gas Company, iron and steel plants in India, China, Egypt, Turkey, Hungary, Poland, Rumania, chemical plants in Bulgaria, China. Silovye Mashiny (Power Machines) OJSC Power Machines is the leading Russian manufacturer and supplier of end-to-end products and solutions for the power-plant industry, including engineering, production, supply, assembly, service and equipment upgrades for thermal, nuclear, hydraulic and gas-turbine power plants. The company has manufactured equipment with a combined capacity of 300,000 MW, which is installed and is successfully operating in 57 countries across the world. Established in 2000, OJSC Power Machines unites engineering, production and intellectual resources of Russia’s largest enterprises, including the ones located in St. Petersburg - Leningrad Metal Plant, Electrosila, Turbine Blades Plant, Polzunov Power Engineering Research and Design Institute. Turbine Blades Plant Turbine Blades Plant is the major enterprise in Russia specialized in production of blades for steam and gas turbines. The plant started its production in 1964 and since then has been providing turbine blades for all types of power units in the CIS and in about 20 countries abroad. The plant is a permanent partner of the Leningrad Metal Plant.Handling equipment Otis Elevator Company The worlds largest manufacturer of vertical transportation systems has three manufacturing plants in Russia, including the one operating in St. Petersburg since 1994. Otis St. Petersburg was established in 1991 to meet the elevator need for new construction as well as for the replacement market. With 470 employees, Otis St. Petersburg is the only company that manufactures European standard elevators in Russia. Since the opening of the production line, St. Petersburg’s plant has shipped more than 3,000 elevator units to CIS countries and other Russian regions. Doing business in St. Petersburg24 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 25. Household appliances Bosch and Siemens The largest manufacturer of home appliances in Europe and one of the leading home appliances companies in the world opened its manufacturing plant in St. Petersburg in 2007. Today, two full cycle manufacturing lines with the capacity of 500 thousand two-compartment refrigerators per year manufacture more than 20 refrigerator models with A+ Energy Efficiency Class. In 2007 the company laid the foundations for a washing machine factory with the capacity of 350,000 machines per year, which is due to be launched in 2012.Mining and construction equipment IZ-Karteks The company, which is a part of JSC United Heavy Machinery Plants, specializes in engineering, manufacturing, supply and servicing of mining equipment. IZ-Karteks manufactures high-performance equipment used in all stages of mineral surface extraction and processing, including rock drilling machines, mine excavators, crushing and grinding equipment. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 25 St. Petersburg Foundation for SME Development
  • 26. 2.3. Electrical and optical equipment2.3.1. General overviewMajor production sectors include production of electric machines and electrical equipment, electronics,radio, television and communication systems, medical devices, measurement, control, managementand testing instruments, optical equipment, photo and cine equipment.Characteristics of electrical and optical industry, 2011Number of large and medium-sized enterprises, units 148Volume of shipped products, 133.1bln RUBNumber of employees, 57.4thousand peopleSource: Committee for Economic Development, Industrial Policy and Trade2.3.2. Industry in numbersProduction of electrical products, electronics and instrumentation is one of the key industrial sectors ofSt. Petersburg. St. Petersburg’s enterprises produce almost the entire range of electrical products,including welding equipment, batteries, wiring products, electro gas high-voltage equipment, electroporcelain, power and fiber optic cables and other equipment.The consumers of electrical products manufactured by St. Petersburg’s leading enterprises, such asCJSC REP Holding and OJSC Electroapparat, include almost all types of mining and manufacturingindustries, including oil and gas, shipbuilding, metallurgy, military-industrial sector, agriculture andothers. The long-term partners include OJSC Gazprom, OJSC Russian Railways, CJSC AvtoVAZ as wellas Russian and international oil and energy companies.The products of electronic instrument companies located in St. Petersburg include aircraft avionics,equipment for professional radio and television stations, telephone and telecommunications systemsof closed and open communications, radar and instrumentation safety for air passenger transport, andcell component bases. The leading businesses in this area include OJSC HK Leninets, OJSC Svetlana,OJSC SPE Radar MMS, OJSC Research Institute Vektor, JSC Russian Institute of Radio navigation andTime, OJSC Inteltech, OJSC Avangard.The leading companies producing electrical, electronic and power equipment include OJSC New Era,CJSC NIIEFA-Energo, and CJSC NPF System Service. These companies design and manufacture high-tech transformer substations, complete switchgear, power units, automation and control, mainswitchboards, power semiconductor converter systems used by OJSC Gazprom, OJSC Russian Railwaysas well as other leading oil companies in Russia. Doing business in St. Petersburg26 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 27. 2.3.3. CompaniesElectric machines and electrical equipment Efremov scientific research institute of electrophysical apparatus (NIIEFA) NIIEFA is the leading scientific, design and research, production center of Russia in electrophysical equipment and installations for research in plasma physics, nuclear physics, elementary particle physics, health care, radiation and energy technologies, nondestructive inspection. More than 2,000 of NIIEFA facilities were designed as inventions. Units designed in NIIEFA are successfully operated in many scientific research and industrial organizations of Russia, CIS countries, Bulgaria, Hungary, Germany, Egypt, India, China, Cuba, USA, Finland, France, Japan, Korea. NE NE Open Joint Stock Company is a modern industrial enterprise specialized in producing a wide range of low-voltage & medium-voltage electrical equipment for marine and industrial application. NE was established in 1993 on the basis of apparatus manufacturing of the Leningrad state enterprise «ERA». Today, NE manufactures electrical equipment for almost all branches of industry, including power engineering, nuclear industry, oil & gas industry, offshore projects, shipbuilding, ore mining & metallurgy, communal services, construction, transport system, chemical industry.Electronics, radio, television and communication systems INTELTECH INTELTECH is one of the leading Russian companies in the fields of scientific research, development and production of telecommunication and automatic control systems. Today, the company is a well-known provider of hardware and software systems for automatic control and data exchange, digital networks for secured telephone communication and protected telecommunication systems for government, civil and military departments of the Russian Federation. Leninets Holding Company Leninets holding company is a leading Russian developer and manufacturer of avionics, navigation equipment and high precision target systems. The company is specialized in development and manufacturing of on-board avionics, navigation equipment, high precision arms guidance systems for heavy aircraft and target-seeking equipment for air-to- surface rockets. Leninets holding company includes a number of enterprises engaged in R&D, design and experimental, project and construction activities as well as warranty services. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 27 St. Petersburg Foundation for SME Development
  • 28. Radar MMS Research and scientific enterprise Radar MMS, established in 1950, is a leader in development of intelligence guidance systems. The company is engaged in a full cycle of R&D and manufacturing activities, including R&D, testing, manufacturing, distribution and maintenance. Russian Institute of Radionavigation and Time (RIRT) RIRT is the leading organization engaged in development of systems and coordinate-time support. The systems developed by the Institute are used to determine the current time and mestopo-proposal objects in sea- surface of the Earth, the worlds oceans and inland waters, airspace as well as solve problems in astrophysics, geodesy and geodynamics. Svetlana JSC Svetlana is one of the leaders of electronic industry in Russia. The history of the enterprise dates back to 1889. Today, Svetlana involves a parent company and subsidiaries specialized in output of specific production lines. The enterprise has the strongest positions in development and production of power electrovacuum devices, klystrons and x-ray tubes. Svetlana-microelectronics is one of the major Russian design centers for sophisticated microprocessors with original architecture and standard instruction sets and information and control systems. Svetlana – Electrondevice is the only enterprise that develops and produces protective microwave devices and discrete phase shifters as well as vacuum and semiconductor microwave devices mainly for radar engineering. Svetlana-SED-SPb is a leading enterprise of Russia in field of development and production of power transmitting, modulator, regulator and receiving tubes. Scientific and Research Institute Vektor Scientific and Research Institute Vektor is engaged in development and manufacturing of electronic equipment used in the following application areas: EM waves propagation physics, radio reception at communication complexes, monitoring of electromagnetic radiation, acoustic monitoring, testing of radioelectronic equipment and many others.Medical devices, measurement, control, management and testing instruments, optical equipment,photo and cine equipment NPO Impuls NPO Impuls is one of the main Russian organizations engaged in development of state-of-the-art automated control systems for Russian armed forces and strategic rocket forces. Tekhpribor Founded in 1942, JSC Tekhpribor is one of the oldest air instrument- making companies. The company focuses on development, production, certification and technical operation of various airborne equipment for all airplanes and helicopters manufactured in Russia and CIS. Doing business in St. Petersburg28 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 29. ElectronElectron is one of the leaders in the Russian market of X-ray anddiagnostic equipment as well as programming solutions for healthcare.The company’s product line of digital X-ray diagnostic equipmentincludes chest examination devices, two workplace X-ray devices,multipurpose X-ray diagnostic complexes, including remotely operatedcomplexes, interventional radiology devices.LOMOFounded in 1914, LOMO is a leading Russian and international companyas well as the largest Russian company involved in production and salesof optic-mechanical and optic-electronical devices. LOMO manufacturesa wide range of products, including microscopes, endoscopes, spottingscopes - telescopes and night vision devices and cameras. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 29 St. Petersburg Foundation for SME Development
  • 30. 2.4. Food and beverage production2.4.1. General overviewFood complex in St. Petersburg is represented by 11 major industries, which include more than 80 largeand medium as well as 180 small enterprises. Brewing and tobacco manufacturing are the two mostdeveloped sectors of the local food industry.High investment activity of St. Petersburg’s enterprises is one of the major factors accounting for thesuccessful development of food industry in the city. Increased automation and productionimprovements allowed companies to significantly diversify the assortment of produced food productsand improve their consumer appeal. Continuous renewal of assortment is one of the characteristics ofthe food industry in St. Petersburg. St. Petersburg’s enterprises develop at least 100 new sorts ofvarious bakery and pastry products, including bread and rolls, dried bread and biscuits, pies andcookies. Assortment of the produced bakery products totals more than 400 items which makes it themost diversified assortment present in Russia.2.4.2. Industry in numbersIn 2011 the volume of food industry shipments, including beverage and tobacco, constituted 12% of thetotal manufacturing industry in St. Petersburg. Structure of industry shipments, 2011 Investment in fixed assets by industry, 2011 4% 3% 8% 81% 10% 50% 12% 7% 12% 13% Food manufacturing, including beverargres and tobacco Other manufacturing industries Food manufacturing, including beverages and tobacco Other manufacturing industries Motor vehicle and equipment manufacturing Other manufacturing industries Machinery and equipment Electric power, gas and water production Metallurgy and metal product manufacturing Electronic and optical equipmentSource: Committee for Economic Development, Industrial Policy and Trade, 2012As of 2011, food and beverage industry employs 11% of the total number of employees occupied in theSt. Petersburg industrial complex. Food industry, including beverage and tobacco, is the mostprofitable industrial sector in St. Petersburg (19.8%), which is attributable to high production indices oftobacco (34.9%), alcohol (25.8%) and beer (24.8%) producing enterprises. Approximately 13% of allinvestment into industrial sector accounts for food manufacturing, including beverages and tobacco. Doing business in St. Petersburg30 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 31. 2.4.3. CompaniesBakery Hlebny Dom JSC Hlebny Dom has operating at the Russian market for more than 70 years and is one of the largest baking enterprises in Russia. The company became a part of the Fazer Group in 1997. It is represented by 4 production sites in St. Petersburg as well as one in Moscow. Hlebny Dom produces bakery and confectionery products, long term storage foods as well as frozen and flaky dough products. Karavay JSC Karavay was established in St. Petersburg more than 80 years ago. Today, it is a modern fully-equipped bakery which produces more than 170 items of fancy and bakery products. Karavay is one of the leaders of baking industry in St. Petersburg. It currently possesses 4 baking plants.Beverage production Carlsberg Group Baltic Beverages Holding, a leader at the Russian beer market which manages Baltika, became a part of the Carlsberg Group in 2008. Carlsberg currently owns 89.01% of Baltika stock. Today, Baltika Brewery, founded in 1990, is the largest brewery in Eastern Europe and the second-largest brewery in Europe after Heineken Brewery. Coca-Cola Company Coca-Cola’s plant, opened in St. Petersburg in 1995, produces Coca-Cola products for more than 13 million customers in St. Petersburg and Northwestern Russia. It employs more than 1,000 people, while creating up to 200 additional seasonal workplaces during the peak seasons. Heineken Heineken has been operating in Russia since 2002 when it acquired the Bravo plant in St. Petersburg. St. Petersburg’s Heineken brewery also produces and distributes Budweiser beer, having signed a licensing agreement with Bud’s brand owner Anheuser-Busch. Pepsi Bottling Group, Inc. (PBG) PepsiCo drinks are produced by Pepsi Bottling Group at its four plants in Russia. One of the top global FMCG companies in Russia opened its St. Petersburg’s plant in 1992. PBG produces and distributes all PepsiCo products, including carbonated soft drinks, water, snacks, juices, teas. Russian Standard Company A leading Russian premium vodka producer opened its distillery in St. Petersburg in 2006. Total investments into the facility amounted to 60 million dollars. The distillery produces 3.6 million dekaliters of vodka annually. A 30,000 square meter facility handles the production of the companys entire vodka portfolio, including Russian Standard Original, Russian Standard Platinum and Imperia. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 31 St. Petersburg Foundation for SME Development
  • 32. Candy Chupa Chups S.A. The Spanish candy maker launched its St. Petersburg’s production facility in 1991. Neva Chupa Chups produces Chupa Chups caramel lollipop candies of various flavors and colors not only for the Russian market but also for export to CIS countries. St. Petersburg’s factory has the capacity of making up to 200 million 200-gram rolls per year. Confectionery factory named after N.K. Krupskaya The history of the Confectionery factory began in 1938. In 2006 the factory was acquired by the Norwegian Concern Orkla which is one of the leading suppliers of branded consumer goods to Nordic food retailers as well as Central and Eastern Europe and Russia. Today, the factory is a modern industrial complex with capacity to produce more than 20 thousand tons of confectionery products per year. It produces more than 130 confectionery products, including chocolate of different sorts, diabetic products, chocolate semi-finished products for food industry.Chewing gum Wm. Wrigley Jr. Company The world’s largest maker of chewing gum has been operating a 70 million dollar plant in St. Petersburg since 1999. Wrigley is planning to expand its St. Petersburg plant with an investment of 100 million dollars. The company also announced that it might build a second factory in Russia and acquire local producers to tap its growth at the Russian market.Dairy Petmol dairy plant, Unimilk Petmol dairy plant launched the production of dairy products in 1934. In 2003 LLC Unimilk became the main shareholder of the company. Today, Unimilk is one of the leading manufacturers of dairy products in Russia and CIS. Established in 2002, the company employs more than 14 thousand people and unites 28 enterprises in Russia, Ukraine and Belarus specialized in the production of dairy products and baby food. Baltic Milk, Wimm-Bill-Dann Baltic Milk Dairy Factory was launched in 1987. The factory became a part of the Wimm-Bill-Dann production and trade group in 2000. Will-Bill- Dann is the leader at the Russian market of dairy products and baby food as well as one of the leading producers at the soft drinks market in Russia and CIS. The company operates more than 35 processing plants in Russia, Ukraine and Central Asia and employs more than 18 thousand people.Tobacco British American Tobacco (BAT) BAT’s plant in St. Petersburg operates 13 production lines producing five premium brands. It provides about 25% of BAT’s production volume in Russia. The company completed the construction of new production facilities at its plant in St. Petersburg in 2007 with the total investment of 110 million dollars, thus increasing St. Petersburg plant’s production capacity to 40 billion cigarettes a year. Doing business in St. Petersburg32 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 33. Japan Tobacco International (JTI) PetroJTI Petros cigarette making facility in St. Petersburg is the company’sbiggest worldwide plant with the total of 400 million dollars invested. Thebrand portfolio includes over 30 brand names, both international andlocal. It supplies the firms Russian and Ukrainian plants with maintobacco components used for cigarette production.Philip Morris International (PMI)Philip Morris Inc. officially opened its third Russian cigarette factory in St.Petersburg in 2000. The total investment of 335 million dollars made thisproject the company’s largest cigarette plant in Europe. The plant, whichemploys 750 workers and operates 15 conveyer belts, produces theMarlboro, Parliament, Virginia Slims, L&M, Chesterfield and Bond Streetbrands. In 2002 the company began construction of a new processing lineand a warehouse with the total investment estimated at 240 milliondollars. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 33 St. Petersburg Foundation for SME Development
  • 34. 3. Key business clusters3.1. Automotive cluster3.1.1. General overviewAutomotive industry and automotive parts manufacturing play an important role in St. Petersburg’stransport machinery complex. The city locates production facilities of the world’s leading carmanufacturers, including Nissan, Toyota, General Motors, Hyundai and Scania.Leading car manufacturing plants in St. Petersburg, 2011Brand name Opening Production Volume of Employees Model range volume, investment th.units/yearToyota 2007 25 133 mln USD 600 Toyota CamryGeneral Motors 2008 60 303 mln USD 1,300 Chevrolet Cruze, Opel AstraNissan 2009 50 200 mln USD 1,500 Teana, X-trail, MuranoHyundai 2010 120 650 mln USD 2,400 Solaris, Kia RioScania 2010 6.5 10 mln Euro 600 all types of trucksSource: Committee for Economic Development, Industrial Policy and Trade3.1.2. Industry in numbersDevelopment of automotive cluster is one of the prerequisites of successful development ofautomotive industry. St. Petersburg has one of the fastest-growing and promising automotive clusters,which makes the city a leading center of Russian car manufacturing industry. During the first stage ofcluster development from 2005 to 2010 Nissan, Toyota, General Motors, Hyundai, Scania built their carassembling facilities in the city. With the total area of allocated land lots of 686.3 hectares and morethan 6 thousand workplaces created, the volume of investment into the construction of new carmanufacturing facilities constituted 1.3 billion dollars. The total volume of budget spendings directedtowards the implementation of investment projects constituted 6.6 billion roubles.The first quarter of 2012 saw significant growth in the volume of motor vehicles and equipmentproduction (123.2% to the first quarter of 2011) which is attributable to increase in car volumesmanufactured at all car manufacturing plants located in St. Petersburg. Hyundai Motor ManufacturingRus showed the largest production growth rates. Total volume of car manufacturing reached 182.2thousand units during the first quarter of 2012 which is 2.7 times larger than the corresponding periodin 2011.Volume of car manufacturing in St. Petersburg, thousand units, 2011 1st Q 2012 182.2 2011 259 2010 69.4 2009 19.9 2008 47.5Source: Committee for Economic Development, Industrial Policy and Trade Doing business in St. Petersburg34 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 35. 3.1.3. CompaniesLight motor vehicles General Motors General Motors opened its automobile factory in St. Petersburg in 2008. Global car making giant became the second foreign carmaker to open a factory in St. Petersburg. Investment in the project totalled 300 million dollars with up to 1,700 jobs created, followed by the opening of a second production line in 2010. Hyundai Motor Company Hyundai officially launched its full-cycle manufacturing plant in St. Petersburg in 2010. St. Petersburg’s plant is Hyundai’s sixth production facility outside its home market of South Korea. The facility is expected to roll out 105,000 vehicles in its first year of operation with the rise to 150,000 in 2012. Hyundai plans to create 5,300 jobs by 2012 in St. Petersburg together with eleven parts suppliers from Korea. Nissan Nissan Manufacturing Rus was established in St. Petersburg in 2009. The plant currently represents approximately a 150 million euro investment with the total volume of 28,500 units since the start of production. The plant currently employs 2,000 employees. Toyota Motor Corporation Toyota became the first Japanese carmaker to start production in Russia with its car assembly plant opened in St. Petersburg in 2007. The plant, with an annual output capacity of about 50,000 vehicles, initially built 20,000 Camry sedans per year while gradually expanding its production since then.Trucks Scania Scania opened its industrial facility for assembling and bodyworking trucks for the Russian market in St. Petersburg in late 2010. This Russian facility is Scania’s sixth delivery center. From the new Delivery Center in St. Petersburg, Scania supplies complete trucks that are adapted to the requirements and operating conditions that apply in Russia. St. Petersburg’s facility has a technical assembly capacity of about 5,000 truck chassis and 1,500 superstructures per year. It employs about 70 employees. Yarovit Motors Yarovit is a Russian manufacturer of cargo trucks, dump trucks, bolster trucks and concrete mixers. Yarovit’s manufacturing facility was set up in St. Petersburg in 2003. In 2012 ë-Auto, a joint venture of Yarovit and the Onexim investment group, are planning to start the production of a hybrid electric car yo-mobile. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 35 St. Petersburg Foundation for SME Development
  • 36. Components suppliers Magna International A global automotive supplier currently operates five production sites in Russia, three of which are located in the St. Petersburg region since 2010. The Cosym stamping and assembly plant in Shushary has 170 employees and produces body, chassis and energy-management systems for OEM customers such as Hyundai, General Motors, Nissan and Volkswagen. The Cosym assembly and sequencing plant in Kamenka is a Hyundai- dedicated production site that employs 50 employees. Magna announced the opening of a Magna Exteriors and Interiors facility in Kolpino which has approximately 25 employees producing exterior and interior components for OEM customers, including Ford and Nissan.3.1.4. Supporting institutions3.1.4.1. Associations St. Petersburg Association of Manufactures of Automotive Components (SPbAPAC) St. Petersburg Association of Manufactures of Automotive Components is the largest professional association of automotive components manufacturers in Russia which functions on the principle of a cluster. At present the association unties more than 60 enterprises which manufacture over 1,500 products. Active participation in regional, interregional and international exhibitions and conferences as well as support of the Government of St. Petersburg and the Union of Industrialists and Entrepreneurs makes the association one of the key players at automotive and automotive components market of the Russian Federation. Doing business in St. Petersburg36 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 37. 3.2. Software and information technology services3.2.1. General overviewSt. Petersburg is an absolute Russian leader in attracting international investments into IT-related R&D.Dozens of global vendors have already established R&D centers in the city.Every year over 4,500 IT specialists graduate Universities and enter IT market, thus creating animportant pool of talents available for IT-related R&D and commercial software development. St.Petersburg’s Universities have been ranked high in the ACM International Programming CollegiateContests, the most prestigious world championship in software development among Universities.Within the last 13 years St. Petersburg’s Universities earned 6 Absolute Champion titles and numerousmedals.Availability of engineers in other high-tech R&D and application areas alongside with softwarecommunity provides an exclusive opportunity for finding breakthrough solutions on the edge ofdifferent sciences and technologies. Creativity and managerial skills of local engineers have beensuccessfully transferred into global successes of local IT businesses in both software developmentservices and software products.3.2.2. Industry in numbersSt. Petersburg’s domestic IT market has the capacity of more than 100 billion roubles (3.5 billion USdollars, as of 2011) and accounts for about 14% of the Russian market. Approximately 16% of all incomefrom software development business in Russia is generated by St. Petersburg-based providers. Thestudy conducted in 2012 estimates over 300 software companies operating in St. Petersburg with thetotal number of employees about 17,000 software developers.St. Petersburg’s companies account for 20% of the Russian export of software and IT related services.As of 2011, the city received about 750 million US dollars from IT export which is represented mainly bysoftware products and software development services. St. Petersburg-based companies are mainlyoriented to the US and Canada markets (50%), Germany (40%), Scandinavia (30%), and other WesternEuropean countries (38%).5Structure of St. Petersburg’s IT export, 2011 33% 40% Services from R&D international centers to mother companies Software products Customized software development and other services 27%5 St. Petersburg Software and Information Technology Services Industry: industry overview, catalogue of exportoriented companies & promising start-ups, Enterprise Europe Network - Russia, Module A Regional Center – St.Petersburg (2012) Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 37 St. Petersburg Foundation for SME Development
  • 38. 3.2.3. CompaniesSt. Petersburg’s software companies and IT-service providers Arcadia Arcadia is an innovative offshore software development company based in St. Petersburg. The company provides a wide range of software development outsourcing services to customers worldwide. Today, Arcadia unites team of more than 170 software professionals with over 18 years of experience in custom development of business applications. ASCON ASCON (CAD/CAM/CAPP/PDM systems developer) has not yet become a global company. The company dominates the post-Soviet area only, but its development strategy envisages active promotion of its software products in new markets within the next 10 years. According to the approved strategy, the company is planning to start operating on all continents at the beginning of the next decade. ASCON opened its first foreign office in Munich at the beginning of 2012. The office is engaged in development of a partner network in German-speaking European countries, including Germany, Austria, and Switzerland. Entry into foreign markets was delayed due to the global financial crisis which led to essential reduction of the Russian CAD/CAM/CAPP/PDM systems’ IT market, thus causing decrease in ASCON sales. Astrosoft Arcadia, Astrosoft and Digital Design are the companies engaged in custom software development for foreign companies. While Astrosoft and Digital Design are more oriented to the fast-growing Russian market, Astrosoft has strong positions at the Finnish market. It is a premium level IT-services supplier with more than 10-year expertise in implementing projects all over Europe. Bercut Bercut and Peter-Service, located in St. Petersburg, are the leading Russian solutions providers for telecom operators. Though both companies are more oriented to the Russian and the CIS markets, they also have installations in other foreign countries. Bercut is a supplier of end-to-end solutions in the field of telecom services (for example, to Tele2 in Russia) which offers a unique integrated approach to VAS development and management based on cooperation between operator and subscriber. Outside Russia and the CIS, systems installed by the company can be found in Africa and in the Middle East. DataArt DataArt is a custom software development company that provides advanced solutions for financial services, healthcare, hospitality and other industries. The company’s services include application development, quality assurance, team completion, reengineering and R&D. Doing business in St. Petersburg38 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 39. DevExpertsDevExperts is one of the global leaders in developing software for financialmarkets. The company provides professional software systems for on-linebrokerage, exchange, and financial activities mostly on stock, options, andForex markets. DevExperts is specialized in development, implementation,and support of financial systems intended to handle complex businessactivities, including a full set of advanced tools to meet both trader andbroker requirements.Digital DesignHeadquartered in St. Petersburg, Digital Design is an IT consultancy whichoffers a full range of IT services to clients in Russia and all over the world.Based on its own research, the company creates new companies whichpromote their solutions not only in Russia but also abroad (DocsVision andAvroRAID). DocsVision is a developer of the self-named document andcorporate business processes management system. It dominates themarkets of Russia and neighboring countries. AvroRAID is engaged in datastorage software development. Its main solution, AVRORA 2.0 platform,assists in creating a high performance and fault tolerant data storagesystem based on inexpensive widespread standard hardware components.This platform has customers not only in Russia and the CIS countries, butalso in India and the US.FirstLineSoftwareBoth Lanit-Tercom and FirstLineSoftware were listed in the ratings of thetop 100 world’s leading outsourcing technological companies during thelast two years.i-Freei-Free content provider is another St. Petersburg’s company with theturnover estimated at hundreds of millions of US dollars in recent years.The company’s sales volume exceeded 200 million US dollars in 2011.Though it a relatively young company created in 2011, i-Fee has beenpresent at the worlds largest markets since 2006. The company’s officesare located in Kiev (Ukraine), Minsk (Belarus), Almaty (Kazakhstan),Mumbai (India), Beijing (China), and San Paulo (Brazil). The companysproducts and services are delivered to more than 100 countries across theworld. i-Free specializes in implementation of innovative projects in thefield of mobile and NFC technologies, electronic finance, digital contentdistribution, electronic payment systems and micropayments, applicationdevelopment for smartphones and new network devices, as well aspromotion of digital products in the B2C market and implementation ofB2B projects in the mobile marketing sphere. The company uses its foreigndivisions to promote other Russian developers solutions in the foreignmarkets. i-Free has good development prospects, and its turnover isexpected to increase several times. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 39 St. Petersburg Foundation for SME Development
  • 40. JetBrains JetBrains and DevExperts are excellent examples of the success of new Russian companies at the global market. JetBrain develops tools for software developers which regularly win prizes at the most prestigious software competitions. Lanit-Tercom Lanit-Tercom is based in St. Petersburg State University. The company also has a number of spin-offs which develop new technologies for the global market. Peter-Service Peter-Service is engaged in development of billing solutions for large telecom operators and renders services for products’ implementation, integration and technical maintenance. The company has about 100 successful projects implemented for 50 telecom operators in 10 countries across the world (mainly, in the CIS). One of the companys projects has been implemented in Turkey. PROMPT The turnover of such St. Petersburg’s companies as PROMT (machine translation system developer) and Speech Technology Center (speech recognition and synthesis system developer) will most likely not exceed 100 million US dollars, though considering their partners and customers across the world, these companies are already global. PROMT is a leading Russian developer of linguistic IT solutions for business and private users which has good positions in Western Europe. The company has been successfully operating at the market of innovative linguistic technologies for 20 years and, today, provides its services to more than 10 thousand client companies all over the world. Reksoft Reksoft and DataArt should be specifically noted among outsourcing software developers. For several years both companies were listed in various versions of the top 100 world’s leading outsourcing technological companies, including the IAOP Global Outsourcing 100 and the Global Services 100. Reksoft specializes in supplying software development services, products and solutions to enterprises, ISVs, and system integrators operating in a variety of industries. SPB Software SPB Software is another example of successful development. The company which specializes in mobile application development was acquired by Yandex in 2011 and became the center of mobile solutions development for the leading Russian internet company. Doing business in St. Petersburg40 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 41. Speech Technology Center Speech Technology Center (STC) is an international leader in speech technology and multimodal biometrics. It has over 20 years of research, development and implementation experience in Russia and internationally. STC is a leading global provider of innovative systems in high-quality recording, audio and video processing and analysis, speech synthesis and recognition, and real-time, high-accuracy voice and facial biometrics solutions. STC innovations are used in both public and commercial sectors, from small expert laboratories, to large, distributed contact centers, to nation-wide security systems. STC is ISO 9001:2008 certified. Transas group Transas group of companies is the largest St. Petersburg’s IT solution developer. It occupies leading positions in the world market in the field of software for synthesis of 3-D images, vessel navigation and traffic control systems, as well as sea and air transport simulators. The company’s annual turnover has exceeded 300 million US dollars with export accounting for about a half of the turnover. Transas aims to increase these numbers to 1 billion US dollars during the next years. With some of its products, the company dominates such large markets as China and the US.R&D centers of multinational companies located in St. Petersburg Alcatel-Lucent The Alcatel-Lucent experts working in St. Petersburg are engaged not only in development of solutions for the Russian market, but also participate in the companys global projects. They develop software solutions for corporate telecommunications, IPTV and contact centers. In the field of IPTV, a priority task lies in developing a fully functional service platform for large operators. Particularly, St. Petersburg’s center develops over-the-top solutions for delivery of multimedia applications via public. As for corporate communication field of activity, the center created a group working on MyTeamwork, a product for on-line conferences. The R&D center launched from-the-scratch development of analytical solutions for the Genesys Interactive Insight contact centers. This project is interesting since “extreme programming” approaches were first applied in St. Petersburg on demand of Alcatel-Lucent. In cooperation with the Russian Technologies State Corporation Alcatel- Lucent established a joint venture engaged in development, production and promotion of IP protocol-based hi-tech equipment in the Russian and the CIS markets. Subsequently, the partners decided to organize production of equipment for Russian LTE networks as well as launch another research and development center in St. Petersburg (which is now integrated into the Alcatel-Lucent wireless solutions group). ECTACO An American company ECTACO is one of the leaders in the world market of pocket electronic translators. In 1998 the company opened the Center for advanced development on the basis of its Russian office in St. Petersburg. The center eventually became the company’s main development center. Thus, in many respects St. Petersburg’s experts determine design and quality of the linguistic base and wide functionality of ECTACO translators. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 41 St. Petersburg Foundation for SME Development
  • 42. EMC EMC R&D center in St. Petersburg is oriented towards implementation of projects that require high qualification, although it is not as large as the company’s centers in other countries. At the moment of the center’s opening, the Captiva engineering division acquired by EMC, which was engaged in development of software for transfer of information from paper to electronic media, was located in the city. 50 employees of the division joined the center. The key direction of the companys activities is storage devices. St. Petersburg’s center is engaged in activities associated with Symmetrix, a flagman family of EMC storage systems. Google Googles software development centers in Russia are located in Moscow and St. Petersburg. There is not much information available regarding their operation. Most likely, the centers develop solutions used by the company in Russia. However, it is known that the Russian software development centers carry out projects for the entire company. Thus, the centers possess the authorship for Google Code, a search service for programmers, as well as perform a large share of work on the Google toolbar development. HP Labs HP opened a unique research laboratory in St. Petersburg. Unlike other international R&D centers located in Russia, it is not engaged in localization and development of short-term technologies, but focuses on pursuing fundamental science research with the expected return in at least 5 years. Its staff mostly includes scientists employed on a permanent basis. At the same time, the HP laboratory in St. Petersburg actively cooperates with the leading Russian Universities and academic institutions. Particularly, the laboratory in St. Petersburg implements a unique project for corporations research division aimed at developing the Contextualized Information Delivery Platform (CIDP). The platform is intended for so- called knowledge workers (financial or political analysts, sales or marketing experts, researchers and other users) who constantly work with large data sets to make decisions and provide recommendations. In close collaboration with HP Labs scientists, Russian professors, teachers, postgraduate students and students conduct research in the laboratory focusing on such fields as natural language processing; extraction of semantic information from multimedia data; extraction of objects, events, complex events, facts for deep text analysis; integration of information from heterogeneous sources; contextual compression, automatic summarization; scalable graph algorithms; service-oriented architectures and cloud services. Intel Among all corporations in Russia, Intel has the largest contingent of developers and researchers which includes about 2 thousand people. They work in 5 cities, including Moscow, Nizhny Novgorod, Sarov, Novosibirsk, and St. Petersburg. Intel R&D centers in Russia are mainly oriented to computer technologies development. Nevertheless, some employees are involved in implementation of specific projects, such as development of the Intel Wireless Display technology (Wi-Di) used to connect big screens to a laptop or a desktop computer via wireless channel. Doing business in St. Petersburg42 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 43. In July 2004, the R&D center was opened in St. Petersburg. 8 years ago, itsemployees started to work on the development of the Managed Run TimeEnvironment (MRTE) software which is a new field for the company. IntelsR&D center in St. Petersburg was created on the basis of the Elbrus MCSTcompany, which was one of the Russian leading scientific centers in thefield of computer technologies. Together with the regional offices, thecompany employed over 500 highly-qualified experts, including threelaureates of the Lenin Prize and five laureates of the State Prize, sixprofessors, eight Doctors of Science, and more than fifty Candidates ofScience. They developed a new generation of microprocessors, E2K andElbrus, and the Elbrus-3M universal multiprocessor computer complex.MotorolaMotorola is one of the first foreign corporations which opened adevelopment center in Russia. The division has four basic lines of activity,including optimization and solutions for wireless platforms, automobileelectronics and telematics, cellular network infrastructure, and remoteaccess systems and solutions for them. In cooperation with a Russianholding InformInvestGroup Motorola corporation started to localizeproduction of equipment for 4G broadband mobile communicationnetworks. Russian experts conduct preliminary research and developmentfor the project.NokiaNokia created a network of research laboratories in Russia at Universitiesand the Russian Academy of Sciences. Due to proximity to Finland, thisnetwork started to form in St. Petersburg. The Finnish companyacknowledged Russian specialists’ expertise in certain areas where they arecapable of solving assigned tasks with the same level of quality as theirWestern European peers. India and China are also considered as an option,however, for a more distant perspective (10 years and more). Despite thefact that the science develops rapidly in these countries, the required"historical basis" has not been acquired yet.Two related companies, Nokia and Nokia Siemens Networks, conductresearch in the fields that partially overlap, though Nokia SiemensNetworks division in St. Petersburg is more oriented to the field oftelecommunication infrastructure.Oracle DevelopmentFollowing the Sun Microsystems’ acquisition by Oracle in 2009, the SunMicrosystems’ center of high technologies in St. Petersburg has beenfunctioning as Oracle Development LLC. This divisions basic sphere ofactivity included Java technologies and development tools, in particular,applied aspects of Java, Jini, N1, J2ME, and compilers development. Afterthe Sun Microsystems’ absorption, some experts suggested thatspecialization of its St. Petersburg center will not comply with the Oracledevelopment strategy. However, the corporation continued to financedevelopment in St. Petersburg. Today, the Center of High Technologies, inaddition to Java, develops Fusion Middleware products, including, forexample, application server and server virtualization solutions. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 43 St. Petersburg Foundation for SME Development
  • 44. St. Petersburg’s experts are engaged in the full cycle of software development which is developed for the global market. The Oracle developers in St. Petersburg are engaged in solving complex problems that can be dealt with by very few experts in the world. Siemens Communications Siemens Communications opened a joint center on the basis of two St. Petersburg’s software development divisions. Siemens opened its first Russian software development center in 1997. The center was engaged in fixed telephony segment. Then, in 2001, the second center, which developed solutions for mobile communication switching subsystems, was established. In 2005, taking into account the global technology convergence tendencies, the company’s management decided to consolidate developers under the same roof. Generally, the software development center receives orders directly from the Siemens AG head office. Other orders are received from the regional Siemens offices in Russia, Belarus, Ukraine, and other CIS countries. Main objectives of the center lie in development, testing and standardization of software products and applications; adaptation of Siemens technology considering the specific features of the regional market, as well as certified support and maintenance of the solutions in the Russian and CIS markets. The center’s area of competence also lies in intellectual network software adaptation to customers needs (and consulting services on its application) as well as database development for advance payment services. T-Systems T-Systems is the Deutsche Telekoms subsidiary enterprise and R&D center in St. Petersburg. It develops software on demand of its parent structure and other large European telecom operators. Besides, the center works for the Russian market. It develops customized software and implements complex information systems. T-Systems’ basic lines of activity in Russia include implementation and support of the SAP ERP enterprise management systems, software development, integration and support, and rendering of telecommunication services.3.2.4. Supporting institutions3.2.4.1. Universities St. Petersburg National Research University of Information Technologies, Mechanics and Optics (SPNRU ITMO) The National Research University of Information Technologies, Mechanics and Optics is one of the oldest higher education institutions in Russia. The school has been training specialists in cutting- edge technologies directed to science and technical development for more than 100 years. Today, the University, which has 10 departments and offers 49 specializations, enrolls more than 9,000 full-time students. SPNRU ITMO is known not only in Russia but also internationally due its students success at the ACM International Programming Collegiate Contests. The University’s top world’s rating reflects the results of participation in prestigious competitions within several years. SPNRU ITMO is the only university in the world that has become the winner of the ACM International Programming Collegiate Contest 4 times in different years. Doing business in St. Petersburg44 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 45.  St. Petersburg State University (SPBU) Founded in 1724, St. Petersburg State University is the oldest institution of higher education in Russia. The Universitys Department of Mathematics and Mechanics together with its comprising scientific institutions is one of the largest mathematical centers in the world. The Department offers 23 specializations and also includes the Research Institute of Mathematics and Mechanics, a computer center and astronomy observatory. In addition to SPNRU ITMO, SPBU also successfully participates in the International Programming Collegiate Contests. Its students became absolute world champions twice and with several exceptions constantly become prize-winners. The SPBU team became the first Russian winner of the ACM International Programming Collegiate Contest in 2000-2001. St. Petersburg State Polytechnic University (SPBSTU) St. Petersburg State Polytechnic University was founded in 1899. It has recently become the National Research University, thus recognized as a leading Russian and international center in the field of higher engineering and economics. The University attracts students form 96 countries of the world and provides education programs in the field of engineering, physics, economics, humanities and IT. Today, the University has 20 departments and institutes as well as 120 R&D labs and offers more than 150 specializations. St. Petersburg State Electrotechnic University (ETU) St. Petersburg State Electrotechnic University is one of the worlds largest education and research centers specializing in radio engineering, electrical engineering, electronics and computer science. The University has a staff of more than 1,000 highly-qualified specialists and scientists, including the Nobel Prize Winner in physics Zhores Alferov. Electrotechnic University is alma mater for over 70 thousand students and over 3 thousand international students. St. Petersburg State University of Space Instrumentation (SUAI) Historically, the University (formerly known as Aircraft Instrumentation Institute) has been largely involved into projects related to development of software for embedded devices for aviation and space. Today, the University accommodates an important R&D center and implements joint training programs on embedded software development in cooperation with Nokia, Intel and other vendors.IT specialists are also educated at the following St. Petersburg’s Universities: Bonch-Bruevich St. Petersburg State University of Telecommunications (SPbSUT) Bonch-Bruevich St. Petersburg State University of Telecommunications is one of the oldest higher education engineering institutes in Russia. Founded in 1930, the University’s history is closely linked to the development of Russian and world science in communication area and great scientific and technical base. The University is a founding member of the Association of European Universities and Companies of Informatics and Computer Electronics (EUNICE). Baltic State Technical University ("Voyenmekh") Founded in 1932, the University educated more than 60,000 thousand specialists in the areas of aircraft jet production, aerospace, physics and mechanics, arms and armament systems, information and control systems, mechatronics and control, applied mechanics and automation, international industrial management. St. Petersburg State Transport University (PSTU) St. Petersburg State Transport University includes 10 faculties, 52 departments, scientific research institutes and centers, branches and offices in various Russian towns as well as a complex of specialized secondary educational institutions. According to the Russian Federation Ministry of Education, the University ranks 10-13 among 175 Russian technical higher schools. The University educates specialists in various areas, including railways power supply, automatics, telemechanics, Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 45 St. Petersburg Foundation for SME Development
  • 46. telecommunications, traffic management as well as information systems, standardization and certification, technological processes safety, management and marketing. St. Petersburg State Engineering Institute ( LMZ-VTUZ) Founded in 1930, St. Petersburg State Engineering Institute focuses on educational, scientific and engineering activities in the areas of power engineering, technology and automatization, industrial processes, triboengineering, corporate IT systems and other.3.2.4.2. Research Institutions JSC “Computing Scientific Research Institute “Spektr” The company is engaged in development of software, hardware, microelectronics solutions for aviation equipment and production of onboard equipment. Federal State Unitary Enterprise “Emergency Center of the Ministry of Atomic Energy of Russia” One of the areas of the Center’s activities lies in the development of automated systems for radiation monitoring. Institute of High-Performance Computing and Databases of the Ministry of Science and Technology The Institute is engaged in development of modern information technologies, parallel computing, modeling in the field of fundamental sciences, databases and distributed information systems development, and visualization. St. Petersburg Department of Steklov Institute of Mathematics, Russian Academy of Sciences (RAS) The Institute specializes in fundamental research on theoretical mathematics and mathematical models of theoretical physics, including mathematical logic and theory of algorithms, theory of numbers, geometry and topology, mathematical analysis, theory of probability, mathematical statistics and many other. Central Research Institute of Robotics and Technical Cybernetics The Central Research Institute of Robotics and Technical Cybernetics of St. Petersburg State Polytechnical University is created as a special design office of technical cybernetics. Its major activities involve robotics and control systems, photon techniques, special instrument development, laser technologies, telenetics. Vektor Scientific Research Institute The Institute is engaged in research, development and production of radio engineering and radio electronics equipment. JSC “Concern “Central Scientific and Research Institute “Elektropribor” The Institute is engaged in high-precision navigation, gyroscopy, gravimetry, and marine radio communication. St. Petersburg Institute for Informatics and Automation of the Russian Academy of Sciences (SPIIRAS) St. Petersburg Institute for Informatics and Automation is engaged in scientific IT research, including computer security, cryptology, information system security, applied problems of information security, distributed computing structures, object-oriented geoinformation systems, programming technologies and systems, information systems and problems of information security, data transmission system, integrated automation systems, intellectual systems, IT in system analysis and modeling, scientific research automation, applied information science, society informatization, theoretical and interdisciplinary problems of information science, IT in management and robotics, information and analytical technologies in economy, speech and multimodal interfaces, biomedical information science. Doing business in St. Petersburg46 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 47.  JSC “Russian Scientific and Research Institute “Elektronstandart” “Elektronstandart” is the leading research institute of the radio electronic complex of Russia in the field of reliability, quality, certification, standardization of electronic component base and radio and electronic equipment. Ioffe Physical Technical Institute The Ioffe Institute is engaged in nanoheterostructure physics, solid state electronics, solid state physics, dielectric and semiconductor physics, plasma physics, atomic physics and astrophysics. JSC “Scientific Research Institute “Neptun” The Scientific Research Institute “Neptun” is engaged in development, production and repair of communication equipment, design and construction of coastal objects.3.2.4.3. Associations RUSSOFT RUSSOFT is a nationwide association of Russian software companies, which also includes a number of leading software companies from Belarus and Ukraine. The association was founded in 1999 and is headquartered in St. Petersburg. Today, RUSSOFT unites more than 70 companies which employ more than 20 thousand highly-qualified programmers and software engineers. The association was created to represent Russian software development companies at the global market, enhance marketing and PR activities of its members, and lobby their interests in the Russian government. RUSSOFT is a part of the Russian Information and Computer Industry Association (APKIT) where it plays a role of the Software Development and Export Committee. SPb CIO Club St. Petersburg CIO Club is a professional community uniting IT directors of leading companies of the Northwestern region of the Russian Federation. The organizations major objectives lie in providing support and strengthening the development of professional community of IT directors. Established in 2004, the Club is at present the largest professional IT community in Russia. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 47 St. Petersburg Foundation for SME Development
  • 48. 3.3. Pharmaceutical cluster3.3.1. General overviewThe development of pharmaceutical cluster is one of the priorities of the Government of St. Petersburg.According to Pharmexpert Market Research Center, St. Petersburg is the most investment-attractiveregion of the Russian Federation as well as a launch pad for successful implementation of pharma andmedical equipment projects.63.3.2. Industry in numbersSt. Petersburg Special Economic Zone (SEZ) and the territory of “Pushkinskaya” industrial zonerepresent the priority sites for location of new infrastructure and innovative industries. The set ofmeasures aimed at supporting the cluster increases its attractiveness for new residents.Due to active support of the city and investors, the launch of new production lines in the framework ofthe launched projects is scheduled for 2012-2013.Priority sites for pharmaceutical manufacturing facilities and R&D centers are located within the“Pushkinskaya” industrial zone sections “Noidorf” (18.99 ha) and “Novo-Orlovskoe”(110.41 ha). TheGovernment of St. Petersburg provides preferences and favorable environment for pursuing businesswithin these locations.Major pharmaceutical investment projects, 2010 Company Location ActivityBiokad “Noidorf” SEZ section oncology/hematology, gynecology/urology, neurology, viral infections, diabetes and cardiologyPharm-Holding “Noidorf” SEZ section development, testing and introduction of new pharmaceuticalsCytomed “Novo-Orlovskoe” SEZ section research and production of active pharmaceutical substancesGem-Standard “Novo-Orlovskoe” SEZ section blood-derived productsNovartis “Novo-Orlovskoe” SEZ section innovative licensed and generic oral solid medicationsPharmasintez “Novo-Orlovskoe” SEZ section import-substituting medications for oncology and HIVVertex “Novo-Orlovskoe” SEZ section new generation of innovative medications and generics to be applied in cardiology, dermatology, gynecology and dentistryVital “Novo-Orlovskoe” SEZ section manufacturing equipment for diagnostic laboratoriesSource: Committee for Economic Development, Industrial Policy and TradeEstablishment of Life Sciences Park aimed at complex development of biotechnology infrastructureand pharmaceutical and medical industry is one of the key city’s initiatives. The idea of the project liesin creating a positive synergy by localizing research complexes, key companies’ labs and major serviceswithin one site.Not-for-Profit Partnership «Medical and Pharmaceutical Projects: 21st Century» was created in 2011with the aim of uniting and coordinating the efforts pursued by cluster participants in the field ofresearch, development and circulation of pharmaceuticals and medical equipment. This is the first6 Committee for Economic Development, Industrial Policy and Trade, 2012 Doing business in St. Petersburg48 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 49. stage of development of the self-regulatory organization engaged in research, development andcirculation of pharmaceuticals and medical equipment. Today, it comprises 15 national and foreignorganizations representing all market segments – from idea to production.Non-for-profit partnership “Cluster of Medical and Ecological Instrument Engineering andBiotechnologies” was established in 2010 and unites 85 small and medium enterprises engaged inmedical instruments engineering and biotechnologies. The partnership represents the participantcompanies’ interests in interaction with the authorities and facilitates the promotion of products to theregional and international markets.3.3.3. CompaniesKey St. Petersburg pharmaceutical cluster companies and projects: «Alkor Bio» Group «Alkor Bio» Group established in 1992 is the major biotechnological holding company in the Northwest Russia. Today, it incorporates 12 companies which represent the top national manufacturers of reagents for enzyme immunoassay. The group is focused on development, manufacturing and promotion of diagnostic kits for EIA & molecular genetic analysis; private laboratory studies; development of cellular technologies with further introduction to clinical practice; banking of hematopoietic stem cells from cord blood; investment in innovative biotechnological projects. 200,000 reagent sets of over 60 positions are manufactured annually, including test-systems for hormonal diagnostics, cancer diagnostics, allergies, dangerous infectious diseases diagnostics, sets and software for DS prenatal screening. All diagnostics sets are registered in Russia, most of them received CE mark. The company has 7 R&D labs and 11 patents, including cancer diagnostics, hepatitis C diagnostics, steam sells treatment methods against severe fractures, periodontitis, mental retardation. AstraZeneca AstraZeneca is a global, innovation-driven biopharmaceutical business with a primary focus on discovery, development and commercialization of prescription medicines for gastrointestinal, cardiovascular, neuroscience, respiratory and inflammation, oncology and infectious disease. AstraZeneca operates in over 100 countries and its innovative medicines are used by millions of patients worldwide. On March 2011 AstraZeneca officially announced the launch of its St. Petersburg Predictive Science Centre (PSC) and became the first global pharmaceutical company to open its R&D facilities in Russia. The activity of AstraZeneca PSC will primarily focus on development and application of computational predictive modeling capabilities in all phases of drug discovery. Another area of interest will lie in development of data analysis methods as well as software and systems; modeling and optimization of pharmacological properties of potential drugs. The PSC will also focus on implementation of personalized medicine. Analysis of clinical and high-throughput (e.g. genomics) data will help develop and validate complex biomarkers identifying patients as well as take into account genetic makeup of Russian population in order to optimize treatment strategies. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 49 St. Petersburg Foundation for SME Development
  • 50. Biocad CJSC «Biocad» is a Russian biotechnological company founded in 2001. It is a fully integrated biotech company which combines scientific research with manufacturing and marketing. The key company activities are focused on original and biosimilar/generic drugs development. The company was among the first four members of the “Noidorf” SEZ section and pharmaceutical cluster of St. Petersburg. At the moment a pharmaceutical complex Biocad 2.0, which will create 500 new jobs, is under construction. The first set of manufacturing facilities is scheduled to begin operations in 2013. The company is planning to develop and manufacture 32 widely used pharmaceutical products included into the VED (Vital and Essential Drugs) list. This will allow to substitute imported pharmaceuticals in a number of therapeutic areas of the Russian pharma market, including oncology/hematology, gynecology/urology, autoimmune diseases, viral infections. Cytomed Cytomed medical and biological research and manufacturing complex is one of the first Russian pharma manufacturers which has been present at the market for over 20 years. Cytomed was among the first companies to support domestic biochemical and pharma R&D, manufacturing and promotion of original Russian products. The product range includes pharmaceuticals applied in dermatology, urology, pediatrics. Each pharmaceutical has its registered brand name: Timogen, Prostatilen, Epitalamin, Cytovir.Manufacturing facilities of the company include over 1200 sq m with units for creams, pills and ovules production. All products are manufactured from high-quality materials using modern equipment which meets GMP quality standards. Diagnostic and Treatment Center of the International Institute of Biological Systems (DTC UUBS) Main activity of DTC IIBS lies in providing affordable and high-quality diagnostics and medical treatment services to patients. Established in 2003, the company is a Russian leader in magnetic resonance tomography and radiosurgery. Started from the first private MRI office in Russia, today DTC IIBS incorporates 58 MRI centers, multislice computer tomography and ultrasonic diagnostic cabinets, neurology and epileptology centers, sleep laboratory, multifunctional policlinic department, radiosurgery centers Gamma Knife and Cyber Knife, comprehensive Cancer center. In 2011 DTC IIBS centers examined over 900,000 patients and completed 748 radiosurgery procedures. The company aims to extend its MRI centers network to 70 by 2013 and establish 5 new centers for positron emission tomography within the next 2 – 3 years with total investment of over 70 million US dollars. Currently, a state-of-the-art Proton beam therapy center in St. Petersburg is being designed. This large-scale project will be completed within 4 years. Doing business in St. Petersburg50 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 51. GalenoPharmJSC «Pharmaceutical Factory of St. Petersburg» traces its history backto 1937. Currently, the company focuses on production ofpharmaceuticals for asthma and COPD treatment.In 2009 the company established the first Russian manufacturing ofaerosolized medicines without ODS. Today, the company produces«Beklospir®», which is the first Russian dosed aerosol inhaler withbeclometasone dipropionate as an active ingredient. 7 moreantiasthmatic pharmaceuticals are undergoing registration. This willsatisfy the demand for these medicines at the Russian market.Gem-StandartGem-Standart Ltd was established in 2011 to supervise the investmentproject located on the territory of “Novo-Orlovskoe” section of St.Petersburg Special Economic Zone. The project envisages theconstruction of R&D and manufacturing facilities aimed at developmentand production of innovative pharmaceuticals from human bloodplasma on the basis of nanotechnological solutions. The project focuseson development of a unique technology of deep and full processing ofhuman blood plasma. The project, scheduled for completion in 2015,will create 150 new workplaces.GeropharmGeropharm Ltd is one of the leading Russian pharmaceuticalmanufacturers. Currently, Geropharm is engaged in construction of anew high technology industrial complex in accordance with GMPstandards in St. Petersburg with manufacturing facilities located in“Pushkinskaya” industrial area. New manufacturing facilities will allowto produce original Russian pharmaceuticals, innovative products aswell as generics for treatment of important diseases. The volume ofinvestment into the first project stage exceeds 500 million US dollars.The project is scheduled for completion in 2014.MSDMSD is a tradename of Merck & Co., Inc. headquartered in WhitehouseStation, N.J., U.S.A. It is a global healthcare leader providing medicines,vaccines, biologic therapies, and consumer care and animal healthproducts. The company works with customers and operates in morethan 140 countries to deliver innovative health solutions. MSDdemonstrates its commitment to increasing access to healthcarethrough far-reaching programs that donate and deliver its products topeople in need.In Russia, MSD is committed to developing innovative, first-in-classproducts, improving health and saving lives of Russian citizens. MSD inRussia is dedicated to science and scientific excellence, focusing onclinical research activities in the country. MSD products have beenavailable in Russia for many years. The company has been recentlyrenamed into MSD Pharmaceuticals LLC in Russia. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 51 St. Petersburg Foundation for SME Development
  • 52. Novartis Novartis has been active in Russia since the 19th century, and today the company is one of the key players at the Russian pharmaceutical market. Novartis currently employs over 2,400 associates in Russia across all business divisions. The company provides innovative healthcare solutions that address the evolving needs of patients and societies. Novartis offers a diversified portfolio of products, including innovative medicines, eye care, cost- saving generic pharmaceuticals, preventive vaccines and diagnostic tools, over-the-counter and animal health products. In December 2010 Novartis signed a Memorandum of understanding with the Government of St. Petersburg and announced a strategic investment program in Russia with the investment of over 500 million US dollars over a 5-year period. This comprehensive partnership addresses three core areas, including local manufacturing, R&D partnerships and public health development in Russia. In June 2011 Novartis held a groundbreaking ceremony for a new pharmaceutical manufacturing plant in St. Petersburg. Once completed and approved for commercial production, which is expected in 2014, the state of-the-art facility will use cutting-edge technologies to produce approximately 1.5 billion units per year. It will also be an attractive workplace for local talent, employing more than 350 highly qualified professionals who will have access to world-class training and development programs at Novartis. The new plant will meet GMP requirements (“Good Manufacturing Practice”). Pharmasyntez RSI Syntez Ltd is a subsidiary of the Irkutsk pharmaceutical factory (Pharmasyntez, OJSC). The company was established to implement an investment project on building scientific and manufacturing facilities in “Novo-Orlovskoe” SEZ section. The project is aimed at developing and producing innovative antitumoral pharmaceuticals with planned annual turnover of at least 100 million US dollars. The product range includes antitumoral pharmaceuticals in different dosage forms (pills, capsules, solutions, gels, lyophilizates). The project with the volume of total investment of 700 million US dollars will create 200 new workplaces. The project is scheduled for completion in 2013- 2014 Pharm-Holding Pharm-Holding CJSC (a subsidiary of Geropharm Ltd) is an R&D company engaged in development of innovative pharmaceuticals. The company focuses on innovative peptide and genetically engineered medicines; modern diagnostics systems; improved generics. In December 2011 the company opened a unique Pharm-Holding R&D center in “Noidorf” SEZ section. The volume of investment into the project constituted 4 million US dollars. The project created 50 new workplaces. Doing business in St. Petersburg52 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 53. PolysanA scientific and technological pharmaceutical company «POLYSAN»Ltd was founded in 1992. The company manufactures four originalpharmaceuticals, including Cycloferon, Cytoflavin, Reamberin andRemaxol. Currently, six more new original products scheduled formanufacturing within the next four-five years are being developed. Thecompany has been awarded a number of awards, including the RussianGovernment Award for Science and Technology, the «Golden Mercury»Award for business achievements, and the St. Petersburg GovernmentAward for top quality of products. The company’s pharmaceuticalmanufacturing facilities are located in St. Petersburg and are certifiedby the European Unions GMP. Today, the second stage of constructionis in process. Primary sales markets and regions include Russia, CIS andSouth-East Asia.Samson-MedSamson-Med Ltd is a pharmaceutical company which started itsoperations in 1937. The main activity of the company lies in producingpharmaceuticals and medicines by means of endocrine and enzymaticmaterials processing. The company has unique expertise starting fromD&D and technical regulations development to industrialmanufacturing of a wide range of pharmaceuticals (injectablepreparations and infusion solutions) and biologically active substances.The company is currently implementing a project aimed at constructinga new full cycle of manufacturing facilities at the “Pushkinskaya”industrial area. The project scheduled for completion in 2013-2014 willcreate 400 new workplaces. The total volume of investment accountsfor 500 million US dollars.VAMFounded in 1995, «VAM» Group focuses on development and patentingof an original scientific and technological platform to develop a newgeneration of drugs based on current achievements in molecularbiology. The platform has been granted an entry into the registry of«Medical equipment and pharmaceuticals» project group under thePresidential Commission for Modernization and TechnologicalDevelopment of the Russian Economy. Tuberculosis and viral hepatitispharmaceuticals, Glutoxim® and Molixan®, were among the firstbreakthrough products recognized by the international scientificcommunity and registered in Russia. New generation ofpharmaceuticals developed by “VAM” Group provides pharmacologicalsolutions affecting human innate defense mechanisms.VertexVERTEX OJSC is a Russian pharmaceutical company with 10-yearhistory of success. The product range includes 108 positions, 65 areadded to the VED (Vital and Essential Drugs) list and manufactured withthe GMP standards. VERTEX is currently implementing an investmentproject to create R&D and manufacturing facilities for development andproduction of innovative drugs and generics. New manufacturing will belocated at “Novo-Orlovskoe” Special Economic Zone section. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 53 St. Petersburg Foundation for SME Development
  • 54. The project includes laboratories for new dosage forms development; supply of modern equipment; facilities for experimental works; innovative technologies involvement; highly experienced scientific and technical staff; professional training. The project scheduled for completion in the fourth quarter of 2014 will create 220 new workplaces. Volume of investment into manufacturing construction exceeds 500 million US dollars. Vital Development Corporation «Vital Development Corporation» JSC is one of the leading Russian developers and manufacturers of reagents kits for clinical diagnostics of various diseases, including pancreas, kidneys, heart and other important systems diseases. The company also produces semi- automatic biochemical analyzers, water purifying stations for medical laboratories. Established in 2006, Vital Development Corporation has become a joint stock company with annual turnover of 6 million US dollars and 42 permanent employees by 2010. The current company’s priority lies in pursuing R&D in laboratory diagnostics. Thus, the company became a resident of the “Novo- Orlovskoe” SEZ section in St. Petersburg Special Economic Zone in 2009. By the end of 2012, the company intends to set up the R&D and manufacturing facilities “Vital”. The facilities with the total area of 9,000 sq. m will include two manufacturing buildings and one administrative building and will create over 100 new workplaces.3.3.4. Supporting institutions3.3.4.1. Universities St. Petersburg State Chemical-Pharmaceutical Academy St. Petersburg State Chemical-Pharmaceutical Academy is a leading Russian center in educating high qualified process engineers occupied in industrial production of pharmaceuticals of various origin. The academy participates in the EU-Russian programs in the sphere of GMP experts’ training. St. Petersburg State Institute of Technology St. Petersburg State Institute of Technology is an acknowledged world’s center of chemistry, chemical and biotechnologies, nanotechnologies, cybernetics and engineering. The Institute possesses a vast range of methods of active pharmaceutical ingredients synthesis as well as pilot production of substances in accordance with the GMP requirements. It is a major center dedicated to training of personnel for scientific centers and industrial enterprises. St. Petersburg State Pavlov Medical University One of the leading medical schools in Russia carries out preclinical research, including study of new molecules and dosage forms, translational studies, clinical research, pharmacoepidemiological and pharmacoeconomic research as well as training of GLP, GCP, GSP and evidentiary medicine specialists. St. Petersburg State Polytechnical University St. Petersburg State Polytechnical University conducts a world top-level bioanalytical research in accordance with the FDA and GLP requirements. The oldest pharmaceutical institution of higher education in Russia carries out high-tech research projects on the development and study of active pharmaceutical substances of natural and synthetic origin and educates highly qualified specialists in the sphere of molecular biology. Doing business in St. Petersburg54 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 55. 3.3.4.2. Research Institutions Institute of Cytology of the Russian Academy of Sciences (RAS) Institute of Cytology is the leading institution of the Russian Academy of Sciences within the field of modern cell biology. The institute is tasked with studying the structural organization and expression of nuclear genome, structure and function of cell organelles, investigation of intracellular processes and intercellular contacts. Institute of Toxicology The scientific center focuses on fundamental and applied research in the field of toxicology, pharmaceutical chemistry and pharmacology. The Institute specializes in the study of mechanisms of action of potential dangerous chemical and natural substances as well as development of novel antidotes and therapies. Research Institute of Influenza Research Institute of Influenza is involved in solving fundamental and applied tasks in the field of virology, epidemiology and infectious pathology, thus serving a goal of protecting and augmenting human health, developing healthcare and medical science. The institute is engaged in epidemiologic and etiologic influenza/ARI surveillance improvement, molecular genetic and phylogenetic analysis of influenza viruses, genetic classification of existing and newly emerging viruses, studies on molecular mechanisms of viral pathogenesis, nanotechnology-based diagnostic reagents generation, exploration of new ways for next-generation vaccine production as well as other relevant research areas. State Research Institute of Highly Pure Biopreparations The Institute is a biotechnological center specialized in novel therapeutics and diagnostics. The main scientific areas include elucidation of mechanisms of therapeutic activity of endogenous mediators for the development of new biopharmaceuticals, development of new drug delivery systems for targeted and sustained release of drugs as well as medicine manufacturing. St. Petersburg State Mechnikov Medical Academy The oldest and one of the most prestigious institutions of higher medical education in Russia represents a scientific and research center which includes morphology, genetics, biochemistry, immunology, physiology, mathematical modeling and epidemiological analysis labs. St. Petersburg Institute of Pharmacy St. Petersburg Institute of Pharmacy functions on the basis Adaptogen Interregional Center and St. Petersburg State Mechnikov Medical Academy. It is engaged in carrying out preclinical studies of new pharmaceuticals, specific food products, biologically active substances and beauty products.3.3.4.3. Associations Not-for-Profit Partnership ”Medical and Pharmaceutical Projects: 21st Century” “Medical and Pharmaceutical Projects: XXI Century” is a non-commercial partnership operating in the sphere of development, production and circulation of pharmaceuticals and medical devices. It was founded in 2011 by a group of companies (participants of the pharmaceutical cluster in St. Petersburg) as an effective tool for development of medical-pharma branch and establishment of a market of quality and modern medical services. The main tasks of the partnership lie in participation in the development of the branch regulatory and legal framework; working out uniform rules and standards for the pharmaceutical market, methods of transition to GMP standards; support of investment projects, promotion of the region’s investment attractiveness; legal backing (copyright, intellectual property, licensing); international representation, monitoring of international projects. Today, the partnership unites almost all companies engaged in production, research and educational projects in St. Petersburg. It is planned to create a self- Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 55 St. Petersburg Foundation for SME Development
  • 56. regulatory organization (SRO) in the sphere of pharmaceuticals and medical devices development, manufacturing and circulation on the basis of the partnership. Cluster of Medical and Ecological Instrument Engineering and Biotechnologies The cluster was established in 2005 on the basis of small enterprises engaged in medical instrument engineering since the beginning of the 90s. The cluster member companies pursue the common interests in industrial cooperation, joint promotion of products at the Russian and foreign markets, implementation of project aimed at establishment of scientific and production complex in the sphere of medical instrument engineering and biotechnologies. The main product line of companies consists of R&D findings translated into serial production Doing business in St. Petersburg56 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 57. 3.4. Shipbuilding cluster3.4.1. General overviewShipbuilding is one of the leading industrial sectors in St. Petersburg’s economy. For centuries the cityserved as the sea capital of Russia as well as a recognized center for shipbuilding, naval science andeducation. Today, shipbuilding industry is undergoing major reorganization. High concentration ofindustrial and scientific sectors as well as unique port infrastructure stipulates the development ofshipbuilding industry and provides new opportunities for pursuing effective forms of cooperation withinthe city.The development of a modern shipbuilding complex on the Island of Kotlin in St. Petersburg will benefitnot only the shipbuilding industry but also a number of related sectors. It will facilitate the creation of amodern high-tech production in St. Petersburg as well as promote social and economic development ofKronshtadt.Basic information on the shipbuilding complex on the Island of Kotlin, St. PetersburgMain products tankers, LPG tankers, offshore ice-resistant fixed platforms, ice-breakers, floatable nuclear heat and power plants, first rate ships, aircraft carriers, diesel-electric submarineAnnual gross receipts 38 billion roublesVolume of investment 35 billion roublesTotal number of employees 6,500 peopleCity tax revenue 3.5 billion roubles a yearImplementation period 8 yearsSource: Committee for Economic Development, Industrial Policy and Trade, 20123.4.2. Industry in numbersSt. Petersburg’s possesses unique potential for shipbuilding industry. 43 shipbuilding enterprises,including 23 industrial and 20 scientific enterprises, are located in the city. 42 thousand people areemployed in shipbuilding industry, which accounts for 16% of the total number of employed inmanufacturing industries.The production volume of products manufactured at the city’s shipbuilding enterprises accounts for 4%of St. Petersburg’s GRP, while the share in the manufacturing industries represents 18%.90% of all scientific and project potential of shipbuilding industry is concentrated in St. Petersburg. Thisfact facilitates introduction of innovation and development of new solutions not only at the productionsites located in the city but also in Kaliningrad, the North, Far East and Volga regions. Shipbuildingproducts account for 50% of all military industrial sector products manufactured in St. Petersburg.St. Petersburg shipbuilding enterprises provide more than 70% of all export of the Russian shipbuildingindustry. The city’s enterprises account for up to 30% of all shipbuilding industry’s production volume inRussia.77 Concept of development of shipbuilding cluster in St. Petersburg, Committee for Economic Development,Industrial Policy and Trade Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 57 St. Petersburg Foundation for SME Development
  • 58. 3.4.3. Companies United Shipbuilding Corporation United Shipbuilding Corporation is a government-owned company, which unites 37 shipbuilding, repair and maintenance subsidiaries located across Russia. Today, the corporation has 3 subsidiaries, including the Western Shipbuilding and Repair Center in St. Petersburg, the Northern Shipbuilding and Repair Center in Severodvinsk and the Far Eastern Shipbuilding and Repair Center in Vladivostok. The shipbuilding enterprises united under the corporation are engaged in both commercial and naval shipbuilding and account for 80% of all shipbuilding projects in Russia. The Western Shipbuilding and Repair Center includes among others Admiralty Shipyard, Maritime Construction Bureau Almaz, Baltiysky Zavod (Baltic Plant), Kronstadt Marine Plant, Severnaya Verf (Northern Shipyard), Sredne-Nevskiy Shipyard. ALMAZ Marine Yard ALMAZ Marine Yard was founded in 1931 and specialized in building and repair of Russian Coast Guard and Navy high-speed crafts. In 1970 the production facilities of ALMAZ Marine Yard were modernized and reconstructed to start the production of high-speed crafts, including air- cushion landing crafts for the Russian Navy. Through the application of new technology the marine yard builds the world’s largest landing hovercraft of ZUBR class. Since 1974 the company has delivered one hydrofoil and 45 hovercrafts to the Russian Navy. Avrora Avrora is a scientific and production association established in St. Petersburg in 1970. Today, the company is engaged in the development and manufacturing of control systems and devices for commercial and naval vessels, including automated control systems of technical facilities, automated combat information and control systems, complex control systems, training systems and simulators, development and manufacturing of control systems for industrial, technological and power generation objects, transportation and port facilities, automated control systems of technological processes of oil and gas extraction, processing and transportation as well as other industrial, medical and technical products. Gidropribor Concern “Sea underwater weapon – Gidropribor” is a leading Russian enterprise engaged in development of marine underwater weapons and special-purpose underwater equipment. Over 100 years of history the enterprises of the Concern developed and manufactured dozens of multipurpose torpedoes and mines, mine sweeping gears, including devices to detect and destroy sea mines, means of surveillance of underwater environment, acoustic countermeasure systems and underwater vehicles for divers transportation for the Navy. Doing business in St. Petersburg58 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 59. Granit – Elektron Concern “Granit-Elektron” was established in 2006 though reorganization of the Central Scientific and Research Institute “Granit”. The concern is a large scientific and production enterprise specialized in development of electronic warfare systems for the Navy. Granit- Elektron has a status of the federal scientific and production center and is included in the list of strategic enterprises of Russia. Krylov Shipbuilding Research Institute Krylov Shipbuilding Research Institute is the leading scientific institution of the national shipbuilding industry and has a status of the Russian Federation State Research Centre for naval commercial ships. This status comes due to both high qualifications of the staff researchers and experts who have established their own world-recognized schools of learning and a unique complement of experimental facilities combined with innovative in- house research methods and tools. The Institute is engaged in performing naval ship conceptual design studies, hydrodynamics, commercial ship and offshore engineering conceptual design studies, structural mechanics, marine power plants and power generation as well as other marine-related technologies. Oceanpribor Concern “Oceanpribor” was established in 2006 in a form of an integrated organization which unites scientific and production capacity of Russia in the area of hydro-acoustics. The concern unites scientific and research institutes and plants which product hydroacoustic complexes and stations for shipbuilding industry as well as hydroacoustic equipment for various needs of economy. Shipbuilding and Ship Repair Technology Center Shipbuilding & Ship Repair Technology Center is one of the major research institutions in St. Petersburg and a leading center of shipbuilding technologies in Russia. The Center carries out fundamental and exploratory research in the field of creation of modern technologies for shipbuilding and engineering sectors and participates in the development and implementation of large-scale investment projects. Today, the Center incorporates research laboratories, design and construction divisions engaged in the development and modernization of shipbuilding yards, water-development facilities and engineering enterprises, on-shore bases for marine objects, design and manufacturing of ship fittings, design of fishing and fish-processing vessels, special-purpose vessels, as well as production facilities for manufacturing of designed equipment.3.4.4. Supporting institutions3.4.4.1. Universities Admiral Makarov State Maritime Academy The Academy is the first and only higher education institution in Russia which educates engineers for locally-built vessels with nuclear power plants. It is the only higher education institution engaged in carrying out targeted training of specialists serving the Northern Marine Route. Among these specialists are not only officers for nuclear powered ice-breakers, but also meteorologists, Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 59 St. Petersburg Foundation for SME Development
  • 60. oceanologists, hydrographers and radio engineers. The Academy is one of the largest centers of marine science with high scientific potential, including 75 doctors of sciences and professors, 175 candidates of sciences and assistant professors. Baltic State Technical University ("Voyenmekh") Founded in 1932, the University educated more than 60,000 thousand specialists in the areas of aircraft jet production, aerospace, physics and mechanics, arms and armament systems, information and control systems, mechatronics and control, applied mechanics and automation, international industrial management. St. Petersburg State Marine Technical University St. Petersburg State Marine Technical University is the only institute of higher education in Russia which educates world class marine engineers specialized in design, manufacture and maintenance of marine vessels, surface ships and submarines, technical equipment for exploration and extraction of oil, gas and other undersea mineral resources. Founded in 1902, today the University offers educational programs at 5 departments, including natural and social sciences and humanities, naval architecture and ocean engineering, marine engineering, marine electronics and control systems, business and management. St. Petersburg State Polytechnical University St. Petersburg State Polytechnical University founded in 1899 is a National research University, a world’s recognized leader in the field of engineering and economic education. The University educates specialists in 36 bachelor and 188 master degree programs as well as 88 PhD and 88 doctorate programs. The University partners with more than 280 Universities, 131 scientific and research institutions and 172 companies from more than 55 countries. It has more than 20 international research centers which carry out joint research in cooperation with such companies as Motorola, Microsoft, AT&T, Siemens, LG Elelctronis, Apple and others. St. Petersburg State University of Waterway Communications (SPSUWC) For 200 years St. Petersburg State University of Waterway Communications has been training engineers for waterway transport in Russia. Today, the University is a large transport education center which educates students from more than 30 countries. A number of transport laboratories function at the University, including Prof. Timonov Laboratory of Safety of Hydro technical Engineering Constructions, Prof. Butov Laboratory of Modelling of Transport Processes, Laboratory of Vessel’s Navigation Qualities (Towing Tank), Prof. Emets Planetarium Laboratory of Vessels Power Plant, different Training Centers for ashore personnel and seafarers of shipping companies. The University graduates succeed in marine and waterway transport industries and apply their skills in shipping companies, ports, cruise companies, shipbuilding and ship repair yards as well as water supply management and administration.3.4.4.2. Research Institutions Elektropribor, Central Scientific and Research Institute Elektropribor is the leading Russian research institute located in St. Petersburg. The Institute carries out a full cycle of work, including fundamental research as well as product manufacturing. Main products include integrated satellite/inertial navigation systems, mobile airborne marine gravimeter, periscope complex. The institute supplies its products not only to the Russian Navy but also foreign companies from China, Finland, Germany, India, Japan, Norway and the Republic of Korea. Central Scientific and Research Institute of Electric Engineering and Technology Central Scientific and Research Institute of Electric Engineering and Technology is a branch of the Krylov State Scientific Center. It is a multidisciplinary specialized scientific and production center engaged in scientific research, design and experimental as well as technology operations. The Institute carries out production, supplies and testing of knowledge intensive electrical equipment, Doing business in St. Petersburg60 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 61. autonomous electric systems, management and control systems, electrostatic protection means for oil-loading facilities. Central Research Institute of Marine Engineering Central Research Institute of Marine Engineering was established in 1970 with the aim of organization of an R&D base for marine equipment and reduction of its development cycle. Today, it is one of the major Russian enterprises engaged in development and supply of ship machinery installed practically on all Russian merchant and naval vessels. The Institute possesses a powerful research and engineering potential as well as a developed high-tech experimental and production facilities. Prometey, Central Scientific and Research Institute of Structural Materials Established in 1939, Central Research Institute of Structural Materials has become a multi- specialized state unitary enterprise which carries out orders of the federal ministries as well as Russian and foreign companies engaged in different industries. Prometey’s major fields of operation include hull metallic and nonmetallic materials used in shipbuilding, materials used in shipbuilding and machine engineering, materials for nuclear and heat power engineering, materials for oil and gas production facilities, transportation and refining. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 61 St. Petersburg Foundation for SME Development
  • 62. 4. Business solutionsSt. Petersburg is an ideal location for the following business needs: Headquarters Favorable economic and geographical position, highly educated, efficient and motived workforce as well as developed infrastructure make St. Petersburg an ideal location for Russian headquarters of any international business. Research & Development center (R&D) St. Petersburg is an acknowledged scientific and educational center as well as a Russian leader in information technology, which possesses all necessary innovative infrastructure and extensive government support to accommodate your R&D activities. Production center One of Russia’s most important production centers provides you with developed logistics, innovative and flexible business environment as well as highly efficient and motivated workforce to accommodate your production facilities in the city. Distribution center St. Petersburg’s westernmost mainland location in Russia and well-developed transport infrastructure makes it an ideal location for your Russian and European distribution center. Test market St. Petersburg is an ideal test market in the European part of Russia, which will allow you to assess the demand for your new products and improve your technology and business models. Doing business in St. Petersburg62 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 63. 4.1. HeadquartersSt. Petersburg is the second largest city in the Russian Federation. It is a major European cultural centerand an important Russian port on the Baltic Sea. A close proximity to Europe, developed infrastructureand favorable investment climate make St. Petersburg an attractive location for Russian headquartersof numerous international corporations, banks and other businesses.Russian rating agency Expert ranked St. Petersburg among the most attractive regions of the RussianFederation for trade and investment (1A) characterized by high investment potential given minimumrisks. St. Petersburg was also ranked as one of the most business-friendly cities in the RussianFederation (A+) characterized by favorable business climate and excellent conditions for pursuingbusiness in the city.84.1.1. Advantages Favorable economic and geographical position St. Petersburg is the world’s northernmost city with over one million population. It is the largest westernmost city of the Russian Federation conveniently located along the shores of the Neva Bay of the Gulf of Finland. A complex system of river ports is interconnected with the system of seaports, thus making St. Petersburg the major link between the Baltic Sea and the rest of Russia through the Volga-Baltic Waterway. St. Petersburg is a major trade gateway as well as a financial and industrial center of the Russian Federation specialized in power plant engineering, machine tool technology, shipbuilding and instrument engineering. The city boasts a highly developed iron steel and nonferrous metal industry, chemical industry as well as consumer goods, food and printing industries. Highly educated, efficient and motived workforce Flexible and highly educated labor market provides excellent conditions for establishing your headquarters in St. Petersburg. St. Petersburg is the fourth most populated city in Europe with more than 40% of residents having higher education degrees. Destined by the European location and close proximity to the European markets, residents of the city possess foreign language skills which makes them an ideal workforce for any headquarter located in the city. Developed infrastructure St. Petersburg has a well-developed infrastructure which connects European part of Russia with the Nordic and Baltic regions, thus conveniently suiting the business needs of your headquarter. Moreover, the ongoing development of a major strategic investment transportation project will determine further development of the city as a major world transport hub. The Western High- Speed Diameter (WHSD) envisages construction of a motorway which will link passenger and freight transport along the busiest traffic lines and St. Petersburg transport hub, including the Large Port, to the national road network. By 2013 the totally new Pulkovo Airport will provide fast and efficient connections to major destinations around the world.8 Investment rating of Russian regions 2010-2011, Expert RA Rating Agency Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 63 St. Petersburg Foundation for SME Development
  • 64. 4.1.2. CasesThe following national and international companies have already registered, located or announcedtheir plans to relocate headquarters to St. Petersburg: Gazprom Neft One of the largest oil producing and refining companies in Russia, which is an oil arm of Gazprom, has a fully operational head office in St. Petersburg since December 2011. Rostelecom Russia’s national telecommunications operator with the largest domestic backbone network has its de jure headquarters in St. Petersburg. Russian Standard One of the leading banking and alcohol beverage groups which holds the stock of Russian Standard Company, a producer and distributor of Russian Standard Vodka, as well as Russian Standard Bank, announced its plans to register to St. Petersburg in 2007. Sovcomflot Russian state-owned maritime shipping company specialized in petroleum and LNG shipping relocated its headquarters to St. Petersburg in 2006. Transaero The first private company and one of the largest airline companies in Russia operating since 1991 registered to St. Petersburg in 2006. Transneft Russian state-owned company which transports about 93% of all oil produced in Russia and owns the largest oil pipeline system in the world, announced its plans to register to St. Petersburg in 2005. VTB Bank VTB Bank is one of the largest banks in Russia, a backbone financial institution with over 85% of the lender’s securities held by the state. VTB Bank moved its headquartered to St. Petersburg in 2005. X5 Retail Group The largest retail chain in Russia announced its plans to relocate to St. Petersburg in 2007. Doing business in St. Petersburg64 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 65. 4.2. Research & DevelopmentDue to its unique scientific and educational base, St. Petersburg plays a major role in the developmentof nanotechnology industries in Russia, thus making it an ideal location for your R&D activities. Themajority of Russian R&D centers and facilities of international companies are based in St. Petersburg.As a result of innovation activity in 2011 St. Petersburg was included in the list of the most innovativeregions of the Russian Federation.94.2.1. Advantages Largest scientific and educational center St. Petersburg is a leading scientific and educational center of the Russian Federation which possesses 10% of all intellectual potential of the country. The city is home to 252 scientific institutes and organizations with more than 170 thousand scientific workers employed. 8% of all Russian students and 15% of all Russian post graduate students pursue their studies in St. Petersburg. St. Petersburg is home to more than 100 higher education institutions, including St. Petersburg State Electrotechnical University (ETU) which along with the National Research Nuclear University functions as the coordinator of educational activities within the National Nanotechnology Network. Extensive government support The Government of St. Petersburg applies systematic approach to the development of innovation and technology. The city adopted a complex program aimed at developing and supporting a modern competitive regional innovation system. The government views the development of the following industrial clusters as a priority in sustaining innovative climate in the city: automotive industry, pharma and biotechnology, shipbuilding, information and communication technologies, radiology and power plant engineering. In addition, every year the city hosts the St. Petersburg International Economic Forum (SPIEF), a flagship event which serves a major platform for economic talks between Russian and CIS leaders as well as the world’s business elite. Innovative special economic zone A special economic zone of technical-implementation type has been functioning in St. Petersburg since 2010. The zone focuses on rendering tax, customs and other type of concessions to the companies engaged in the development of high-tech solutions. Simplified customs regime facilitates the development of export/import activities, thus creating favorable conditions for promoting foreign economic activities. A leader in information technology 60% of all Russian IT companies are based in St. Petersburg, including 49 centers of leading international and Russian ICT companies. Availability of developed IT infrastructure, including a technopark, business incubator, modern research and scientific institutions, as well as highly qualified IT-personnel facilitate the development of St. Petersburg as a Russian leader in information technology.9 Rating of innovation activity in the Russian Federation in 2011, St. Petersburg Policy Fund, Russian PresidentialAcademy of National Economy and Public Administration, RBC daily Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 65 St. Petersburg Foundation for SME Development
  • 66. 4.2.2. CasesThe following national and international companies have already located their R&D facilities in St.Petersburg: Alcatel-Lucent Alcatel has been operating its R&D center in St. Petersburg since 2005. Its main objective lies in the development and integration of innovative telecommunications software systems and adaptation of existing Alcatel products to the specific requirements of the regional market. The center covers three fields of applications, including fixed, mobile and enterprise networks, and employs 150 specialists trained at the specialist Alcatel R&D centers in Europe and the US. AstraZeneca AstraZeneca is planning to establish a Predictive Science Center in St. Petersburg within 2012. It is the company’s first Predictive Science Center in Russia which will focus on the development of bioinformatics, data analysis methods, software and systems to better predict the safety and efficacy of potential new medicines. The center will employ around 30 specialists who will work in close collaboration with local companies and organizations as part of a related agreement with the St. Petersburg government. Corning Corning scientific center was founded in 1996 in St. Petersburg and is specializing on mathematic and computer modelling of materials, products and technological processes. EMC Opened in 2007, EMC R&D center in St. Petersburg is an important part of the global EMC R&D investment program. The center focuses on rendering support and continuous development of a wide range of world’s leading software products. St. Petersburg’s center currently employs more than 170 program engineers specialized in data management and data storage systems. Google Google opened its second R&D center in Russia in 2006. Today, Russia is only the second country outside the US in which Google has two R&D centers, including Moscow and St. Petersburg. St. Petersburg division focuses on the development of security software and its adaptation to the needs of Russian users. It employs around 10 software engineers engaged in the development of Chrome Developer Tools as well as improvement of V8 virtual machine. HP Labs HP Labs Russia is the newest member of the international HP Labs community, and the third new research lab created by the company in the last five years. Opened in St. Petersburg in 2007, HP Labs Russia focus on information management and development of new technologies linked to the explosion of information access brought about by the World Wide Doing business in St. Petersburg66 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 67. Web. The only Russian HP research lab delivers breakthroughtechnologies and technology advancements that provide a competitiveadvantage for HP and create business opportunities that go beyond HPscurrent strategies.IntelOpened in St. Petersburg in 2004, Intel R&D center currently employsmore than 100 specialists. The center focuses on conducting research anddevelopment of innovative software solutions for Internet-relatedtechnologies, including Dynamic Runtime Layer (DRL), communicationtechnologies that enhance wireless communication, grid computing tooptimize programming environment. St. Petersburg center works in closecollaboration with the city universities with the aim of creating a solidacademic foundation for information.LG MC Russia R&D LabLG MC Russia R&D Lab (LGERP), opened in St. Petersburg in 1997, is acentral LG division in CIS. The Lab plays a key role in the development ofinnovative high tech solutions for LG Electronics. LG MC Russia R&D Labfocuses on three major directions, including mobile communications,digital television and household appliances.MicrosoftIn June 17, 2011 the Government of St. Petersburg and Microsoft signedthe cooperation agreement stipulating the development of education andtraining system for IT specialists and introduction of modern technologiesinto the public management system. Microsoft has already been workingand launching a number of educational programs in St. Petersburg. Thenew agreement involves the establishment of Microsoft InformationCenter within Ingria Technopark located in St. Petersburg as well as thecompany’s participation in the development of St. Petersburg IT cluster.SitronicsSitroninics opened its 5th international R&D center in St. Petersburg inJune 2011. Investment into the R&D center operating intelecommunications sector constituted 177,000 dollars. The center whichis to employ 120 specialists will specialize in the development and testingof convergent billing decisions, including highly-productive ratingsystems for tariffs in real-time mode. In the future the center plans tocarry out research in the field of self-service systems, including web-portals, terminals, pad-computers and communicator applications, CRM-decisions. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 67 St. Petersburg Foundation for SME Development
  • 68. 4.3. Production сenterToday, St. Petersburg is Russia’s second most important production center, specializing in theproduction of complex machinery and equipment. Leading industries in this sector include shipbuilding,instrument manufacture as well as production of electrical generators and turbines, machine tools andmachines for printing, textile, paper, food, automotive and leather industries.During the recent years St. Petersburg turned into the Russia’s automobile manufacturing center,which already hosts the production facilities of the world’s largest automakers and automobile partsmanufacturers, including Hyundai Motor Company, Toyota Motor Corporation, General MotorsCompany, Nissan Motor Company and Scania.4.3.1. Advantages Highly qualified and motivated workforce St. Petersburg is a major scientific and educational center of the Russian Federation, which possesses 10% of all intellectual potential of the country. The city is home to a number of leading technical universities, including St. Petersburg State Electrotechnical University (ETU) which along with the National Research Nuclear University functions as the coordinator of educational activities within the National Nanotechnology Network. St. Petersburg boasts a diverse pool of technical specialists given the city’s reputation as a Russian IT center. Innovative and flexible business environment The city’s innovative business environment provides production companies with access to a diverse pool of talented specialists who can help you innovate and improve your production processes. The fact that 20% of all Russia’s advanced technologies are created in St. Petersburg indicates a high degree of production process development and automatization, which significantly enhances the value of your production processes as well as end product. Moreover, the flexibility of existing labor market provides an ideal environment for flexible production, which can be easily scaled up and down. Acknowledged R&D center and test market St. Petersburg is one of the most innovative regions in Russia and an acknowledged R&D center and test market on the territory of the Russian Federation. Excellent framework conditions, open and fast-adopting market as well as high purchasing power of the population will help you assess the demand and improve your new products as well as research and development efforts, technology implementations and business models. Developed logistics Due to the ideal geographical location and scarcity of Russian ports on the Baltic Sea, St. Petersburg is Russia’s foremost logistics hub. The city’s transport infrastructure with highly developed motor transport network, railway, air, river and sea transport, including Russia’s main port of foreign trade and sea gate to Europe, might serve as a key asset in your decision to locate your production center in the city. In addition, the city has a number of modern multifunctional logistics complexes and parks (Pulkovo, Kolpino, Yanino) suitably located to address storing, processing and customs clearance needs of your business. Doing business in St. Petersburg68 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 69. 4.3.2. CasesThe following international and leading Russian companies have already located their productionfacilities in St. Petersburg:Bakery Fazer Group Fazer Group started operating on the food catering and services market in Russia in 2006, and has invested 204.78 million dollars in its operations in Russia during the last ten years.Beverage production Carlsberg Group Baltic Beverages Holding, a leader at the Russian beer market which manages Baltika, became part of the Carlsberg Group in 2008. Carlsberg currently owns 89.01% of Baltika stock. Today, Baltika Brewery, founded in 1990, is the largest brewery in Eastern Europe and the second-largest brewery in Europe after Heineken Brewery. Coca-Cola Company Coca-Cola opened its plant in St. Petersburg in 1995. The facility produces Coca-Cola products for more than 13 million customers in St. Petersburg and Northwestern Russia. It employs more than 1,000 people, while creating up to 200 additional seasonal workplaces during the peak seasons. Heineken Heineken has been operating in Russia since 2002 when it acquired the Bravo plant in St. Petersburg. St. Petersburg’s Heineken brewery also produces and distributes Budweiser beer, having signed a licensing agreement with Bud’s brand owner Anheuser-Busch. Pepsi Bottling Group, Inc. (PBG) PepsiCo drinks are produced by Pepsi Bottling Group, Inc. (PBG) at its four plants in Russia. One of the top global FMCG companies in Russia opened its St. Petersburg’s plant in 1992. PBG produces and distributes all PepsiCo products, including carbonated soft drinks, water, snacks, juices, teas, and sports and energy drinks. Russian Standard Company A leading Russian premium vodka producer opened its distillery in St. Petersburg in 2006. Total investments into the facility amounted to 60 million dollars. The distillery produces 3.6 million dekaliters of vodka annually. A 30,000 square meter facility handles the production of the companys entire vodka portfolio, including Russian Standard Original, Russian Standard Platinum and Imperia. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 69 St. Petersburg Foundation for SME Development
  • 70. Candy Chupa Chups S.A. The Spanish candy maker launched its St. Petersburg’s production facility in 1991. Neva Chupa Chups produces Chupa Chups caramel lollipop candies of various flavors and colors not only for the Russian market but also for export to CIS countries. St. Petersburg’s factory has the capacity of making up to 200 million 200-gram rolls per year.Car assembly General Motors General Motors opened its automobile factory in St. Petersburg in 2008. Global car making giant became the second foreign carmaker to open a factory in St. Petersburg. Investment in the project totalled 300 million dollars with up to 1,700 jobs created, followed by the opening of a second production line in 2010. Hyundai Motor Company Hyundai officially launched its full-cycle manufacturing plant in St Petersburg in 2010. St. Petersburg’s plant is Hyundai’s sixth production facility outside its home market of South Korea. The facility is expected to roll out 105,000 vehicles in its first year of operation with the rise to 150,000 in 2012. Hyundai plans to create 5,300 jobs by 2012 in St. Petersburg together with eleven parts suppliers from Korea. Nissan Nissan Manufacturing Rus was established in St. Petersburg in 2009. The plant currently represents approximately a 150 million euro investment with the total volume of 28,500 units since the start of production. The plant currently employs 2,000 employees. Scania Scania opened its industrial facility for assembling and bodyworking trucks for the Russian market in St. Petersburg in 2010. This facility is Scania’s sixth delivery center. From this new delivery center, Scania supplies complete trucks that are adapted to the requirements and operating conditions that apply in Russia. St. Petersburg’s facility which employs about 70 employees has a technical assembly capacity of about 5,000 truck chassis and 1,500 superstructures per year. Toyota Motor Corporation Toyota became the first Japanese carmaker to start production in Russia with its car assembly plant opened in St. Petersburg in 2007. The plant, with an annual output capacity of about 50,000 vehicles, initially built 20,000 Camry sedans per year while gradually expanding its production since then. Doing business in St. Petersburg70 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 71. Chewing gum Wm. Wrigley Jr. Company The world’s largest maker of chewing gum has been operating a 70 million dollar plant in St. Petersburg since 1999. Wrigley is planning to expand its St. Petersburg plant with an investment of 100 million dollars. The company also announced that it might build a second factory in Russia and acquire local producers to tap its growth at the Russian market.Components suppliers Magna International A global automotive supplier currently operates five production sites in Russia, three of which are located in the St. Petersburg region since 2010. The Cosym stamping and assembly plant in Shushary has 170 employees and produces body, chassis and energy-management systems for OEM customers such as Hyundai, General Motors, Nissan and Volkswagen. The Cosym assembly and sequencing plant in Kamenka is a Hyundai- dedicated production site that employs 50 employees. Magna announced the opening of a Magna Exteriors and Interiors facility in Kolpino, which has approximately 25 employees producing exterior and interior components for OEM customers, including Ford and Nissan.Electronics HP – Foxconn Hewlett-Packard and component maker Foxconn opened a pilot assembly line to make computers in St. Petersburg in 2010. A pilot production line on a rented 10,000-square-meter facility in Shushary produces HP, HP Pro and Compaq models. It currently employs 100 workers, although the staff is expected to grow as production increases. A 32,000-square-meter main facility is expected to cost 50 million dollars and have an annual capacity of 500,000 personal computers.Elevators Otis Elevator Company The worlds largest manufacturer of vertical transportation systems has three manufacturing plants in Russia, including the one operating in St. Petersburg since 1994. Otis St. Petersburg was established in 1991 to meet the elevator need for new construction as well as for the replacement market. With 470 employees, Otis St. Petersburg is the only company that manufactures European standard elevators in Russia. Since the opening of the production line, St. Petersburg’s plant has shipped more than 3,000 elevator units to CIS countries and other Russian regions.FMCG P&G P&G opened its Gillette razor manufacturing plant in St. Petersburg in 2000 with an investment of 40 million dollars and 500 people employed. It has soon become one of the major razor manufacturing plants in the world with a capacity of 860 million blades a year. In 2004 the facility was expanded with an investment of 502 million roubles and several Gillette factories’ productions moved to St. Petersburg. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 71 St. Petersburg Foundation for SME Development
  • 72. Unilever Unilever has been operating in Russia since 1992 and has 7 manufacturing and production sites, including the one located in St. Petersburg. The plant was opened in 1994 and currently focuses on the production of home care, personal care and tea products. In 2009, the company acquired the sauces business of Baltimor Holding, a leading ketchup business in Russia. The acquisition included ketchup, mayonnaise and tomato paste business, accounting for annual turnover of around 70 million euros, as well as a production facility at Kolpino, near St. Petersburg.Home Appliances Bosch and Siemens The largest manufacturer of home appliances in Europe and one of the leading home appliances companies in the world opened its manufacturing plant in St. Petersburg in 2007. St. Petersburg’s plant manufactures Bosch and Siemens cooling appliances. In 2007 the company laid the foundations for a washing machine factory with the capacity of 300,000 machines per year, which is due to be built by 2012. In 2010 the company launched a new line of washing machines and a second line of refrigerators at its existing plant in Strelna. It has also announced about the expansion of its logistics center. The Strelna factory currently employs 420 people and is to create 100 additional workplaces with the expansion of the production line.IT NEC Corporation One of the worlds leading providers of Internet, broadband network and enterprise business solutions established NEC Neva Communications System, a public switching system manufacturing facility, in 1997. It was the first high-tech alliance between a Japanese and Russian company. NEC delivers tailored solutions in the key fields of computer, networking and electron devices, by integrating its technical strengths in IT and networks, and by providing advanced semiconductor solutions through NEC Electronics Corporation.LED manufacturing OptoGan Group A vertically integrated European LED & luminaire manufacturer acquired the Russian subsidiary of Elcoteq together with its industrial facility and infrastructure in St. Petersburg in 2010. Elcoteq started the production of electronic devices and telecom equipment in St. Petersburg in 2006. OptoGaN has already invested over 9.5 million euros in new production lines. The first line with the capacity of 30 million LEDs per month was launched in fall 2010. Doing business in St. Petersburg72 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 73. Packaging Amcor Tobacco Packaging Originally built by Alcan Packaging in the Krasnoselskaya industrial zone of St. Petersburg in 2005, a tobacco packaging plant started operating under Amcor Tobacco Packaging brand after Amcor acquired Alcan Packaging from Rio Tinto in 2010. With the original investment of 40 million euros, the plant’s current capacity constitutes 3 billion units per year.Pharmaceuticals Novartis In 2010 Novartis started a construction of a new greenfield pharmaceutical manufacturing plant in St. Petersburg, as part of 500 million dollar five-year investment into the Russian healthcare infrastructure. The facility will be constructed in the Novoorlovskaya Special Economic Zone (SEZ) located to the north of the St. Petersburg city center. Once completed and approved for commercial production, which is expected in 2014, the facility will produce approximately 1.5 billion units of both innovative pharmaceuticals and generics per year.Pipe products Severstal One of the Russia’s largest steel and mining industry companies opened its Izhora Pipe Mill at Kolpino outside St. Petersburg in 2006. The plant with the capacity of 600 thousand tons per year specializes in manufacture of large diameter pipes from strip made by Cherepovets Steel Mill. The plant produces unique products for Russian domestic pipe industry which allow to expedite the process of pipeline construction as well as lower the costs and enhance reliability.Telecommunication Alcatel-Lucent Alcatel has been operating its R&D center in St. Petersburg since 2005. Its main objective lies in the development and integration of innovative telecommunications software systems, and adaptation of existing Alcatel products to the specific requirements of the regional market. The center covers three fields of applications, including fixed, mobile and enterprise networks, and employs 150 specialists trained at the specialist Alcatel R&D centers in Europe and the US.Tobacco British American Tobacco (BAT) BAT’s plant in St. Petersburg operates 13 production lines producing five premium brands. It provides about 25% of BAT’s production volume in Russia. The company completed the construction of new production facilities at its plant in St. Petersburg in 2007 with the total investment of 110 million dollars, thus increasing St. Petersburg plant’s production capacity to 40 billion cigarettes a year. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 73 St. Petersburg Foundation for SME Development
  • 74. Japan Tobacco International (JTI) JTIs cigarette making facility in St Petersburg is the company’s biggest worldwide plant with the total of 400 million dollars invested. The brand portfolio includes over 30 brand names, both international and local. It supplies the firms Russian and Ukrainian plants with main tobacco components used for cigarette production. Philip Morris International (PMI) Philip Morris Inc. officially opened its third Russian cigarette factory in St. Petersburg in 2000. The total investment of 335 million dollars made this project the company’s largest cigarette plant in Europe. The plant, which employs 750 workers and operates 15 conveyer belts, produces the Marlboro, Parliament, Virginia Slims, L&M, Chesterfield and Bond Street brands. In 2002 the company began construction of a new processing line and a warehouse with the total investment estimated at 240 million dollars. Doing business in St. Petersburg74 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 75. 4.4. Distribution сenterSt. Petersburg’s westernmost mainland location in Russia as well as well-developed infrastructure andlogistics makes it an ideal location for your Russian and European distribution center. St. Petersburg isan administrative center of the fourth largest federal district in Russia. With a distribution centerlocated in St. Petersburg your business will be able to directly cover 1.7 million square kilometers of thenorthern part of European Russia and reach more than 13 million consumers within short-term delivery.4.4.1. AdvantagesExisting transport infrastructure supported by extensive rail and road network, one of the busiestRussian airports, developed port infrastructure and efficient inland water transportation system makeSt. Petersburg an ideal location for your Russian and European distribution center. By air St. Petersburg is served by the Pulkovo International Airport, which is the fourth busiest airport in Russia. The airport handled 9,610,767 passengers in 2011 which represents a 14% increase in comparison with 2010. Pulkovo Cargo Terminal is one of the five leading cargo terminals in Russia and the largest cargo terminal in the Northwest Russia. It has the annual cargo handling capacity of 30 thousand tons. Pulkovo has been undergoing a major 1 billion euro modernization since 2007. The first phase of reconstruction, which includes the construction of a new passenger terminal and other airport infrastructure improvements, is scheduled for completion in 2013.10 By land St. Petersburg has a well-developed rail and road network with major highways and national roads, connecting northwest Russia with the rest of Russia as well as Nordic and Baltic countries. St. Petersburg and the surrounding Leningrad region have the highest density of roads with a road network covering approximately 1,300 km. Railroad network which is one of the most efficient and dynamic forms of transport in the region is also connected to the Large Port of St. Petersburg and other port complexes in the region. By river Inland water transportation is one of the largest and most unique logistical competitive advantages of St. Petersburg and northwest Russia. St. Petersburg and the Neva River serve a major terminal point for the Volga-Baltic Waterway, which is a part of the Unified Deep Water System (UDWS) of European Russia, providing inland water connection from the Baltic Sea to the Caspian Sea, the Black Sea and onwards to the world oceans. By sea Sea transport is one of the most important transport modes in St. Petersburg. Today’s northwest Russian port infrastructure is concentrated on the eastern end of the Gulf of Finland, mainly in St. Petersburg. The Large Port of St. Petersburg connected to the Baltic Sea through a channel is Russia’s main port of foreign trade and the country’s main sea gate to Europe.10 Pulkovo St. Petersburg Airport official website (www.pulkovoairport.ru). Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 75 St. Petersburg Foundation for SME Development
  • 76. 4.4.2. CasesThe following international and leading Russian companies have already located their distributioncenters in St. Petersburg: LaserPLY American company’s product line includes flat dieboards, rotary dieboards and platforms. The company’s platforms are used in birch core/maple face and back flat dieboards, flat dieboards with a wood and polymer veneer combination, as well as core material for rotary dieboard production. Today, the company operates two international distribution centers, including the one strategically located in St. Petersburg. Lenta One of the Russia’s largest hypermarket chains operating on the market since 1999 opened its 20 thousand square meters distribution center in St. Petersburg in 2007. Total investments into the project constituted 20 million dollars. Distribution warehouse utilizes the latest processing technologies, thus allowing to reduce costs in shelf storage, cross-docking as well as packaging arrangement and dispatching. Onninen The Finnish company provides comprehensive materials’ services, including complex electrical, lighting, heating and plumbing as well as other engineering products and services for contractors, industry, public organizations and technical retailers in nine countries. Onninen officially opened its Russian headquarters and distribution center in St. Petersburg in 2007. The company’s distribution center serves all northwest Russia and has the capacity of 9,000 pallets, including 18,000 products from 200 suppliers. Static Control Components The worlds largest manufacturer and global distributor of parts and supplies supporting the laser toner remanufacturing industry is headquartered in Sanford, USA. Static Control operates 20 separate manufacturing plants and operates through the network of global distribution partners. The company’s distribution partner in Russia operates several distribution centers, including the one strategically located in St. Petersburg to ensure fast product delivery all across Russia. Doing business in St. Petersburg76 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 77. 4.5. Test marketSt. Petersburg’s market is a perfect test market for new products and technologies. It is an ideal testmarket in the European part of Russia for high-tech companies longing to assess the demand andimprove their new products as well as research and development (R&D) efforts, technologyimplementations and business models.4.5.1. AdvantagesExcellent framework conditions, open and fast adopting market as well as high purchasing power makeSt. Petersburg an ideal test market located in the European part of Russia. It will allow you to assess thedemand for your new products and improve your technology and business models. Excellent framework conditions St. Petersburg is conveniently located in the northern part of European Russia, which can be reached from the capital city of Moscow within an hour by plane. It is the second largest city in Russia as well a major European cultural center. Destined by its geopolitical location as well as historical development, St. Petersburg is often described as the most western city of the Russian Federation. It is characterized by homogeneous population, which is highly receptive to new ideas and products. Open and fast-adopting market St. Petersburg has one of the most advanced information societies in Russia with the most innovative, motivated and critical consumers. Given St. Petersburg’s open, receptive and fast- adopting market, the decision to test your business models, technologies or products in St. Petersburg will allow you to effectively improve and adjust your solutions before entering all- Russian or European markets. High purchasing power Given the existing variations in population’s income and buying power across different regions of the Russian Federation, the most well-to-do population is concentrated in Moscow, St. Petersburg and large regional centers. St. Petersburg’s population is characterized by high income and purchasing power, thus facilitating the growth of demand for high quality and innovative products, technologies and solutions. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 77 St. Petersburg Foundation for SME Development
  • 78. 4.5.2. CasesThe following international companies chose St. Petersburg as a test market for their products as wellas technology and information sharing: AstraZeneca AstraZeneca is planning to establish a Predictive Science Center in St. Petersburg within 2012. It is the company’s first Predictive Science Center in Russia, which will focus on the development of bioinformatics, data analysis methods, software and systems to better predict the safety and efficacy of potential new medicines. The center will employ around 30 specialists who will work in close collaboration with local companies and organizations as part of a related agreement with the St. Petersburg government. Google Google opened its second R&D center in Russian in 2006. Today, Russia is only the second country outside the US in which Google has two R&D centers, including Moscow and St. Petersburg. St. Petersburg division focuses on the development of security software and its adaptation to the needs of Russian users. It employs around 10 software engineers engaged in the development of Chrome Developer Tools as well as improvement of V8 virtual machine. Microsoft On June 17, 2011 the Government of St. Petersburg and Microsoft signed the cooperation agreement stipulating the development of education and training system for IT specialists and introduction of modern technologies into the public management system. Microsoft has already been working and launching a number of educational programs in St. Petersburg. The new agreement involves the establishment of Microsoft Information Center within Ingria Technopark located in St. Petersburg as well as the company’s participation in the development of St. Petersburg’s IT cluster. Doing business in St. Petersburg78 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 79. 5. Doing business5.1. Russian Judicial System Information for the current chapter was developed and kindly provided by Baker & McKenzieThe Russian judicial system consists of federal courts (the Constitutional Court of the RussianFederation, courts of general jurisdiction, and state “arbitrazh” (commercial) courts) and the courts ofthe Russian Federation’s constituent entities (constitutional courts and magistrates).The Constitutional Court of the Russian Federation generally resolves issues relating to compliancewith the Constitution of federal and some regional laws and regulations if they are related to issueswithin the competence of federal authorities.Constitutional courts of constituent entities resolve issues of compliance of the constituent entityslaws, regulations of its state and municipal authorities with the constitution of the constituent entity.Disputes regarding business activities and those involving legal entities and self-employedentrepreneurs are heard before state arbitrazh (commercial) courts. Other disputes fall under thepurview of courts of general jurisdiction and magistrates.5.1.1. Courts of General JurisdictionDispute resolution procedure in the courts of general jurisdiction is governed by the Russian FederationCode of Civil Procedure. Most claims subject to courts of general jurisdiction are heard at first instanceby either a magistrate or a district court, the Code of Civil Procedure expressly provides for specific typesof claims to be heard at first instance by federal general jurisdiction courts of constituent entities andthe Supreme Court of the Russian Federation.Courts of general jurisdiction have four levels: Trial Court; Court of appeal; Court of cassation appeal (two-tier); and Supervisory appeal court.The particular court entitled to resolve disputes at every level depends on the category of the case, withthe levels for review available to a party and their sequence being uniform. Each subsequent review ispossible once the lower level of review has been passed.Judgments of trial courts can be appealed within one month of their issuance. The court of appealreviews a judgment on the grounds stated in the appeal. New evidence is accepted only when the partysucceeds in proving it was unable to present such evidence to the trial court for reasons beyond itscontrol and the court finds these reasons to be valid. The rulings of the court of appeal becomeeffective immediately upon issuance.The rulings of the court of appeal (and trial courts judgments) may be appealed to the cassation courtwithin 6 months of becoming effective. As a rule, cassation review is possible only after appellatereview. The judgments of a trial court that were not subject to appellate proceedings may be appealedin a cassation court only when the appeal was left unheard for failure to comply with the submissiondeadline and the deadline was not restored. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 79 St. Petersburg Foundation for SME Development
  • 80. Cassation review is a two-tier process. Upon filing a cassation appeal is reviewed by the relevant judgeof the cassation court who is entitled to establish whether there are grounds for carrying out thecassation review. If such grounds are established the cassation appeal is transferred for review at acassation court session. Otherwise the judge issues a ruling refusing to transfer the cassation appeal forreview.The cassation court may set aside or modify court resolutions only when it finds material violations ofsubstantive or procedural law rules that have affected the outcome of the case.A cassation courts acts become effective immediately upon issuance and may be appealed with thecassation court one more time (to a higher cassation court division). Thus, strictly speaking there aretwo cassation reviews within the general jurisdiction court system. Lastly, certain court acts may beappealed (within three months of becoming effective) at a supervisory appeal court: the Presidium ofthe Supreme Court of the Russian Federation.The supervisory court may set aside or modify a court ruling/judgment when it finds that it violates: the rights and freedoms guaranteed by the RF Constitution, international law principles and international agreements of the Russian Federation; the rights and lawful interests of an indefinite number of persons or other public interests; the uniformity of the courts interpretation and application of law.5.1.2. State Arbitrazh CourtsThe title “arbitrazh court” is not related to arbitration tribunals, but originates from an old Soviettradition whereby disputes between state enterprises were heard before the so-called “StateArbitrazh.” In the USSR it was assumed that under a planned economy no disputes could arise betweensocialist enterprises (since all enterprises ultimately had the same owner), and any differences that didarise could be settled by an intermediary – the State Arbitrazh – which was a quasi-judicial governmentinstitution.Since then, the arbitrazh court has evolved into an independent branch of the court system, mainlydealing with commercial disputes. It is headed by the Supreme Arbitrazh Court, which recentlyacquired de jure powers to establish precedents to unify and direct the practice of lower courts.11The procedural rules applicable to Russian arbitrazh courts are based on the general principles ofprocedural law adopted in continental Europe.Traditionally, Russian arbitrazh courts favor written documentary evidence rather than examination ofwitnesses, hearing experts, or use of audio or video recordings.On 8 December 2011 a specialized court dealing with intellectual property disputes was introduced, toform part of the system of Russias arbitrazh courts and consider both (1) cases involving disputes overthe establishment and validity of IP rights and challenges to regulatory and non-regulatory acts in theintellectual property field (as the court of first instance), and (2) IP infringement cases (as the court ofcassation instance). Under the new law, the Intellectual Property Court should start operations not laterthan 1 February 2013.Arbitrazh courts have four levels: Trial court; Court of appeal; Court of cassation appeal; and The Supreme Arbitrazh Court of the Russian Federation.11 Resolution of the Constitutional Court of the Russian Federation No. 1-P dated 21 January 2010 Doing business in St. Petersburg80 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 81. 5.1.2.1. Trial courtsThe maximum state fee for filing a claim is limited to approx. EUR 5,000 (as of January 2012). The trialperiod in Russian arbitrazh courts is relatively short. Proceedings start with a statement of claim. Undercurrent regulations, a court must consider cases within three months of receipt of a statement of claim.The judge may request an extension of up to six months due to the complexity of the case orconsiderable number of parties. In practice the period may be longer but regular cases are reviewedwithin these deadlines. A judgment is announced immediately after the final hearing.A judgment of the first instance may be appealed within one month of being rendered; otherwise itcomes into force at the end of the month. The basis for an appeal can be mistakes either in establishingthe factual circumstances of a case or in application of the law. In fact an appeal is a limited retrial.5.1.2.2. Court of appealIn most cases an oral hearing takes place one month after filing an appeal with a court of appeal. Beforethe hearing all parties to a case are allowed to provide the court with written responses to the appeal.The resolution of a court of appeal comes into force immediately after its operative part is pronounced.5.1.2.3. Court of cassation appealA judgment of the first instance after passing the appellate court’s review may also be appealed in acourt of cassation appeal (third level court) within two months after such judgment or resolution comesinto force. The cassation court does not retry the case or re-evaluate the evidence, but deals only withpoints of law. As a result of the cassation hearing the judgment may be upheld, reversed or amended,or the case may be sent back to the court that issued the judgment for a re-trial.A cassation appeal must be filed within two months of the date of the relevant judgment, and is heardwithin one month of the date of filing. Generally, the submission of a cassation appeal does notsuspend the enforcement of the appealed judgment, though the cassation court may order a stay ofexecution.A party may also challenge a judgment of any court by filing a supervision appeal with the SupremeArbitrazh Court, provided that the party has exhausted lower court appeals. The appeal may be filedwithin three months of the last judgment in the case.5.1.2.4. The Supreme Arbitrazh CourtIn contrast to the procedures in the lower courts, supervisory review is a two-tier process. Before theappeal is actually heard on its merits, a panel of three judges of the Supreme Arbitrazh Court reviewsthe party’s appeal and decides whether there are grounds for carrying out a supervisory review of thejudgment that is appealed against. If the panel decides to refer the case for supervisory review thePresidium of the RF Supreme Arbitrazh Court proceeds to hear the appeal.In practice less than two percent of applications for hearing an appeal are accepted by the SupremeArbitrazh Court.5.1.2.5. Procedural IssuesA legal entity involved in an arbitrazh court case in Russia may represent itself in court using theservices of an in-house lawyer, or retain a foreign or local law firm.Certain formalities must be followed in order for a person to appear as a legal representative in court.The Code of Arbitrazh Procedure provides that a legal entity may be represented by its general directoror by another person acting pursuant to a power of attorney. The power of attorney must be signed bythe general director of the company and bear the corporate seal. Where a power of attorney is issuedoutside the Russian Federation it must be notarized and legalized in Russian embassy or by affixing an Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 81 St. Petersburg Foundation for SME Development
  • 82. Apostille (option available in the countries which are parties to the Convention Abolishing theRequirement of Legalization for Foreign Public Documents).Moreover, a representative acting under a power of attorney may perform certain procedural actionsonly if such actions are expressly stated in his/her power of attorney. These actions include the right tosign a statement of claim, statement of defense, appeals, applications to amend the subject-matter orcause of action, applications for provisional remedies, acceptance or withdrawal of claims, etc.The procedure for serving notice has been simplified. From 1 November 2010 an arbitrazh court needsto send by post only the first ruling on acceptance of a claim and initiation of proceedings (or settingthe first hearing date). Thereafter the court is entitled to notify the parties of subsequent hearings bytelephone, telegram, fax or e-mail. The information is also placed on the official website of theSupreme Arbitrazh court.12The filing of claims and submissions is traditionally performed on paper with blue ink signatures of theauthorized representatives. Recently it was made possible to file claims electronically.5.1.3. Personal Jurisdiction over Foreign DefendantsRussian arbitrazh courts have jurisdiction over foreign defendants if: The defendant is located or resides or his/her assets are located in the Russian Federation; The management body or a branch or representative office of the foreign party is located in the Russian Federation; The dispute arose out of a contract, performance under which should have taken place, or actually took place, in the Russian Federation; The claim arose out of damage caused to assets by an act or other event that occurred in the Russian Federation, or upon the onset of harm in the Russian Federation; The dispute arose out of unjust enrichment that took place in the Russian Federation; The claimant filing an action for the protection of its business reputation is located in the Russian Federation; The dispute arose out of a relationship connected with circulation of securities that were issued in the Russian Federation; The applicant in a case to establish a fact of legal relevance claims that such fact occurred in the Russian Federation; The dispute arose out of a relationship connected with state registration of names and other assets and the provision of services via the Internet in the Russian Federation; or In other cases where the disputed legal relationship is closely linked with the Russian Federation.In addition, Russian arbitrazh courts also have jurisdiction over disputes involving foreign parties if suchdisputes fall within the exclusive jurisdiction of the Russian courts, i.e.: Disputes relating to state property, including privatization disputes and takeovers of private property for public needs; Disputes relating to title and other registered rights to real property located in the Russian Federation; Disputes connected with the registration in the Russian Federation of patents, trademarks, designs or utility models, or registration of other rights in the results of intellectual pursuits; Disputes involving the establishment, liquidation or registration of legal entities and self-employed entrepreneurs in the Russian Federation; Corporate disputes with regard to a Russian legal entity; and Disputes arising over administrative and other public law relationships with Russia or Russian state agencies.12 http://rad.arbitr.ru, http://kad.arbitr.ru Doing business in St. Petersburg82 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 83. Russian arbitrazh courts also have jurisdiction over a foreign defendant where the parties have agreedin writing to submit their disputes to Russian courts, provided that the agreement does not violate theexclusive jurisdiction of a foreign court.5.1.4. International ArbitrationAs an alternative to the state arbitrazh courts, foreign investors may refer disputes to a privatearbitration tribunal, including ad hoc and institutional arbitration tribunals located either in the RussianFederation or abroad. Arbitration proceedings may handle a wide range of issues, but not disputesarising from administrative relations (e.g., tax and customs) and disputes that fall within the exclusivejurisdiction of the Russian arbitrazh courts (e.g., disputes arising from bankruptcy proceedings, or otherdisputes specifically enumerated in Russian law).The principal rules of international arbitration are governed by the Federal Law On InternationalCommercial Arbitration, enacted on 7 July 1993 and based on the provisions of the Model UNCITRALLaw.In addition, the international commercial arbitration provisions of various international treaties towhich the Russian Federation is a party – in particular, the European Convention on InternationalCommercial Arbitration of 1961 and the New York (United Nations) Convention on the Recognition andEnforcement of Foreign Arbitral Awards of 1958 (the New York Convention) – also apply in Russia.5.1.5. Enforcement of Judgments and Arbitral AwardsJudgments of Russian courts of general jurisdiction and of Russian arbitrazh courts are enforcedthrough the state bailiff service.A foreign court judgment may be enforced in Russia only if such judgment has been recognized by aRussian court. Such recognition is available if supported by a relevant international treaty, or on thebasis of reciprocity. Russian courts also recognize and enforce foreign court judgments relying on theprinciple of reciprocity on a case by case basis.Russia is a party to the Kiev Convention on the Procedure for Resolving Disputes Relating to BusinessActivities (the Kiev Convention). According to the Kiev Convention, judgments rendered by state courtsof certain CIS nations are enforceable in the Russian Federation. The Russian Federation is also a partyto a number of bilateral agreements concerning the recognition and enforcement of court judgments.Arbitral awards rendered by arbitration tribunals located in the Russian Federation or abroad are alsoexecuted by the bailiff service after such awards are recognized and ordered to be enforced by Russiancourts. As a rule, Russian courts may not review any foreign arbitral award on its merits. The groundsfor refusal to recognize and enforce foreign arbitral awards are generally the same as those set forth inthe New York Convention.5.1.6. Alternative Dispute Resolution and MediationThe Federal Law on an Alternative Procedure for Dispute Resolution with the Participation of anIntermediary of 27 July 2010 (the “Law on Mediation”) regulates dispute resolution procedures involvingthe assistance of a mediator on the basis of voluntary consent of the parties.The mediation procedure may be applied to civil (including disputes arising out of economic relations),labor (except for collective employment disputes) and family law disputes. However, mediation is notpossible in the above-named disputes if they affect public interests or the rights and legitimateinterests of third parties that are not participating in the mediation procedure.The mediation agreement concluded by the parties as a result of the mediation procedure cannot beenforced and is subject to voluntary performance by the parties. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 83 St. Petersburg Foundation for SME Development
  • 84. When the parties have concluded a mediation agreement as the result of the mediation procedure afterthe dispute has been referred to a state court or arbitration, the court or arbitration tribunal mayapprove the mediation agreement as an amicable settlement.Mediators, as well as other intermediaries assisting the parties in settling the dispute, may not bequestioned as witnesses in state courts on matters that came to their knowledge in the course ofperforming their duties. Doing business in St. Petersburg84 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 85. 5.2. Promoting Foreign Investment in Russia Information for the current chapter was developed and kindly provided by Baker & McKenzie5.2.1. Foreign Investment Law5.2.1.1. General Provisions regarding Foreign InvestmentsThe Constitution and the Civil Code of the Russian Federation, as well as laws on joint stock and limitedliability companies and insolvency, provide the general legal framework for trade and investment inRussia.Foreign investments are regulated by the Federal Law On Foreign Investments in the Russian Federation,dated 9 July 1999 (the “Law on Foreign Investments”). The Law on Foreign Investments guaranteesforeign investors the right to invest and to receive revenues and profits from such investments, and setsforth the terms for foreign investors’ business activity in Russia.The Law on Foreign Investments does not apply to the investment of foreign capital in banks, creditorganizations, insurance companies or non-commercial organizations; foreign investments in suchentities are regulated under different Russian legislation.The objective of the Law on Foreign Investments is to attract foreign materials, financial resources, andtechnology and management skills to improve the Russian economy, while providing stability forforeign investors.The Law on Foreign Investments emphasizes the role of both federal and regional legislation, andstipulates that foreign investors and investments must be treated no less favorably than domesticinvestments, with certain exceptions. Such exceptions may be introduced to protect the Russianconstitutional system, the morality, health and rights of persons, or in order to ensure state securityand defense.The Law on Foreign Investments permits foreign investment in most sectors of the Russian economy:portfolios of government securities, stocks and bonds, direct investment in new businesses, theacquisition of existing Russian-owned enterprises, joint ventures, etc. Foreign investors are protectedagainst nationalization or expropriation unless such action is mandated by a federal law. In such cases,foreign investors are entitled to receive compensation for any investment and other losses.One of the most important features of the Law on Foreign Investments is the tax stabilization clause,also known as the “Grandfather Clause”, set forth in Article 9. This clause applies to (i) foreign investorsthat are implementing “priority investment projects”, (ii) Russian companies with more than 25%foreign equity ownership, and (iii) Russian companies with some foreign participation that areimplementing “priority investment projects.”Article 2 defines a priority investment project as a project with foreign investment of at least RUB 1billion (about USD 33.3 million at the current exchange rate), or where a foreign investor has purchasedan equity interest of at least RUB 100 million (about USD 3.3 million at the current exchange rate); ineither case, the investment project must also be included in a list of projects approved by the RussianGovernment.For companies and projects that qualify, the Grandfather Clause prohibits increasing the rates ofcertain import duties and federal taxes until initial investments have been recouped (up to a maximumof seven years, unless this period is extended by the Russian Government). Key exceptions to theGrandfather Clause are established for protective customs tariffs on commodities, excise tax, VAT ondomestic goods, and Pension Fund payments. Article 9.4 provides a further and potentially broad Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 85 St. Petersburg Foundation for SME Development
  • 86. exception for laws protecting certain public or state interests. Article 9.5 contemplates the adoption ofregulations to implement the Grandfather Clause. Despite all these exceptions and qualifications, itremains arguable whether the tax stabilization clause is of real benefit to foreign investors.5.2.1.2. Restrictions on Strategic CompaniesCertain restrictions on foreign investments are imposed by Russian Law No. 57-FZ of 29 April 2008 “Onthe Procedures for Foreign Investments in Companies of Strategic Significance for National Defense andSecurity” (the “Law on Strategic Companies”). The Law on Strategic Companies is designed to regulatethe acquisition of control over Russian strategic companies by foreign investors or “groups of persons”that include a foreign investor. Acquisitions by such entities of control of strategic companies (includingthrough acquisitions of shares) require the preliminary consent of the Russian Government and/or a post-transaction notification.The Law on Strategic Companies provides a list of more than 40 activities that constitute strategicactivities in Russia. Accordingly, any company engaged in such activities is viewed as a strategiccompany. Strategic activities include the following:1. Works having an active impact on geophysical processes;2. Works related to hydro-meteorological processes and events;3. Activities related to the use of infectious agents;4. Activities related to the nuclear industry and the storage of nuclear and radioactive materials;5. Activities related to encryption and licensed encryption techniques, excluding distribution and maintenance of encryption techniques and related services performed by Russian banks that are not directly owned by the Russian Federation;6. Activities related to the secret obtaining of information in premises and equipment (excluding activities performed for the purposes of the security of legal entities);7. Activities related to the production, trade, repair and utilization of weapons and military equipment, and their spare parts and ammunition (excluding bladed weapons, civil and service weapons) and explosive materials for industrial purposes;8. Activities related to aviation equipment and security;9. Space activities;10. Activities related to television or radio broadcasting on a territory, where half or more of the population of a constituent entity of Russia;11. Services provided by a company included in the register of natural monopolies, (excluding natural monopolies in the public telephone and wireless communication and postal communications fields, and services for the supply of heat energy and electrical energy through the distribution grid);12. Activities performed by a company included in the register of companies having more than a 35% market share in a particular market of goods and occupying a dominant position in the following fields:  The market of communication services on the territory of Russia (excluding providing access to the Internet);  The market of fixed telephonic communication on the territory of five or more constituent territories of Russia;  The market of fixed telephonic communication on the territories of Moscow and St. Petersburg. Doing business in St. Petersburg86 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 87. 13. Activities related to geological research of subsoil and/or mineral exploration and extraction of federal subsoil;14. Procurement of aquatic biological resources (fishing);15. Performance of printing by a commercial entity, if such commercial entity is capable of printing no less than two hundred million pages a month; and16. Performance of editorial office activities and/or activities of a periodical publisher, publishing publications with individual circulations of no less than one million.Therefore, from the standpoint of foreign investment, it is important to verify all activities the targetcompany is engaged in to assess whether it qualifies as strategic and is therefore subject to therestrictions outlined below.5.2.1.3. Controlled TransactionsThe following transactions involving the acquisition of control over strategic companies require thepreliminary consent of the Russian Government:(i) Transactions with shares (participatory interests) if as a result of such transactions a foreign investor or group of persons acquires:  The right to direct or indirect disposal of 25 or more percent of the total number of votes at shareholder level  for companies using federal subsoil plots;  The right to direct or indirect disposal of more than 50 percent of the total number of votes at shareholder level  for companies engaged in strategic activities other than the use of federal subsoil plots;.  The right to appoint (a) the chief executive officer, and/or (b) more than 50 percent of the members of a collective executive body of the strategic company;  The unconditional ability to elect more than 50 percent of the members of the board of directors (supervisory council) or another collective governing body of such company;(ii) For companies using federal subsoil plots – transactions aimed at the acquisition by a foreign investor/group of persons of shares (participatory interests) if the foreign investor or group of persons already has (a) the right of direct or indirect disposal of twenty five or more percent of the total number of votes at shareholder level (that is, any increase in a shareholding in a strategic company), (b) the right to appoint the chief executive officer, and/or twenty five or more percent of the members of a collective executive body of such a company, and (c) the unconditional ability to elect twenty five or more percent of the members of the board of directors (supervisory council) or other collective governing body of such company;(iii) Agreements resulting in the acquisition by a foreign investor or by a group of persons of rights to perform the functions of a management company;(iv) Other transactions aimed at the acquisition by a foreign investor or group of persons of the right to determine the decisions of the governing bodies of such a company, including the rights to determine its business activities; and/or(v) Transactions aimed at the acquisition by a foreign state, international organization or organization controlled by them, of the right to dispose directly or indirectly of more than  Five percent of the total number of votes at shareholder level - for companies using federal subsoil plots; or  More than 25 percent of the total number of votes at shareholder level - for companies engaged in strategic activities other than the use of federal subsoil plots. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 87 St. Petersburg Foundation for SME Development
  • 88. Similar criteria are employed by the Law on Strategic Companies when defining the notion of “control”.“Control” denotes not only a certain minimum shareholding level, but also rights to appointmanagement bodies and otherwise determine the company’s business activity.Acquisition of five percent or more of the shares (whether voting or not) in any strategic companyrequires providing a post transaction notification to the Federal Antimonopoly Service.5.2.1.4. Special Restrictions for Foreign States, International Organizations and Organizations under Their ControlInvestments of foreign states, international organizations and organizations under their control intoRussian companies (strategic and non-strategic) are subject to additional clearance requirements underthe Law on Foreign Investments. Any transaction which gives a foreign state, an internationalorganization or an organization under their control the right to control (dispose of) directly or indirectlymore than 25% of the total number of votes attached to voting shares in any Russian company, orotherwise block decisions of the governing bodies of a Russian company, requires preliminary clearancefrom the Russian Government and/or the Federal Antimonopoly Service.Moreover, a foreign state, international organization or organization controlled by them are explicitlyprohibited from acquiring control, as defined by the Law on Strategic Companies, over strategiccompanies. Namely, they are not allowed to acquire:(i) 25 or more percent of the total number of votes at shareholder level - for companies using federal subsoil plots;(ii) 50 or more percent of the total number of votes at shareholder level - for companies engaged in strategic activities other than the use of federal subsoil plots; or(iii) Other rights mentioned in items (iii) and (iv) of the above section “Controlled Transactions”.5.2.1.5. Consequences of Violation of the Law on Strategic CompaniesTransactions executed in breach of the Law on Strategic Companies are deemed void. The parties to avoid transaction may be ordered to return everything received under such transaction in a court action.If it is impossible to reverse a deal, a court may rule to deprive the foreign investor of voting rights atgeneral shareholders meetings of a strategic company if the foreign investor has not complied with therequirements of the Law on Strategic Companies. Doing business in St. Petersburg88 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 89. 5.3. Establishing a Legal Presence Information for the current chapter was developed and kindly provided by Baker & McKenzieIn Russia, foreign investors may: Establish a representative office or a branch of a foreign legal entity; Establish a Russian legal entity as an enterprise with foreign investment, which is either (a) entirely foreign-owned, or (b) co-owned with a Russian partner(s); and Act directly as a pure foreign investor.5.3.1. Representative Office and Branch of a Foreign Legal Entity5.3.1.1. Legal StatusA representative office or a branch of a foreign legal entity is not considered to be a Russian legalentity, but rather a body representing the interests of a foreign legal entity in Russia.A representative office is entitled to carry out liaison and ancillary functions in order to promote thebusiness of its foreign founder. Representative offices are not expected to engage in commercialactivities in Russia. Consequently, most representative offices are not subject to profits tax, unless theiractivities give rise to a “permanent establishment” for tax purposes, i.e., when a foreign legal entityengages in regular commercial activity through its representative office (for example, the sale of goodsor the provision of services).A branch is a subdivision of a foreign legal entity, which may fulfill all or part of the functions of itsforeign founder. These functions include contracting with Russian entities with payments in foreigncurrency and rubles, sales and marketing and other business activities.The obligations imposed on a branch may include the same obligations as imposed on a representativeoffice. However, a branch has less flexibility in selecting an accrediting authority in Russia than arepresentative office. This can sometimes affect the effectiveness of visa support and other areas.5.3.1.2. RegistrationThere are several bodies authorized to grant accreditation to representative bodies, including thoseresponsible for the accreditation of representative offices in a particular industry; representative officesof foreign banks, for example, are accredited by the Central Bank of the Russian Federation. The bodiesmost frequently charged with accreditation of foreign entities are the Chamber of Commerce andIndustry of the Russian Federation (the “CCI”) and the State Registration Chamber at the Ministry ofJustice of the Russian Federation (the “SRC”).All documents from a foreign legal entity must be notarized and apostilled/legalized in the country ofexecution, and any document supplied in a language other than Russian must be accompanied by atranslation which has a notarized certification. Accreditation is usually granted for a period of up tothree years, with the right to extension.Branch offices must be accredited by the SRC in accordance with the 1999 Federal Law On ForeignInvestments.Following accreditation, the representative office or branch office must carry out a number of post-accreditation procedures before it becomes fully operative, including registration with the StateStatistics Committee, with the tax authorities, and with the Russian social benefits funds. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 89 St. Petersburg Foundation for SME Development
  • 90. 5.3.2. Forming a Russian Legal EntityThe Civil Code of the Russian Federation recognizes, among others, the following types of commerciallegal entities: General partnerships; Commercial partnerships (starting from 1 July 2012); Limited partnerships; Limited liability companies; Additional liability companies; and Joint stock companies.The establishment and operations of limited liability companies (“LLC”) and joint stock companies(“JSC”) are governed by Federal Law No. 14-FZ On Limited Liability Companies dated 8 February 1998(as amended), (the “LLC Law”), and Federal Law No. 208-FZ On Joint Stock Companies dated 26December 1995 (as amended), (the “JSC Law”), respectively.The two most popular forms of corporate structuring are LLCs and JSCs.5.3.2.1. Choosing between an LLC and a JSCIn choosing between an LLC and a JSC in establishing a wholly-owned subsidiary, LLCs are morepopular because they are easier to establish and finance, since there is no legal requirement that an LLCmust register its shares.In an LLC a participant is entitled to leave the company in certain circumstances and receive his/herproportionate share of the value of the LLC’s assets. In addition, participants in an LLC who eitherindividually or collectively hold at least a 10% interest in the company’s charter capital can apply to acourt seeking expulsion of another participant. In order to actually exclude a participant from the LLCthe other participant(s) must prove that the participant substantially hindered the company’soperations or materially breached its obligations.In contrast to the JSC law, the LLC Law lists a large number of issues that require a unanimous vote ofall the LLC participants.5.3.3. Limited Liability Companies5.3.3.1. Number of ParticipantsAn LLC may be established by one or more persons or legal entities (“participants”). However, if thenumber of participants exceeds 50, the LLC must be reorganized into an open joint stock company or aproduction cooperative within a year. An LLC may not have as its sole participant another businessentity consisting of a single person.5.3.3.2. Rights of ParticipantsThe participants in an LLC have the right to: Participate in the management of the LLC in accordance with the procedures established by the LLC Law and the company’s charter; Obtain information concerning the activities of the LLC and have access to its accounting and other documents in accordance with the procedures established by the LLC charter; Participate in the distribution of profits; Doing business in St. Petersburg90 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 91.  Sell or otherwise assign their participation interests in the LLC charter capital, or a part thereof, to one or more of the participants in the LLC, and to third parties, unless prohibited by the LLC’s charter, in accordance with the procedure established by the LLC Law and the LLC’s charter; and Receive a portion of the assets left over after settlement with creditors in case of liquidation of the LLC.The participants in an LLC also have other rights as provided by the LLC Law, and may have additionalrights set forth in the LLC charter during the establishment of the LLC, or which are granted at a laterdate by a decision of the LLC’s general participants’ meeting. The following points should be noted withregard to granting additional rights to LLC participants: Where additional rights are granted by decision of the LLC’s general participants’ meeting, this decision must be unanimous; and Additional rights granted to a particular participant in the LLC are not transferred to any party acquiring all (or a part) of such participant’s ownership interest if it is transferred.5.3.3.3. Obligations of ParticipantsThe participants in an LLC are required to: Make contributions to the charter capital as specified in the LLC Law and the LLC charter (or in the decision on the establishment of the LLC, if there is only one participant in the LLC) and within the time periods specified in the LLC Law; and Not to disclose confidential information concerning the activities of the LLC.Participants in an LLC also have other obligations as provided for by the LLC Law, and may haveadditional obligations set forth during the establishment of the LLC in the LLC charter, or which areimposed on them later by a decision of the LLC’s general participants’ meeting.The following issues should be considered when imposing additional obligations on participants of anLLC: When additional obligations are imposed by decision of the LLC’s general participants’ meeting on all LLC participants, this decision must be made unanimously; If additional obligations are imposed by decision of the LLC general participants’ meeting on a particular LLC participant, such decision must be made by a two-thirds majority vote of the total number of votes held by the LLC participants, provided that the LLC participant on whom such additional obligations are imposed voted in favor of such decision or consented to such obligations in writing; and Additional obligations imposed on a particular participant(s) in the LLC do not pass to any party acquiring all (or part) of such participant’s ownership interest in case it is transferred.5.3.3.4. Charter CapitalThe charter capital of an LLC consists of contributions made by its participants. The initial chartercapital may not be less than RUB 10,000 (approx. USD 333 at the current exchange rate).At least 50% of the charter capital amount must be paid up by the date of the LLC’s registration, andthe balance must be paid in full within the first year of its operation. Contributions may be made in cashor in kind, and certain customs benefits may be available for in-kind contributions made by foreigninvestors. The charter capital may be increased only after the original charter capital has been paid upin full.An LLC has to provide access to the information about its net assets to any interested party. The netassets of a company must exceed its charter capital amount. If the LLC has net assets less than its Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 91 St. Petersburg Foundation for SME Development
  • 92. charter capital amount for two years from its establishment and each subsequent year, it must reducethe charter capital to the amount of its net assets. Moreover, if a Russian company has net assets lessthan the minimum charter capital established by law for two years from the LLC’s establishment andeach subsequent year, it must take a decision on voluntary liquidation. Failure to take such decisionmay result in a claim from the Russian tax authorities for the forced liquidation of such company. Also aRussian company with negative net assets may not declare and/or pay dividends to its shareholders.It should be noted that the charter capital reduction procedure triggers the right of the LLC’s creditorsto demand acceleration of the LLC’s obligations to such creditors.5.3.3.5. Participation InterestsA participation interest (i.e., an ownership share) in an LLC is not considered a security under currentRussian legislation. Therefore, in contrast to the shares of a joint stock company, LLC participationinterests do not need to be registered.Participation interests in an LLC may be sold to third parties if allowed by the LLC charter, but otherparticipants must be given the right of first refusal to purchase the participation interests at the priceoffered to the third parties. Participants in an LLC, if allowed by the LLC charter, may have a unilateralright to withdraw from the LLC and to be compensated for their participation interests.5.3.3.6. Management StructureThe general participants’ meeting is the highest governing body of an LLC. Participants in an LLC maychoose to create a board of directors to govern the operations of the LLC.The General Participants’ Meeting has the right to: Amend the charter; Define the basic goals and directions of the LLC; Delegate to a commercial organization or to an individual entrepreneur the authority reserved for the LLC chief executive officer, and approve the agreements with such organizations or persons, if such decision does not fall within the competence of the Board of Directors in accordance with the LLC charter; Assign supplemental rights and duties to the participants in the LLC; Approve the annual financial report and the distribution of profits; Alter the amount of the charter capital of the LLC; Approve regulations governing the internal activities of the LLC; and Reorganize or liquidate the LLC, appoint a liquidation commission, and approve the liquidation balance sheet of the LLC.The daily management of the LLC is the responsibility of the executive body, which may be one person(the general director) or may consist of both the general director and the management council. Theexecutive body is responsible for all matters that do not fall within the authority of either the board ofdirectors or the general participants’ meeting. The general participants’ meeting or (if provided by theLLC charter) the board of directors may choose to delegate the powers of the executive body to anexternal commercial organization or to an individual manager on a contractual basis.5.3.3.7. RegistrationWith effect from 1 July 2002, the Federal Law On State Registration of Legal Entities (the “RegistrationLaw”) transferred the authority for registration of legal entities in Russia to the local bodies of theFederal Tax Service of the Russian Federation. As a result, the state registration of legal entities andtheir registration as taxpayers are now under the auspices of the local tax inspectorates. Doing business in St. Petersburg92 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 93. The following documents are required for registration purposes: An application; The protocol of the founders’ meeting or, if the LLC has only one founder, the resolution of the founder on the establishment of the LLC; The charter of the LLC; A copy of the passport of the proposed general director of the LLC; Power(s) of attorney issued by the founder(s) for establishment of the LLC; Power(s) of attorney issued by the founder(s) for filing the application for the state registration of the LLC; Confirmation of the legal status of the founder(s) (e.g., extract from the trade register or certificate of good standing); The charter (articles of association, by-laws) of foreign legal entities; Confirmation of payment of the state registration fee; Foreign tax registration certificate of the founders (to be provided to a bank); Bank letter of good credit standing of a foreign legal entity; and Confirmation of the foreign legal entity’s contribution to the charter capital of the LLC.Any Russian founder participating in an LLC must also provide additional documentation. Alldocuments from a foreign legal entity must be notarized and apostilled/legalized in the country ofpreparation. Any document supplied in a language other than Russian must be accompanied by aRussian translation which has a notarized certification.5.3.4. Joint Stock Companies5.3.4.1. Types of Joint Stock CompaniesA significant number of commercial organizations have been established since the JSC Law came intoforce on 1 January 1996. While the adoption of the LLC Law in 1998 introduced another option forinvestors seeking to establish a corporate entity, the JSC Law represents one of the most significantpieces of civil legislation of the post-Soviet era; JSCs remain among the most common commercialcorporate forms and structures for doing business in Russia.A JSC is a legal entity which issues shares in order to raise capital for its activities. A shareholder of aJSC is not generally liable for the obligations of the JSC and bears the risk of any loss only in the amountpaid by it for the shares.Two types of joint stock companies exist in Russia: Closed joint stock companies; and Open joint stock companies.An open JSC may have an unlimited number of shareholders. Shareholders in an open JSC are entitledto freely dispose of their shares. The number of shareholders in a closed JSC may not exceed 50, andthe JSC must be transformed into an open JSC within one year should this number be exceeded. Aswith participants in an LLC, shareholders in a closed JSC have a right of first refusal to acquire sharessold by other shareholders to third parties, at the price offered to the third parties. Shareholders in bothopen and closed JSCs have a preemptive right to acquire newly issued shares that are to be privatelyplaced, in proportion to their existing shareholdings. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 93 St. Petersburg Foundation for SME Development
  • 94. Shareholders in an open JSC also have a preemptive right to acquire newly issued shares that are to bepublicly placed, in proportion to their existing shareholdings, but do not have a right of first refusal toacquire shares sold by another shareholder to third parties.All JSCs are required to maintain a shareholder register. The register includes information about eachregistered shareholder including the number, category, and classes of shares held. A JSC with morethan 500 shareholders must delegate the keeping of the shareholder register to a licensed registrar.5.3.4.2. Formation of a Joint Stock CompanyIndividuals and legal entities may be the founders of a JSC. A company’s foundation document, i.e., itscharter, must include the following information: The name, address, and type of the JSC (i.e., open or closed); The size of the JSC charter capital; The quantity, nominal value, and categories (common or preferred) of shares, as well as the classes of preferred shares issued and distributed by the JSC; The rights of the holders of shares of each category; The structure and competence of the governing bodies of the JSC, and their decision-making procedures; The procedure for preparing for and holding general meetings of shareholders, including a list of issues requiring either unanimous consent or a resolution adopted by a qualified majority of votes; Information on branches and representative offices; Information on the existence of any special right of participation in the management of the company (a “golden share”) held by the Russian Federation, a constituent entity of the Russian Federation, or a municipality of the Russian Federation; and Other provisions required by law.The charter may include other provisions, so long as these comply with applicable Russian legislation.5.3.4.3. Charter CapitalThe charter capital of an open JSC may not be less than 1,000 times the Russian statutory monthlyminimum wage (the monthly minimum wage used for the purposes of calculating the minimum chartercapital of the JSC is currently RUB 100). Currently, using an exchange rate of approximately 30RUB/USD, the minimum charter capital for an open JSC is approx. USD 3,333. A closed joint stockcompany must have a minimum charter capital equivalent to at least 100 times the minimum monthlywage (i.e. the minimum capital is currently approx. USD 333).In contrast to LLC founders, the founders of a JSC must pay 50% of the JSC charter capital within threemonths following its state registration, with the balance payable in full within the first year.5.3.4.4. Shares and Other Types of SecuritiesA JSC can issue securities in the form of shares, bonds, and issuer’s options. Such securities must beregistered with the Federal Service for the Financial Markets of the Russian Federation (the “FSFM”),which replaced the former Federal Commission for the Securities Market (the “FCSM”) in March 2004.A JSC can issue common shares and/or several classes of preferred shares. The total value of a JSC’spreferred shares may not exceed 25% of its charter capital.The concept of a “fractional share” was introduced on 1 January 2002. A fractional share is a sharerepresenting a portion of a whole share, which can come into existence when it is not possible toacquire the whole share during a consolidation of shares, when a shareholder exercises its preemptive Doing business in St. Petersburg94 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 95. right, or in the course of acquiring newly-issued shares. A fractional share grants its owner the samerights that are granted by the whole share of the corresponding category or class, on a pro rata basis.5.3.4.5. Management StructureBoth open and closed JSCs must maintain two governing bodies: the general meeting of shareholdersand the executive body. An open JSC with more than 50 shareholders must also have a board ofdirectors (also called a supervisory board). An open JSC with less than 50 shareholders and all closedJSCs may appoint a board of directors, although this is not a requirement. The authority of the board ofdirectors is defined by the charter of the JSC and, if a board is not provided for in the charter, thecorresponding authority is held by the JSC’s general meeting of shareholders.In addition to the foregoing governing bodies, a JSC must either establish an internal auditingcommission or elect an internal auditor to oversee its financial and economic activities, members ofwhich must be elected by the shareholders.The general meeting of shareholders is the highest governing body overseeing the activities of a JSC.Its authority is outlined in the JSC Law and cannot be altered. Each common share carries one vote atthe general meeting of shareholders (except for cases of cumulative voting where provided for in theJSC Law), and most decisions are made by a simple majority vote, although for certain key decisions asupermajority of 75% is required.The daily management of a JSC is the responsibility of the executive body, which may be one person –the general director – or may consist of both the general director and the management council. Theexecutive body is responsible for all matters that do not fall within the authority of either the board ofdirectors or the general meeting of shareholders. The general meeting may (by a majority vote) chooseto delegate the powers of the executive body to an external commercial organization or to an individualmanager on a contractual basis; however this decision may be taken only pursuant to a proposal fromthe board of directors (if the company has a board of directors).5.3.4.6. RegistrationAs of 1 July 2002, the procedure for state registration described in Section 5.3.3.7 above for LLCs is alsoapplicable to JSCs; the only additional requirement with respect to JSCs is registration of the issuanceof the JSC’s shares with the FSFM, which is obligatory upon establishment of the company and whenincreasing the charter capital of the JSC. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 95 St. Petersburg Foundation for SME Development
  • 96. 5.4. Competition Protection Law Information for the current chapter was developed and kindly provided by Baker & McKenzieAntitrust matters in Russia are regulated by the Federal Law on Protection of Competition (the“Competition Law”) effective as of 26 October 2006 (as last amended on 6 December 2011) and fallunder the auspices of the Federal Antimonopoly Service (“FAS”).The Competition Law has extra-territorial effect. This means that its provisions extend to relations(agreements, actions) that arise (are concluded, performed) among and by Russian and/or non-Russianpersons in and/or outside of Russia, and that affect (or may affect) competition in the RussianFederation.The Competition Law regulates competition in both the commodities market and financial servicesmarkets, and includes the following main areas of particular interest to foreign investors: Abuse of a dominant position; Agreements and concerted actions limiting competition; State preferences; Establishment of companies; Mergers and acquisitions; Unfair competition; Requirements for tenders and quotation requests.5.4.1. Abuse of a Dominant PositionDominant entities are subject to certain restrictions on their activities. Determining whether aparticular entity enjoys a dominant position involves a complex evaluation of various factors, the mostimportant of which is the entity’s market share.For entities with a market share of 50% or greater there is a presumption of market dominance.Entities with a market share of between 35% and 50% are deemed dominant, provided their dominantposition has been established by the FAS.For entities with a market share of 35% or less there is a presumption of non-dominance, with a fewexceptions provided by the Competition Law. Namely, an entity with a market share of less than 35%can be deemed to hold a dominant position if it has a decisive influence on the conditions of productcirculation in the market.The FAS deems a financial organization to be a dominant entity according to the criteria/thresholds setby the Russian Government (and with respect to credit organizations, together with the Russian CentralBank). A financial organization whose share in any single market in the Russian Federation does notexceed 10%, or whose share does not exceed 20% in a commodity market if the commodity alsocirculates in other commodity markets in the Russian Federation, may not be deemed dominant.When determining market share, the FAS may take into account not merely one company in isolationbut also the group of companies to which it belongs. The group will include all persons/legal entitiesrelated by a common controlling share ownership, contractual or other de facto management control.In addition to the term “dominant position” the Competition Law has a concept of “collective dominantposition”, i.e. the collective domination of the market by between three and five independentcompanies. According to the Competition Law, a participant in collective domination can hold as little as Doing business in St. Petersburg96 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 97. 8% of the market for a certain commodity and be viewed as a violator if it, together with one or twoother participants, has more than 50% of the given market, or, together with up to four otherparticipants, holds more than 70% of the market, and such entities meet certain criteria specified in theCompetition Law.For those in a dominant position, the Competition Law prohibits any of the following activities: Setting and/or maintaining monopolistically high or low prices; Withdrawal of goods from circulation if the result of such a withdrawal is a rise of the price of the goods; Creation of conditions that place one or more business entities in an unequal position as compared to other entities in their ability to access the market for particular goods (creation of discriminatory conditions); Imposition of contractual terms that are disadvantageous to the other party or do not relate to the subject matter of the contract (and which are not economically or technologically justified); Discontinuance or reduction of production of goods for which there is a consumer demand if it is possible to produce them on a profitable basis; Unjustified refusal to enter into a contract with particular customers if it is possible to provide the relevant goods to such customers; Setting different prices for the same goods where this is not economically or technologically justified; Creation of barriers to market entry or exit for other business entities; Violation of pricing rules established by legislation; Price gouging in the wholesale and (or) retail electricity markets.Some of the above activities may be allowed if the dominant entity can prove that the positive effectsof a particular activity outweigh its negative consequences pursuant to the criteria set in theCompetition Law.5.4.2. Agreements, Concerted Actions and Actions of State Bodies Limiting Competition5.4.2.1. Agreements Limiting CompetitionThe Competition Law prohibits cartels, i.e. agreements concluded between competitors acting on thesame market, if such agreements lead or may lead to the following: Control or fixing of prices, discounts, bonus payments, or surcharges; Increase or reduction of prices or the manipulation of prices at tenders; Division of the market by territory or according to the volume of sales/purchases, the range of marketable goods, or the range of sellers or buyers; Refusal to deal with particular sellers or customers; Discontinuance or reduction of production of goods.The Competition Law prohibits vertical agreements (i.e. agreements between firms at different levels ofthe supply chain) if they (a) lead to resale price fixing, save for fixing of a maximum resale price, and/or(b) impose an obligation on the buyer not to permit the sale of a competitor’s products unless the sales Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 97 St. Petersburg Foundation for SME Development
  • 98. are arranged by the buyer under the trademark or other means of individualization of the respectivemanufacturer or supplier.The Competition Law prohibits agreements between economic entities acting on wholesale and (or)retail electricity markets and commercial or technological infrastructure markets if such agreementslead to price gouging on the wholesale and (or) retail electricity markets.The Competition Law further prohibits other agreements that lead or may lead to restriction ofcompetition. Such agreements might impose unfavorable conditions on the counterparty, set differentprices for the same goods without economic or technologic justification, create barriers for third partiesentering into or exiting from a certain market, establish conditions for participating in professional orother communities.In addition, the Competition Law prohibits the so-called “coordination of economic activities” byeconomic entities if such coordination may lead to restriction of competition. “Coordination ofeconomic activities” is understood as coordination of the actions of economic entities by a third personwho does not belong to the “group of persons” of such economic entities and does not act on themarket where coordination is taking place. Pursuant to the Competition Law, any actions under andwithin a vertical agreement are not treated as the coordination of economic activities.At the same time the Competition Law provides certain exemptions from the above restrictions, inparticular: Except for cartels, the Competition Law permits vertical agreements (i) that are concluded between economic entities each having a market share of less than 20% in any market; and/or (ii) that are commercial concession (franchise) agreements concluded in written form; Save for cartels, an agreement may be recognized as permissible if it can be proved that such agreement does not lead to elimination of competition, does not impose excessive restrictions on the parties to it or third parties and the positive effects of the agreement, including socio-economic effects, outweigh its negative consequences pursuant to the criteria set in the Competition Law; An agreement on joint activities, even if it leads to the consequences of a cartel arrangement, may be recognized as permissible if it can be proved that such agreement does not lead to elimination of competition, does not impose any restrictions on third parties and the positive effects of the agreement, including socio-economic effects, outweigh its negative consequences pursuant to the criteria set in the Competition Law; Agreements entered into between companies of the same group of persons, if either party to the agreement controls, is controlled by or is under common control with the other party to the agreement are exempt from all the restrictions. Control for this purpose is understood as the ability of one person or entity to determine directly or indirectly the decisions taken by the other entity either through use of more than 50% of voting shares in, or by performing the functions of an executive body of, such entity; Agreements on provision or disposal of the right to use the results of intellectual activity or means of individualization are exempt from all the restrictions.In addition the Russian Government has introduced general exemptions in a number of economic areasproviding certain rules and criteria for recognizing the agreements in such areas as permissible.5.4.2.2. Concerted Actions Limiting CompetitionThe Competition Law prohibits concerted actions made by competitors acting on the same market, ifsuch concerted actions lead to the following: Control or fixing of prices, discounts, bonus payments, or surcharges; Increase or reduction of prices or the manipulation of prices at tenders; Doing business in St. Petersburg98 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 99.  Division of the market by territory or according to the volume of sales/purchases, the range of marketable goods, or the range of sellers or buyers; Refusal to deal with particular sellers or customers unless such refusal is envisaged by federal legislation; Discontinuance or reduction of production of goods.Under the Competition Law “concerted actions” are understood as actions carried out by economicentities without agreement, if such actions meet the following criteria: (i) the outcome of such actionsis in the interest of each of the participating economic entities, (ii) each economic entity is aware ofsuch actions due to a public announcement made by one of the economic entities participating in theconcerted actions, and (iii) the actions of each of the economic entities are based on the actions ofother economic entities and do not result from circumstances equally affecting all economic entities inthe market.In addition, the Competition Law prohibits concerted actions made by economic entities acting on thewholesale and (or) retail electricity markets and commercial or technological infrastructure markets ifsuch agreements lead to price gouging on the wholesale and (or) retail electricity markets.The Competition Law further prohibits other concerted actions that lead to restriction of competition,including concerted actions that create unfavorable conditions for a counterparty, the setting ofdifferent prices for the same goods without economic or technologic justification, creating barriers forthird parties trying to enter into or exit from a certain market.In certain cases some concerted actions may be permitted if it can be proved that the positive effects ofthe actions, including socio-economic effects, outweigh their negative consequences pursuant to thecriteria set in the Competition Law.The above-mentioned prohibitions are not applied to the concerted actions made (i) by persons whoseaggregate market share does not exceed 20% and the share of each of them does not exceed 8%, or (ii)among the same group of persons if one of the participants controls or is under common control withthe other participant of concerted actions.5.4.2.3. Acts and Actions of State Bodies Limiting CompetitionThe Competition Law also provides certain restrictions applicable to the acts, actions, omissions,agreements and concerted actions of federal executive state bodies, the Central Bank, non-budgetaryfunds, regional and municipal state bodies and organizations performing state functions or providingstate services that may lead to the limiting, restricting or eliminating of competition.In particular, actions that result in (i) introducing restrictions when establishing legal entities, (ii)establishing prohibitions on the movement of goods within Russia or other restrictions on the sale,purchase or exchange of goods, (iii) limiting the right to choose suppliers, (iv) granting statepreferences in breach of prescribed procedure, (v) creation of discriminatory conditions and someothers actions are prohibited by the Competition Law.5.4.3. State PreferencesState and municipal preferences were introduced by the Competition Law in 2006.In accordance with the Competition Law, state (or municipal) preferences consist of granting aneconomic entity certain privileges over other market participants, ensuring more favorable conditionsfor its activity in the relevant market by transferring property and (or) civil rights, preferences or state(or municipal) guarantees.The Competition Law regulates the procedure for providing state (or municipal) preferences for thefollowing purposes: Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 99 St. Petersburg Foundation for SME Development
  • 100.  Ensuring vital services for the population in Arctic regions and equivalent areas; Development of science and education; Carrying out fundamental scientific research; Environmental protection; Cultural development and conservation of the cultural heritage; Development of sports and physical culture; Agricultural production; State defense and security; Rendering social services to the population; Health and labor protection; Rendering support to small or medium businesses, etc.State (or municipal) preferences shall be granted with the preliminary written approval of the FAS,subject to a few exceptions specified in the Competition Law.In order to provide state (or municipal) preferences, the authority intending to grant the preferencessubmits an application to the FAS for approval together with supporting documents (including a draftact providing for the granting of the state (or municipal) preferences with an indication of the goals andamounts of the preferences; a list of the beneficiary’s activities over the two years preceding the date ofthe FAS application; and other information required by the Competition Law).The FAS takes a decision on the application within one month from the moment it is submittedtogether with all necessary documents. The FAS may extend the period for review of the application byup to two months if the FAS believes that granting such state (or municipal) preferences may lead torestriction of competition.5.4.4. Establishment of Companies and Mergers & AcquisitionsThe Competition Law stipulates that the following transactions and other actions are subject to statecontrol if certain thresholds are met: transactions with the assets of Russian financial organizations; transactions with main production (fixed) assets and (or) intangible assets which are located in Russia; transactions with voting shares, participatory interests or rights in Russian commercial and non- commercial legal entities; transactions with voting shares, participatory interests or rights in foreign companies supplying goods to the Russian Federation worth more than RUB 1 billion (approx. USD 33.3 million) during the year preceding the transaction.5.4.4.1. Establishment of CompaniesThe founders must obtain consent from FAS prior to the establishment of a new company (be it Russianor foreign) provided its charter capital is paid in-kind with the shares and/or property of a Russian legalentity and the new company acquires (as payment of its charter capital) more than 25%/50%/75% ofsuch shares or more than 1/3/50%/2/3 of such participatory shares, or where the company acquires more20% of the main production (fixed) assets and (or) intangible assets located in Russia (exclusive of mosttypes of buildings and land plots) of another legal entity, and where the thresholds set in theCompetition Law are met. Doing business in St. Petersburg100 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 101. According to specific conditions provided by the Competition Law, the establishment of a companywhose charter capital is paid using the shares and/or property of a Russian financial organization maybe subject to mandatory FAS notification prior to establishment. These conditions are similar to thosedescribed above for entities acting in the commodities market with certain differences that should beconsidered on a case-by-case basis.5.4.4.2. Mergers and Acquisitions5.4.4.2.1 MergersThe consolidation or merger of legal entities (save for financial organizations) is subject to the priorapproval of the FAS if the aggregate asset value of these entities and their group of persons exceedsRUB 7 billion (approx. USD 233.3 million) or the aggregate revenue earned by the entities and their“group of persons” from the sale of goods during the past calendar year exceeds RUB 10 billion (approx.USD 333.3 million) or if either of the entities is included in the FAS register of entities with a marketshare exceeding 35% in the relevant market. The procedures for obtaining such approval are similar tothe procedures used for acquisitions.As for the consolidations or mergers involving financial organizations, the respective thresholds are setdepending on the type of financial organizations involved by the Russian Government.Intra-group consolidations or mergers may be exempt from the requirement to obtain prior FASapproval, provided certain conditions are met.5.4.4.2.2 Acquisition of an Interest, Assets and Rights in a Russian Company5.4.4.2.2.1 Acquisition of Shares/Participatory Interest in a Russian CompanyWhen an individual, legal entity or group of persons acquires more than 25%/50%/75% of voting sharesor more than 1/3/50%/2/3 of participatory shares in a Russian entity, such persons, entities or group mustreceive prior approval from FAS if: The aggregate book value of the assets of the acquirer and its “group of persons” plus the target and its “group of persons” exceeds RUB 7 billion (approx. USD 233.3 million) and the balance sheet value of the total assets of the target and its group exceeds RUB 250 million (approx. USD 8.3 million); or The aggregate revenue earned by the acquirer and its “group of persons” plus the target and its “group of persons” from the sale of goods over the past calendar year exceeds RUB 10 billion (approx. USD 333.3 million) and the balance sheet value of the total assets of the target and its group exceeds RUB 250 million (approx. USD 8.3 million); or Either the acquirer, or any of the entities belonging to its “group of persons”, or the target, or any of the entities belonging to its “group of persons”, is included in the FAS register of entities with a market share exceeding 35% in the relevant market.5.4.4.2.2.2 Acquisition of Assets Located in RussiaWhen an individual, legal entity or group of persons acquires the right of ownership or the right to usethe main production (fixed) assets located in Russia or intangible assets of a Russian or foreign entity(subject to certain exceptions provided in the Competition Law), if the acquired assets account for morethan 20% of the aggregate book value of the main production (fixed) assets and intangible assets of theselling entity, such persons, entities or a group of entities involved in the acquisition must receive priorapproval from FAS if: The aggregate book value of the assets of the acquirer and its “group of persons” plus the target and its “group of persons” exceeds RUB 7 billion (approx. USD 233.3 million) and the balance sheet Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 101 St. Petersburg Foundation for SME Development
  • 102. value of the total assets of the target and its group exceeds RUB 250 million (approx. USD 8.3 million); or The aggregate revenue earned by the acquirer and its “group of persons” plus the target and its “group of persons” from the sale of goods during the past calendar year exceeds RUB 10 billion (approx. USD 333.3 million) and the balance sheet value of the total assets of the target and its group exceeds RUB 250 million (approx. USD 8.3 million); or Either the acquirer, or any of the entities belonging to its “group of persons”, or the target, or any of the entities belonging to its “group of persons”, is included in the FAS register of entities with a market share exceeding 35% in the relevant market.The main production (fixed) assets or intangible assets of an entity to be transferred taken into accountfor the purposes of the above calculation do not include land plots and non-industrial buildings,constructions, premises and parts thereof or unfinished construction objects.5.4.4.2.2.3 Acquisition of Rights in a Russian CompanyWhen an individual, legal entity or group of persons acquires rights conferring the ability to determinethe commercial behavior of the target company (including as a result of change of indirect control overa Russian target company) or the right to perform the functions of its executive bodies, such persons,entities or group must receive prior approval from FAS if: The aggregate book value of the assets of the acquirer and its “group of persons” plus the target and its “group of persons” exceeds RUB 7 billion (approx. USD 233.3 million) and the balance sheet value of the total assets of the target and its group exceeds RUB 250 million (approx. USD 8.3 million); or The aggregate revenue earned by the acquirer and its “group of persons” plus the target and its “group of persons” from the sale of goods over the past calendar year exceeds RUB 10 billion (approx. USD 333.3 million) and the balance sheet value of the total assets of the target and its group exceeds RUB 250 million (approx. USD 8.3 million); or Either the acquirer, or any of the entities belonging to its “group of persons”, or the target, or any of the entities belonging to its “group of persons”, is included in the FAS register of entities with a market share exceeding 35% in the relevant market.5.4.4.2.2.4 Mergers and acquisitions outside of Russia which require Russian anti-trust approvalWhen an individual, legal entity or group of persons acquires more than 50% of the voting shares of, orany right of control over, a legal entity incorporated outside Russia, or the right to perform thefunctions of its executive bodies, the acquirer must receive prior approval from FAS if: Such target foreign legal entity controls a Russian subsidiary, or such target foreign legal entity supplied goods to the Russian Federation worth more than RUB 1 billion (approx. USD 33.3 million) during the year preceding the transaction; and The aggregate book value of the assets of the acquirer and its “group of persons” plus the target and its “group of persons” exceeds RUB 7 billion (approx. USD 233.3 million) and the balance sheet value of the total assets of the target and its group exceeds RUB 250 million (approx. USD 8.3 million); or The aggregate revenue earned by the acquirer and its “group of persons” plus the target and its “group of persons” from the sale of goods over the past calendar year exceeds RUB 10 billion (approx. USD 333.3 million) and the balance sheet value of the total assets of the target and its group exceeds RUB 250 million (approx. USD 8.3 million); or Doing business in St. Petersburg102 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 103.  Either the acquirer, or any of the entities belonging to its “group of persons”, or the target, or any of the entities belonging to its “group of persons”, is included in the FAS register of entities with a market share exceeding 35% in the relevant market.If any of the thresholds established for consolidations, mergers or acquisitions of voting shares,participatory interest, assets or rights described above is not met and due to this fact the prior approvalof FAS is not required, FAS still must be notified within 45 days post-closing if: the aggregate book value of the assets or the aggregate revenue earned by the consolidated or merged companies exceeds RUB 400 million (approx. USD 13.3 million); or the aggregate book value of the assets or the aggregate revenue earned by the acquirer and its “group of persons” plus the target and its “group of persons” exceeds RUB 400 million (approx. USD 13.3 million) and the balance sheet value of the total assets of the target and its “group of persons” exceeds RUB 60 million (approx. USD 2 million).The Russian Government establishes other thresholds for the notification requirement for financialorganizations which are involved in such transactions.In determining the threshold for asset and revenue values, FAS takes into consideration not only theacquirer and the target company, but also all persons (individuals or legal entities) in the acquirer’s andtarget’s “group of persons.” The broad term “group of persons” includes all individuals or legal entitiesrelated to the acquirer/target as a result of controlling share ownership or through certain managementcontracts, familial relations, and/or other de facto control mechanisms. This term, however, does notinclude the seller of the shares in question and its group of persons provided, as a result of thetransaction, the seller/its group loses the controlling right.Where a merger or acquisition takes place between entities in the same “group of persons” andpreliminary approval by FAS would normally be required by law, the Competition Law permits post-transaction notification of FAS within 45 days after the transaction is completed instead of preliminaryapproval, provided that the transaction is made between a parent company and its direct subsidiary. Inother cases the Competition Law permits post-transaction notification of FAS within 45 days after thetransaction is completed, provided the group structure is submitted to FAS no later than one monthprior to the transaction and the group structure does not change until after the transaction iscompleted.The Competition Law contains separate articles for the acquisitions of an interest, assets and/or rights infinancial organizations that are subject to pre-acquisition FAS notification, and the articles containspecific conditions and thresholds applicable to such acquisitions that should be considered on a case-by-case basis.5.4.5. Procedures and TimingIf FAS determines that an establishment of a company or a merger, or acquisition may restrictcompetition or strengthen a dominant position it may request additional information anddocumentation. FAS may also require the parties to take measures to ensure competition.After all documents have been submitted, FAS has 30 days to review the application or notification. IfFAS believes that the transaction may lead to restriction of competition, the review period may beprolonged for an additional two months, during which FAS places information about the transaction onits official web-site and invites all interested parties to voice their opinions on the transaction.5.4.6. Unfair CompetitionUnfair competition, namely any actions by commercial entities aimed at acquiring a competitiveadvantage in commercial activity in contravention of the Competition Law, business customs, the Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 103 St. Petersburg Foundation for SME Development
  • 104. requirements of good-faith, reasonableness and fairness, which may or have caused losses to othercompeting legal entities, or damage their business reputation, is prohibited in Russia.Types of activities that constitute unfair competition include: Distribution of false, inaccurate or distorted information that may cause losses to a commercial entity or damage this entity’s business reputation; Misleading consumers about the nature, methods and place of production, as well as consumer properties and quality, of goods; Incorrect comparison by a commercial entity of goods produced or sold by this entity with the goods of other commercial entities; Sale of goods with the illegal use of the results of intellectual activity (i.e., intellectual property) and of the means of individualization of a commercial entity, products, or services, such as trademarks, logotypes and other objects of intellectual property; Receipt, use and disclosure of commercial, official or other secrets, without the consent of the commercial entity to which this information belongs, etc.5.4.7. Requirements for Tenders and Price QuotationsThe Competition Law provides a list of actions in conducting tenders and requesting price quotations(including governmental tenders) which are prohibited if they lead to a restriction of competition (forexample, the creation of preferential conditions for participation in tenders, violation of the procedurefor determining the winner, etc).All federal and municipal bodies, bodies of the Russian Federation’s constituent entities and non-budgetary funds must select a financial organization by holding a public tender (in line with theprocedures set by other federal laws) to render certain financial services, a full list of which is providedby the Competition Law, and which includes rendering services on the securities market, attractingmonetary funds from legal entities, opening and maintaining bank accounts for legal entities, andmaking settlements with these accounts, etc.The Competition Law provides a procedure for referring disputes relating to violations of tenderprocedures to FAS. This mechanism is additional and without prejudice to the possibility of challengingtender results in Russian courts. Doing business in St. Petersburg104 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 105. 5.5. Corporate Compliance Information for the current chapter was developed and kindly provided by Baker & McKenzie5.5.1. Overview of the Key Provisions Anti-Bribery Laws of RussiaThe year 2011 brought substantial changes to Russian anti-bribery laws to make them resemblegenerally recognized international standards in this area. These changes have largely been a result ofRussia’s joining the Organization for Economic Cooperation and Development which requiredaccession to the OECD Convention on Combating Bribery of Foreign Public Officials in InternationalBusiness Transactions of 21 November 1997. In addition, Russia is a party to the UN Convention againstCorruption of 31 October 2003, and the Criminal Law Convention on Corruption adopted by the Councilof Europe on 27 January 1999.The Code of Administrative Offences was amended to hold legal entities liable for any illegal transfer,offer or promise of any valuables (cash, property, services, etc.) made in their interests to a stateofficial, foreign official or official of a public international organization in exchange for actions (inaction)related to their official position. The Code of Administrative Offences follows contemporary US andEuropean practice and covers remuneration paid, offered or promised by company employees or bythird parties on behalf or in the interests of the company. The Criminal Code has also been changed tocriminalize bribery of foreign public officials and officials of public international organizations.5.5.2. Administrative OffensesIn Russia, there is no criminal liability for legal entities. When a legal entity is held responsible forunlawful conduct, such an entity is ordinarily subjected to administrative liability, such asadministrative fines.5.5.2.1. Active Public and Commercial Bribery on Behalf of a Legal EntityArticle 19.28 of the Code of Administrative Offenses provides for administrative liability of a legal entityfor unlawful provision, offer or promise of anything of pecuniary value to a Russian or foreign publicofficial, an official of a public international organization as well as officers in a commercial company forany actions or omissions to act in the interests of this legal entity.Definitions of a Russian public official, a foreign public official, an official of a public internationalorganization as well as a person performing managerial functions in a commercial or other organizationare the same as for the corresponding criminal offenses (see sections on Active Public Bribery andActive and Passive Commercial Bribery below).5.5.2.2. The Concept of Fault as a Qualified DefenseFor legal entities and individuals in Russia, administrative liability is fault-based. Article 2.1 of the Codeof Administrative Offenses defines fault of a legal entity as a failure to take all measures within its powerto comply with the Code’s requirements. Therefore, a legal entity may raise as a defense the measuresit has taken to prevent bribery on its behalf.5.5.2.3. SanctionsThe sanctions under Article 19.28 of the Code of Administrative Offenses vary depending on the amountof the unlawful remuneration, i.e. the bribe. The minimum sanction for a bribe up to RUB 1 million(approx. USD 33,000) is a fine of up to 3 times of the amount of the bribe, but not less than RUB 1million. The maximum sanction for a bribe over RUB 25 million (approx. USD 833,000) is a fine of up to Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 105 St. Petersburg Foundation for SME Development
  • 106. 100 times of the amount of the bribe, but not less that RUB 100 million (approx. USD 3.3 million). In allcases, the bribe or its equivalent value may be confiscated.A legal entity may be held liable under Article 19.28 of the Code of Administrative Offences irrespectiveof liability of a particular individual involved in the giving of a bribe.5.5.2.4. ExtraterritorialityPursuant to Article 1.8 of the Code of Administrative Offenses, unless an international treaty providesotherwise, Russian authorities have jurisdiction to prosecute all administrative offenses which arecommitted in Russia. Thus, if bribery is directed at a Russian public official, the offence is withinjurisdiction of Russian authorities.Russian authorities will also have jurisdiction over any legal entity located in Russia if a bribe is directedat a foreign official or an official of a public international organization.5.5.2.5. Liability of Legal SuccessorsAccording to Article 2.10 of the Code of Administrative Offenses, legal entities succeeding to the rightsof other legal entities as a result of various corporate reorganizations, mergers, etc. are liable for theadministrative offenses committed by the legal predecessors regardless of whether the succeedingentities knew of such administrative offenses.5.5.3. Criminal OffensesRussian criminal law prohibits active and passive bribery in both public and private sectors.5.5.3.1. Active Bribery of Public OfficialsArticle 291 of the Criminal Code prohibits provision of a bribe to Russian public officials, foreign publicofficials and officials of public international organizations. This Article also covers provision of a bribethrough intermediaries.A Russian public official is defined in Article 285 of the Criminal Code as persons who permanently,temporarily or pursuant to a specific authorization perform the function of a representative of statepower as well as persons who perform organizational or administrative functions in the state andmunicipal bodies, state or municipal establishments, as well as in the Russian military and other armedforces.A foreign public official is defined in Article 290 of the Criminal Code as any person who is appointed orelected to an office in the legislative, executive or judicial body of a foreign state, including a publicadministration or enterprise. An official of a public international organization is an international civilservant or any person authorized by such an organization to act on its behalf.5.5.3.2. SanctionsThe sanctions under Article 291 of the Criminal Code vary depending on (a) whether the person giving abribe has acted alone or in conspiracy with others, (b) whether the bribe is given for the commission ofa lawful or an unlawful act (omission) and (c) the amount of the bribe. The minimum sanction – for abribe not exceeding RUB 25,000 (approx. USD 833) – is a fine from 15 to 30 times the amount of thebribe, or forced labor for the period of up to 3 years or imprisonment for up to 2 years with a fine of 10times the amount of the bribe. The maximum sanction – for a bribe exceeding RUB 1 million (approx.USD 33,000) – is a fine from 70 to 90 times the amount of the bribe or imprisonment for from 7 to 12years and a fine 70 times the amount of the bribe.A person who has given a bribe may be relieved of criminal liability if he actively aids detection andprosecution of the crime or reported himself after the commission of the crime to the criminal lawenforcement authorities or was solicited by a particular public official to give a bribe. Doing business in St. Petersburg106 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 107. 5.5.3.3. ConfiscationAccording to Article 104.1 of the Criminal Code, property obtained as a result of a criminal offense andany property into which such criminally obtained property has been subsequently transformed as wellas any proceeds from the use of such property may be subject to confiscated. If criminally obtainedproperty or proceeds from its use have been commingled with other property, confiscation will beproportional to the value of the criminally obtained property and the proceeds from its use. Criminallyobtained property transferred to another person may be confiscated only if this person knew or shouldhave known that such property was obtained as a result of a criminal act.According to Article 104.2 of the Criminal Code, a court may decide to confiscate the value of thecriminally obtained property if, by the time the court issues a judgment, confiscation of this property assuch becomes impossible due to this property having been used, sold or for other reasons.5.5.3.4. Active Commercial BriberyArticle 204 of the Criminal Code defines commercial bribery as unlawful provision of anything which haspecuniary value (including property rights, services, etc.) to a person who performs managerialfunctions in a commercial or other organization for an act or omission in connection with such personsofficial position in the interests of the provider.We note that the requirement that a bribe must be given in the interests of its provider raises a questionas to what extent such a bribe may subsequently be imputed to an organization for the purposes ofadministrative liability if this bribe was provided by an employee to obtain or retain business for thisorganization. In our view, the lack of immediate interest on the part of the employee will notnecessarily exclude administrative liability of the organization.Moreover, the same conduct may be prosecuted under Article 201 of the Criminal Code which prohibitsabuse of authority, i.e. the use by a person who performs managerial functions in a commercial or otherorganization of his authority contrary to the lawful interests of this organization for the purpose ofobtaining an advantage not only for himself but also for other persons as well as for the purpose ofcausing damage to other persons.A person who performs managerial functions, according to Article 201 of the Criminal Code, can be anindividual executive officer or a person who is a member of a collective executive body or the board ofdirectors. In addition to the top management, relevant persons include those who performorganizational or administrative functions, i.e. engage in the management of at least some personnelor at least some property of the organization. As a practical matter, it should be noted that Article 204of the Criminal Code also covers conspiracies to engage in commercial bribery which expands the reachof this Article beyond the persons with managerial functions.5.5.3.5. SanctionsThe sanctions under Article 204 of the Criminal Code vary depending on whether the person giving abribe has acted alone or in conspiracy with others as well as on whether the bribe is given for thecommission of a lawful or an unlawful act (omission). The minimum sanctions are a fine from 10 to 50times the amount of the bribe and prohibition from holding certain positions or engaging in certainprofessional activity for a period of up to 2 years, or a limitation of freedom for a period of up to 2 years,or forced labor for a period of up to 3 years, or imprisonment for a period of up to 3 years. Themaximum sanctions are a fine from 40 to 70 times the amount of the bribe and prohibition from holdingcertain positions or engaging in certain professional activity for a period of up to 3 years, or forced laborfor a period of up to 4 years, or an arrest for a period from 3 to 6 months, or imprisonment for a periodof up to 6 years.A person who has committed the offense provided by Article 204 of the Criminal Code, regardless ofwhether that person has provided or received a bribe, may be relieved of criminal liability if he actively Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 107 St. Petersburg Foundation for SME Development
  • 108. aided in detecting or prosecuting this offense, or he was subject to bribe solicitation, or he voluntarilyreported the bribe to criminal law enforcement authorities.5.5.3.6. Aiding and Abetting Public BriberyArticle 291.1 of the Criminal Code makes aiding and abetting public bribery a separate criminal offense.Aiding and abetting is defined as the physical giving of a bribe on the instructions of the person eithergiving or receiving a bribe as well as any other assistance to either of these persons in reaching orexecuting an agreement between them to give and take a bribe. This Article applies only to bribes witha value exceeding RUB 25,000 (approx. USD 833). This Article also applies to offers or promises ofassistance in public bribery regardless of the value of the bribe. The sanctions are comparable to thosefor active public bribery. Doing business in St. Petersburg108 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 109. 5.6. Taxation Information for the current chapter was developed and kindly provided by Baker & McKenzieOver the past 14 years Russia has been engaged in a significant reform of its tax system, which hasbeen implemented in phases. This reform has improved procedural rules and made them morefavorable to taxpayers, has reduced the overall number of taxes, and has reduced the overall tax burdenin the country.Part I of the Tax Code of the Russian Federation (the “Tax Code”) came into effect in 1999, dealing largelywith administrative and procedural rules. More recent amendments to Part I clarified certainadministrative and procedural issues raised by over 10 years of practice of the application of Part I ofthe Tax Code (in particular, regarding tax audit procedures, procedural guarantees for taxpayers,operations with taxpayer bank accounts and bank liability). Since 2009 taxpayers have been required toappeal adverse tax inspectorate decisions on a tax audit to a higher-tier tax authority as anadministrative appeal before bringing a court claim.The provisions of Part II of the Tax Code regarding excise taxes, VAT, individual income tax, and theunified social tax came into force in 2001, followed by the profits tax and mineral extraction taxprovisions of the Tax Code in 2002. In 2003 further amendments introduced a simplified system oftaxation, a single tax on imputed income, a new Chapter on transportation tax, and established aspecial tax regime for production sharing agreements in Russia. A Chapter on corporate property taxcame into effect as of 1 January 2004. In 2005 the water tax, land tax, and state duty Chapters cameinto effect. Most of these Chapters of the Tax Code replaced and significantly updated or improvedindividual tax laws that initially were enacted as far back as 1991. The remaining Chapter of the TaxCode still under review covers the property tax on individuals, which is currently governed by the old1991 legislation. In 2006 the inheritance and gift tax that had been in existence since 1991 wererepealed. In addition, over the last several years, various amendments have been made to the Tax Code,including several recent key changes largely intended to address the economic downturn in Russia.Recent major changes relate to complete revision of the transfer pricing rules and introduction of a taxconsolidation regime. These rules may substantially change the way businesses operate in Russia.Other changes comprise the replacement of the unified social tax by social security contributions to theRussian social funds. The Chapter on the unified social tax was deleted from the Tax Code effective 1January 2010; the new provisions were introduced in a separate Federal Law No. 212-FZ. Certain otherchanges are aimed at improving the taxation of dividends and capital gains on long-term investmentsreceived by Russian companies, financial instruments, repo and stock-lending transactions, taxincentives for R&D, introduction of accelerated VAT refund and VAT correction procedures. Thus, taxreform continues to be an ongoing process.5.6.1. Types of TaxThe Tax Code sets forth three levels of taxation: federal, regional and local. Currently, federal taxesinclude VAT, excise taxes, profits tax, personal income tax, mineral extraction tax, state duty, specialtax regimes, and several other taxes. Regions have the right to establish their own tax systems onlywithin the limits and framework established at the federal level by the Tax Code. At the moment,regional taxes payable to the budget of St. Petersburg include corporate property tax, transportationtax, and gambling tax, while local taxes include land tax and individual property tax. Social securitycontributions are payable to the State Pension Fund, Social Security Fund, and Federal MedicalInsurance Fund. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 109 St. Petersburg Foundation for SME Development
  • 110. There are four types of special tax regimes that may be applicable to certain activities and/or categoriesof taxpayers: single agriculture tax, simplified system of taxation, single tax on imputed income fromcertain kinds of activity (on the territory of St. Petersburg, put into force by the Law No. 299-35, datedJune 17, 2003) and taxation of production sharing agreements. These special tax regimes have thestatus of a federal tax. However, laws adopted by constituent entities of the Russian Federation mayestablish special tax rates or other exceptions depending on categories of taxpayers which apply specialtax regimes. For instance, St. Petersburg Law No. 185-36, dated May 05, 2009, sets forth a lower taxrate of 10%13 to be applied to incomes reduced by the amount of expenses for organizations andindividual entrepreneurs which apply a simplified system of taxation.5.6.2. Tax AuditsThe Russian tax authorities may conduct chamber and on-site tax audits of taxpayers. Newamendments, most of which came into effect on 1 January 2007, clarified certain procedural aspects forboth types of tax audits. The tax authorities may audit several different taxes simultaneously as part ofan on-site tax audit. However, except in cases of a liquidation or reorganization, when a higher taxauthority inspects the activities of a lower tax authority that conducted an on-site audit, or when ataxpayer files an amended tax return claiming a lower level of taxation, a tax for a given period mayonly be audited once. The taxpayer may also be repeatedly inspected for the same tax period upon adecision of the Head of the Federal Tax Service of Russia. In the event that during a repeated tax auditthe tax authorities find an underpayment that was not found during a previous tax audit, a penalty forsuch underpayment would not be applied to the taxpayer, except for cases where the undetectedviolation resulted from a conspiracy between the taxpayer and the tax authorities.In exceptional cases provided by the Tax Code, the Russian tax authorities may suspend an on-site taxaudit. However the overall term of suspension in any case may not exceed nine months. The results of atax audit relating to taxes reviewed may only be reconsidered by the supervising tax authorities. In anycase, however, the tax authorities may only audit the three calendar years preceding the year of the taxaudit. As a general rule, a three-year statute of limitations applies to the imposition of penalties for taxviolations, although according to a position taken in Constitutional Court Ruling No. 9-P, dated 14 July2005, this type of defense could be rejected by the court if the taxpayer impeded the tax audit by thetax authorities.Also, the tax authorities may levy for outstanding taxes, late payment interest and penalties unilaterallywithout a court decision. If the taxpayer does not settle its tax liabilities within two months after receiptof a tax demand notice, the tax authorities are required to forward the file to the Russian Ministry ofInternal Affairs for review. Starting from 1 January 2007, in certain circumstances the amount ofoutstanding taxes (that the taxpayer failed to pay within a three-month period) may be collected fromthe taxpayer’s affiliated companies. This may be possible if the taxpayer, instead of paying theoutstanding tax amounts, made payments to the bank accounts of such affiliated companies.Transfer pricing audits will be performed by a special department in the Federal Tax Service separatelyfrom the regular tax audit process. The audits will be performed in-house only and may not beperformed as a part of on-site regular tax audits. A transfer pricing audit for 2012 may be initiated notlater than 31 December 2013, and for 2013 – not later than 31 December 2015. For 2014 and futureperiods a transfer pricing audit may be initiated for the three calendar years preceding the year when itwas initiated.5.6.3. Corporate Profits TaxStarting from 1 January 2009, the maximum tax rate for all companies was reduced from 24% to 20%,which is currently payable at a rate of 2% to the federal budget and 18% to regional budgets. The13 The Tax Code provides for a 15% tax rate Doing business in St. Petersburg110 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 111. regional authorities may, at their discretion, reduce their regional profits tax rate to as low as 13.5%.Thus, the overall tax rate can vary from 15.5% to 20%.In the course of ongoing reforms significant changes were introduced to dividend taxation. Effective 1January 2008, the tax rate on dividends received from foreign companies by Russian shareholdersdecreased from 15% to 9% to match the rate applicable between Russian entities. Also, to promoteRussian holding companies, starting from 1 January 2008 dividends payable by foreign and Russianentities qualifying as “strategic investments” to Russian companies are exempt from profits tax. Theexemption applies provided that on the day the corporate decision to pay the dividends is taken thefollowing three tests are met:1. The recipient of the dividends has held the shares continuously for not less than 365 days;2. The recipient of the dividends owns not less than 50% of the shares in the company paying the dividends; and3. The company paying dividends is not located in a jurisdiction included in a “black list” of off-shore jurisdictions adopted by Order No. 108n of the Russian Ministry of Finance, dated 13 November 2007 (the “black list” includes most of the off-shore low-tax jurisdictions and territories).Starting from 1 January 2011, Russian holding companies are no longer required to meet the RUB 500million (approx. USD 16.7 million) investment threshold to apply the dividend exemption, which willsubstantially increase the use of Russian holding companies.After these amendments to Chapter 25 of the Tax Code, the following tax rates apply to dividends: 0% withholding tax on dividends payable by Russian and foreign companies qualifying as “strategic investments” (50% or more shareholder with 365 days or more holding period); 9% withholding tax on dividends payable by Russian and foreign companies to Russian shareholders in all other cases; and 15% withholding tax on dividends payable by Russian companies to foreign legal entities.Chapter 25 also introduced special tax rates on income earned from Russian state securities.Under the rules promoting the creation of an international financial center in Russia, Russiancompanies received a full tax exemption on income from the sale or redemption of shares in Russiancompanies (acquired starting from 1 January 2011) provided that: they have continuously held those shares for more than 5 years (the “holding period”); and the income has been derived from the sale or redemption of participation interests or shares in Russian companies, provided that (a) the interests or shares have not been publicly traded on a securities market throughout the holding period, or (b) the interests or shares are of Russian companies operating in the high-tech (innovative) sector of the economy throughout the holding period.Taxable profit is defined as income less deductible expenses. Although, prior to 2002, deductions weresubject to substantial restrictions, as of 1 January 2002, many of those expense limitations disappearedunder the new profits tax provisions of the Tax Code. Under the current rules a taxpayer is generallypermitted to deduct economically justified and documentarily confirmed business expenses. Deductionof certain types of expenses is subject to restrictions (e.g. certain advertising costs andrepresentational, including business entertainment, and travel costs). As of 1 January 2009, some ofthese restrictions were repealed, in particular, taxpayers are now entitled to deduct per diems(previously only within the limits set by the Russian Government) and expenses on the education ofemployees in Russia and certain voluntary insurance expenses. Expenses on research and development Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 111 St. Petersburg Foundation for SME Development
  • 112. (including those that failed to yield a positive result) falling into the list approved by Resolution of theRussian Government No. 988, dated 24 December 2008, are deductible in the reporting period at a rateof 150% of their actual amount.The tax consolidation rules came into force on 1 January 2012. The tax consolidation regime allowsqualifying Russian groups the use of the losses of a member against the profits of other group memberssimilar to branches of a Russian company. Moreover, transactions between the members of aconsolidated group of taxpayers (the “Group”) will be exempt from transfer pricing control.Importantly, consolidation only applies for profits tax purposes and may not be used with respect toother tax obligations of the taxpayer (such as VAT).Under the current rules a Russian holding company can consolidate its Russian subsidiaries for profitstax purposes if it directly or indirectly holds at least 90% of the shares in such subsidiaries. Cross-borderconsolidation as well as consolidation with companies in certain industries is not allowed (i.e., banks,insurance companies, non-state pension funds or professional traders on the securities market canconsolidate only with alike companies). In order to form a Group the consolidating companies mustjointly meet the following high requirements: the total amount of federal taxes for the Group (except for taxes paid in connection with cross- border transfers) paid for the previous year is not less than RUB 10 billion (approx. USD 333.3 million), the combined turnover for the previous year is not less than RUB 100 billion (approx. USD 3.3 billion), and the combined net book value of assets on the first day of the year of consolidation is not less than RUB 300 billion (approx. USD 10 billion).The consolidating companies form the Group by signing a Tax Consolidation Agreement outlining thegroup members, responsible participant and the consolidation period (minimum 2 years), etc. The TaxConsolidation Agreement must be registered with the tax inspectorate. The Group can be created fromthe beginning of a calendar year provided the necessary documents are submitted to the taxauthorities before 30 October of the previous year.The Group’s tax base is calculated by the responsible participant by summing up all income (excludingdividends and other income subject to tax withholding) and all expenses of the Group members.Effectively this allows the offsetting of losses incurred by one or several group members against theprofits of other Group participants. Pre-consolidation losses cannot be used against the profits of theGroup, but are kept for when the loss-making company leaves the Group.Due to the high financial thresholds the tax consolidation rules will initially be available only for a verylimited number of large Russian groups. At some point, it is expected that the thresholds forconsolidation will be reduced.5.6.3.1. Interest Deductibility and Thin Capitalization RulesGenerally, under the Tax Code, interest is deductible as long as it does not deviate by more than 20%from market interest rates paid on comparable loans in the same calendar quarter. Any excessive partof the interest will not be deductible. If no such comparable loans exist (or at the choice of a taxpayer)interest is deducted within certain limits. According to the amended provisions of the Tax Code, from 1January 2011 to 31 December 2012 deductible interest for ruble loans may not exceed a factor of 1.8(previously 1.1) of the Russian Central Bank refinancing rate, and for loans denominated in a foreigncurrency, the deduction is limited to a factor of 0.8 of the Russian Central Bank refinancing rate(previously 15%) per annum. Thus, the interest deductibility cap on ruble loans has effectively beenincreased while the cap on foreign currency denominated loans has been effectively reduced. Inaddition, there is a specific provision with respect to “thin capitalization.” The Tax Code introduces a12.5/1 debt-to-equity ratio limit for banks and leasing companies, and a 3/1 ratio limit for all other Doing business in St. Petersburg112 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 113. companies. If the ratio of the Russian borrower company’s internal capital to its outstanding debt owedto a foreign shareholder holding more than a 20% interest in the Russian borrower company (includingdebt owed to a Russian affiliate of the foreign shareholder and debt guaranteed by the foreignshareholder or its Russian affiliate) exceeds these limits, the Tax Code restricts the deductibility ofinterest paid on the excess debt. Non-deductible interest is also considered to be a dividend payment tothe foreign shareholder and hence is subject to a 15% withholding tax, unless the latter is reduced oreliminated by an applicable tax treaty. The limitation is recalculated at the end of each quarter.5.6.3.2. Asset Depreciation and Carrying Forward LossesAssets with a value exceeding RUB 40,000 (approx. USD 1,300; RUB 20,000 prior to 1 January 2011) anda useful life of more than 12 months are subject to depreciation. Chapter 25 allows taxpayers to splitassets into ten groups, depending on the type of asset and its useful life, and to apply accelerateddepreciation rates; for example, the useful life for buildings under the new rules is 30 years. UnderChapter 25, taxpayers are able to choose between a linear method (somewhat similar to the oldmethod of asset depreciation) and a non-linear method. As of 1 January 2009, the non-linear methodwas substantially revised. Most importantly, the depreciation of assets under the non-linear method isperformed by groups of assets (rather than on a stand-alone basis for each individual asset) and under anew formula and depreciation rates. Effectively, taxpayers can deduct approximately a half of thedepreciation value of assets for 25% of their useful lifetime (certain limitations on the application of thenon-linear method must be observed). Land, subsoil, and natural resource assets are not subject todepreciation and hence do not reduce the tax base for profits tax.Starting from 1 January 2006, a lump-sum deduction in the amount of 10% of the initial book value ofnewly acquired fixed assets was allowed to be made for profits tax purposes in the period when thefixed assets were acquired. Effective from 1 January 2009, for capital assets with a useful life of frommore than 3 to 20 years this special investment incentive is increased from 10% to 30%. A claw-backrule applies to recapture the investment incentives deduction if the taxpayer alienates any capital assetduring the first five years of its use. This provision applies both to the 10% and 30% investmentincentive deductions. Russian information technology companies (the “IT companies”) having properaccreditation are entitled to write off the full value of computer equipment at the time it is put intoservice. Losses may be carried forward for 10 years. There are separate tax baskets for certain expensese.g. for expenses on acquisition of securities. Also, there is no requirement to spread the loss over theentire carry-forward term. Starting from 1 January 2007, there is no limit on the amount of taxableprofit that can be reduced by a loss carry-forward in a particular year. In addition, capital losses may beoffset against operating income; this deduction, however, must be evenly spread over the residualuseful life of the capital asset for which the loss was incurred.5.6.3.3. Investment BenefitsRussian companies enjoyed various regional and local tax concessions under the 1991 Corporate ProfitsTax Law, and under the relevant regional and/or local laws of several territories (particularly Chukotka,Kalmykia, Mordovia, and Evenkia).Chapter 25 of the Tax Code abolished all tax incentives, including the capital investment allowance.Some types of tax benefits (including investment benefits) were grandfathered, although they ceasedto be effective as of 1 January 2004.Presently, regional and local legislative bodies are no longer authorized to provide tax concessions,except for regional authorities, which may reduce their regional profits tax rate by 4.5% and thusreduce the overall tax rate to 15.5%. However, the effective tax rate could be even lower under thespecial tax regimes or under the special economic zone (the "SEZ") regime.While article 56 of the Tax Code establishes the general framework for application of tax benefits, St.Petersburg Law, dated July 30, 1998, No. 185-36 "On State Support of Investment Activities on the Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 113 St. Petersburg Foundation for SME Development
  • 114. Territory of St. Petersburg" (the "City Investment Law") together with St. Petersburg Law No. 81-11 "OnTax Benefits", dated June 28, 1995, and the St. Petersburg Laws on particular regional taxes(hereinafter referred to collectively as the "City Tax Laws") comprise the set of legislative acts which, toa great extent, regulate the investment climate in the city.Particularly, amendments to St. Petersburg Law No. 81-11 of July 14, 1995 “On Tax Benefits” (the "Lawon tax benefits") first brought in by Law No. 620-88 of December 16, 2004 and entered into full force onJanuary 1, 2006, were aimed at improving the citys investment climate.The Law on tax benefits defines “investments” as the acquisition of fixed assets (subject that such assetshave never been used or operated in St. Petersburg before), or their construction, reconstruction ormodernization of the production assets, or receiving fixed assets as a charter capital contribution forthe development of industrial production and for administrative purposes.The amount of the actual investments has to be calculated as the difference between the value of thenewly introduced fixed assets and the net book value of fixed assets disposed during the same period,i.e. the amount of fixed assets accrued during the year.Currently the Law on tax benefits mandates a lower rate for the regional portion of the federalcorporate profits tax, which is 13.5 % applied as follows: for investments of not less than RUR 3 billion (approx. USD 96.7 million) made by investors performing their business activities in compliance with Section D "Manufacturing activities" of the All-Russian classifier of economic activities starting from January 01, 2007; for investments of not less than RUR 800 million (approx. USD 15.8 million) made by investors performing their business activities in compliance with Section D "Manufacturing activities" and/or Section E "Producing and distribution of electricity, gas and water" and/or Section I "Transportation and Communication" of the All-Russian classifier of economic activities except for the particular economic activities provided for by the Law on tax benefits during 3 calendar years starting from January 01, 2010; for investments of not less than RUR 50 million (approx. USD 1.6 million) made during 3 calendar years starting from January 01, 2010 by investors performing their business activities in high-tech industries and having 80% of proceeds coming from producing computers, computer programs, optical fiber cables, telecommunications, television and radio transmitting equipment, lasers, liquid crystal devices, and certain medical equipment; for investments of not less than RUR 15 billion (approx. USD 438.8 million) made by investors during 5 calendar years starting from January 01, 2012.Generally, companies are eligible for the reduced tax rate for a period of 5-years if they invested morethan RUR 50 million during the year the tax benefits were applied, except for those companies whichinvested not less than RUR 15 billion: the latter companies are eligible for the tax benefit for a 7-yearperiod unless otherwise foreseen by the Law on tax benefits.This right will cease at the end of the year (i) when the total yearly amount of taxes and levies payableto the St. Petersburg budget were reduced compared to the year before the profits tax benefit wentinto effect or (ii) when the investor disposed fixed assets (transferred them to its branches and/or otherpermanent establishments) prior to expiration of the aforementioned 5 and 7-year periods.Special attention is given to attracting investors to the SEZ acting on the grounds of the Federal LawNo. 116-FZ, dated 22 July 2005, "On Special Economic Zones in the Russian Federation" (the "Law onSEZ"). Those companies, residing in the St. Petersburg SEZ, are entitled to use the rate of the regionalportion of the 13.5% profits tax provided that they keep separate records of receipts and expenses,obtained (incurred) from activities on and outside the territory of the SEZ. Doing business in St. Petersburg114 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 115. It should be emphasized that along with tax benefits (portions of taxes) payable to the St. Petersburgbudget and stipulated by the Law on tax benefits, the City Investment Law provides for the followingmajor types of state support of investment activities: Advantage for renting real estate under the condition of the subsequent investment in it, includes, but is not limited to, postponing rent payments or allowing for their payment by installments for a period of up to 5 years; Sovereign guarantees of St. Petersburg securing the loans of investors; Participation of St. Petersburg in city investment projects, and some other projects at various stages of their development, appraisal or realization; and Support of investors at the expense of the St. Petersburg budget.5.6.3.4. Technology Incubation CenterUnder the Law on SEZ and in compliance with the Agreement "On establishment of SEZ" of January 18,2006, St. Petersburg has been nominated to host one of Russias Technology Incubation Centers(“TICs”). The St. Petersburg TIC specializes in IT and the development of analytical instruments in thefields of telecommunications, household appliances, medicine, military and civil avionic, automatedcontrol systems (i.e. the development of computer programs and databases, processing of information,R&D, complex equipment development, experimental series testing and implementation).Russian legal entities interested in participating in a SEZ (TIC) (the benefits would apply only upon thecreation of a Russian subsidiary) should obtain the status of a SEZ (TIC) resident by entering into anagreement on technology implementation activities with the SEZ (TIC) Administration. The applicationshould be supported by a business plan. A Special SEZ Expert Council decides on whether an applicantqualifies as a SEZ (TIC) resident based on a score evaluation system, taking into account the priorexperience and expertise of the applicant (or the founder of the applicant) in IT, a calculation of theinvestment recoupment period, an analysis of the markets for the developed products, analysis of othercompetition and other business risks, intellectual property rights issues, etc. The state, in its turn,would contribute to the development of the businesses in the SEZ by creating the necessaryinfrastructure.Companies residing in a SEZ in the form of a TIC will be provided with the following major tax benefits,which provide exceptional opportunities in St. Petersburg for investments in new IT technologies andproducts:1) a reduced regional portion of the 13.5% profits tax, resulting in a total profits tax rate of 15.5%, down from the usual 20%; also, provisions of the Tax Code now allow for the immediate write-off of expenditures of resident companies for scientific research and development works;2) the reduced rates for contributions to be paid to social security funds during a transitional period from 2012 to 2017, namely: to the State Pension Fund at a rate of 8%; to the Social Security Fund - at a rate of 2%; to the Federal Medical Insurance Fund - at a rate of 4%;3) exemption from property tax for the first ten years after a property is acquired and from land tax and transportation tax for the first five years following the year of acquisition (registration) of a land plot (a transport vehicle, except for aircraft and water transport vessels);4) a special customs regime incorporating the ability to import goods and equipment for the resident company’s use with neither import customs duties nor VAT, and the possibility to acquire Russian goods under a 0% export rate of VAT.5.6.3.5. Transfer Pricing Rules Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 115 St. Petersburg Foundation for SME Development
  • 116. Prior to 2012, the Tax Code contained several rules related to transfer pricing. Specifically, it set forththe presumption that the contractual price agreed to by the parties, including related parties, is the“market price”. At the same time, in any of the following four circumstances, the tax authorities couldexercise control over the price: A transaction between affiliated parties; A barter transaction; A foreign trade transaction; or A transaction involving significant variations in prices (i.e. a fluctuation of more than 20%) for identical goods or services within a short period of time (in practice, this term is interpreted as 30 days immediately preceding the date in question).If a transaction fell under one of the above four categories, the tax authorities could adjust the contractprice based on the market value and impute additional taxes, penalties, and late payment interestaccordingly.Section V.1 of the Tax Code introduced new transfer pricing rules, which came into force on 1 January2012. The new rules require taxpayers to notify the tax authorities of controlled transactions that areperformed in a given calendar year. Controlled transactions include any transactions between relatedparties (domestic or cross-border). Among other criteria, parties are considered related if one directlyor indirectly owns more than 25% of another or can control the formation of at least 50% of the boardof directors or the executive body of such other party. The courts may also determine that parties arerelated if the relationship between the parties could affect the results of transactions between them ortheir economic activities even in the absence of the statutory criteria. In addition, the followingtransactions are subject to transfer pricing control: Cross-border transactions with oil and oil products, ferrous and nonferrous metals, mineral fertilizers, precious metals and stones, Cross-border transactions with foreign entities registered in certain low-tax jurisdictions according to a list established by the Russian Finance Ministry, provided that the total revenues under these transactions exceed RUB 60 million (approx. USD 2 million) in total in a given calendar year. The list of low-tax jurisdictions is the same as currently established by the Russian Finance Ministry for applying for the dividend participation exemption. The list still includes Cyprus, which is one of the most popular holding jurisdictions for Russia.With certain exceptions, the following domestic transactions are not subject to transfer pricing control: transactions between related parties not exceeding RUB 1 billion (approx. USD 33.3 million) in total in a given calendar year. For 2012 and 2013 this threshold will be RUB 3 billion (approx. USD 100 million) and RUB 2 billion (approx. USD 66.7 million), respectively; transactions where both parties are registered and conduct all operations in the same region and do not have tax losses, including loss carry-forwards.Russian taxpayers forming a consolidated taxpayer group are not subject to transfer pricing control forprofits tax purposes.The new rules provide for five transfer pricing methods (comparable uncontrolled price, resale, costplus, comparable profits, and profit split). The comparable uncontrolled price method is the primarymethod to be applied. In all other cases, the best method rule generally applies.The new rules provide detailed guidance on selecting and adjusting comparables. There is a broad listof permitted data sources on comparables. The rules prohibit the tax authorities from using any outsidecomparables if the taxpayer has comparable transactions with unrelated parties. Adjustments arepermitted with respect to the following taxes: profits tax, VAT (if one of the parties does not pay VAT), Doing business in St. Petersburg116 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 117. mineral extraction tax (if paid on an ad valorem basis), and individual income tax. In certain casestaxpayers are permitted to make true-up adjustments for previous tax periods. Correspondingadjustments (i.e., in case a transfer pricing adjustment is made to another party of a controlledtransaction) are allowed for Russian corporate taxpayers only. In a cross-border context suchadjustments are not allowed.There are also special transfer pricing rules for securities, which differ for those traded on the organizedsecurities market and those which are not.Taxpayers having controlled transactions (with certain exceptions) are required to maintain transferpricing documentation and provide it to the tax authorities within 30 days of the relevant request. Thetransfer pricing documentation may be requested no earlier than 1 June of the year following thecalendar year in which the relevant transactions took place. For 2012 and 2013 the transfer pricingdocumentation and notification requirements and transfer pricing audit rules will apply only if the totalvalue of controlled transactions with a given party exceeds RUB 100 million (approx. USD 3.3 million)and RUB 80 million (approx. USD 2.7 million), respectively.Taxpayers that are regarded as major taxpayers under the Tax Code are permitted to enter intounilateral or multilateral advance pricing agreements ("APAs") with the Russian Federal Tax Service ofup to 3 years with a possibility to extend to 5 years. The new rules enable taxpayers to conclude APAscovering cross-border transactions with a party resident in a state having a double tax treaty withRussia under the competent authority procedures with the participation of the relevant foreign taxauthority. In case of changes in the Russian rules covering APAs, the terms of the concluded APAs aregrandfathered.5.6.4. Taxation of Foreign CompaniesRussian legislation taxes profits derived from a “permanent establishment” in Russia, as well as certainother types of income derived without a permanent establishment in Russia. Importantly, whether apermanent establishment exists under Russian tax law is unrelated to whether a foreign company’soffice has been registered in Russia. A permanent establishment may exist even if the office is notregistered, and the existence of a registered office may not necessarily give rise to a taxable permanentestablishment. Profit derived by foreign legal entities from their permanent establishments in Russia isgenerally taxed at the same profits tax rates applicable to Russian taxpayers. As of 1 January 2012, anew rule was included in the Tax Code requiring that the income of a permanent establishment bedetermined taking into account the functions performed in Russia, the assets used and commercialrisks assumed, which is generally in line with the OECD approach.Chapter 25 sets forth a limited list of Russian source income not connected with a permanentestablishment in Russia that is subject to Russian withholding tax. The list includes mainly passive typesof income, such as royalties, interest, dividend income, and rentals. Other income received by non-Russian residents that is not specified in the list is not subject to any withholding tax.Unless an applicable double taxation treaty provides for a lower rate, dividends payable by Russiancompanies to foreign shareholders are subject to a 15% withholding tax. Other listed income receivedby foreign legal entities from Russian sources is subject to either a 20% withholding tax (for mostcategories of income, including royalties and most types of interest) or a 10% withholding tax (forincome from freight and lease of transportation vehicles), subject to any reduction available under anapplicable double taxation treaty.Russia is now a party to 77 double taxation treaties, which can provide for the reduction of thewithholding tax rate on dividend income to as low as 5% and generally provide for a 0% withholdingrate on other income (e.g. interest, royalties, and capital gains). For example, the 1998 Russia-CyprusDouble Taxation Treaty provides for a 0% withholding tax rate on interest, royalties, capital gains, andother income not related to a permanent establishment; a 5% withholding tax rate on dividends Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 117 St. Petersburg Foundation for SME Development
  • 118. payable to Cypriot shareholders who have contributed over USD 100,000 to the charter capital of aRussian subsidiary responsible for paying out these dividends; and a 10% withholding tax rate ondividends payable to all other Cypriot shareholders. Many other tax treaties provide for similarwithholding tax rates, although some have higher rates.Chapter 25 includes a provision that explicitly states that, in the event of a conflict, double taxationtreaties override the Tax Code. Chapter 25 contains more beneficial rules than had existed underprevious laws governing tax treaty relief for a foreign legal entity. Under Chapter 25 of the Tax Codetaxpayers can obtain adverse tax treaty relief from tax withholding in Russia without any filings with theRussian tax authorities by presenting documents evidencing the tax residency status of the taxpayer tothe tax withholding agent (usually the Russian payer). However, obtaining a tax refund where the taxwas actually withheld would require the filing of the relevant forms with the Russian tax authorities.The profits tax is payable and reported on a quarterly basis based on actual results for the first threemonths, the first six months, the first nine months and the year. The annual tax return and a report on aforeign legal entity’s activity in Russia must be submitted to the tax authorities by 28 March of the yearfollowing the close of the taxable year.5.6.5. Double Taxation TreatiesRussia has entered into the following bilateral treaties for the avoidance of double taxation which arecurrently in force: 14 No Country Dividends Interest Royalties Individual Qualifying Companies Companies1. Albania 10 10 10 10 152. Algeria 15 5 15 15 163. Armenia 10 5 0 0 174. Australia 15 5 10 10 185. Austria 15 5 0 06. Azerbaijan 10 10 10 107. Belarus 15 15 10 108. Belgium 10 10 10 1014 Many treaties provide for an exemption for certain types of interest e.g. interest paid to local state authorities,central bank export credit institutions or in relation to sales on credit. Such exemptions are not considered in thiscolumn.15 The rate applies if the recipient company (other than a partnership) directly owns at least 25% of the capital inthe company paying the dividends.16 The rate applies if the value of the holding is at least USD 40,000.17 The rate applies if the recipient company (other than a partnership) directly owns at least 10% of the companypaying the dividends, and if the value of the holding is at least AUD 700,000, and the dividends to be paid by theRussian company are exempted from Australian taxes.18 The rate applies if the recipient company directly owns at least 10% of the capital in the Russian company andthe value of the holding exceeds USD 100,000. Doing business in St. Petersburg118 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 119. 14 No Country Dividends Interest Royalties Individual Qualifying Companies Companies 199. Botswana 10 5 10 10 2010. Brazil 15 10 15 1511. Bulgaria 15 15 15 15 21 2212. Canada 15 10 10 0/1013. China 10 10 10 10 2314. Croatia 10 5 10 10 24 2515. Cuba 15 5 10 0/5 2616. Cyprus 10 5 0 017. Czech Republic 10 10 0 1018. Denmark 10 10 0 019. Egypt 10 10 15 15 2720. Finland 12 5 0 0 2821. France 15 5/10 0 0 2922. Germany 15 5 0 0 3023. Greece 10 5 7 719 The rate applies if the recipient company owns at least 25% of the capital in the company paying the dividends.20 The rate applies if the recipient company directly owns at least 20% of the capital in the company paying thedividends.21 The rate applies if the recipient company owns at least 10% of the capital or voting power in the Russiancompany, as the case may be.22 The lower rate applies to computer software, patents and know-how.23 The rate applies if the recipient company owns at least 25% of the capital in the Russian company and the valueof the holding is at least USD 100,000.24 The rate applies if the recipient company (other than a partnership) owns at least 25% of the capital in thecompany paying the dividends.25 The lower rate applies to copyright royalties.26 The rate applies if the value of the holding is at least USD 100,000. On October 2010 Russia and Cyprus signed aprotocol to the treaty that changed the above amount to EUR 100,000. The protocol was ratified by the RussianState Duma on 15 February 2012 and will apply starting from 1 January 2013.27 The rate applies if the recipient company directly owns at least 30% of the capital in the Russian company andthe value of the holding exceeds USD 100,000.28 The 5% rate applies if the French company: (1) has directly invested at least EUR 76,225 in the Russiancompany; and (2) is subject to tax in France, but is exempt with respect to dividends (i.e. participation exemption).The 10% rate applies if only one of the requirements is fulfilled.29 The rate applies if the German company owns at least 10% of the capital in the Russian company and the valueof the holding is at least EUR 80,000. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 119 St. Petersburg Foundation for SME Development
  • 120. 14 No Country Dividends Interest Royalties Individual Qualifying Companies Companies24. Hungary 10 10 0 0 3125. Iceland 15 5 0 026. India 10 10 10 1027. Indonesia 15 15 15 15 3228. Iran 10 5 7.5 529. Ireland 10 10 0 030. Israel 10 10 10 10 3331. Italy 10 5 10 0 3432. Japan 15 15 10 0/1033. Kazakhstan 10 10 10 1034. North Korea 10 10 0 0 3535. Korea (Rep.) 10 5 0 536. Kuwait 5 5 0 1037. Kyrgyzstan 10 10 10 1038. Lebanon 10 10 5 5 36 3739. Lithuanian Republic 10 5 10 5/10 3840. Luxembourg 15 10/5 0 030 The rate applies if the Greek company (other than a partnership) owns at least 25% of the capital in thecompany paying the dividends.31 The rate applies if the recipient company directly owns at least 25% of the capital in the company payingdividends and the value of the holding exceeds USD 100,000.32 The rate applies if the recipient company directly owns at least 25% of the capital in the Russian company.33 The rate applies if the recipient company directly owns at least 10% of the capital in the Russian company andthe value of the holding is at least USD 100,000.34 The lower rate applies to copyright royalties.35 The rate applies if the recipient company (other than a partnership) directly owns at least 30% of the capital inthe company paying the dividends and the value of the holding is at least USD 100,000.36 The rate applies if the recipient company (other than a partnership) directly owns at least 25% of the capital inthe company paying the dividends and the value of the holding exceeds USD 100,000.37 The lower rate applies to the royalties for the use of industrial, commercial, and scientific equipment.38 The 10% rate applies if the Luxembourg recipient directly owns at least 30% of the capital in the Russiancompany and the value of the holding is at least EUR 75,000. Pursuant to the protocol amending the Tax Treatythe 5% rate should apply if the Luxembourg recipient directly owns at least 10% of the capital in the Russiancompany and the value of the holding is at least EUR 80,000 or its equivalent in national currency. The protocolwill enter into force after both parties have completed ratification procedures under their domestic laws and willstart to apply from the calendar year following its entry into force. Doing business in St. Petersburg120 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 121. 14 No Country Dividends Interest Royalties Individual Qualifying Companies Companies41. Macedonia 10 10 10 10 39 40 4142. Malaysia -/15 -/15 15 10/15 4243. Mali 15 10 15 044. Mexico 10 10 10 10 43 4445. Morocco 10 5 0/10 1046. Moldova 10 10 0 10 4547. Mongolia 10 10 10 - 4648. Namibia 10 5 10 5 4749. Netherlands 15 5 0 050. New Zealand 15 15 10 1051. Norway 10 10 10 052. Philippines 15 15 15 1553. Poland 10 10 10 10 4854. Portugal 15 10 10 1055. Qatar 5 5 5 056. Romania 15 15 15 10 4957. Saudi Arabia 5 5 5 10 5058. Serbia and 15 5 10 1039 The 15% rate applies to profits of joint ventures. Otherwise, the domestic rate applies; there is no reductionunder the treaty.40 The 15% rate applies to profits of joint ventures. Otherwise, the domestic rate applies; there is no reductionunder the treaty.41 The lower rate applies to industrial royalties.42 The rate applies if the value of the holding is at least FRF 1 million.43 The 5% rate applies if the value of the holding exceeds USD 500,000.44 The lower rate applies to interest on foreign currency deposits.45 The domestic rate applies, there is no reduction under the treaty.46 The rate applies if the recipient company owns at least 25% of the capital in the Russian company and the valueof the holding is at least USD 100,000.47 The rate apples if the Netherlands company directly owns at least 25% of the capital in the Russian companyand has invested in it at least EUR 75,000 or its equivalent in national currency.48 The rate applies if the Portuguese company has owned directly at least 25% of the capital in the Russiancompany for an uninterrupted period of at least 2 years prior to the payment.49 The treaty generally applies as of 1 January 2011. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 121 St. Petersburg Foundation for SME Development
  • 122. 14 No Country Dividends Interest Royalties Individual Qualifying Companies Companies Montenegro 5159. Singapore 10 5 7.5 7.560. Slovakia 10 10 0 1061. Slovenia 10 10 10 10 5262. South Africa (Rep.) 15 10 10 0 53 5463. Spain 15 5/10 0/5 5 5564. Sri Lanka 15 10 10 10 5665. Sweden 15 5 0 0 57 5866. Switzerland 15 5 5/10/0 0 5967. Syria 15 15 10 4.5/13.5/18 6068. Tajikistan 10 5 10 0 6169. Thailand 15 15 10 1570. Turkey 10 10 10 1071. Turkmenistan 10 10 5 550 The rate applies if the recipient company owns at least 25% of the capital in the Russian company and the valueof the holding is at least USD 100,000.51 The rate applies if the recipient company owns at least 15% of the capital in the company paying the dividendsand the value of the holding is at least USD 100,000.52 The rate applies if the recipient company directly owns at least 30% of the capital in the Russian company andthe value of the holding is at least USD 100,000.53 The 5% rate applies if: (1) the Spanish company has invested at least EUR 100,000 in the Russian company; and(2) the dividends are exempt in Spain. The 10% rate applies if only one of the conditions is met.54 The lower rate applies to long term loans (minimum 7 years) granted by credit institutions resident in acontracting state.55 The rate applies if the company in Sri Lanka owns at least 25% of the capital in the Russian company.56 The rate applies if the Swedish company owns 100% of the capital in the Russian company (or in the case of ajoint venture, at least 30% of the capital in such a joint venture) and the foreign capital invested is at least USD100,000.57 The rate applies it the Swiss company owns at least 20% of the capital in the Russian company and the value ofthe holding exceeds CHF 200,000.58 The lower rate applies to loans of any kind granted by a bank, interest will not be taxable under the protocolamending the Tax Treaty. The protocol will enter into force after both parties have completed ratificationprocedures under their domestic laws and will start to apply from the calendar year following its entry into force.59 The 4.5% rate applies to cinema movies and TV and radio broadcasting programs, the 13.5% rate applies toliterature, art, and science products, and the 18% rate applies to computer software, patents, trademarks, andknow-how.60 The rate applies if the recipient company owns at least 25% of the capital in the company paying the dividends.61 The 10% rate applies to loans granted by Russian banks. Doing business in St. Petersburg122 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 123. 14 No Country Dividends Interest Royalties Individual Qualifying Companies Companies 62 72. Ukraine 15 5 10 10 73. United Kingdom of 10 10 0 0 Great Britain and Northern Ireland 63 74. United States of 10 5 0 0 America 75. Uzbekistan 10 10 10 0 64 65 66 76. Venezuela 15 10 5/10 10/15 67 77. Vietnam 15 10 10 15 In addition to the above, Russia has entered into the following tax treaties for the avoidance of double taxation which do not yet apply (e.g., have not been ratified, the exchange of ratification instruments process is pending): 68 No. Country Dividends Interest Royalties Individual Qualifying Companies Companies 691. Argentina 15 10 15 15 70 712. Chile 10 5 15 5/10 723. Estonia 10 5 10 10 62 The rate applies if the value of the holding is at least USD 50,000. 63 The rate applies if the recipient company holds at least 10% of the capital or voting power in the Russian company as the case may be. 64 The rate applies if the recipient company (other than a partnership) directly owns at least 10% of the capital in the company paying the dividends and the value of the holding is at least USD 100,000. 65 The 5% rate applies to bank loans. 66 The lower rate applies to the fees for technical assistance. 67 The rate applies if the Vietnamese company has invested at least USD 10 million directly in the capital of the Russian company. 68 Many treaties provide for an exemption for certain types of interest e.g. interest paid to state local authorities, central bank export credit institutions or in relation to sales on credit. Such exemptions are not considered in this column. 69 The rate applies if the recipient company owns at least 25% of the capital in the company paying the dividends. 70 The rate applies if the recipient company directly owns at least 25% of the capital in the company paying the dividends. 71 The lower rate applies to the royalties for the use of, or the right to use, any industrial, commercial, or scientific equipment. 72 The rate applies if the recipient company (other than a partnership) owns at least 25% of the capital in the company paying the dividends and the value of the holding is at least USD 75,000. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 123 St. Petersburg Foundation for SME Development
  • 124. 68 No. Country Dividends Interest Royalties Individual Qualifying Companies Companies4. Ethiopia 5 5 5 155. Georgia 10 10 10 56. Laos 10 10 10 0 73 747. Malta 10/- 5 0 0 758. Mauritius 10 5 0 0 769. Oman 10 5 0 5 5.6.6. Value Added Tax (“VAT”) VAT is imposed on all goods imported into Russia and is also applied to the sale of goods, work and services. According to the recent amendments to the Tax Code the same VAT regime applies to goods and services that are sold in or imported into territories under Russian jurisdiction e.g., artificial islands and drilling platforms on the continental shelf. Under the new rules certain types of works (services) provided for the purposes of geological study, exploration and development of hydrocarbons on subsoil plots located on the continental shelf and (or) exclusive economic zone of the Russian Federation are subject to Russian VAT. The tax period for VAT for all taxpayers and tax withholding agents is a calendar quarter (prior to 2008 for most taxpayers the tax period was a calendar month). Taxpayers must pay VAT by equal installments not later than the 20th day of each month following the reporting quarter (this procedure replaced a single-installment payment as of the third quarter of 2008). Current legislation imposes a VAT rate of 18% on the sale of most goods, work and services. A lower 10% rate is applied to limited types of goods, such as pharmaceuticals, medical equipment, and certain food products and periodicals. The export of goods is subject to 0% VAT. In addition, certain types of goods, work, and services are exempt from VAT (for example, land plots, dwelling houses and apartments, lease of office space to accredited representative offices and branches of foreign legal entities from jurisdictions which apply reciprocal benefits, certain medical goods and services, the sale of shares, derivatives and repo transactions, etc.). As of 1 January 2008, the assignment of exclusive IP rights (e.g., patents, know-how), with the exception of trademarks, and rights to use the results of these IP rights (e.g., a software use license) based on licenses (including non-exclusive licenses) is no longer subject to Russian VAT. The import VAT exemption now applies to technological equipment that is not produced in Russia according to a list adopted by Resolution of the Russian Government No. 372, dated 30 April 2009 (previously the exemption covered importation of technological equipment contributed to the charter capital of a Russian corporation). Generally, VAT paid on the acquisition of goods, work and services may be offset against VAT collected from customers. Starting from 1 January 2009, Russian buyers are not required to postpone offsetting input VAT on advance payments until the goods, work and services are delivered 73 The rate shall not exceed the rate established for Maltese income tax purposes if the recipient company is a Russian resident. 74 The rate applies if the recipient company (Maltese resident) directly owns 20% in the capital of the Russian company and the foreign capital invested is at least USD 100,000. 75 The 5% rate applies if the value of the recipient company’s holding is at least USD 500,000. 76 The rate applies if the value of the recipient company’s holding is at least USD 500,000. Doing business in St. Petersburg 124 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 125. and can take an offset on special advance VAT invoices. The new rules allow recognition of retroactivediscounts in the current tax period through issuing corrective VAT invoices. For barter transactions,taxpayers are no longer required to transfer VAT to each other in cash and remit VAT under generalrules. In order to claim a refund of input VAT paid in relation to goods that were subsequently exportedand subject to 0% VAT, the taxpayer is required to file various supporting documents with the Russiantax authorities.The VAT refund is granted only following a chamber tax audit of the respective VAT return anddocuments, which should be conducted within 3 months. Starting from 1 January 2009, instead of filingcopies of numerous customs declarations the exporter is entitled to file registers of customsdeclarations stamped by the customs authorities. Effective from 1 October 2011, a taxpayer mustrestore input VAT previously recovered and pay it to the Russian budget on goods, works, and services,including fixed and intangible assets used for activities subject to 0% VAT (e.g., export of acquiredgoods or producing goods to be exported). This VAT may be offset in the future when the tax base hasbeen determined e.g., a full set of documents confirming export operations is prepared. As of the firstquarter of 2010, a taxpayer may refund VAT before the end of a tax audit if it meets one of thefollowing requirements: (i) the taxpayer has existed for not less than three years, and the total amountof VAT (except import VAT), excise taxes, corporate profits tax and mineral extraction tax paid over thethree preceding calendar years is not less than RUB 10 billion (approx. USD 333.3 million); or (ii) thetaxpayer provided a bank guarantee of an authorized Russian bank covering the full amount of thereclaimed VAT. The list of the authorized banks is maintained by the Russian Ministry of Finance. Incapital construction, the input VAT paid to suppliers of goods, work and services may be offset under ageneral procedure as the construction progresses (prior to 2006, such input VAT could be offset onlywhen the constructed assets were recorded on the taxpayer’s balance sheet). Generally an enterpriseends up transferring to the state only the difference between input VAT paid and VAT collected. As ageneral rule, however, a taxpayer may not offset input VAT if such VAT is incurred on goods, works orservices used by the taxpayer for the sale of goods or the provision of services that are exempt fromVAT. In this case, the taxpayer will be required to maintain split accounting and include such input VATinto its production costs and will effectively lose this input VAT for future recovery. In those caseswhere only a portion of certain input costs was used for the production of goods or the provision ofservices subject to VAT, the corresponding input VAT may be offset only on a pro-rata basis. Therefore,for example, careful planning will be required to maintain full recovery if part of a newly constructedbuilding is to be directly leased to representative offices or branches of foreign legal entities accreditedin Russia for which a VAT exemption applies.Starting from 2006, foreign legal entities having more than one representative office and/or branchregistered in various locations in Russia may consolidate all VAT accruals and offsets on a companylevel (prior to 2006, each representative office and/or branch was regarded as a separate VAT payer).For that purpose a foreign legal entity must choose a particular representative office or branch to beresponsible for VAT reporting on a company level and notify the local tax authorities responsible foreach representative office and branch registered in Russia of its decision.A Russian customer of a foreign company that is not registered with the tax authorities and is active(making sales or providing services) in Russia must withhold either 9.09% or 15.25% reverse charge VAT(depending on the applicable underlying VAT rate of 10% or 18%, respectively) from the amountstransferred to the foreign company and must itself remit such reverse charge VAT directly to the statebudget.5.6.7. Corporate Property TaxOn 1 January 2004, Chapter 30 of the Tax Code (covering corporate property tax) came into effect,replacing the Corporate Property Tax Law, established in 1991. Property tax is a regional tax, i.e. itsimposition is regulated by the legislation of the relevant region. The St. Petersburg Law On Property Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 125 St. Petersburg Foundation for SME Development
  • 126. Tax of November 26, 2003 No. 684-96 (the “St. Petersburg Law on Property Tax”) effective from January01, 2004 still remains in force and establishes a maximum tax rate of 2.2% provided by the Tax Code.The tax base includes movable and/or immovable fixed assets owned by the taxpayer in Russia, and iscalculated based on the depreciated book value of those assets determined according to accountingrules (and not tax accounting rules).Taxable assets do not include inventory, any costs or intangible assets recorded on the taxpayer’sbalance sheet, or land and water objects. Since 1 January 2011, managing companies of mutual fundsinvesting in real estate have been subject to property tax on the property held in the fund. Thecorporate property tax is paid by the managing company from the property of the fund and effectivelyapplies to property held for both corporate and individual investors.Chapter 30 of the Tax Code further exempts certain categories of property from taxation, such as assetsused by religious organizations for religious activities. Corporate property tax is payable on an annualbasis, with advances due every quarter.When imposing property tax, the regional governments of the Russian Federation may fix lower ordifferentiated rates for different categories of payers and/or types of taxable property. Moreover,regional governments may also exempt certain categories of payers, including both Russian andforeign organizations, from the obligation to assess and make such advance payments, and sometimesprovide property tax exemptions or investment incentives.For instance, prior to 2004 the St. Petersburg tax laws established tax deductions for investors based onthe net book value of fixed assets that had been put into effect the previous year. However, St.Petersburg Law on Property Tax abolished this tax benefit, beginning from January 1, 2004.Presently, the St. Petersburg Law on Tax Benefits allows exemption from the property tax for differenttypes of legal entities, among them, those companies which made investments of not less than 3 billion(approx. USD 96.7 million)77 and companies which invested not less than RUR 800 million (approx.. USD15.8 million) during three calendar years (after January 1, 2007), provided that they performed businessactivities in compliance with Section D "Manufacturing activities" and/or Section E "Producing anddistribution of electricity, gas and water" and/or Section I "Transportation and Communication" of theAll-Russian classifier of the economic activities types.This tax benefit is applicable for a five-year period. The same rules of the Law on Tax Benefits as withthe profits tax should be followed to qualify the investments. At the same time there are no specialprovisions for investors running their businesses in high-tech industry in the current version of the Lawon Tax Benefits.Apart from the tax incentives mentioned in the Law on tax benefits, St. Petersburg Law No. 316-28 “Onthe Investment Tax Loan”, dated July 12, 2002, introduces another measure to support the investorsand to encourage the construction and/or modernization of fixed assets on the territory of St.Petersburg.The investment tax loans for property tax may be granted from a one-year period up to a ten-yearperiod (while the Tax Code provides for a maximum five-year period) to investors on a competitive basisafter analyzing the feasibility, size and timing of the investment project based on the business plan andother technical documentation under stipulation that the St. Petersburg budget disposes necessarymonetary funds to grant investment tax loans. Currently the interest rate payable on the investmenttax loans (to be set forth in an agreement on granting investment tax loans) can vary from 1/8 to thewhole refinancing rate of the Russian Federation Central Bank78.77 Kindly note that exemption from the property tax for this type of taxpayer will be excluded from the Law on TaxBenefits starting January 1, 2013.78 Currently is 8,25% Doing business in St. Petersburg126 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 127. It has to be noted that the Government of St. Petersburg with its Resolution No. 235 of March 15, 2012approved the draft Law “On the Investment Tax Loan” (the "Tax Loan Draft Law").Pursuant to the Tax Loan Draft Law, the investment tax loan can be granted for any regional tax and forthe corporate profits tax in the sum payable to the St. Petersburg budget. The tax loan can be givenunder stipulation that a company invested not less than RUR 300 million in fixed assets (including theirmodernization) used for production purposes on the territory of St. Petersburg. The interest ratepayable on the investment tax loans is 1/2 of the actual refinancing rate of the Russian FederationCentral Bank as of the date when parties enter into the agreement on granting investment tax loan.According to Resolution No. 235 of March 15, 2012 of the St. Petersburg Government, the Tax LoanDraft Law shall replace the effective Law No. 316-28 dated July 12, 2002 and shall enter into force onJanuary 01, 2013. However, as of October 2012 the Tax Loan Draft Law had not yet been considered bythe St. Petersburg Legislative Assembly.5.6.8. Social Security ContributionsEffective as of 1 January 2010, the Unified Social Tax, which previously combined payments to thevarious Russian social funds, was replaced by separate contributions to the State Pension Fund, theSocial Security Fund, the Federal Medical Insurance Fund and the Territorial Medical Insurance Funds(the latter were excluded from the list of recipients as of 1 January 2012).The social security contributions apply at an aggregate rate of 30% (34% in 2011) of an employee’sannual salary of up to a certain threshold (“social contributions threshold”) and 10% of an employee’sannual salary in excess of such social contribution threshold. Starting from 1 January 2012, the socialcontribution threshold amounts to RUB 512,000 (approx. USD 17,000; RUB 463,000 in 2011) and it maybe adjusted by the Russian Government. The social security contributions are payable as follows: (i) at arate of 22% of the amount not exceeding the social contribution threshold and 10% of the amountexceeding the social contributions threshold to the State Pension Fund (26% up to the socialcontribution threshold and 0% of the amount exceeding such threshold in 2011), (ii) at a rate of 2.9% ofthe amount not exceeding the social contributions threshold and 0% of the excess to the SocialSecurity Fund, (iii) at a rate of 5.1% of the amount not exceeding the social contributions threshold and0% of the excess to the Federal Medical Insurance Fund (in 2011 - 3.1% to the Federal Medical InsuranceFund and 2% to the Territorial Medical Insurance Funds on the amount not exceeding the socialcontribution threshold and 0% on the amount exceeding such threshold).The social security contributions apply to all payments to individuals (including individuals applying thesimplified system of taxation) even if made from net income. The social security contributions period isa year, and the social security contributions are paid on a monthly basis.During a transition period from 2011 to 2027 reduced rates of social security contributions will apply tocertain categories of payers, e.g. companies engaged in the IT industry upon a special accreditationprocedure79, agricultural goods producers, certain companies applying the simplified system oftaxation, certain mass media companies, budgetary scientific institutions and other categories of socialcontributions payers listed in the law will pay social security contributions at various reduced rates from0% to 30%80.As of 1 January 2012, salaries or other payments to foreign citizens temporarily staying in Russia andworking under employment contracts for not less than 6 months who were previously exempt from the79 Resolution of the Russian Government No. 758 of November 6, 200780 For example, the following social security contribution rates apply depending on the category of employees: 0%- to remuneration of the employed crew members of vessels registered in the Russian International Register ofShips; 14% - 28% to remuneration of employees of IT companies depending on the year; 27% - 30% toremuneration of employees of media companies depending on the year; etc. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 127 St. Petersburg Foundation for SME Development
  • 128. social security contributions are subject to social security contributions paid to the State Pension Fund(at a regular rate of 22% (or 16%) depending on their age, on amounts not exceeding the socialcontributions threshold and 10% on payments above the social contributions threshold). An exemptionapplies to compensation paid to so-called “highly-qualified foreign specialists”, i.e. as a general ruleforeign employees earning at least RUB 2 million (USD 67,000) annual salary under their employmentcontracts in Russia.5.6.9. Personal Income TaxIndividuals who are defined as “Russian tax residents,” i.e. those who have been in the country for 183days or more during any 12 consecutive months, are subject to personal income tax on all their income,both that earned in Russia and that earned elsewhere. Individuals who do not meet this criterion aresubject to tax on any income received from Russian sources. From 1 January 2001, Russia has enactedvarious income tax rates, including: a 13% flat rate applicable to most types of income; a 9% rateapplicable to dividend income; a 35% rate applicable to income from gambling, lottery prizes, deemedincome from low-interest or interest-free loans (except loans directed at new construction oracquisition of a residence) and excessive bank interest; and a 30% rate applicable to Russian-sourceincome received by non-residents. As of 2011, foreign nationals who have not yet obtained Russian taxresident status but are recognized as highly qualified foreign specialists for the purposes of the Russianemployment legislation (i.e., receiving a salary of at least RUB 2 million per year (approx. USD 67,000))enjoy 13% Russian personal income tax on their Russian salary.As part of the legislative initiatives for creating an international financial center in Russia, starting in 1January 2010 new rules apply to individuals recording financial results on transactions with differentcategories of securities and derivatives for tax purposes. Also, individual investors were granted theright to carry forward losses on tradable securities and tradable derivatives for ten years. Detailedprovisions regarding the determination of the tax base on repo transactions for individuals wereincluded into the Tax Code effective from 1 January 2011. Similarly to companies, Russian individualsalso received a full tax exemption on income from the sale or redemption of shares in Russiancompanies (acquired after 1 January 2011) satisfying the requirements discussed in Section 5.6.3 above.By 30 April of the following year, a taxpayer who received income on which no income tax was withheldat the source of payment must file a tax return based on his/her actual income for the previous year,and settle tax obligations for that year by 15 July of the following year. Foreign individuals are requiredto file annual tax returns with the tax authorities by 30 April of the year following the reporting yearonly if they receive income from non-Russian sources, or income where no income tax was withheld atthe source of payment. Those foreign individuals who leave the country during a calendar year shouldfile a tax return for the relevant taxable period no later than one month prior to leaving Russia.5.6.10. Regional and Local TaxesRegional and local legislative bodies may, at their discretion, introduce various tax incentives andcredits with regard to regional and local taxes. Although these taxes are set regionally and locally, thefederal legislature has enacted limits on their overall rates.Besides the corporate property tax, regional taxes currently include transportation tax and gamblingtax.5.6.10.1. Transportation TaxAutomobiles, motorcycles, motor scooters, buses and other self-powered pneumatic and caterpillarmachines and mechanisms, as well as the aircraft, helicopters, motor ships, yachts, sailing vessels,launches, snowmobiles, motor sledges, motor boats, hydro cycles and other water and air transportvehicles, registered in the established order in conformity with the legislation of the Russian Federationare subject to the transportation tax. Doing business in St. Petersburg128 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 129. In introducing the tax, St. Petersburg Law of November 04, 2002 No. 487-53 "On transportation tax"(the Law On transportation tax) defines the tax rate within the limits set forth by the Tax Code, theprocedure and the terms for tax payment. Respective rules of the Tax Code and regional legislation donot provide for any incentives for legal entities except for the exemption from the tax for residents ofthe SEZs, subject to conditions of the St. Petersburg Laws On transportation tax and On tax benefits.The St. Petersburg Government, with its Resolution No. 879 of August 17, 2012, approved a draft Law"On amendments to the Law On transportation tax", which provided new rates of the transportation taxthat will come into force on January 01, 2013. However, as of October 2012 this draft Law had not yetbeen adopted by the St. Petersburg Legislative Assembly.5.6.10.2. Gambling TaxOrganizations which pursue entrepreneurial activities in the field of a gambling business are subject topaying gambling tax. According to the Tax Code, each taxable unit (i.e. a bookmaker office processingcenter, a betting shop processing center, a totalizer stake receiving point, etc.) is subject to registrationwith the tax authority at the place of installation of this taxable unit. Taxpayers that are not registeredwith tax authorities in the territory where the taxable unit (units) are to be installed (opened) must beregistered with the tax authorities at the location of such taxable unit (units).On June 27, 2012 the St. Petersburg Legislative Assembly adopted Law No. 395-66 of July 03, 2012 "Onrates of the gambling tax" which came into force on September 01, 2012.Local taxes currently include property tax on individuals and land tax.5.6.10.3. Land TaxPursuant to the general rules of the Tax Code, taxpayers of the land tax shall be deemed organizationsand natural persons that own land plots that have the right to use them on a permanent basis (on atermless basis) or the right of life heritable tenure thereof.In St. Petersburg the land tax is established by the Tax Code and by the Law No. 611-86 of November28, 2005 "On land tax in St. Petersburg and amendments to the St. Petersburg Law On tax benefits",that would cease to be effective in compliance with the Tax Code and the respective St. Petersburg law.The tax base shall be determined in respect of every land plot as the cadastral value thereof as ofJanuary 1 of the year in which the tax is paid. The Tax Code provides for the exemption from the landtax for residents of the SEZ.The St. Petersburg Government, with its Resolution No. 625 of June 19, 2012, approved a draft Law “Onland tax” which provides for new land tax rates to be effective from January 01, 2013. However, as ofOctober 2012 the St. Petersburg Legislative Assembly had not yet adopted the draft Law. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 129 St. Petersburg Foundation for SME Development
  • 130. 5.7. Customs Information for the current chapter was developed and kindly provided by Baker & McKenzieCustoms legislation in Russia is based on the unified rules of the Customs Union (i.e., Russia, Belarusand Kazakhstan, hereinafter – the “CU”) that started to operate as of 1 January 2010, and the mainlegislative framework of which gained shape on 1 July 2011. Therefore, currently all Russian foreigntrade regulations are primarily based on rules established by agreements and decisions taken at thelevel of the Customs Union. Moreover, Russia is a member of the World Customs Organization andparticipates in the International Convention on Harmonized Commodity Description and CodingSystem, the Convention on Temporary Admission and the International Convention on theSimplification and Harmonization of Customs Procedures (hereinafter - the “Kyoto Convention”).5.7.1. Accession to the WTOOn 16 December 2011 Russia was officially approved to join the WTO. Russia’s commitments andobligations are established in the Protocol of Accession of Russia to the WTO dated 16 December 2011(hereinafter – the “WTO Accession Protocol”) and the Working Party Report on the Accession of Russiato the WTO dated 17 November 2011 are publicly available. In order to become a member state of theWTO, Russia should ratify the WTO Accession Protocol by the end of August 2012.5.7.1.1. Market access for goods — tariff and quota commitmentsOn average the final legally binding tariff ceiling for the Russian Federation will be 7.8% compared witha 2011 average of 10% for all products: The average tariff ceiling for agriculture products will be 10.8%, lower than the current average of 13.2% The ceiling average for manufactured goods will be 7.3% vs. the 9.5% average today on manufactured imports.Russia has agreed to lower its tariffs on a wide range of products. Average duties after fullimplementation of tariff reductions will be: 14.9% for dairy products (current tariff 19.8%); 10.0% for cereals (current tariff 15.1%); 7.1% for oilseeds, fats and oils (current tariff 9.0%); 5.2% for chemicals (current tariff 6.5%); 12.0% for automobiles (current tariff 15.5%); 6.2% for electrical machinery (current tariff 8.4%); 8.0% for wood and paper (current tariff 13.4%); USD 223 per ton for sugar (current tariff USD 243 per ton).Tariffs will be bound at zero for cotton and information technology (ITA) products (the current tariff onITA products is 5.4%).It should be noted, however, that 90% of the initial rates of import duties that should be applied fromthe date of accession to the WTO, as set out in the WTO Accession Protocol, are higher than the ratesof the Common Tariff of the Customs Union that was applied before the date of accession. This meansthat Russia retains the right to increase import duty rates for certain types of goods, which is unlikely atthe moment.The final bound rate will be implemented on the date of accession for more than one third of thenational tariff lines with another quarter of the tariff cuts to be put in place during a transition period of Doing business in St. Petersburg130 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 131. 3-7 years provided for each particular good. The longest implementation period is eight years forpoultry, followed by seven years for motor cars, helicopters and civil aircraft.Tariff rate quotas (TRQs) will be applied to beef, pork, poultry and some whey products. Importsentering the market within the quota will face lower tariffs while higher duties will be applied toproducts imported outside the quota.The in-quota and out-of-quota rates are listed below with the out-of-quota rates in parentheses: For beef 15% (duty rate out of quota 55%); For pork zero (duty rate out of quota 65%). The TRQ for pork will be replaced by a flat top rate of 25% as of 1 January 2020; 25% (duty rate out of quota 80%) for some selected poultry products; 10% (duty rate out of quota 15%) for some whey products; Some of these quotas are also subject to member-specific allocations.5.7.1.2. Export dutiesExport duties will be binding for over 700 tariff lines, including certain fish and crustaceans, mineralfuels and oils, raw hides and skins, wood, pulp and paper, and base metal products.5.7.1.3. Market access for servicesRussia made market access commitments in 11 services sectors and 116 sub-sectors. No market accessrestrictions were provided for 30 sectors, including advertising, market research, consulting andmanagement services. At the same time, Russia did not make any commitments for 39 sectors,including pipeline, railroad and internal water transport, medical services and scientific researchactivities, i.e., market access for foreign companies would still be restricted in these areas.Russia maintained certain limitations on market access and national treatment with respect to varioustypes of services that are provided in the Russia’s WTO Accession Protocol. For example, priority isprovided for Russian entities acting as contractors, suppliers and carriers that participate in productionsharing agreements for exploration, development and production of mineral raw materials.Foreign insurance companies would be allowed to establish Russian branches 9 years after Russia joinsthe WTO, i.e., in 2012.Foreign banks would be allowed to establish subsidiaries in Russia. There would be no cap on foreignequity in individual banking institutions, but the overall foreign capital participation in the bankingsystem of the Russian Federation would be limited to 50% (not including foreign capital invested inpotentially privatized banks).On distribution services, Russia would allow 100% foreign-owned companies to engage in wholesale,retail and franchise sectors upon accession to the WTO.5.7.1.4. Other commitmentsRussia made a commitment to gradually decrease domestic support for agricultural sector from USD 9billion in 2012 to USD 4.4 billion by 2018.Russia has maintained the right to impose strict limitations on market access and national treatmentfor foreign persons in such sectors as energy, telecommunications and education. Ontelecommunications, the foreign equity limitation (49%) would be eliminated during the four yearsfollowing accession. The Russian Federation also agreed to apply the terms of the WTO’s BasicTelecommunications Agreement. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 131 St. Petersburg Foundation for SME Development
  • 132. 5.7.2. Customs UnionSince the formation of the CU the territories of Russia, Belarus and Kazakhstan comprise a unifiedcustoms territory. The CU has unified rules for foreign trade activity, including the importation andexportation of goods. Once goods are imported and released in any CU member state such goods maybe freely moved within the CU. There is no customs clearance or customs control at the internal stateborder between Russia and Belarus and between Russia and Kazakhstan.The supreme authority of the CU is the Intergovernmental Counsel of EurAsEC. The Commission of theCU is a supranational regulatory and executive body of the CU that is authorized to take implementingregulations and monitor execution of the regulations of the CU by its member states.The CU is a stage in the formation of the Unified Economic Area, which is expected to imply freemovement of services, workforce, and capital within the unified territory. The basic agreements on theformation of the Unified Economic Area have already been signed by Russia, Belarus and Kazakhstan(on unified macroeconomic policy, market access for various sectors, etc.) and are expected to takeeffect in 2012. It is expected that the Unified Economic Area will be established gradually by 2020 formost economic sectors, such as: free trade in services, including market access to natural monopolies(e.g., railways, energy, etc.); access to financial services, including free movement of capital; a unifiedsocial policy and free movement of workforce; unified competition laws; a concerted macroeconomicpolicy, etc.5.7.2.1. Unified Tariff Regulation of the Customs UnionThe classification of goods for customs purposes in Russia is carried out in accordance with the UnifiedCustoms Tariff of the CU, which is based on the International Convention on the HarmonizedCommodity Description and Coding System, dated 14 June 1983 (the Harmonized System), providingthat all the goods crossing the customs territory of the CU are assigned customs classification codes(HS codes) determined in accordance with the general rules of interpretation of the HarmonizedSystem. Customs authorities control the correctness of the classification of goods.5.7.2.2. Preliminary Classification DecisionsAt the discretion of importers of record, the Russian customs authorities may take preliminarydecisions on classification of goods (hereinafter – “a preliminary classification decision”) which isequivalent to binding tariff information used in the USA and the EU.Information and documents provided by applicants for the preliminary classification (such as technicaldescriptions, pictures, samples, etc.) should be exhaustive and should contain all the data required forproper determination of a HS classification code. Preliminary classification decisions are issued in thename of the applicants (i.e., importers of record) and may only be used by them (for more informationplease refer to the section “Importer of Record” below). The timing for issuance of a preliminaryclassification decision is 90 calendar days from the date of filing an application, which may be extendedfor a number of reasons provided by law. Preliminary classification decisions are valid for three yearsand are mandatory for all Russian customs authorities with respect to the classified goods.5.7.2.3. Sanitary-Epidemiologic MeasuresUnified sanitary measures of the CU are applied in order to confirm that goods imported anddistributed in CU territory comply with all safety requirements and do not pose any threat to life andhealth. The unified sanitary rules are applied at the external border and within the whole territory of theCU and include three lists of goods:(i) The list of goods that are subject to sanitary-epidemiologic control (includes almost all food products and consumer goods). Goods falling under this list must comply with the established sanitary and safety requirements; Doing business in St. Petersburg132 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 133. (ii) The list of goods that are subject to state registration, which is required in order to confirm compliance with sanitary-epidemiologic and hygiene requirements and applies to food products, cosmetic and household chemical products, certain clothing items, mineral water, alcoholic beverages, etc. The state registration must be carried out prior to the goods’ importation into the CU;(iii) The list of exemptions from state registration (for example, when goods subject to state registration are imported for exhibition purposes).5.7.2.4. Technical Regulation (Confirmation of Compliance)Confirmation of compliance is designed to confirm that goods conform to the statutory quality andconsumer characteristics requirements. Confirmation of compliance in Russia is based on the Russiannational regulations and on the legislation of the CU and the EurAsEC. The technical rules of the CUestablish a unified list of goods that are subject to mandatory confirmation of compliance in the form of(i) certification or (ii) declaration of compliance, as well as unified forms for the (i) certificate and (ii)declaration of compliance that are issued by the accredited agencies and laboratories of the CUmember states and are valid throughout the CU. It should be noted that compliance confirmation offoreign goods imported into Russia may be performed with certification only.The technical rules of the CU envisage adoption of a number of technical regulations with requirementsfor goods on the aforementioned unified list, including 47 priority CU technical regulations. As ofDecember 2011, about 24 technical regulations were adopted (e.g., on the safety of perfumes andcosmetics; packaging; toys, grain, vehicles, machinery, foodstuff, juices, fat-and-oil products, etc.). It isexpected that the majority of technical regulations will be adopted by 31 December 2012. Once the CUor EurAsEC technical regulations come into force they would be applied with direct effect and relevantRussian national requirements should no longer be applied. It is expected that by 31 December 2014 allnational mandatory technical requirements would be replaced by the CU technical regulations or wouldno longer be applied. The EurAsEC technical regulations would duplicate CU technical regulations.It should be noted that currently the technical rules of the CU are still being formed and currentlynational standards and national lists of products that are subject to mandatory confirmation ofcompliance also still exist separately in Russia, Belarus and Kazakhstan.Therefore, currently the two different systems of compliance confirmation co-exist in the CU, i.e., theunified system of the CU and separately applied national (local) technical rules of Russia, Belarus andKazakhstan. Prior to importation of goods into any of the CU member states it is important to ensurethat the goods are in compliance with both systems of compliance confirmation.In order to facilitate and improve the Russian system of technical regulation a Federal Service onAccreditation was established at the end of 2011, which should be a common body responsible for theaccreditation of certification bodies and testing laboratories, maintenance of registers and statesupervision.5.7.2.5. Phytosanitary and Veterinary ControlImportation into Russia of certain types of products, such as living animals, animal foods, meat, meatproducts, seafood, plants, etc. are subject to special supervision (control) in accordance with the unifiedveterinary and phytosanitary rules of the CU. Thus, a consignment with controllable goods can beimported into Russia in accordance with the unified veterinary requirements of the CU and with specialpermission (a veterinary or phytosanitary certificate) issued in the established procedure by the RussianFederal Service on Veterinary and Phytosanitary Supervision (Rosselhoznadzor), which is responsiblefor monitoring controllable goods and maintaining the register of foreign companies authorized toexport certain goods into Russia, as well as lists of certain products banned for importation into Russiafrom third countries. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 133 St. Petersburg Foundation for SME Development
  • 134. 5.7.2.6. Import and Export LicensingLegal basis for the import licensing system is the CU legislation on non-tariff measures. The purpose ofthe licensing measures is to monitor and control imports and exports of goods which are classified assensitive by the CU member states or by the international community. Import/export licenses arerequired: (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 orenvironmental protection; (iii) to grant an exclusive right to import certain goods; or (iv) to carry outinternational obligations. A unified list of goods to which import and export limitations and prohibitionsare applied was established in the CU, based on which certain categories of goods (e.g., fertilizers; rareanimals and plants; goods with a high level of cryptographic protection, hazardous waste, drugs, itemsof cultural value, precious stones and metals, etc.) require an import or export license for theirmovement across the CU border. In Russia licenses are issued by the Ministry of Industry and Trade inaccordance with the unified licensing rules of the CU. Products containing any cryptographic devices orfunctions and not requiring an import license (such as electronics; phones; computers; laptops;modems; software, etc.) are subject to mandatory notification with the Russian Federal SecurityService. A Russian licensee may import licensed goods into Russia only and has the right to transit suchgoods through the territory of the other CU member states.Importation into Russia of certain categories of goods that are not subject to licensing at the CU levelmay still require a local Russian handling license (e.g., aerosols containing ozone-destroying elements,etc.).It should be noted that in accordance with the WTO requirements on non-discrimination in foreigntrade, the import licensing of medicinal preparations was abolished in the CU in 2011. The importlicensing of alcohol products will also be abolished automatically in the CU when Russia becomes amember of the WTO.5.7.3. The Russian Customs AuthoritiesThe introduction of the CU has not affected the internal structure of the Russian customs service, whichremains as follows: The Federal Customs Service; Regional customs administrations; Customs-houses; and Customs posts.Importantly, together with the formation of the CU, a new concept of customs clearance of goods atthe Russian external state border is currently being implemented, which should entail a significantreorganization of the Federal Customs Service and the whole local customs clearance infrastructure.Under this concept the customs clearance of goods transported by road and rail should be performed atthe external border of Russia starting from 1 January 2012 and 1 January 2020, respectively. It isexpected that when this reorganization is completed, physical shipment of goods into Russia will oftencoincide with their release for free circulation.As a result of implementation of the concept it is expected that a large number of regional customsadministrations and customs houses situated far from the customs border of Russia will be closed orconsiderably reduced in staff and functionality. The concept would require significant economic andinfrastructural development of the Russian border regions in order to provide sufficient customs,logistic and warehousing resources to process clearance and control of almost all the traffic and goodscrossing the Russian border. At the same time considerable governmental and private investment isstill required for successful implementation of the concept by 2020. Doing business in St. Petersburg134 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 135. 5.7.4. Declarant (Importer of Record)The resident principle applies in the CU, i.e., only companies that are local residents of a CU memberstate and are parties to cross-border supply agreements may act as importers of record before thecustoms authorities.As a general rule, foreign entities may not act as importers of record, except for a limited number ofcases when goods may be imported by representative offices or branches of foreign legal entitiesaccredited in Russia.5.7.5. Registration of Importer of Record with Local Customs AuthoritiesCurrently all importers of record in Russia are expressly required to undergo preliminary registrationwith the Russian customs authorities for customs clearance purposes. Since 2004, Russian customsregulations have not contained such a requirement. However, in practice, the Russian customsauthorities still open files on all importers of record prior to the beginning of shipment operations andperformance of customs clearance formalities. Without doing this it is impossible to perform customsclearance formalities in Russia. At some customs posts the registration of the importer of record usuallycoincides with the filing of the first customs declaration.5.7.6. Customs Broker (Representatives/Agents)A declarant may clear goods through a customs broker (in accordance with the Customs Code of the CUthe term “customs agent” is used) - an intermediary legal entity fulfilling customs clearance formalitieson behalf and in the name of, and as instructed by, the declarant or another person who is authorized toperform customs operations. The customs agent may pay customs duties and taxes on declared goods.Every customs agent should be included by the CU Commission in the official list of customs agents. Acustoms agent is jointly and severally liable together with the declarant for the observance of thecustoms legislation.5.7.7. Authorized Economic OperatorAuthorized economic operator (AEO) is a special status granted by the Russian customs authorities toRussian importers and exporters that is based on the Kyoto Convention and is similar to the alreadyestablished concept in the European Union. AEO status ensures certain procedural simplifications,including but not limited to: Temporary storage and release of imported goods at the premises of the AEO; Release of imported goods for free circulation prior to their declaration to the Russian customs authorities; Simplified customs transit procedure; Other customs benefits that could be provided to AEO by the CU customs regulations.5.7.8. Customs ClearanceGoods that are moved into Russia through Kazakhstan and Belarus are placed under the transitcustoms regime at the external border of the CU and are finally released for free circulation by theRussian customs authorities. In Russia imported goods are legally released for free circulation after theRussian customs authorities confirm this by a special stamp of the customs authorities placed on thecustoms declaration (“vypusk razreshyon” - release granted). Imported goods are normally cleared atcustoms either before their shipment to Russia or when the goods reach the designated customshouse/post (and are placed in a special temporary customs warehouse if necessary). Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 135 St. Petersburg Foundation for SME Development
  • 136. Customs clearance is normally completed by the importer of record (or a customs agent acting on itsbehalf) filing the customs declaration (the main document) and the required set of documents. The listof documents required for customs clearance in each particular case depends on the type andcharacteristics of the goods and terms of their importation (e.g., the customs regime chosen).The timing for the customs clearance procedure is one business day after the date when a customsdeclaration was registered by the Russian customs authorities, provided that all the requireddocumentation was submitted. However, in practice the customs clearance process may take longerthan the statutory term.The legislation gives a customs inspector the right to extend that term by up to ten business days at thediscretion of the chief of a customs terminal.5.7.9. Electronic DeclarationAs of 1 January 2010, the Russian customs authorities have started to carry out customs clearanceoperations with the use of electronic declarations (hereinafter – “e-declaration”), which shouldsignificantly speed up customs clearance formalities for declarants and customs agents. Currentlyalmost all customs posts are equipped with the technical facilities for performing “electronicdeclaration”, 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) electronicallyrelease the goods. E-declaration also makes it possible for importers located far from clearing customsposts 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.Currently almost all customs clearance in Russia is performed electronically. In practice some terminals(especially in the Central Region) still require the importers of record to provide documents as hardcopies along with e-declaration due to work overloads, but this old-fashioned approach is expected tocease in the near future.5.7.10. Customs RegimesGoods may be placed under any of the applicable customs regimes (i.e., “customs procedures”)established by the Customs Code of the CU that are based on the International Convention onHarmonized Commodity Description and Coding System. Below is a brief description of the mostcommonly used customs regimes.5.7.10.1. Internal (Home) ConsumptionImportation of goods for internal (home) consumption (usually, the synonymous term “release for freecirculation” is used in practice) on Russian territory is the main customs regime for importation with theensuing free circulation of the goods in Russia without any further customs restrictions or post-clearance customs control, provided that all applicable customs duties and taxes have been paid.5.7.10.2. Temporary ImportTemporary import is considered to be a special “economic” customs regime, pursuant to which foreigngoods are used for a certain period of time (the term of the temporary import) on Russian customsterritory with full or partial exemption from import customs duties and taxes (i.e., import VAT andexcise taxes, where applicable). Temporarily imported goods must remain unchanged, except forchanges 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 importedgoods required for their preservation, maintenance of the consumer features of products, and keepingthe products in the condition they were in before they were cleared at customs for temporaryimportation into Russia. Doing business in St. Petersburg136 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 137. Certain products (e.g., pallets and other types of returnable packaging for goods temporarily importedto further international trade, tourism, science, culture, cinema and sporting relations, etc.) may betemporarily imported with full exemption from import customs payments.Where partial (rather than full) exemption from import customs payments is granted, the temporaryimport regime contemplates that 3% of the total amount of import customs payments (that wouldhave been paid if the goods had been fully imported for free circulation) must be paid.However, the generally permitted term for temporary import is only two years. There are somestatutory requirements that should be met in order to be eligible for exemption from customs duties. Inparticular, temporarily imported goods may not be sold or otherwise transferred to any third party. Thecustoms authorities could also request security for import customs payments (most likely a bankguarantee or cash deposit) from the importer of record before applying the temporary import regime.5.7.10.3. Bonded WarehouseUnder the bonded warehouse customs regime, goods imported into the CU are stored at special places(bonded warehouses) under customs control without an obligation to pay import customs duties andtaxes, and without regard to domestic quota restrictions or other economic measures. Storage at abonded warehouse is subject to regular non-refundable storage fees as contractually agreed with thebonded warehouse’s owner. Goods so imported and put under this customs regime (pursuant to thepermission 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 anoption to extend this term with the permission of the customs. Goods with a shorter useful life and/orsale terms must be assigned to other customs regimes and shipped from such bonded warehouses atleast 180 days prior to expiration of such term (except for products subject to accelerated deteriorationwith 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 bondedwarehouse can sell or otherwise transfer them to third parties, with preservation of the same customsstatus, with the prior consent of the customs authorities, which is followed by a legal substitution of theimporter of record by the third party that acquired these goods. Please, however, note that such a saleor transfer might be subject to local Russian taxation, since apart from the special customs regime abonded warehouse is no different from any other warehouse located in Russian territory.Goods placed in a bonded warehouse can be further exported, placed under another customs regime,including importation for internal (home) consumption. When sold to Russian customers for freecirculation on the local market, such goods should be declared for the “internal consumption” customsregime with payment of the relevant import customs duties and taxes.5.7.10.4. TransitUnder the customs transit regime goods cross the customs border of the CU and are under customscontrol during their movement across Russian customs territory without an obligation to pay importcustoms duties and taxes, and without regard to domestic quota restrictions or other economicmeasures. Only foreign goods can be subject to this customs regime, which is granted only based onthe permission of the customs authorities. The regime is normally granted either to a carrier or anexpediter if it is a Russian legal entity or an entity of the CU. The transit customs regime is terminatedwhen the goods are actually shipped out of Russia. A special transit customs declaration is required fordeclaration of the transit customs regime.5.7.10.5. DestructionProducts having the status of foreign goods can be declared for destruction before the customsauthorities, which would imply that such destruction must be completed under customs control and theimporter would not be subject to import customs duties and taxes with respect to such destroyed Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 137 St. Petersburg Foundation for SME Development
  • 138. 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 clearancerequirements and import customs duties and taxes under general rules.5.7.10.6. Abandonment to the StateForeign goods imported into Russia may be abandoned to the Russian state, which is a special customsregime that can be selected by the importer of record. Under this regime the title to the importedgoods is gratuitously transferred to the state without an obligation of the importer to pay any importcustoms duties and taxes, including the customs processing fee. Imported products may be clearedunder this regime with a permit from the customs authorities. This regime may be a convenient way toavoid 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 theimporter is ready to pay, or the customs request a permit / license that the importer does not possess,and it is too costly / burdensome to ship the goods back from Russia).5.7.10.7. ExportExport of goods is the main customs regime for definitive exportation of goods out of the customsterritory of Russia. Export of certain types of goods is subject to export customs duties. Export of anygoods is also subject to Russian VAT with a special 0% rate (see below).5.7.10.8. Re-exportRe-export is the customs regime when goods initially delivered into Russian territory may be taken outof Russian territory with the return of customs duties and fees (if any were paid) and withoutapplication of any economic restrictions provided by Russian laws. Generally, the re-export regimeapplies only to “foreign goods”, i.e. goods that were delivered into Russian territory but have notundergone the entire customs clearance procedure and have not been released under a particularcustoms regime. Thus, generally, the re-export customs regime is not applicable to goods that wereimported into Russia and released for free circulation in Russia. The re-export regime can be applied togoods released into free circulation in relation to which it has been established that when they crossedthe Russian customs border they had defects or in some other way did not conform to the provisions ofthe foreign trade contract in terms of quality, quantity, description or packaging, and for this reasonwere returned to the supplier or another nominated person. Such goods may be placed under thecustoms regime of re-export, if they (i) were not used or modified, except if such use or modificationwas required for detection of the defect; (ii) may be identified by the Russian customs authorities (iii)were re-exported within six months from the date of release into Russia.5.7.10.9. Re-importRe-import is the opposite of the re-export customs regime and is designed to exempt goods that wereinitially exported from the customs territory of Russia without payment of the applicable importcustoms duties and taxes from the payment of import customs duties and taxes, without theapplication of any economic restrictions provided by Russian laws and laws of the CU.5.7.11. Customs Valuation RulesThe customs value of goods imported into the CU, which is used as a basis for calculation of importcustom duties and taxes, includes the cost of goods, insurance costs and costs on transportation of thegoods to the customs border. Depending on the actual circumstances, including contractualarrangements, an importer of record may in addition have to include royalties (payable for the right touse trademarks and other IP rights in order to resell the goods) or other income (e.g., freight charges,insurance costs, etc.) into the customs value of those goods, provided that the importer must directlyor indirectly (e.g., via third parties) pay those royalties, other license fees and/or other income as adirect consequence of importation of the goods being valued at customs. Doing business in St. Petersburg138 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 139. It should be noted that the Russian customs authorities often increase the customs value of importedgoods and the importers of record have the right to challenge such adjustments in court. Court practiceshows that in the majority of cases the courts supported the importers of record.5.7.11.1. Import Customs DutiesCustoms duties are imposed on top of the declared customs value confirmed and accepted by theRussian customs authorities. The rates of import customs duties in Russia normally range from 0% to25% (for cars – up to 35%) based on the Unified Customs Tariff of the CU. The nominal rates of theUnified Customs Tariff of the CU apply to goods originating from approximately 130 countries withwhich Russia has established a “most-favored nation” (“MFN”) regime. Double rates of import customsduties apply to goods produced in non-MFN states. Lower rates (0.75% of the nominal value indicatedin the Customs Tariff) apply to certain categories of goods produced in some developing countries,while no duties apply to products imported from the 48 least developed countries. Import customsduties may be deducted for corporate profits tax purposes.Starting from 1 July 2010 the import customs duties are paid to the unified budget of the CU and aresubsequently distributed among the members of the CU.5.7.11.2. Export Customs DutiesEven after the formation of the CU, setting export customs duties will remain within the competence ofthe member states. Generally, Russian mineral resources and raw materials (such as oil,petrochemicals, gas, wood, metals etc.) are subject to export customs duties. There is no unified list ofexport customs duties and the Russian Government separately establishes the export customs dutiesfor particular types of products. The Russian Government establishes the rates of export customs dutiesfor oil and petrochemicals at 2 month intervals. Export customs duties may be deducted for corporateprofits tax purposes. Oil supplied to Belarus starting 1 January 2011 is duty free and the export customsduties are levied when it leaves the external border of Belarus.5.7.11.3. Import VATStarting from 1 July 2010 payments of import VAT and distribution of the VAT between member statesare performed based on a special agreement signed by the member states. The customs VAT applies tothe sum total of the customs value and the customs duty. Import of goods is generally subject toRussian customs VAT levied at the same rates as Russian sales VAT (i.e., 18% and 10%). VAT is imposedon all goods imported into Russia and also applies to the sale of goods, works and services in Russia.The general VAT rate is 18% and applies to most goods, works and services. The 10% VAT rate appliesto limited categories of goods, e.g., pharmaceuticals, children’s products, some food products, whilesome other medical equipment and medical goods, art and cultural goods, etc. may be VAT exempt.Import VAT may generally be offset against output VAT collected from local customers.Pursuant to a direct provision of the Russian Tax Code the importation of products that do not haveanalogues manufactured in Russia and are included in the list approved by the Russian Government isVAT exempt. This exemption came into effect from 1 July 2009.5.7.11.4. Export 0% VATExportation of goods from Russian customs territory is subject to 0% VAT. There is a special statutoryprocedure that Russian exporters of record must comply with in order to apply the 0% VAT rate toexports. Generally, they must provide the Russian tax authorities with the following documents:(A) The contract for the exportation of goods;(B) A statement from the exporter’s bank confirming the receipt of payment for the exported goods;(C) A customs declaration bearing a stamp of the Russian customs authorities evidencing the actual export of goods out of Russia; and Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 139 St. Petersburg Foundation for SME Development
  • 140. (D) Copies of shipping documentation (transfer and acceptance statements, waybills, invoices, etc., confirming the transport of the goods out of Russia).Additional requirements are provided for the exportation of goods that were previously imported intoCU countries.The taxpayer must submit these documents together with a VAT refund application within 180 daysafter the export of the goods. If the taxpayer does not meet the requirements outlined above, thetaxpayer loses the right to apply the 0% VAT rate on exports and the usual VAT rates (10% or 18%)apply depending on the type of goods.5.7.11.5. Import Excise TaxesExcise taxes apply to Russian imports of limited categories of products, like tobacco products, spiritsand alcohol, beer, cars, petroleum products, diesel & motor oil.5.7.12. In-Kind ContributionImportation of goods as an in-kind contribution into the charter capital of a Russian legal entity is dutyfree. After importation of the goods, the importer of record is required to prove that the goods wererecorded on its balance sheet and were not disposed of.Goods imported with no import duty as in-kind contributions into charter capital are treated asconditionally released and if the goods are alienated by the importer in any manner, the importer willbe required to pay the import customs duties and import VAT plus interest for the whole term duringwhich the duty exemption applied to the goods.5.7.13. Customs Inspection and LiabilityCustoms authorities are allowed to carry out customs inspections within 3 years after clearance of therespective goods. During a customs inspection the customs authorities verify the fact of release ofimported goods and the accuracy of information stated in the customs declaration and otherdocuments submitted to the customs authorities in the process of customs clearance. Please note thatthe customs authorities may check not only the declarant of the goods, the customs brokers, owners oftemporary-storage and/or bonded warehouses, customs carriers, but also the legal entities authorizedto dispose of the imported goods in the customs territory of Russia (e.g., the local downstreamwholesalers and retailers of the imported goods).A customs inspection may be either a documentary or on-site inspection. When the customs authoritiesreveal a customs legislation breach during a documentary inspection, a targeted on-site inspection maybe carried out. An on-site inspection should be performed within two months. However, in certain casesit may be extended by one month. The customs authorities may use documents and informationprovided by Russian banks, as well as inventory and audit conclusions, and the conclusions made byother state authorities.5.7.13.1. Arrest of Goods during Customs InspectionThe customs authorities are authorized to arrest goods during a special customs inspection, if theyreveal that: The goods were imported without any special marks, symbols, or other elements applied in accordance with Russian legislation certifying the legality of their import; The customs declaration does not contain the “Release for free circulation” or other applicable stamp of the corresponding customs regime, or the customs authorities deem such stamps fictitious or the documents on which such entries are made are missing; Conditionally released goods were utilized and/or disposed of for purposes other than those permitted by customs. Doing business in St. Petersburg140 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 141. Arrested goods should be returned to their owner on the final day of the customs inspection if a breachof the customs legislation was not confirmed.5.7.13.2. Seizure of Goods during Customs InspectionDuring customs inspections goods may be seized for a term that does not exceed one month if theimport of such goods into the Russian market is directly prohibited or a simple restriction on movingthe goods is not sufficient to detain the goods. Such seizure can only last for the period of the customsinspection. Generally seized goods are removed to a temporary storage warehouse. The goods shouldbe released on the final day of the customs inspection if a breach of the customs legislation was notconfirmed. Goods may be confiscated only based on a court ruling.5.7.13.3. Administrative SanctionsBased on the results of the customs inspection, the customs authorities may hold the inspectedcompany administratively responsible for breach of the customs rules. Chapter 16 of the RussianAdministrative Code provides such sanctions as administrative fines and/or confiscation of the importedgoods. Note that in the case of confiscation, this sanction may be applied not only to the actual violator(the importer of goods) but also to the bona fide downstream owner of the goods if the goods wereinvolved in a customs law violation. Depending on the type of violation committed, the sanctionagainst the companies could amount to fines of up to 200% of the amount of the goods’ value or theamount of customs duties and import VAT that were not paid with respect to the cleared goods inquestion and include confiscation of those goods.There is a 2-year limitation period established for customs violations. Normally it runs starting from themoment of commitment of the violation. However, in the case of lasting/repeated violations, this 2-year period runs from the date of discovery of the violation by the Russian customs authorities.Importantly, customs payments cannot be enforced after expiration of the statute of limitations termestablished for customs audits, i.e. more than 3 years after customs clearance of the respective goods.Please note that the administrative sanctions (i.e., confiscation of goods, fines) may be imposed onlyon the basis of a court decision; the customs authorities may not confiscate the goods ex officio.5.7.13.4. Criminal SanctionsRussian law does not have the concept of corporate criminal liability. Only individuals (i.e., themanagers of an importer of record or a customs broker) responsible for a particular crime can facecriminal penalties in Russia. Importantly, Russian law does not limit the application of criminal liabilityfor corporate crimes only to employees of the relevant corporate entity that committed the offence.Relevant crimes could constitute evasion of customs payments, tax evasion and bribery.The maximum liability for evasion of customs payments is 12 years of imprisonment or a fine of up toRUB 1 million (approx. USD 33,000) or the amount of the salary or other income of the convicted personfor a period of up to 5 years. The maximum statute of limitations for this crime is 15 years.5.7.14. Safeguard MeasuresThe CU applies its own safeguard mechanisms, such as anti-dumping, countervailing and safeguardmeasures that are generally based on WTO regulations and may be applied for the neutralization of injurycaused to domestic industries by dumping, subsidies or considerably increased importation of goods fromthird countries. Safeguard measures are imposed by the Commission of the CU based on the results ofspecial investigations. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 141 St. Petersburg Foundation for SME Development
  • 142. Since the CU is still being formed, a transition period has been in operation during which safeguardmeasures applied at the national level of the CU member states are reviewed and extended to the wholeCU territory. New safeguard investigations are conducted by the Commission of the CU. Doing business in St. Petersburg142 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 143. 5.8. Currency Regulations Information for the current chapter was developed and kindly provided by Baker & McKenzieThe Civil Code states that the ruble is the national currency of the Russian Federation. Althoughagreements may refer to the ruble value equivalent of foreign currency, all transactions conductedinside the Russian Federation must, as a general rule, be settled in rubles. The Civil Code, however,permits the use of foreign currency in cases provided for by law. Federal Law No. 173-FZ On CurrencyRegulations and Currency Control, dated 10 December 2003, as amended; (the “Currency Law”)establishes the basic rules of currency regulation and control.5.8.1. Currency OperationsThe Currency Law regulates a broad range of currency operations including: Payments made in a foreign currency; Transfer of foreign securities; Ruble transfers between a Russian resident and a non-resident or between two non-residents; Transfer of domestic securities between a resident and a non-resident or between two non- residents; The import and export of rubles and securities; Transfer of funds and securities from the overseas account of a resident into a domestic account, and vice versa; Transfer of rubles and securities between the domestic accounts of a non-resident; Clearing settlements; Settlements between commission agents and principals connected with clearing; and Settlement under derivative transactions.5.8.2. Resident vs. Non-resident StatusThe Currency Law divides individuals and legal entities into two classes: residents and non-residents.Residents include: Russian citizens and other individuals whose permanent place of residence is theRussian Federation; legal entities established in accordance with Russian legislation; representativeoffices (branches) of Russian legal entities outside Russia; and the governments of the RussianFederation, constituent entities of the Russian Federation, and municipal units. Non-residents aredefined as individuals whose permanent place of residence is located outside Russia; legal entitiesincorporated outside Russia; enterprises/organizations that are not legal entities, organized andlocated outside the Russian Federation; and representative offices (branches) of foreign legal entities inRussia.5.8.3. Special Currency Control RulesOn 1 January 2007, the Russian currency control regime was significantly relaxed and a number ofpreviously existing requirements were abolished. As of today, there are no substantive currency controlrequirements (in the form of “consents, authorizations or permits”, etc.) that apply to foreigntransactions.However, certain requirements still apply to Russian residents: Russian companies must remit all foreign currency export proceeds to their Russian bank account(s) (“repatriation of currency proceeds”), subject to certain exceptions; Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 143 St. Petersburg Foundation for SME Development
  • 144.  “Transaction passports” are required for certain transactions (external trade, loans) at Russian banks; Most Russian residents are prohibited from performing foreign currency transactions (the Currency Law provides some exceptions); The purchase and sale of foreign currency may only be performed at authorized Russian banks; Cash exports are subject to restrictions; When a Russian company or individual opens an overseas bank account in OECD/FATF member countries they must notify the tax authorities and present regular reports on the cash flow in such accounts; and The operation of an overseas bank account by a Russian resident is subject to certain restrictions.5.8.4. Repatriation of Currency ProceedsIn accordance with Article 19 of the Currency Law, Russian companies must collect the full amount ofpayments due under a foreign trade contract on their accounts with Russian banks in accordance withthe terms of the relevant foreign trade contract (the so-called “repatriation rule”). Article 19 of theCurrency Law does not expressly allow a Russian supplier to assign or set-off its claims against a foreignbuyer under a foreign trade contract. The exceptions to this rule allow for offsetting claims only inlimited instances, including for Russian transport and fishing companies as well as under reinsurancecontracts.5.8.5. Transaction PassportA Russian counterparty (that is not a bank) must comply with certain procedural requirements inconnection with payments to a foreign lender or other counterparty (export/import transactions),including:1. To open a transaction passport with its Russian authorized bank; and2. To file certain information, including a separate “certificate on currency transaction identification”.The main requirements in relation to transaction passports are listed in the Currency Law andInstruction of the Central Bank of Russia No. 117-I dated 15 June 2004 (“Instruction No. 117-I”). Inparticular, Instruction No. 117-I stipulates a list of documents that must be submitted to an authorizedRussian bank by a Russian company in order to open a transaction passport. The documents should beprovided to the bank before the first currency operation under the relevant transaction. The banksgenerally require all documents to be translated into Russian. The documents to be filed typicallyinclude a certified copy of the agreement documenting the transaction. Furthermore, under Article 23of the Currency Law, banks may request other supporting documents, such as acceptance certificates,bank statements, customs declarations, etc., although, in practice, only the basic documents areusually required. After receipt of the documents the bank reviews them and opens the transactionpassport.The identification certificate requirement is applicable to settlements between Russian residents andnon-Russian residents under various types of financing transactions, including loans. For each paymentunder the relevant transaction, the resident company has to provide a separate “certificate on currencytransaction identification” indicating the transaction passport details (if applicable) and the details ofthe currency operation, as envisaged by Instruction No. 117-I.5.8.6. Liability for ViolationThe currency control system is supervised by the CBR, the Government, and the Federal Service ofFinancial and Budgetary Oversight. Currency control is executed through agents of the currency controlregime, including: authorized banks, professional participants of the securities market, andgovernmental agencies. Doing business in St. Petersburg144 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 145. Violation of Russian currency control requirements may entail civil, administrative, or criminal liability.Administrative penalties for violation of Russia’s currency control requirements include various fines,which may be imposed on individuals, legal entities, and company executives. The amount of a finemay be as high as the entire value of a transaction performed in violation of the currency controlrequirements. Other sanctions include the revocation of licenses (primarily applicable to banks), andimprisonment.Violation of currency control requirements include, non-compliance with the terms for submission to aRussian authorized bank of reports on currency operations. Recent changes to the currency controllegislation introduced differential fines ranging from RUB 5,000 (approx. USD 167) to RUB 50,000(approx. USD 1,667) for legal entities depending on the term of the violation.In addition, failure to comply with the repatriation requirements in respect of foreign currency proceedsmay result in imposition of fines in the amount of 1/150 the CBR refinancing rate (currently 8% p.a.) ofthe amount of proceeds returned with a delay for each day of such delay. In case of non-return offoreign currency proceeds the fine may be up to 100% of the amount of non-returned proceeds. Failureto return foreign currency proceeds in the amount of more than RUB 30 million (approx. USD 1 million)may also lead to criminal liability of the companys senior management. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 145 St. Petersburg Foundation for SME Development
  • 146. 5.9. Employment Information for the current chapter was developed and kindly provided by Baker & McKenzieThe principal legislation governing labor relationships in the Russian Federation is the Labor Code of theRussian Federation (the “Labor Code”), effective 1 February 2002, as amended through 2011. In additionto this core legislation, labor relationships are regulated by the 1996 Federal Law On Trade Unions, TheirRights and Guarantees of Activity, as amended (currently through 2011), as well as Russian legislation onminimum wages, labor safety and other related laws and numerous regulations.Russian labor law applies equally to regular employees and top managers, including the CEOs ofRussian companies and heads of representative offices and branch offices of foreign companiesaccredited in Russia. Russian labor law also applies to foreign nationals employed by Russian or foreignbusinesses in Russia. All employers should comply with special immigration law requirements forforeign employees.A written employment agreement in Russian setting out the basic terms and conditions of theemployment relationship must be entered into with each employee working in Russia. The Labor Codeprovides all employees with mandatory minimum guarantees and employment-related benefits andcompensations, which cannot be superseded by the agreement between the employer and theemployee. Accordingly, any provisions in an employment agreement that impair the employee’sposition as compared to that set forth by such guarantees will be invalid. As a general rule employmentagreements are entered into for an indefinite period of time. A definite term (fixed-term) employmentagreement may also be concluded, but such an agreement cannot be enforced for longer than fiveyears, and it may only be concluded when the nature or conditions of work make it impossible for theparties to enter into an indefinite term agreement, in particular in the circumstances specificallyprovided for by Article 59 of the Labor Code. Further, an employee cannot be prohibited from holding asecond job in addition to his/her full-time employment, with certain limited exceptions and restrictionsprovided by the Labor Code and other federal laws.Under Russian labor legislation the relevant employment duties and obligations must be expresslydefined in the employment agreement. It is important that these duties and obligations are definedbroadly enough since an employee cannot be required to perform tasks outside the scope of job dutiesexpressly described in his/her employment agreement. The employer cannot expand or otherwisemodify them unilaterally without the written consent of the employee. Similarly, the employergenerally cannot make unilateral changes to the employee’s obligations. In general, employment termsand conditions that have been agreed upon by employer and employee can only be amended by awritten agreement of both parties. In the limited cases where an employer is allowed to unilaterallyamend the employment terms and conditions agreed upon by the parties the employer must have legalgrounds for such changes, must notify the employee two months in advance of any changes, and followother formalities prescribed by law.5.9.1. Employment-related OrdersEmployers in Russia are required to issue an internal order each time an employee is hired, transferredto a new job, granted vacation, disciplined or terminated, and in certain other cases. For example,Article 68 of the Labor Code expressly requires that the order on hiring must be issued and presented tothe employee for countersigning no later than three days after the employee has commenced work.When an employment agreement is terminated for any reason an order on termination must be issuedand presented to the employee for countersigning on the last day of employment (Article 84.1 of theLabor Code). Doing business in St. Petersburg146 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 147. 5.9.2. Labor BooksThe labor book is the principal document containing a formal record of a person’s employment historyand certain other information. The employer must make a record of employment in its employees’labor books in respect of any employment exceeding five days. The labor book is vital to each employeebecause it confirms his/her right to a state pension and other social benefits. Employers are responsiblefor keeping their employees’ labor books (if this work at this employer is the employees primaryemployment) and making all records in them in a timely manner and in strict conformity with therequired format. The employer must return the labor book, duly completed and stamped, to theemployee on the last day of employment.5.9.3. Mandatory Policies and ProceduresAll employers in Russia are required to issue Internal Labor Regulations and other mandatory labor-related policies and procedures. All employees should familiarize themselves with these policies againsttheir signature. This procedure is essential for the relevant policies, procedures and other mandatoryrequirements to become binding on the employees. The employer’s policies and procedures should beissued in the Russian language (or in a bilingual version) and be approved by an internal order of theCEO of the company or head of the representative office/branch office.5.9.4. Probationary PeriodThe employer has the right to establish a three-month probationary period for a newly hired employee.The employer may also set a six-month probationary period for employees hired for certain topexecutive positions (e.g., head of an organization and chief accountant and their deputies, and head ofa branch office, representative office, or other separate structural subdivision of an organization). Theimposition of a probationary period must be specifically stated in both the employment agreement andthe order on hiring. If during the probationary period the employer determines that the employee doesnot meet the criteria established for the role for which he/she was hired, the employee can bedismissed by the employer without payment of severance pay and with only three days’ written notice.Such notice to the employee must provide the reasons why the employee is deemed as having failed topass the probation. The employee is also entitled to resign during the probationary period, withoutstating any reason, with three days’ written notice to the employer.5.9.5. Minimum WageWages for full-time work may not be lower than the minimum monthly wage established by theapplicable Russian legislation. The amount of the minimum monthly wage is periodically indexed bythe government. The federal statutory minimum monthly wage is currently RUB 4,611 per month(approx. USD 154).Regional minimum wages are established by regional agreements. They apply to all employers in thatregion that do not opt out within 30 calendar days of the official publication of the respective regionalagreement. Some of the constituent regions of the Russian Federation, including the City of Moscow,have already implemented regional agreements on a minimum wage. Regional minimum wages arealways equal to or higher than the federal minimum wage and are tied to the regional minimumstandard of living. For instance, the minimum monthly wage in Moscow as of 1 January 2012 is RUB11,300 (approx. USD 377) and will be increased as of 1 July 2012 to RUB 11,700 (approx. USD 390).5.9.6. Work TimeEmployers are required to keep a record of all the time worked by each employee, including anyovertime. The regular working week is 40 hours. Any time worked over 40 hours per week is classifiedas overtime and may only be demanded by employers in extraordinary circumstances, as specified in Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 147 St. Petersburg Foundation for SME Development
  • 148. Article 99 of the Labor Code, and in most cases only with an employee’s prior written consent. TheLabor Code limits the total amount of overtime for an employee to 120 hours a year, and an employeecannot be required to work more than four hours of overtime over two consecutive days. Overtimemust be paid at a rate of 150% of the regular hourly rate for the first two hours of overtime worked inany one day, and at a rate of 200% of the regular hourly rate thereafter. Upon the employee’s writtenrequest, the employer can compensate for overtime work by granting the employee additional time offin lieu of payment; the time off should be no less than the time worked as overtime.It should be noted that certain limitations regarding overtime work apply to certain protectedcategories of employees, including employees under the age of 18, pregnant women, women withchildren under the age of three, disabled employees, and some other categories defined by federallaws.Workers may also be hired on the terms of an open-ended working day. The primary advantage of thisis that there is no need to obtain consent whenever the employer asks an employee to work overtime.Moreover, the extra hours worked by employees with an open-ended working day need not be paid asovertime: instead they are entitled to additional paid vacation of no less than three calendar days peryear. Nevertheless, it is important to note that employees with an open-ended working day can berequired to work overtime only occasionally and upon a specific order of the employer when there is aneed for such overtime work. Further, job positions subject to the open-ended working day regimemust be approved by the employer and listed in the company’s Internal Labor Regulations.5.9.7. Holidays and Non-working DaysThere are currently 12 public holidays in the Russian Federation.Uninterrupted weekly time off must not be less than 42 hours. As a rule, employees may only berequired to work on a non-working day or public holiday in extraordinary circumstances, as specified inthe Labor Code, and only with the employees’ prior written consent. As a general rule, employees mustreceive payment at no less than twice the regular rate for any work performed on a non-working day orpublic holiday, or be given time off in lieu of payment.Some limitations regarding working on public holidays and non-working days apply to certainprotected categories of employees, including employees under the age of 18, pregnant women, womenwith children under the age of three, disabled employees, and other categories as defined by federallaws.5.9.8. VacationsEmployees in Russia are entitled to annual paid vacation of at least 28 calendar days per year ofemployment. An employee is entitled to use his/her vacation time in full once he/she has worked for theemployer for at least six months. The Labor Code requires that the dates of the annual vacation of eachemployee be indicated in the vacation schedule for the calendar year, which the employer mustapprove by mid-December of the preceding year. The Labor Code further requires that employers notifytheir employees in writing at least two weeks before the commencement of the vacation. Eachemployee’s vacation allowance should be paid at least three days before a vacation is due to start.5.9.9. Sick LeaveEmployees are required to submit a doctor’s note for any absence only after their recovery and returnto work. Generally, employees cannot be terminated by the employer while absent on sick leave, andare entitled to receive statutory sick leave compensation. Sick leave compensation for the first threedays of sick leave is covered by the employer, the rest of the term of sickness is covered by the RussianState Social Insurance Fund, which is funded by the employer’s mandatory social contributions paid ona year-to-date salary of up to RUB 512,000 (approx. USD 17,067) in 2012 for each employee percalendar year. Since 1 January 2007, sick leave compensation and maternity leave compensation have Doing business in St. Petersburg148 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 149. been regulated by Federal Law No. 255-FZ On Obligatory Social Insurance in the Event of TemporaryDisability and in Connection with Maternity (as amended), dated 29 December 2006. Pursuant to thislaw, sick leave compensation must be paid to an employee in the event of his/her illness or injury (labor-related or other) and when an employee is caring for a sick family member, as well as in some otherinstances.The duration of payment and amount of sick leave compensation varies according to the grounds forthe sick leave. In cases of labor-related injury or occupational disease, the amount of sick leavecompensation is 100% of the employee’s average earnings. In other cases sick leave compensation isdetermined on the basis of the employee’s average earnings and total term of employment.Since 2011 the average earnings for the purpose of sick leave compensation are to be calculated withreference to the two calendar years preceding the year when an employee takes sick leave. In 2012 thestatutory maximum average daily earnings for the purpose of sick leave compensation are RUB1,202.74 per day (approx. USD 40), if the employee’s overall employment term exceeds or is equal to 8years.If the employee’s total term of employment is less than six months, the sick leave compensation cannotexceed the federal minimum monthly wage.If the employee has more than one place of employment and has been employed with the sameemployers for the preceding two calendar years, he/she is entitled to sick leave and/or maternity leavecompensation at each place of employment and to child care leave compensation at one place ofemployment at the employee’s choice. If the employee has more than one place of employment andhas been employed with different employers for the preceding two calendar years, he/she is entitled tothe above compensations only at one of his/her current places of employment at the employee’schoice. If the employee has more than one place of employment and has been employed both with thecurrent and with other employers for the preceding two calendar years, he/she is entitled to the abovecompensations either at each place of employment or at one of his/her current places of employmentat the employee’s choice.5.9.10. Maternity LeavePaid maternity leave consists of 70 calendar days prior to a birth, plus 70 calendar days after the birth.Further paid maternity leave is provided in the event of complications while giving birth or in cases ofmultiple births (86 and 110 calendar days after the birth respectively). Maternity leave is to be providedcumulatively; that is, if less than 70 days maternity leave are used before birth, the balance is added tothe 70 days of paid maternity leave provided after birth.Just like sick leave compensation, maternity leave compensation is paid out of the Russian State SocialInsurance Fund, which is funded by the employer’s mandatory social contributions. The amount of thematernity leave compensation is determined on the basis of the employee’s average earnings and totalterm of employment.Since 2011, average earnings are calculated with reference to two calendar years preceding the yearwhen an employee takes maternity leave. In 2012 the statutory maximum average daily earnings forthe calculation of maternity leave compensation are RUB 1,202.74 per day (approx. USD 40).The maternity leave compensation is to be paid as a single payment. If the employee’s total term ofemployment is less than six months, the maternity leave compensation cannot exceed the federalminimum monthly wage.In 2012 women have the right to request the employer to calculate their maternity leave allowancebased on a specific formula, effective until January 1, 2011. In this case an employee’s average earningsfor the purpose of maternity leave allowance should be calculated with reference to the last twelvemonths of work preceding the month when an employee takes maternity leave. The statutory Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 149 St. Petersburg Foundation for SME Development
  • 150. maximum average daily earnings for the calculation of maternity leave allowance in this case are RUB1,136.99 per day (approx. USD 38).A child’s care provider (the employee who has given birth or who is the father, grandmother,grandfather or other relative who is taking care of the child) may request partially paid childcare leaveuntil the child is three years old. The employee retains the right to return to his/her job during the entireperiod of paid/unpaid leave, and the full leave period is included when calculating the employee’slength of service.The procedure for calculation of sick leave, maternity leave and child care leave allowances is rathercomplicated in Russia; it is highly recommended to verify the procedures and documentaryrequirements on a case-by-case basis.5.9.11. DismissalAn employment relationship may be terminated by the employer only on the specific grounds providedin the Labor Code, including: a reduction in the workforce, the employee’s repeated failure to performhis/her employment duties without justifiable reasons (if the employee was lawfully disciplined withinthe preceding 12 months), the employee’s unjustified absence from the workplace for more than fourconsecutive hours during one working day, and other reasons. Arbitrary termination of an employmentrelationship by the employer is not allowed, except in the case of the company CEO, who can beterminated by unilateral decision of the owner provided he/she is paid adequate severancecompensation, equal at least to three months’ average earnings.Employers must strictly comply with specific procedures and documentary requirements provided bythe Labor Code when terminating employment for any reason. The Labor Code gives additionalprotection to a number of categories of employees, including minors, female employees, employeeswith children, trade union members, and various other categories. Conversely, employees are entitledto terminate their employment at any time, without stating any reason, and, as a general rule, withonly two weeks’ written notice to the employer.5.9.12. CompensationSalaries must be paid to employees at least once every fortnight. Employers are obliged to pay salaryand other employment-related payments on the dates set by their internal labor regulations and by theindividual employment agreement. The employer is required to pay compensation (i.e., interest) forany delay in payment of salary and other employment-related payments in accordance with Article 236of the Labor Code. In addition, employees have the right, upon prior written notice to their employer, tostop working if their employer delays payment of their salary for more than 15 days. Employees mustbe compensated in the currency of the Russian Federation (rubles). As a general rule, employment-related payments in a foreign currency (both in cash and by bank transfer) are prohibited.5.9.13. Employment of Foreigners in RussiaGenerally, when hiring foreign national employees employers must obtain: (i) permission to hire foreignnationals, (ii) individual work permits and (iii) work visas, before foreign nationals are employed and/oractually commence work in Russia (except for citizens of Belarus and Kazakhstan). As a precondition forobtaining permission to hire and a work permit, a company must file an application for a quota for workpermits. The application for a quota for the following year should be filed with the authorities before 1May of the current year.The above procedure equally applies to foreign nationals working in Russia under civil-law agreementsfor the performance of work or the provision of services (e.g., marketing consultants or salesrepresentatives). Permission to hire, work permit and work visa requirements equally apply torepresentative offices and branch offices of foreign firms. Foreign nationals working at accreditedRussian representative offices or branch offices of foreign firms also need to obtain a personal Doing business in St. Petersburg150 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 151. accreditation card from the accrediting body of the representative or branch office in order to apply fora work permit and work visa. Generally a work permit and work visa are issued for a one year period.The procedure and required documents vary according to whether or not the foreign national requires aRussian visa. In practice, the process of obtaining permission to hire foreign nationals, individual workpermits and work visas in Moscow may take from four to six months to complete. In other regions ofthe Russian Federation this period may differ. Also employers are required to provide financial, medicaland social guarantees in respect of their foreign employees in Russia and comply with the generalmigration monitoring requirements, including filing notifications of foreign employees’ travel into andout of Russia, as well as within its territory.Thus, employment of a foreign national in Russia requires advance planning to allow sufficient time forall procedures.The Russian authorities may adopt a list of quota-exempt professions/positions for each year, whichallows employers to hire foreign employees without observing the quota requirement.There is also a special category of foreign employees – the highly qualified foreign specialist (a“Specialist”). A Specialist is subject to a simplified procedure for obtaining a work permit and a workvisa. To obtain a work permit for a Specialist his/her employer is not required to obtain a quota to hireforeigners and permission to hire foreign employees. Representative offices of foreign firms cannot usethis simplified procedure.The main criterion for recognizing a foreign employee as a Specialist is the salary level paid in Russia.To satisfy this criterion, the salary received by the Specialist under a local employment /civil lawagreement should be RUB 2 million (approx. USD 67,000) per year or more. A work permit and a workvisa invitation letter are issued within 14 business days. The Specialist may receive a work permit and awork visa for up to 3 years.Russian law provides for severe penalties for non-compliance with the above work permit and work visarequirements for foreign employees. During the past year the Russian government has made it apriority to increase control over the use of foreign employees in Russia. It has considerably extendedregulation and tightened up enforcement of the above-mentioned migration law requirements.Russian migration legislation is currently undergoing significant amendment, so the proceduresinvolved could be modified at any time. It is highly recommended to verify the procedures anddocumentary requirements on a case-by-case basis in advance.5.9.14. Trade Secrets (Know-how)Trade secrets (know-how) can form an important element of an employment relationship. In particular,Federal Law No. 98-FZ On Trade Secrets, which was enacted on 29 July 2004, and Part Four of the CivilCode of the Russian Federation, effective from 1 January 2008, regulate trade secrets (know-how) in anemployment relationship context. Under these laws, if an employer wishes to protect its trade secrets(know-how) from unauthorized disclosure by employees it should implement certain statutoryprocedures under a “commercial secrecy regime”.In order to implement a commercial secrecy regime, an employer should determine a list of tradesecrets (know-how), restrict access to them, keep track of the individuals who have access to tradesecrets (know-how) and/or individuals to whom trade secrets (know-how) were transferred, includeprovisions in the employment agreements regulating trade secrets (know-how), and mark documentsconstituting trade secrets (know-how) in a special manner set out by the Federal Law On Trade Secrets.Also, the Federal Law On Trade Secrets expressly lists information that may not constitute trade secrets(know-how) and that therefore is not protected under the commercial secrecy regime. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 151 St. Petersburg Foundation for SME Development
  • 152. Employees should be notified, against their signature, of the trade secrets (know-how) directly relatedto their job functions and of their liability for violation of the commercial secrecy regime. Also theemployer is required to provide the conditions necessary for employees to observe the commercialsecrecy regime.The participating employees, for their part, must observe the commercial secrecy regime, must notdisclose trade secrets (know-how), and must pay damages for a culpable disclosure of protected tradesecrets (know-how), if all the statutory procedures were properly implemented by the employer. Inaccordance with Part Four of the Civil Code of the Russian Federation the protection of trade secrets(know-how) extends beyond the termination of the employment relationship, forbidding employeesfrom disclosing trade secrets (know-how) for as long as the employer has effective exclusive rights tothe trade secrets (know-how). However, we recommend concluding a separate civil-law contract onnon-disclosure of trade secrets (know-how) with an employee after termination of employment inorder to protect trade secrets (know-how).5.9.15. Personal DataPursuant to Federal Law No. 152-FZ On Personal Data, enacted on 27 July 2006 and effective as of 26January 2007, employers are required to obtain prior consent from employees and other individuals inorder to process their personal data. If an employer transfers personal data to any third parties and/orabroad it must obtain formal written consent. These requirements are of importance to transnationalcompanies with subsidiaries and representative offices or branch offices in Russia that generallyprocess the personal data of their Russian employees and individual contractors at a central locationabroad. They are also important for all employers who transfer the personal data of their employees tolaw firms, audit and accounting firms, and other providers of professional services. In the case oftransfers of personal data to any third parties and/or abroad employers are also required to notify theauthorized government agency of their intention to process personal data.All employers in Russia must keep their information systems in which personal data are processed incompliance with the requirements set by the law On Personal Data to ensure due protection of personaldata. Doing business in St. Petersburg152 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 153. 5.10. Property Rights Information for the current chapter was developed and kindly provided by Baker & McKenzieBoth the Constitution of the Russian Federation and the Civil Code of the Russian Federation uphold theright to own private property. The Land Code of October 2001 and other legislation adopted further tothe Land Code implement this principle with respect to land.The Land Code, together with Federal Law No. 101-FZ On the Circulation of Agricultural Land of 24 July2002 as amended (the Agricultural Land Law), which entered into force in January 2003, put an end tothe political debate as to whether land ownership in Russia is possible. Federal Law No. 172-FZ OnReclassification of Land and Land Plots from One Category to Another of 28 December 2004, as amended(the Land Reclassification Law), came into force on 5 January 2005. Being a follow-up to the Land Code,it detailed the procedures for the reclassification of land and land plots from one category to another.The Land Reclassification Law defines the powers of federal authorities, authorities of the constituententities of the Russian Federation, and local authorities in the procedure for changing the category ofland plots. A uniform mechanism instituted at the federal level for moving land plots from one categoryto another is a significant development in making the land market in Russia more transparent.For historical reasons, such as the fact that transactions with real properties (other than land plots)became possible earlier than transactions with land plots, at present Russian law still treats land plotsand buildings as separate objects of real estate. Despite this, however, there is a concept of a singleobject of real estate embodied through provisions that prohibit the disposal of a land plot and abuilding located on such land plot separately from each other when such properties are owned by oneand the same owner. When a building is located on a land plot that is state or municipally owned, andunless there are other buildings or structures on the land plot owned by third parties, the owner of suchbuilding has an exclusive right to lease or buy such land plot.Under Russian law, the most common types of rights to real estate available to investors are the rightof ownership and the right of leasehold. However there are, for the moment, different regulations withregard to land plots and buildings.5.10.1. LandThe Land Code distinguishes the following rights to land: the right of ownership (by the RussianFederation, constituent entities of the Russian Federation, municipalities, private individuals, and legalentities), the right of perpetual (indefinite) use, the right of free fixed-term use, leasehold, the right oflifelong inheritable possession, and easements (servitudes). Land plots are generally available toinvestors under the right of ownership and of lease. At present amendments are contemplated inRussian laws that may significantly change the entire legal framework for rights to land and otherimmovable assets.5.10.2. Right of OwnershipThe general principles of land ownership are set forth in the Constitution of the Russian Federation,adopted in December 1993. The Constitution establishes the principle of private ownership of land butdoes not regulate land relations in detail. The core legislative act governing land relations is the LandCode, which establishes fundamental terms and procedures for land use. The Land Code is furthersupplemented by other federal laws regulating land issues, often referred to in the Land Code. Forinstance, the Land Code has limited applicability to agricultural land, as it expressly provides that thecirculation of such land is the subject of a separate law, the Agricultural Land Law. The Land Code is alsosupplemented by regional laws and other regulations, which the constituent entities of the Russian Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 153 St. Petersburg Foundation for SME Development
  • 154. Federation may issue in compliance with the Land Code. In case of conflict between such laws and theLand Code, the latter enjoys preferential status.The possession, use and disposal of land plots classed as agricultural land are regulated by theAgricultural Land Law. Not all agricultural land, however, is subject to the Agricultural Land Law andrestrictions envisaged in this law. It does not extend, for example, to those land plots that wereprovided to individuals for the construction of individual homes or garages, for smallholdings or dachagardens, or land plots underlying buildings and other structures. The circulation of such land plots isgoverned by the provisions of the Land Code. Agricultural land plots may be held under the right ofownership, perpetual (indefinite) use, lifelong inheritable possession, or free fixed-term use, and suchplots may also be leased.Ownership of municipal or state land plots, where such land plots are free from any buildings orstructures, may be granted (for purposes other than development and construction or for the use of anexisting building or facility when special rules apply) to individuals and legal entities, as a rule, throughbidding in a tender or auction. Such bidding may also be held for the grant of a lease of a land plot. Theorganization of such tenders or auctions is detailed in Article 38 of the Land Code and regulationsproviding for the implementation of Article 38 of the Land Code.5.10.3. Foreign OwnershipAlthough there is no express provision permitting land ownership by foreigners (including statelesspersons), the Land Code may clearly be interpreted as allowing such ownership, except in cases where itis specifically prohibited. In 2004 the Constitutional Court of the Russian Federation confirmed thisliberal and pro-foreigner interpretation of the Land Code. Foreigners have the right to lease or acquireownership of vacant land plots (for construction purposes) or land plots under existing buildings,subject to the following restrictions set out in the Land Code: Foreigners 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 (the Decree) for the first time since the adoption of the Land Code in October 2001; (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 to which pre-emptive buy-out or lease rights to land plots may not apply for foreigners. In accordance with the Land Code Implementation Law, before the adoption of the Decree, the border restrictions applied to all border areas. Foreigners are prohibited from owning agricultural land. The Agricultural Land Law 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%. Foreigners are prohibited from owning land plots located within the boundaries of sea ports.Under the Decree border territories are defined to include municipal districts and cities (in theirgeographical entireties) adjacent to the border.Among the border territories are the city of Sochi (and other near-shore municipalities in KrasnodarskyKrai), four districts in Leningrad Oblast (the Lomonosovsky, Kingiseppsky, Slantsevsky and Vyborgskydistricts), 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 Kaliningrad Oblast, agreat many municipal districts in the Far East, and others.Pursuant to the Land Code, the prohibition on land ownership in border territories applies to foreignlegal entities (including entities acting in Russia through branches or representative offices), foreignindividuals and stateless persons, but, unlike in the case of agricultural land, does not apply to Russianlegal entities wholly or partially owned by foreign investors. Doing business in St. Petersburg154 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 155. The Decree provides neither for a transitional period, nor a clear indication as to what should be donewith land plots within restricted border territories acquired by foreigners before the adoption of theDecree. These matters are similarly not addressed by the Land Code or the Land Code ImplementationLaw either. Arguably, the lack of transitional or implementation rules in the Decree reflects theintention of its authors to prompt foreign owners of lawfully acquired land in border territories todispose of such land in accordance with general principles envisaged in the Civil Code. However, suchprinciples fail to provide a timeframe within which a foreign owner should dispose of the respectiveland. More generally, the Civil Code provides a 1-year period for alienation of property by a person orentity which is not entitled to own this type of property.In the context of other provisions of the Land Code dealing with the concept of unity of title to land andfacilities (buildings) built thereon, in the absence of any exemptions in the Decree for foreign owners ofdeveloped land plots, a foreign person will also have to dispose of all the facilities and buildingsdeveloped on all such land plots that it owns.5.10.4. LeaseForeign legal entities and individuals may be granted leases to land plots. Such leases for state ormunicipally owned property are usually based on a standard local form. Although neither the Civil Codenor the Land Code stipulates a statutory maximum length for a land lease, the lease term in most casesdoes not exceed 49 years.For instance in Moscow, Moscow City Law No. 48 On Land Use in the City of Moscow of 19 December2007, which came into force on 5 January 2008, sets different periods for which leases of Moscow-owned land plots may be obtained. The lease terms for sites free of any buildings, structures or facilitiesmay not exceed five years. Land plots on which such property is located are, however, available forlease for 25-49 years. This term can be reduced upon the parties’ agreement.The level of rent payments for the majority of land leases granted by the state or municipalities is set bya general local decree. At the same time, rental payments charged by all public landlords shouldconform to the general principles envisaged in Decree of the RF Government No. 582 dated 16 July2009. The general principles require public landlords to adhere either to the market rent rate or acadastral value-determined rate (where rental payments are calculated as a percentage of the land’scadastral value).In Moscow a lessee must pay for the right to lease any land in excess of the footprint of the existingbuildings on that land. In St. Petersburg the level of rent for land plots is determined by City Law No.608-119 On the Method for Determination of Rental Payments for Land Plots Owned by St Petersburg of 5December 2007 (the law came into effect on 1 April 2008). In both cities the lease rates vary dependingon the location of the site, the type of activity of the lessee, etc.The Land Code provides a lessee with certain basic rights. A lessee that properly fulfills its obligationsunder a lease has a pre-emptive right to renew the lease at the end of its term. The renewal rights of alessee under a land lease are to be treated in conjunction with both the pre-emptive right to purchasethe land granted to the lessee (where the leased land is state or municipally owned) and the exclusiveright of the owners of the existing buildings and structures to purchase or lease the underlying landplot.Significantly, the provisions of the Civil Code, in so far as they apply to land leases, are supplemented bythe Land Code in a number of areas. In particular, the Land Code sets forth a series of modified rights forland lessees. Their applicability in part depends upon the precise drafting of a lease. For example, thepresumption under Article 615 of the Civil Code that a lessee needs the lessor’s consent to sublease hasbeen reversed for lessees of land. Of particular significance is the provision that a lessee of state ormunicipally owned land (other than state enterprises) under a lease with a term exceeding five years isfree to assign its rights under the lease, to mortgage such rights, or grant the land plots for sublease to Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 155 St. Petersburg Foundation for SME Development
  • 156. third parties, subject only to giving notice to the lessor. This rule also applies to land leases with a termexceeding five years with private lessors (in contrast to the prior-consent requirement establishedunder Article 615(2) of the Civil Code). The assignee of a land lease does not need to enter into a newland lease.The lessor and the lessee may terminate the lease (i) by mutual agreement, (ii) unilaterally - in thecircumstances stipulated in the lease, or (iii) by a court order - in the circumstances provided by the CivilCode, the Land Code or in the lease. The Land Code contains provisions that deal with termination ofland leases in conjunction with a court order. For example, the following constitute grounds fortermination of a land lease: Misuse of the land plot (a more stringent test than under Article 619 of the Civil Code requiring either substantial or repeated violations); Use of the land plot that results in a decline in the fertility of agricultural land or, importantly for industrial users, a material deterioration in the environmental situation; Failure to correct a range of other intentional environmental violations of applicable land use regulations; and Where the designated purpose of the land plot is agricultural production or development - failure to use the land plot for its designated purpose for more than three years.5.10.5. Other Rights to LandThe right of perpetual (indefinite) use may be granted only to state and municipal institutions, federaltreasury-owned enterprises, and state and local authorities. Legal entities that possessed land plots onthe right of perpetual (indefinite) use before the introduction of the Land Code and which do not fallinto the above categories had to convert and re-register their rights either as lease or ownership by 1January 2004. This deadline has been extended several times and is currently established as 1 July 2012as a general rule, and as 1 January 2015 with regard to land plots under transportation, communicationsand utilities lines. Failure to convert the rights by the established deadlines will trigger anadministrative penalty of RUB 20,000-100,000 (approx. USD 660-3,300 as of the end of January 2012).However, the penalty is established with effect from 1 January 2013. As the civil circulation of land plotsheld on the right of perpetual (indefinite) use is restricted – e.g., such land plots cannot be sold, leased,mortgaged, or assigned – the disposal of such land plots by legal entities (that do not fall into the abovecategories) will always require the prior conversion of the right of perpetual (indefinite) use into anothertitle (e.g., for commercial legal entities - into lease or ownership).5.10.6. Acquisition of Rights to Land Plots for Construction Purposes (Other than Residential Construction)The Land Code sets out detailed procedures for acquiring rights over state or municipally owned landplots for the purpose of new non-residential construction. The Land Code distinguishes two kinds ofprocedure: (1) without preliminary approval for the location of facilities, and (2) with such preliminaryapproval.The granting of land plots without preliminary approval for the location of facilities is carried outthrough bidding by tender or auction (Article 38 of the Land Code).A land plot which is granted for construction purposes without preliminary approval for the location offacilities must satisfy the following criteria: (i) its boundaries must have been defined for the plot to beeligible for sale or lease, (ii) a cadastral number (indicating the area, location, category, and otheressential characteristics of the plot) must have been assigned, (iii) a designated use of the land plotmust have been properly defined, and (iv) technical conditions for the connection of the land plot toutilities must have been determined. Doing business in St. Petersburg156 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 157. Land plots with preliminary approval for the location of facilities can be granted when a land plotmeeting the requirements of a particular project does not exist or a new construction project requires athorough investigation of ecological, sanitary, architectural and other issues, and upon a specificrequest for granting a land plot for construction from an investor. This may also involve gauging publicopinion regarding the planned construction. In accordance with this procedure a land plot is initiallygranted to legal entities and individuals under a lease only. This, however, does not preclude the ownerof the facilities (upon their construction and state registration) from acquiring ownership of theunderlying land plot. For construction of facilities of a religious purpose, religious organizations aregranted the right of free-of-charge fixed-term use for the period of such construction. In this case, landplots are granted without holding an auction.Preliminary approval of the location of facilities is not required for land plots in urban areas if town-planning documentation and zoning plans have been approved for such land plots. Such land plotsmust be granted through an auction.The regions of Russia may adopt their own rules related to provision of land plots to complement theLand Code rules. For instance, St. Petersburg Law "On the Procedure for Granting Real Estate Ownedby St. Petersburg for the Purposes of Construction and Reconstruction" (the "St. Petersburg Law OnGranting Real Estate ") sets certain principles for granting rights to state-owned real estate to privateinvestors.Pursuant to the St. Petersburg Law On Granting Real Estate, as a general rule land plots for constructionare provided to investors either in ownership or on lease through a tender (auction). To participate in anauction, a person interested in acquiring a land plot should file the respective application and otherrequested documents with the auctioneer and pay a supporting deposit. The supporting deposit isusually equal to 10% of the initial price and is to be returned if the potential investor fails to win theauction. On the basis of the results of the auction, the Committee for City Property Management of St.Petersburg ("KUGI") concludes a sale-purchase agreement or a land lease agreement with its winnerunder investment conditions.The so-called "specific allocation" of land plots in St. Petersburg, e.g., granting land lease rights withoutpublic sale, is allowed only in exceptional cases, that include granting land plots in accordance withagreements entered into by St. Petersburg with the Russian Federation, constituent entities of theRussian Federation, foreign governments, or with strategic investors. The legislation of St. Petersburgdefines the term "Strategic Investor" as an investor participating in implementation of a strategicinvestment project of particular significance for the social, economic, cultural and other developmentof St. Petersburg. An investment project may be recognized as strategic, provided that it satisfiescertain requirements specified by the law, inter alia, it should bring significant investment to the city ofat least 3 billion rubles (approximately, USD 100 million). The list of strategic investors is approved bythe St. Petersburg Government.5.10.7. Exclusive RightAs it was mentioned above, the owners of buildings and structures that are located on land plots ownedby the state or by a municipality have an exclusive right to acquire the underlying land plots or leasethem (Article 36 of the Land Code). With regard to facilities erected on such land plots after the LandCode had become effective, this rule means that the owner of the facility, upon registration of title, mayopt either for extension of the lease, extension of the lease and subsequent acquisition of the land plot,or immediate acquisition of the land plot. Possession of a valid lease contract does not preclude theowner of the facilities from acquiring the underlying land plot before the expiry of the lease. The LandCode does not establish a deadline by which the owners of the facilities should exercise their right.However, it should be noted that since 1 July 2012 they cannot enjoy the preferential minimum price forsuch land plots. With regard to facilities erected before the entry into effect of the Land Code, the rule isgenerally the same, although in circumstances where the underlying land plots had been granted on Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 157 St. Petersburg Foundation for SME Development
  • 158. the right of perpetual (indefinite) use, then in accordance with Federal Law No. 137-FZ On the Entry intoEffect of the Land Code of the Russian Federation of 25 October 2001 (the Land Code ImplementationLaw) the owners of facilities located on such land plots must purchase or lease such land plots before 1July 2012 (in the case of land plots under transportation, communications and utilities routes - before 1January 2015).5.10.8. Other Real Estate5.10.8.1. OwnershipRussian legislation permits both Russian and foreign nationals and legal entities to own real estate(apart from land plots) such as buildings, premises (as parts of buildings), structures and other facilities.In general, the rules relating to the use, disposal, and sale of real estate are set forth in the Civil Code,which guarantees the freedom to sell, rent, and carry out other transactions with real estate. Title toreal estate is usually acquired through a sale-purchase transaction or by means of new construction. Forlegal entities formed in the course of privatization of Soviet era enterprises it is usual that title tobuildings and structures was obtained as a result of such privatization.Until recently Russian courts have largely treated sale-purchase transactions with buildings andstructures that were incomplete at the moment of execution of a sale and purchase agreement or werenot registered in the name of the seller as invalid (on various grounds). In these circumstances partieswanting to buy or sell such “pending” real estate had to enter either into preliminary sale and purchaseagreements (to be followed, upon completion of such buildings and structures and registration ofseller’s title thereto, by main sale-purchase agreements) or investment agreements, both types ofagreements being far from “safe havens” for both parties in terms of enforceability.However, the Plenum of the Supreme Arbitrazh Court in Resolution No. 54 dated 11 July 2011 OnCertain Matters of Resolving Disputes Arising from Agreements on Real Estate to be Developed or Acquiredin the Future explicitly confirmed the validity of sale and purchase agreements with regard to such“future real estate”. At the same time, registration of title transfers from the seller to the buyer, i.e.,acquisition of ownership rights by the buyer would be possible, only after the state commissioning ofreal estate and state registration of the seller’s title to it. Also the plenum maintained that investmentcontracts executed in the past, if they meet certain criteria, should also be construed as contracts forthe sale and purchase of “future real estate”.In accordance with the Civil Code, title (among other rights) to real estate arises after its stateregistration, which is governed by Federal Law No. 122-FZ On State Registration of Rights to Real Estateand Transactions Therewith of 21 July 1997, as amended (the Registration Law). At the request of alegitimate acquirer of title (or at the request of both parties under a sale-purchase agreement), theauthority in charge of the state registration of rights to real estate must state register the title and issuean ownership certificate evidencing the registration of title.For all owners of real estate, the ownership right has to be state registered in accordance with theprocedure set forth in the Registration Law. The exceptions to this rule relate to rights to real estatethat were acquired prior to the adoption of the Registration Law. The owner of such real estate is notobligated to state register its rights unless it wishes to enter into any transaction involving its realestate (e.g., lease, mortgage, sale).Obtaining an ownership certificate is a fairly straightforward, albeit sometimes lengthy, process, aslong as the private company seeking to obtain such certificate can clearly demonstrate that the realestate in question was purchased, constructed, or privatized in accordance with the establishedprocedures. Before an ownership certificate is issued, cadastral documentation must be obtained forsuch real estate.Title to real estate acquired through privatization sometimes cannot be registered as a result ofdeficiencies in the underlying privatization documentation. In the past, state-owned real properties Doing business in St. Petersburg158 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 159. were granted to state-owned enterprises for economic management or use. During the privatizationprocess of the early 1990s such real properties were usually transferred into the ownership of thoseenterprises, which were formed on the basis of Soviet state-owned enterprises that operated and usedsuch real properties on the basis of various “usage”-type rights. A newly privatized enterprise thus“inherited” such real properties from the state-owned enterprise, provided that the real properties asrecorded on the balance sheet of the state-owned enterprise were easily identified in the privatizationplan of the newly formed (privatized) enterprise. The problem of title registration is not unusual forlegal entities that are the legal successors of such Soviet era state-owned enterprises. Such legalentities may, however, register title by virtue of having held and used property for 15 years (acquisitiveprescription) on the basis of a court order.5.10.8.2. Common PropertyUntil recently, the regime of common ownership (a situation where real estate properties belong toseveral owners) was applied only with regard to owners of premises in a multi-apartment building,while the situation for non-residential buildings remained unregulated. Considering disputes betweenowners of premises in non-residential buildings (i.e., office, warehouse, retail, administrative buildings,etc.) the courts (including the Presidium of the Supreme Arbitrazh Court) frequently refused to applythe law by analogy, and on this basis refused to recognize a claimant’s right of common ownership innon-residential buildings. The Plenum of the Supreme Arbitrazh Court took an entirely differentposition in Resolution No. 64 dated 23 July 2009 On Certain Matters Concerning Court Practice RegardingDisputes Between Premises’ Owners with Respect to Their Rights to Common Property in a Building(Resolution No. 64), expressly indicating that in the absence of direct regulation the owners of premisesin a non-residential building must be guided by legal analogy, that is, by the rules governing commonownership in multi-apartment buildings. Thus, a line was drawn under the long-term lack of clarity.Pursuant to Resolution No. 64, the owner of separate premises in a non-residential building always has ashare in the right of common ownership to common property of the building - independently ofwhether or not such right is registered in the Register (please refer to Section 5.10.9 for the definition).This resolution embraces the concept of common property in a non-residential building, including thefollowing: premises designated for serving more than one unit of premises in the building, and alsolandings, stairs, halls, lifts, lift shafts and other shafts, corridors, technical floors, attics, basementshousing engineering communications or other equipment serving more than one unit of premises in thebuilding (technical basements), roofs, supporting and non-structural constructions of the building,mechanical, electrical, sanitary and other equipment located externally or inside the building andserving more than one unit of premises. This definition is an almost verbatim repetition of thedescription of common property in a multi-apartment building given in the Housing Code of the RussianFederation, with the exception that the Plenum of the Supreme Arbitrazh Court does not directly addthe underlying plot of land to the common property of a non-residential building. Applying legalanalogy to complex relations lends clarity to a fundamental question, but inevitably leads to theemergence of certain new ambiguities.It is not clear whether underground car-parks housing engineering communications are deemed to betechnical basements (which, in accordance with the definition, are common property).5.10.8.3. LeaseForeign legal entities and individuals may be granted leases to other real properties (apart from landplots). Like leases of state or municipality owned land plots, leases of other real properties in state ormunicipal ownership are usually based on a standard local form.The Civil Code provides a lessee with certain basic rights. When a property is leased it must be in thecondition stipulated by the lease. Thereafter, unless the lease specifies otherwise, the lessor is liable forthe repair of defects of the premises. If the lessor fails to carry out the necessary repairs, the lessee can Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 159 St. Petersburg Foundation for SME Development
  • 160. opt either for a reduction of the rent or termination of the lease and compensation of the lossesincurred. A lessee that properly fulfills its obligations under a lease has a pre-emptive right to renew thelease (i.e., enter into a new lease for the same premises, but not necessarily on the terms of thepreceding lease) unless this right is expressly excluded by the lease contract.The lease survives the change of ownership over the leased property except in the event of foreclosuresthat meet certain criteria. The lease of buildings and structures assumes the right to use (either in leaseor under another right of usage) the land plot which underlies such buildings and structures and which isnecessary for their operation and use. As with the lease of land plots, the lessor and the lessee mayterminate the lease (i) by mutual agreement, (ii) unilaterally in circumstances stipulated in the lease, or(iii) by a court order in the circumstances provided by the Civil Code or in the lease.Leases for one year or longer must be state-registered and are deemed concluded upon such stateregistration. Leases for less than a year (that is, less than any 365-day period) do not require stateregistration and become valid when signed. To avoid the obligation of state registration, which can be atime consuming process, leases are often concluded for less than a year and renewed on a regular basis.If the procedure is properly described in the lease, such renewal of the lease is regarded as conclusion ofa new lease for a period of less than a year.5.10.9. State Registration of Rights to Real EstateThe right of ownership of, and other proprietary interests in, real properties, their creation,encumbrance (e.g., mortgage, leasehold for a term of one year or more, easement, etc.), transfer andtermination are subject to state registration. Rights to real estate (rights in rem) come into existenceonly upon their state registration. The Registration Law stipulates procedures for the identification andregistration of rights to real estate. In many cases, registration of title is a prerequisite for the validityand enforceability of transactions involving real estate.Certain transactions (in addition to rights or titles) with real estate are also subject to state registration,and become effective only upon such registration. The registration process is carried out by theregistration authorities at the location of the real estate in question. Under the Registration Law, stateregistration of a right to real estate and/or registration of a transaction with real estate takes onemonth, although in practice this term may be significantly extended as a result of suspension or refusalof registration. In certain cases, however, state registration of rights and transactions takes less thanone month. The grounds for suspension or refusal of registration of rights/transactions are specified inthe Registration Law. Refusal of state registration can be contested in court.The registration authorities maintain the Unified State Register of Rights to Real Estate andTransactions Therewith (the “Register”), which indicates the history and the current legal status of areal estate object. The Register also records various “registrable” encumbrances over real estate(including long-term leases and easements) and restrictions (such as freezing orders against, or courtdisputes relating to, the real state object and certain injunctions). The registration authority issues acertificate in a statutorily defined form that certifies by which right an object of real property is held bya legal entity or individual, and which encumbrances and/or restrictions, if any, are established withregard to such object. Information on state-registered transactions with immovable property is alsoincluded in the Register. Basic information on the right holder(s) and restrictions (encumbrances) ofsuch rights is open to the public, and can be provided for a fee within five business days to any personsubmitting a written application to the registration authority.Land plots must also undergo cadastral registration. The procedures and rules for the state cadastralregistration of land are outlined in Federal Law No. 221-FZ On State Cadastral Registration ofImmovable Property of 24 July 2007 (the Cadastral Law), upon the enactment of which on 1 March 2008the Law on the State Cadastral Register of 2 January 2000 ceased to have effect. Under the Land Code,only land plots that have been subject to state cadastral registration can be the objects of sale-purchasetransactions. Particularly in Moscow and St. Petersburg, this applies to all transactions with land plots. Doing business in St. Petersburg160 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 161. The State Cadastral Register is established pursuant to the Cadastral Law and contains detailedinformation on all real properties, including land plots, buildings, structures, premises and otherfacilities. Information contained in the State Cadastral Register is openly available to the public.As a single source of information on real estate available in electronic format, the State CadastralRegister will become operational from 1 January 2013. The Cadastral Law provides for a unified systemof state cadastral registration of all basic types of real estate, including land plots, buildings, premises,unfinished construction, complex immovable property objects, territorial and functional zones andzones with usage conditions.With effect from 1 March 2009, the government agency that performs state registration of rights to realproperties (formerly named the Federal Registration Service) has been renamed the Federal Service forState Registration, Cadastral Matters and Cartography and also became responsible for cadastralregistration of real estate (including land plots).The Cadastral Law does not apply to forests, perennial plantations, bodies of water, subsoil resources,marine vessels or aircraft.5.10.10. Classification of Real EstateThere is no official legislative classification of real estate (properties) in Russian law. In practice, realproperties are classified on the basis of their intended use (e.g., residential or non-residential forbuildings, agricultural or industrial for land plots, etc). The designated use should be identified in thelease, the certificate of ownership, as well as in technical documentation issued by the state-ownedentities engaged in technical assignment of real estate (that is the Bureaus of Technical Inventorying orthe Bureaus for Design and Inventorying) and cadastral documents.Buildings, structures and other facilities require various obligatory state permits and approvals. TheTown Planning Code of 29 December 2004, as amended (the Town Planning Code), stipulates thedocuments to be obtained and procedures to be followed for carrying out construction. Constructionactivities are also governed by regional and municipal legislation, such as, for instance, the TownPlanning Code of the City of Moscow, adopted by Moscow City Law No. 28 of 25 June 2008, which cameinto effect on 10 July 2008 or Leningrad Oblast Law No. 38-oz of 18 May 2012 "On the List of CasesWhen a Construction Permit Is not Required".5.10.11. Payments for Real PropertiesHistorically, when a foreign investor acting through a non-Russian entity purchased or leased realestate from Russian residents, the payments effected under such transactions (in foreign currency)were classified as “capital transfer transactions”, requiring a specific license from the Central Bank ofthe Russian Federation.This licensing requirement was abolished and under Federal Law No. 173-FZ On Currency Regulationand Currency Control dated 10 December 2003 (the greater part of which came into effect on 17 June2004), foreign currency payments made by foreign investors to Russian residents in consideration forpurchased or leased real estate came to be no longer regarded as “capital transfer transactions”.Payments between Russian residents can be carried out in rubles only. Where a seller or buyer, or boththe seller and the buyer (or the lessor and the lessee) are foreign legal entities, settlements are possiblein foreign currency. Settlements between foreign residents (including legal entities and individuals) canbe carried out through foreign (non-Russian) bank accounts. However, transactions with real propertiesmay trigger Russian tax consequences even if carried out outside Russia. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 161 St. Petersburg Foundation for SME Development
  • 162. 5.10.12. Residential Real EstateUp until the early 1990s most apartments in the Russian Federation were state or municipally owned.However, many (if not most) apartments have since been privatized and many new residentialdevelopments have been constructed by investors and most of these apartments are in privateownership. Relations arising in connection with residential real estate are regulated by the HousingCode of 29 December 2004 (the Housing Code), which came into effect on 1 March 2005. The HousingCode defines categories of residential property, which include a residential house (cottage), anapartment in a multi-storey (multi-apartment) building or a room in such an apartment, as well asvarious forms of rights to residential real estate. The Housing Code restricts the use of residentialproperty for purposes other than residence by individuals.5.10.13. Mortgage of Real PropertiesA mortgage arises either by virtue of law or a mortgage agreement. Mortgage rights must be stateregistered and are invalid without such registration.Federal Law No. 102-FZ On Mortgage of Immovable Property of 16 July 1998 (the Mortgage Law)stipulates the following essential terms of a mortgage agreement: (i) description of the mortgagedproperty (described to the extent sufficient to identify it), its location, and valuation; (ii) nature, scopeand maturity date of the obligation secured by mortgage; (iii) the right on which the mortgagedproperty is held by the mortgagor; and (iv) the name of the registration authority that registers themortgage. When requested, and subject to the payment of state duty, local offices of the stateregistration authority (as of 1 March 2009 named the Federal Service for State Registration, CadastralMatters and Cartography) can provide information on whether a specific real property is mortgaged.Such information is provided in the form of an extract from the Register.According to the Mortgage Law, the following types of real properties can be subject to a mortgage: Land plots (including agricultural land plots). However, land plots that have been withdrawn from or are limited in circulation, and (with a few exceptions provided by the Mortgage Law) the land plots held by the state or municipalities cannot be mortgaged; Enterprises i.e., complexes of immovable and movable properties registered as a single real estate property; Buildings, structures and other immovable property used for business activities; Residential houses, apartments and parts thereof consisting of one or several separate rooms; Cottages, garages, and other structures for personal use; Aircraft, sea and river vessels; and Lessee’s lease rights to real properties – “to the extent mortgage of lease rights does not contradict federal law and the nature of lease relations”.Buildings and structures can only be mortgaged together with the land plots underlying these buildingsand structures or together with the lease rights to such land plots.The existing mortgage of a land plot is automatically extended to cover a building or structure erectedon such land plot by the mortgagor, unless otherwise provided by the mortgage agreement. Thisprovision of the Mortgage Law entitles a mortgagee to extend the mortgage over a land plot to allbuildings and structures that may be developed on it, without the need for a subsequent addendum tothe mortgage agreement.The terms and conditions of a mortgage may restrict the owner or user’s capability to dispose of theproperty, including its contribution to charter capital and/or lease to third parties. The disposal ofmortgaged property generally requires the mortgagee’s consent unless the mortgage agreement Doing business in St. Petersburg162 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 163. provides otherwise. Notwithstanding such consent, the mortgage survives the change of ownershipover the mortgaged property, or the change of holder of such property, unless and until the primaryobligation secured by the mortgage is performed. Following this, the property must be released frommortgage. The release of property from mortgage is performed through the procedure of cancellationof the mortgage entry in the Register.The Mortgage Law provides that, unless otherwise provided in the mortgage agreement or by federallaw, a building, structure or any other non-residential property and an underlying land plot, as well as aresidential house or an apartment that was purchased or constructed with loans from banks or otherlenders is deemed to have been mortgaged from the date of state registration of the ownership right ofthe relevant purchaser/investor to the respective non-residential or residential property (and theunderlying land plot). With regard to residential property the Mortgage Law further provides thatforeclosure by the mortgagee on a mortgaged residential house or apartment and disposal of suchproperty constitutes grounds for termination of the occupancy rights of the mortgagor and the familymembers residing together in such residential house or apartment, provided that this residential houseor apartment was mortgaged under a mortgage agreement to secure the return of a loan granted forthe purchase or construction of such residential house or apartment, or a loan granted to refinance aprevious construction / acquisition loan.The implications of these provisions of the Mortgage Law are that a mortgagee can now demand that amortgagor vacates the mortgaged property if the mortgagee intends to foreclose on it. However, thisrule would apply only if the mortgaged property were mortgaged to secure the repayment of a loantaken out by a mortgagor to purchase or construct a property or to refinance a previous construction /acquisition loan. It is also important to note that those individuals who occupy mortgaged propertypursuant to a lease or a “hiring” agreement (under Russian law, a specific type of a residential leasewhere the lessee is a private individual) cannot be evicted upon foreclosure on the mortgaged property.Such a lease or hiring agreement concluded prior to the mortgage agreement will remain in force andcan be terminated only under specific circumstances provided for by the Civil Code or applicablehousing legislation.5.10.13.1. Foreclosure on mortgaged propertyThere are two types of foreclosure on mortgaged property: in court and out-of-court. With regard toout-of-court foreclosure, prior to the recent amendments to the Mortgage Law, the parties could enterinto a contract for the transfer of the mortgaged property to the mortgagee to discharge the securedobligation only after an event of default under the secured obligation had occurred. In the absence ofsuch a contract, a mortgagee could not automatically acquire rights to the mortgaged property if anevent of default occurred, and in most cases the mortgaged property had to be sold at a public auction,with the proceeds then being used for repayment of the debt.With effect from 7 March 2012, the transfer of the mortgaged property to the mortgagee after an eventof default has occurred is possible if the parties stipulate so in the mortgage agreement. There arethree methods for out-of-court foreclosure: (i) sale at a public tender; (ii) sale at an open auction(subject to some exceptions where sale at a closed auction is also possible) and (iii) appropriation of themortgaged property by a mortgagee.Out-of-court foreclosure on mortgaged property is prohibited with regard to certain classes ofimmovable property (such as immovable properties owned by the state and municipalities andresidential properties owned by individuals).5.10.13.2. Mortgage certificatesA mortgage certificate can be issued to the mortgagee at any time after the state registration of themortgage and until termination of the secured obligation. Mortgage certificates can be transferred to adepositary for registration and custody, which is evidenced by a respective note on the document. Such Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 163 St. Petersburg Foundation for SME Development
  • 164. a note should also disclose if the custody is temporary (in which case the certificate’s holder can at anytime require that registration and custody of its certificate is canceled) or obligatory. The type ofcustody can be chosen by the issuer or by the subsequent holder of the mortgage certificate.5.10.13.3. Mortgage agreement vs. mortgage certificateThe Mortgage Law protects the position of mortgage certificate holders by providing, inter alia, that incase of discrepancies between the provisions of a mortgage agreement / main agreement containingthe secured obligation and the provisions of the respective mortgage certificate, the provisions of themortgage certificate have priority unless at the time of acquisition of such certificate its acquirer wasaware or should have been aware of such discrepancies.5.10.14. Draft Amendments to the Russian Civil CodeCurrently the procedure for amending the Civil Code has been started. The bill introducing theamendments was opened to public and then passed through the first hearing in the Russian Parliament.If Russian lawmakers adopt this bill, this will result in significant changes of many fundamentalprovisions of Russian real property law and, in particular, would affect the existing provisions of theRussian Civil Code on real estate leases and ownership title to buildings and land. It would also introducenew types of title allowing holders to develop and use immovable property.Currently the inter-hearing process for collecting amendments and alterations to the bill has beencompleted, but the second hearing of the bill has not been scheduled yet. It is unclear as of the time ofthis guide (October 2012) when this draft bill will become law, what changes will be made to it prior tointroduction, and how exactly it will affect the position of would-be tenants/owners of newly developedproperties. Doing business in St. Petersburg164 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 165. 5.11. Privatization Information for the current chapter was developed and kindly provided by Baker & McKenzie5.11.1. History of PrivatizationIn general, the privatization process in Russia can be roughly summarized as occurring in threeprogressive stages. The first stage of “voucher-assisted privatization” lasted from 1992 to 1994 andincluded the privatization of state property on a massive scale. This first privatization scheme allocatedvouchers to state employees, with these vouchers later transformed into shares in the capital structuresof newly established (privatized) joint stock companies.Although at this early stage the country lacked experience in all privatization matters, and the firstPrivatization Law of 3 July 1991 was perhaps inevitably undeveloped, the Government’s rush toprivatize companies through the allocation of vouchers resulted in a very large percentage of state-owned entities being transferred into private hands.The second stage of the privatization process lasted from 1995 to 1996, and was focused on obtaininglarge payments for significant enterprise stakes. The principal objectives of this scheme were toreplenish the state budget and to attract domestic and foreign investment into Russia. Unfortunately,these objectives were never achieved because: Most of the financially viable and attractive businesses had already been privatized during the first stage of development; Domestically, large-scale investors did not yet exist; and Foreign investors were still wary of large-scale capital injections into Russian entities (particularly due to the volatile political environment in the Russian Federation at the time).As a result of the difficulty in attracting investment during this second stage, the “loans for shares”scheme was introduced. The outcome of these auctions was that a limited number of Russianbusinessmen were able to acquire state property at artificially low prices.The next Privatization Law of 21 July 1997 established a special right (“golden share”) of the relevantstate authorities to participate in the management of those open joint stock companies where such aright was provided during privatization. This right was realized by nominating representatives of therelevant state authorities to the board of directors and audit committee of such open joint stockcompanies, participation in general meetings of shareholders and veto rights on certain agenda issuesof the general meetings of shareholders.Since that time there have been very few major developments within the sphere of privatization.The Privatization Law provided for a single fundamental sanction for the failure to abide by theprivatization rules, i.e. that the corresponding transaction could be declared void and the propertyunlawfully acquired be returned to the state. Furthermore, the privatized entities and the proceduresrelating to their privatization could be challenged and declared invalid for a period of up to ten years.Later, in July 2005, the statute of limitations to challenge a void transaction (including past privatizationdeals which it was still possible to challenge in July 2005 on the grounds of the deals’ alleged invalidity)was reduced from ten to three years.5.11.2. Current StatusThe current Privatization Law entered into force on 26 April 2002. In contrast to previous legislation andconsistent with Government policy with respect to the sale of land, the new Privatization Law allows Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 165 St. Petersburg Foundation for SME Development
  • 166. the privatization of land plots associated with real estate objects. In addition to the usual methods ofprivatization such as sale of state-owned property and shares in open joint-stock companies at tendersand auctions, it allows reorganization of unitary enterprises into open joint-stock companies andcontribution of state-owned property to the share capital of open joint-stock companies.The Privatization Law also established a number of new privatization methods including, for example,the sale of shares in open joint-stock companies on stock exchanges, and the sale of such sharesoutside the Russian Federation. At the same time, some of the previously well-known and widely usedmethods of privatization (such as the sale of shares in open joint-stock companies to their employees,or the buyout of leased state property by the lessees) are now excluded from the new Privatization Law.In doing this the Russian Government is trying to eliminate the use of “cheap” methods of privatization,which appears to be a reasonable and long-expected change based on the inadequacies of previousprivatization attempts.5.11.3. Recent developmentsIn 2010, a number of amendments were made to the Privatization Law, which were mainly connectedwith the following issues: Obligation of the Russian Government to approve a plan with a list of federal property intended for privatization for a period of from one to three years (earlier for one year only); Information about the privatization process, such as the plan, decisions, conditions and results of privatization, to be made available in the mass media and the Internet; Determination of the starting price of the property to be privatized; Conduct of privatization procedures in electronic form.Obviously the amendments of 2010 were aimed at making the privatization process more transparentand open to interested parties.Over 2011 the Privatization Law was further amended. The main goal of the 2011 amendments was tofacilitate privatization of State Unitary Enterprises (SUE), which are now to be reorganized into LimitedLiability Companies (LLC) or Open Joint-Stock Companies (OJSC) depending on the amount of chartercapital, average number of employees and the amount of profits. Therefore all the provisions of the lawthat previously dealt only with OJSC’s have been amended accordingly to affect LLC’s as well.One of the most important amendments is that a privatized SUE cannot buy its own shares orparticipatory interests nor is it entitled to have in its charter provisions concerning the preemptiverights of a privatized SUE. This provision was designed to attract outside investors. Nevertheless, it isstill possible for managers and personnel of a privatized SUE to buy such shares or interests in the SUE.New requirements for the prospective buyers of SUE’s were added to the Privatization Law in 2011.These requirements are to ensure the credibility of a prospective buyer and its real intent to conductbusiness. For instance, one of the new requirements is that a person or entity cannot participate in apublic sale unless a deposit of 10 percent of the starting price is made.The current legislation on privatization clearly demonstrates some decrease in state control over theprivatization process in certain spheres of the Russian economy. At present the privatization of federalproperty, as stated by the Russian Government in the plan for 2011-2013, is one of the instruments bywhich Russia intends to switch to an innovative and socially oriented economy. Doing business in St. Petersburg166 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 167. 5.12. Language Policy Information for the current chapter was developed and kindly provided by Baker & McKenzieUnder Article 68 of the Constitution of the Russian Federation, the state language throughout theterritory of the Russian Federation is Russian. All official election materials, legislation, and other legalacts, must be published in the official state language.In addition, the Constitution upholds the rights of each of the individual republics within the RussianFederation to establish its own state language. Thus, regional state bodies and local institutions of self-government within Russia’s 21 republics may conduct official state business in two languages: Russianand the republic’s national language.There are a few other principle legislative acts dealing with language policy in Russia, in addition toRussia’s Constitution. These are: the Federal Law On the State Language of the Russian Federation, theFederal Law On the Languages of the Nations of the Russian Federation, the Federal Law On Protectionof Consumer Rights, and the Civil Code of the Russian Federation (Article 1473). According to theabovementioned laws:(i) All Russian state and municipal bodies, and all companies operating in Russia, including those owned by foreign investors, are required to use Russian in their activities, for example in book- keeping, tax reporting and office paperwork. Official paperwork in the national republics within Russia may also be conducted in those republics’ national language. Paperwork in the sphere of commerce may be also conducted in a foreign language as provided in respective agreements between commercial partners.(ii) The names of companies operating in Russia must be either in Russian or expressed in Russian transliteration. It is normally permitted to also have a company name in a foreign language and/or the state language of a national republic within the Russian Federation in addition to the mandatory Russian name. The company name of a legal entity in Russian and in the languages of nations of the Russian Federation may comprise borrowed foreign words in a Russian transcription or in a transcription of the languages of nations of the Russian Federation, except for the terms and abbreviations reflecting the legal entity’s legal form. A company whose name is inconsistent with the requirements of the law may be refused registration.Use of the word “Rossiya” (Russia) or “Rossiyskaya Federatsia” (Russian Federation) in Cyrillic, or aderived name, for example “Rossiyskiy” (Russian) in Cyrillic in the name of a company requires a specialpermit from the Ministry of Justice of the Russian Federation, and exposes such company to certain taxconsequences. Only those companies that have branch and/or representative offices in more than halfthe constituent entities of the Russian Federation, companies which are qualified among the largesttaxpayers, companies dominant in a market with a more than a 35% market share, or companies inwhich more than 25% of the shares or of the charter capital is held by the Russian Federation, can applyfor such a permit. However, use of words denoting ethnicity rather than the official country name, suchas “Russkiy” or “Russkaya” in Cyrillic (translated into English also as “Russian”) does not require apermit, as was clarified by the Russian Supreme and Supreme Arbitrazh Courts.(iii) All advertising in the Russian Federation must be either in Russian or in the particular state language of the individual republic in which the advertising appears.(iv) Under the consumer protection regulations a consumer should be informed in a clear and accessible manner in the Russian language about the manufacturer (seller), the operating mode of its work and the goods (works, services) it produces or sells. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 167 St. Petersburg Foundation for SME Development
  • 168. (v) Foreign languages or state languages of individual republics within the Russian Federation may be used in addition to the Russian language, in which case the communications in Russian and in the other language must be identical in their content, sound and form of presentation. When using Russian as the state language of the country, it is prohibited to use words or expressions that are not consistent with the norms of the Russian literary language, except foreign words that do not have commonly used Russian equivalents.There are a few exceptions to the requirement of mandatory usage of the Russian language outlinedabove. For example, trademarks and service marks expressed in the original (non-Russian) language ofthe trademark and registered in Russia may be used without being accompanied by a Russianequivalent.In cases provided for in specific acts of Russian federal laws, a person who does not understand Russianis entitled to an interpreter. For example, it is guaranteed for those foreigners who are subject tocriminal proceedings in Russia to have a Russian interpreter free-of-charge.There is no single state authority responsible for enforcement of the Russian language policy in theterritory of the Russian Federation. Some of the aspects of the language policy, in particular violation ofRussian language norms in advertising, are overseen by the Russian Antimonopoly Service. The RussianAntimonopoly Service may penalize a company in violation of the applicable language rules with a fineand/or issue it an order requiring it to cease and desist from violating the law. Doing business in St. Petersburg168 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 169. 5.13. Civil Legislation Information for the current chapter was developed and kindly provided by Baker & McKenzieThe adoption of the Civil Code of the Russian Federation in 1994 was one of the landmarks in Russia’stransition to a market economy and a fundamental work which followed the example of the civil codesof the Netherlands, Italy and Switzerland. However, unlike many other continental Europeanjurisdictions where civil codes are equal in their legal status with any other civil laws, the Russian CivilCode prevails over other laws (including other federal laws) in the case of inconsistencies.The Civil Code regulates virtually all elements of private law, with the notable exceptions of family law,housing law and transportation law, and consists of four parts.Part I of the Civil Code came into effect on 1 January 1995 and Part II on 1 March 1996. Together thesetwo parts serve as the legal basis for virtually every transaction in the Russian Federation.Part I of the Civil Code provides the basics of Russian civil law and for such rights as the rights to ownand inherit property; to engage in entrepreneurial activity; to establish independent legal entities, andprovides for the protection of non-material attributes, in particular, defense of honor, dignity andbusiness reputation. Part I also defines basic concepts of civil law such as a legal entity, securities,transaction, obligation, power of attorney and contract. Part I of the code provides that parties are freeto enter into a contract, whether or not such type of contract is expressly recognized by law. Parties arefree to conclude contracts containing elements of different types of contracts. Parties are free to agreeon the terms of the contract they enter into unless the contractual terms are prescribed by Russian law.Part I further provides the rules for entering into contracts, such as an offer to make a contract andacceptance of the offer, conditional acceptance, late acceptance, conclusion of contracts at an auction.Part I also provides for various instruments to secure the proper performance of a contract, such aspledge, surety, bank guaranty, earnest money, withholding of property, penalty (fine). The parties to acontract may agree to any of the above to secure the performance of the contract, as well as othersecurity not specifically listed in the Civil Code. Part I of the code also provides for the general groundsfor alteration and termination of contracts. A contract may be altered or terminated by mutualagreement. If there is no agreement, a contract may be altered or terminated if there is either amaterial breach of the contract or if there is a substantial change in those circumstances that were thebases for the parties to enter into that contract.Part II of the Civil Code further expands on the law of obligations. It contains provisions governingcertain types of contracts: sale and purchase; barter; donation; annuity; rent; contractor’s agreement;provision of services; transportation; forwarding; loan; bank deposit; bank account; settlement;storage; insurance; agency; trust management; franchising and simple partnership contracts. Inaddition, Part II of the Civil Code provides for non-contractual obligations such as agency withoutauthority, torts (including product liability), unjust enrichment, public contest, and public promise of areward.Many provisions of the Civil Code required the adoption of additional legislation. Such legislationincludes the Federal Law On Joint Stock Companies, the Federal Law On Limited Liability Companies, theFederal Law On State Registration of Legal Entities and many other laws. Significant amendments to theCivil Code, and respective federal laws related to limited liability companies, pledge and mortgage,came into force in 2009. Instances remain, however, where appropriate lower level legislation has notbeen adopted - the absence of a direct multimodal transport law being one such example.Part III of the Civil Code entered into force on 1 March 2002, covering the law of succession and conflict-of-law rules. Part III, Chapter V of the Civil Code (the Inheritance Law) details the rights of citizens to Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 169 St. Petersburg Foundation for SME Development
  • 170. dispose of their property by devise, establishes priority categories of heirs-at-law (i.e. those who inheritabsent a devise), and provides for other forms of inheritance. Legal entities and the state may act asheirs. In addition to regular wills (which should be executed in writing and notarized), Chapter Vprovides for confidential wills and wills made in a simple written form.Part III, Chapter VI (International Private Law) regulates transactions “complicated by a foreignelement” i.e. transactions with a foreign citizen or with a foreign legal entity, or otherwise involving a“foreign element”. Generally, the parties to a transaction that is complicated by a foreign element arefree to choose any law (either Russian or foreign) as the law governing their transaction; however, thelaw so chosen will not apply if it contravenes the public order of the Russian Federation or so called‘super-mandatory rules’ of Russian law.Part III, Chapter VI of the code recognizes that foreign law may be applicable in Russia regardless ofwhether or not the choice of Russian law as applicable is honored in the respective foreign country. Ifthe application of foreign law depends upon reciprocity, it shall be presumed that reciprocity exists. Ifthe parties did not choose the law applicable to their transaction, the applicable law will be determinedon the basis of the default rules of the Civil Code (Part III, Chapter VI). Generally, these conflict-of-lawrules are based on the idea that a transaction should be regulated by the law of the country that has theclosest connection to the transaction. The code contains conflict-of-law rules relating to bothcontractual and non-contractual (e.g. tort) obligations. Special provisions in the code determine the lawapplicable to international consumer transactions; assignment of rights; obligations arising fromunilateral transactions; interest accrued on monetary liabilities; product and service liability; liability forunfair competition; unjust enrichment.Part IV of the Civil Code, covering various intellectual property issues, came into force on 1 January2008. These issues are discussed in more detail in a separate chapter of this brochure on IP.It is expected that major amendments to the Civil Code may be made during 2012. Some of theproposed amendments stem from the necessity to make the Civil Code more flexible, effective and up-to-date to facilitate attracting foreign investment into Russia. Among other changes, basic provisionsregarding forms of legal entities, property rights (rights in rem) and civil law obligations may bematerially revised. Doing business in St. Petersburg170 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 171. 5.14. Intellectual Property Information for the current chapter was developed and kindly provided by Baker & McKenzie5.14.1. Regulatory EnvironmentRussian IP legislation consists for the most part of the Civil Code of the Russian Federation, specificallyits Part IV put into force by Federal Law No. 230-FZ dated 18 December 2006. Part IV of the Civil Codealong with Federal Law No. 231-FZ dated 18 December 2006 “On Enacting Part IV of the Civil Code of theRussian Federation” have replaced or amended accordingly as of 1 January 2008 all preceding individualIP laws. Part IV of the Civil Code is a codification of pre-existing IP laws, which have been compiled aschapters in Part IV of the Civil Code with some significant amendments. Parts I-III of the Russian CivilCode also set out certain general provisions pertaining to legal protection of IP rights. Any foreign legalentity or individual may seek protection for its/his/her intellectual property rights in Russia, providedthat the requirements of the law are satisfied. Russia is a signatory to major international treaties onintellectual property rights, including the Universal Copyright Convention, the Berne Convention forthe Protection of Literary and Artistic Works, the Paris Convention for the Protection of IndustrialProperty, the Patent Cooperation Treaty, the Madrid Agreement on the International Registration ofTrademarks, the Protocol to the Madrid Agreement, the Singapore Treaty on the Law of Trademarks,the WIPO Performances and Phonograms Treaty, and the WIPO Copyright Treaty.5.14.2. PatentsAn invention is a technical solution in any field related to a product (inter alia, to a device, substance,microbial strain, or cell culture of plants and animals) or a process. Patent protection is given to aninvention if it is novel, inventive and industrially applicable. The maximum duration of patentprotection for an invention is 20 years from the date of the application, subject to payment of annuities.The term of a patent for an invention related to a medicine, pesticide or agrochemical, the use of whichis subject to obtaining special permission, may be extended at the request of the patent owner for aperiod not exceeding five years. The right to obtain a patent belongs to the inventor, his/her employer(in case of an employee’s invention) and their assignees. A patent application is filed with the FederalService for Intellectual Property, Patents and Trademarks (“Rospatent”), which examines it and grantsa patent if the invention meets the above-mentioned criteria.A utility model is a technical solution pertaining to a device. Utility model protection is similar to that ofinventions, with certain limitations and restrictions. A utility model is granted patent protection if it isnew and industrially applicable. The term of a utility model’s patent protection is ten years from thefiling date of the application, subject to payment of annuities, and may be extended for an additionalperiod not exceeding three years.An industrial design is an artistic and construction solution that determines the outer appearance of aproduct of industrial or handicraft origin. An industrial design is granted patent protection if itsessential features are novel and original. An industrial design is deemed novel if the combination of itsessential features does not comprise information publicly available in the world before the priority dateof the industrial design. An industrial design is considered original if its essential features evince thecreative character of a product’s distinctive features. Industrial design patent protection is granted for15 years, subject to payment of annuities, and with the possibility of extension for an additional periodspecified in the application, but not exceeding ten years.Under Russian law it is possible to assign or license an invention, utility model and industrial designprotected by a patent to another person. Such assignment and license agreements should be recorded Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 171 St. Petersburg Foundation for SME Development
  • 172. with Rospatent, failing which the agreements are deemed null and void. These agreements enter intoforce as of the date of such recordation. The patent owner has the sole right to use an invention, utilitymodel or industrial design that is protected by such a patent. Without the patent owner’s permission noone is allowed to use a patented object in any way, including importation, manufacture, application,offer for sale, sale or other introduction into commercial turnover, or storage for this purpose.Infringement of patent rights may entail civil, administrative or criminal liability in accordance with theapplicable legislation.5.14.3. Trademarks, Service Marks, and Appellation of Origin of GoodsUnder Part IV of the Civil Code, trademarks (service marks) are designations individualizing goods orservices of legal persons and individual entrepreneurs. Legal protection of trademarks and servicemarks is granted by virtue of their registration with Rospatent or by virtue of international agreementsto which the Russian Federation is a party. A mark may be represented by a word or words, pictures,three-dimensional signs and other designations or combinations thereof. A trademark may beregistered in any color or color combination. Trademark and service mark protection is granted for tenyears from the filing date of the application, and may be renewed during the last year of validity for asubsequent ten-year period. Trademark and service mark registration is cancelled if the term expireswithout having been renewed. Trademark and service mark legal protection may be terminated upon arequest from an interested party in respect of all or part of the respective goods and services due tonon-use of the trademark or service mark during any continuous three year period after the registrationdate. Assignments and licenses of trademarks and service marks must be registered with Rospatent. Inthe absence of such registration they are deemed null and void.An appellation of origin of goods is a name constituting or containing a current or historicaldenomination of a country, settlement, locality or other geographic unit (hereinafter referred to as a“geographic unit”) or a derivative of such denomination that has become known as a result of its usewith respect to goods the specific features of which are mainly or exclusively determined by naturalconditions or human factors which are characteristic of such geographic unit. A designation which,though representing or containing the name of a geographic unit, has entered into the public domain inthe Russian Federation as a designation of goods of a certain kind (has become generic) and is notrelated to the place of manufacture of said goods, may not be deemed to be an appellation of origin ofgoods. Legal protection is given to an appellation of origin of goods based on its registration withRospatent. An appellation of origin of goods may be registered in the name of one or more persons.The person or persons that have duly registered an appellation of origin of goods obtain the right to usesuch appellation, provided that the goods manufactured by such person(s) satisfy the criteriamentioned above. The right to use an appellation of origin of goods may be granted to any legal entityor individual which produces goods with the same specific features within the same territory. Theprotection is granted for ten years from the date of filing the application, and may be renewed forsubsequent ten-year period. The owner may not grant licenses for use of the appellation of origin ofgoods.Infringement of rights to a trademark, service mark or appellation of origin of goods may entail civil,administrative or criminal liability.5.14.4. Company Names and Trade Names (Commercial Designations)Company names are designations that identify or distinguish different legal entities when conductingtheir commercial activities. Legal protection of company names is provided by the Civil Code and theParis Convention for the Protection of Industrial Property, to which the Russian Federation is a party. Inthe Russian Federation, a company name consists of two parts: the indication of a business’s legalstructure and the distinctive name of the company. A company may use the official name of theRussian Federation or any words derived there from in its company name only with the consent of theRussian Government. The right to a company name arises from the moment of state registration of the Doing business in St. Petersburg172 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 173. legal entity. The owner of a company name is allowed to use its company name exclusively, and toprohibit others from its unauthorized use. The owner of a company name may not alienate its companyname or grant the right to use it to another person. A legal entity may not use a company name that isidentical or confusingly similar to the company name of another legal entity if both entities areengaged in similar business activities and the company name of the former legal entity has beenincorporated in the state register of legal entities prior to state registration of the latter. A legal entityillegally using the company name of another legal entity is obliged to cease such use at the request ofthe company name owner and to compensate for any losses caused. A company name owner may useits company name or its individual elements as a part of its trade name or a trademark (service mark)belonging to the company name owner. A company name incorporated in a trade name or a trademark(service mark) is protected regardless of the protection of the trade name or the trademark itself.Trade names are protected by virtue of the Civil Code. Part IV of the Civil Code contains a special sectionconcerning legal protection of trade names. Trade names (so-called “commercial designations”) aredesignations which individualize trading, industrial or other types of enterprises owned by legal entitiesand individual entrepreneurs. Trade names differ from company names in that they do not requireregistration and are not subject to obligatory incorporation into the foundation documents of the tradename owners. The owner of a trade name enjoys an exclusive right to its trade name and may use it byany lawful means. The exclusive right to a trade name arises if the designation which is used as a tradename possesses sufficient distinctiveness and its use has gained notoriety within a certain territory. Thescope of protection of a trade name used for the purpose of individualization of an enterprise located inthe Russian Federation is limited to the territory of the Russian Federation. An exclusive right to a tradename terminates if the owner of the trade name fails to use it during a continuous one-year period. Atrade name owner may grant the right to use its trade name to another person under a lease ofenterprise agreement or a franchising agreement.5.14.5. Copyrights and Neighboring RightsPart IV of the Civil Code protects works of science, literature and the arts (copyright), and grantsprotection to the rights of performers, phonogram producers, broadcasting and cable-castingorganizations, database compilers and publishers (Part IV of the Civil Code uses the term “publicators”)(neighboring rights). Copyright protection arises by virtue of the creation of a work of art without anyregistration requirements. An author enjoys personal (moral) rights (right of authorship, right to thename, right to public disclosure, right to protect the author’s reputation) and proprietary rights (right ofreproduction, distribution, import, public demonstration, public performance, translation,modification, etc.). Personal (moral) rights are inalienable from the author and cannot be assigned ortransferred by agreement. The proprietary rights to a copyrighted object may be licensed or assignedby virtue of a copyright agreement. Part IV of the Civil Code allows for the transfer of copyright in theform of an exclusive or non-exclusive license agreement as well as by an assignment of copyright. Theterm of copyright protection for all works, including software programs or databases, is the lifetime ofthe author plus 70 years after his/her death. The author’s moral rights (right of authorship, right to thename and right to protect the author’s reputation) are protected perpetually. Infringement of copyrightmay entail civil, criminal or administrative liability.5.14.6. Software Programs and DatabasesCopyright protection also applies to software programs and databases. Pursuant to Part IV of the CivilCode, software programs are protected as literary works, while databases are protected ascompilations. Although registration is not mandatory for protection, an author may optionally registerand deposit software or a database with Rospatent. A software program or a database is protected forthe lifetime of the author(s) plus 70 years after his/her (their) death(s). The right to use a softwareprogram may be granted under a software license agreement. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 173 St. Petersburg Foundation for SME Development
  • 174. 5.14.7. Topologies of Integrated MicrocircuitsIn accordance with Part IV of the Civil Code, legal protection is granted with regard to originaltopologies of integrated microcircuits, developed as the result of an author’s work. The author enjoysthe exclusive right to use the topology as he/she sees fit, including the prohibition of its unauthorizeduse by third parties. The rights to a topology may be transferred fully or partially to another personunder a written assignment agreement or license agreement. Although the registration of a topology isnot mandatory for its protection, an author may voluntarily register it with Rospatent. The exclusiveright to use the topology is effective for ten years from the date of its initial use or from the date of thetopology’s registration, whichever is earlier.5.14.8. Trade Secrets and Know-HowUse of trade secrets and know-how is regulated by the Civil Code (Part IV) and Federal Law No. 98-FZdated July 29, 2004 “On Trade Secrets” (the “Trade Secrets Law”), as amended. Pursuant to the TradeSecrets Law, in order to protect (and have others respect) its trade secrets, an entity needs to establisha so-called Trade Secrets Regime and ensure that it is complied with by all of its employees andcounterparties. Therefore, broadly interpreted, confidential information may fail to be protected underthe Trade Secrets Law. According to the Civil Code (Part IV) and the Trade Secrets Law, information maybe treated as a trade secret only if: (i) it has real or potential commercial value due to the fact that it isunknown to third parties; (ii) it is not freely accessible using lawful means; (iii) the owner has takenreasonable measures to protect its confidentiality, including legal, organizational, technical and othermeasures; and (iv) its confidentiality allows, under existing or potential circumstances, the increase ofrevenue, the avoidance of unnecessary expenses or receipt of other commercial benefits. If any of thesteps required to establish a Trade Secrets Regime are not taken the entity might be unable to protectits trade secrets under the Trade Secrets Law (e.g., to initiate criminal or administrative prosecution forviolation of the trade secrets regime, to claim damages, to dismiss an employee for disclosure, etc.).Part IV of the Civil Code prescribes that an employee who has obtained access to a trade secret of theemployer is obliged to keep such information confidential until termination of the exclusive right to thetrade secret.5.14.9. Domain NamesPlease note that .ru zone domain names are registered in Russia on a first-come, first-served basis byseveral registrars. When registering domain names, the registrars neither check nor require domainname applicants to prove that they have a legitimate right to use the names they seek to register. PartIV of the Civil Code does not contain a legal definition of a domain name. Pursuant to Part IV of the CivilCode, no one may use, without the permission of the trademark owner, designations that areconfusingly similar to a trademark in respect of goods and services for individualization of which thetrademark was registered, or similar goods. Part IV of the Civil Code specifies some acceptable forms ofuse of a trademark by its owner. The exclusive right to a trademark may be exercised, in particular, byuse of the trademark on the Internet, including its application in domain names and other means ofaddress. There is no procedure similar to the Uniform Domain-Name Dispute-Resolution Policy inRussia; therefore, all domain name disputes that are not amicably resolved need to be taken either to acourt of general jurisdiction (if the defendant is an individual) or an arbitrazh (state commercial) court(if the defendant is a legal entity). There is a trend to submit all domain name disputes to arbitrazhcourts, regardless of whether the defendant is an individual or a legal entity. While this does not clearlyfollow from any statutory provisions, it occurs more and more often. Doing business in St. Petersburg174 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 175. 5.15. Product conformity assurance in Russia Information for the current chapter was developed and kindly provided by SGS Vostok Limited, Russian subsidiary of the SGS Group5.15.1. What is the acting legal framework for product conformity assurance in Russia?Back in 1993, the Russian Government enacted legislation obliging to certify a number of consumer andindustrial products and introduced the GOST R system of mandatory certification with the intention ofprotecting health and safety of Russia’s population. GOST R certification implies assessment of productconformity against applicable GOST R standards with regard to safety and quality characteristics by anindependent properly accredited certification body. The GOST R system has been complemented byother conformity assurance systems relating to sanitary regulations, phitosanitary and veterinaryaspects, industrial safety etc.The Russian Federal Law No.184 on Technical Regulating dated on 27.12.2002 introduced dramaticchanges to the former conformity assurance system with the objective to harmonize Russian technicalbarriers to trade with international practices. It established new rules of state regulatory requirementsfor industrial and consumer goods, buildings, related business processes, as well as for consumerservices. According to this Law, a Technical Regulation (in Russian: Tekhnicheskiy Reglament) has beenthe primary document, which stipulates the obligatory requirements for various goods to be soldand/or consumed in Russia, whereas standards and norms should be used as a supportive base only.Apart from mandatory certification another form of conformity assurance has been introduced called“declaration of conformity”. However, until new Technical Regulations are adopted, the GOST Rconformity assurance system has been still valid.In view of the Agreement signed on October 6, 2007 Belarus, Kazakhstan and Russia have establishedthe Customs Union in the framework of the Eurasian Economic Community (EAEC or EurAsEC). InDecember 2009, the Agreement on the circulation of products liable to mandatory conformityassurance within the Customs Union was signed, followed by a number of more specific regulatorydocuments. As a result, the national legal framework in the area of conformity assurance andsupervision over product safety has to be gradually replaced by the Customs Union legal framework.By January 2012, the first 24 Technical Regulations out of the 47 top-priority Technical Regulations ofthe Customs Union have been passed. The first 10 Technical Regulations should come into force in July2012. In 2012, the remaining top-priority Technical Regulations of the Customs Union should passaccording to the agreed schedule. Those 47 Technical Regulations would cover over 60% of the goodscirculating within the Customs Union. During the period from 2013 to 2015, unified requirements shouldbe adopted towards all significant product categories marketed in the Customs Union. As soon as aTechnical Regulation of the Customs Union comes into force, the relevant national requirements areabolished.A Technical Regulation can be either generic or specific. Example of a generic document can be theTechnical Regulation on Electromagnetic Compatibility, which concerns a number of industries.Specific Technical Regulations relate to specific product categories like, for example, the TechnicalRegulation on Safety of Toys or the Technical Regulation on Juice Products from Fruits and Vegetables.To summarize, by early 2012, three major co-existing conformity assurance regulatory frameworks inRussia are as follows: Technical Regulations of the Customs Union; Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 175 St. Petersburg Foundation for SME Development
  • 176.  Technical Regulations of the Russian Federation – applied only when there is no relevant Technical Regulation of the Customs Union; GOST R system – applied only when there are no relevant Russian or Customs Union Technical Regulations.In addition, there are special requirements from Russian and Customs Union authorities with regard toconformity assurance against veterinary, phitosanitary, sanitary and industrial safety norms.5.15.2. How to find out whether the product is liable to mandatory conformity assurance in Russia?Starting from July 1, 2010 the Single list of products liable to mandatory conformity assessment(verification) in the framework of the Customs Union resulting in unified document issuance has beenenacted. The unified document implies either the Certificate of Conformity or the Declaration ofConformity drafted according with the same unified template in Russia, Belarus and Kazakhstan. Thislist has been updated on a regular basis.The other documents to refer to are: the Single list of products liable to sanitary-epidemiological supervision on the customs border and in the customs territory of the Customs Union approved by the Decision of the Customs Union Commission No.299 dated on 28.05.2010; the Single list of products liable to veterinary supervision in the Customs Union approved by the Decision of the Customs Union Commission No.317 dated on 18.06.2010; the List of products liable to quarantine phitosanitary supervision on the customs border and in the customs territory of the Customs Union approved by the Decision of the Customs Union Commission No.318 dated on 18.06.2010.If the product is not included in the Single product lists of the Customs Union, then one should consulttwo national regulatory documents: the Single list of products liable to mandatory certification and theSingle list of products whose conformity verification is to be made in the form of a declaration ofconformity (both approved by the Decree of the Russian Government No. 982 dated on December 1,2009 and since then regularly updated).Besides, one should consult the acting Technical Regulations of the Customs Union and the RussianFederation, and if there are any relevant regulations pertaining to the product category in question,then one should check the scope of the Technical Regulation to find out whether the specific product isliable to mandatory verification of conformity.If the product is not mentioned in any of the product lists and any of the acting Technical Regulationseither of the Customs Union or the Russian Federation, then the product is not subject to mandatoryverification of conformity in Russia.5.15.3. What kinds of permissive documents are there in Russia?There are two forms of conformity assurance in Russia: declaration of conformity (by the manufacturer)and certification of conformity (by a properly accredited certification body being independent from themanufacturer). Declaration of Conformity and Certificate of Conformity have equal legal status and arevalid throughout the whole territory of the Russian Federation. The appropriate form of conformityassurance is stipulated by regulatory documents applicable to the product in question. Sometimes,both forms are possible.The following types of approvals are usually required to prove product compliance in Russia: Declaration of Conformity with Technical Regulations or Certificate of Conformity with Technical Regulations; GOST R Declaration of Conformity or GOST R Certificate of Conformity. Doing business in St. Petersburg176 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 177. For some measuring instruments the so-called Pattern Approval Certificates need to be obtained.These are issued by a state authority called Rosstandart based on results of tests performed byaccredited State Scientific Metrological Centers.When the product is liable to sanitary and epidemiological regulations of the Customs Union,Certificate of State Registration may be required. For products subject to veterinary and phitosanitarysupervision there may be a requirement to obtain Veterinary Certificate, Phitosanitary Ceritificateand/or Import Quarantine Permit.Some other documents may be required at the stage of commissioning for industrial equipment, suchas Technical Passports or Permits to Use.5.15.4. When are Russian permissive documents required?Mandatory verification of conformity is conducted before the product has been launched to the Russianmarket. This concerns both locally produced and imported goods.Approving documents are required at different stages of doing business in Russia, such as: Concluding a sales deal; Customs clearance at the Russian border; Advertising and PR activities; Placing a product in retail; Commissioning of equipment.5.15.5. What labelling/marking requirements are there in Russia?According to the Russian Law No.2300-I “About Consumer Rights protection” dated 07.02.1992, allconsumer goods, both food and non-food, exported to and distributed in Russia require Russianlanguage labelling and the sale of imported products without consumer information in Russianlanguage is illegal.Russian labelling has to cover the following items: Name of a product; Country of origin; Name and address of manufacturer or any other contact information for consumers; How and where the product is to be used; The main characteristics and description of the product; Safety requirements; Conformity assurance and licensing information (relevant Mark of Conformity); Expiration date, if applicable ; Other information required by the applicable Technical Regulations.This information can be contained on a box, label, or any other appropriate material concerning theproduct such as technical brochures or manuals. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 177 St. Petersburg Foundation for SME Development
  • 178. The following marks demonstrate to the consumer the product’s compliance to the applicablemandatory requirements:Mark Symbol DefinitionGOST R Mark of The product is compliant with GOST R standardsConformityTR Mark of The product is compliant with Russian TechnicalConformity Regulations (TR)CU TR Mark of The product is compliant with Customs Union (CU)Conformity Technical Regulations (TR)5.15.6. How long does it take to get certified?The conformity verification process in Russia can take from a few hours up to several months. Itsduration depends on the following factors: The type of certificate you opt for (e.g. verification process for a 3-year validity Certificate of Conformity for serial production normally takes longer than a certificate valid for just one shipment); The need to make tests, number and complexity of the tests; Number of certificates you have to obtain prior to the targeted permissive document; Your ability to quickly collect the internal documents needed for verification; Time spent upon translation of required documents into Russian language; Your previous experience with Russian certification (i.e. obtaining a permissive document for the very first time commonly lasts longer than subsequent similar applications).As a result, you are able to speed up the process by means of manipulating the above-mentionedfactors.5.15.7. Which international certificates are accepted in Russia?Many procedures in the conformity assurance system of Russia and the Customs Union were copiedfrom the West (especially the EU), and foreign manufacturers face similar requirements for operation intheir local market. Still, there are some discrepancies.The reason for that partly lies in the Russian specific climate conditions, partly in the historicalbackground (many of the Russian standards have not been re-viewed since the Soviet times). Quiteoften, verification methods considerably differ from those applied in the Western Europe or the US. Tocite some examples: in Russia, testing of toys includes verification of formaldehyde and phenolcontent, although not checked in the EU; transformers have to be tested at -40°C temperature, i.e. intwice as cold conditions as in Europe; steel pipes might be subject to 100% testing as opposed to 10-20% sampling in Europe. Doing business in St. Petersburg178 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 179. Therefore, even if your products are well-known throughout the world and recognized as safe in the EUor any other country, you still have to prove that they comply with Russian/Customs Unionrequirements in accordance with locally accepted methodology. However, availability of aninternational certificate might facilitate the procedure of obtaining the appropriate Russian approvals.5.15.8. Does it matter whether exporter or importer handles product conformity assurance?When negotiating sales contracts with Russian partners, exporters need to raise issues related toconformity assurance expenses, namely which party bears the costs, procedures and responsibilities. Insome cases, exporter and importer alike are able to carry out certification and obtain proper permissivedocuments. However, a declaration of conformity can be signed only by a Russian legal entity. For aninternational company it means that the declaration of conformity can be signed either by their Russiandistributor representing the foreign manufacturer on the basis of a formal contract for conformityassurance purposes, or by their Russian agent, or by their subsidiary located in Russia.Exporters should bear in mind that in case the certificate or declaration is issued under the name oftheir importer, the latter will become their exclusive distributor in the Russian market during the wholevalidity term of the certificate. Therefore, those exporters who wish to keep control over their Russianmarketing strategy and preserve their independence from any local partner are recommended to takecare of their products’ conformity assurance on their own.5.15.9. How much would it cost to get certified?The cost for conformity verification services is very much dependable on such factors as complexity of aproduct, complexity of manufacturing process and type of required permissive document. Relevantexpenses would usually consist of the following elements: Cost of samples selected for destructive tests; Expenses for packing, storage, freight handling and transportation of samples to the testing laboratory; Cost of product tests in accredited laboratory; Audit expenses, including travel costs; Translation services; Labor expenses of the certification body (man-days * daily rate) over processing of your inquiry, verification of documents, issuance of certificate; Overheads.You may be offered discounts in case you wish to obtain a relatively large number of certificates or ifyou are applying for the same service repeatedly. Such cost reduction is due to decreasing overheads,number of required samples and number of tests.5.15.10. How to make the certification cost-effective?To make the certification process cost-effective, we recommend correlating the type of certificate withanticipated volume of exports and range of exported goods. Thus, if you are planning to regularly shipyour goods to Russia, and their range is quite wide, it might be wiser to opt for a serial certificate validfor a few years. Although it will require higher single payment versus shipment certification, in the long-term such scheme can save both your time and money. In fact, whole product line will have to besampled and tested in the framework of a shipment certification, whereas only a limited number ofsamples will be tested for serial certification since production audit will certify conformity of the rest.Be prepared that the certification cost might appear not proportional versus cost of the product to becertified. Therefore, if your company intends to take part in a tender for a project in Russia, the advice is Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 179 St. Petersburg Foundation for SME Development
  • 180. to plan ahead and ask preliminary quotation for certification from a professional body so as to includethe cost to your bidding. Otherwise, there is the risk that once the project wins the bid not taking intoaccount real certification cost, your anticipated profit will not be sufficient to cover actual expenses. Insome cases, your certification body might suggest slight modifications of initial design for a machine orindustrial unit in order to lower your certification expenses.5.15.11. Whom to address for Russian conformity assurance?Any approving document is to be issued by an accredited body. There are about 1500 certificationbodies and 3550 testing facilities accredited within GOST R system, not counting other certificationsystems. In July 2010, the Single Register of Certification Bodies and Testing Laboratories of theEurasian Economic Community (EurAsEC) Customs Union was established. Only organizations includedin this Register (1010 certification bodies and 2114 test laboratories by the end of 2011) are allowed toissue Certificates of Conformity and Declarations of Conformity recognized in three member countriesof EurAsEC, namely Russia, Belarus and Kazakhstan.Often, certification bodies focus on a specific type of approvals or on a specific industry (e.g. textile ortelecom). It is reflected in their accreditation scope. Only the largest ones provide integrated servicesassisting in getting a range of approvals in one place.While selecting a certification body, request for the accreditation certificate and for the reference list,consider whether the future partner is experienced in the kinds of approvals you need and able to guideyou in the Russian regulatory environment. Unprofessional or fraudulent service might cause headachein the future such as arrest of the shipment at the customs border or costly delays in delivery schedule. Doing business in St. Petersburg180 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 181. 5.16. Banking Information for the current chapter was developed and kindly provided by Baker & McKenzieAs of 1 January 2012, there were 988 banks registered in Russia. The Central Bank of the RussianFederation (the “Bank of Russia”) is the key regulatory authority for banking and is also in charge ofmonetary policy.The primary pieces of banking legislation are the Civil Code of the Russian Federation, Federal Law No.395-1 On Banks and Banking Activities, dated 2 December 1990, Federal Law No.86-FZ On the CentralBank of the Russian Federation, dated 10 July 2002; Federal Law No. 40-FZ On the Insolvency(Bankruptcy) of Credit Organizations, dated 25 February 1999; Federal Law No. 177-FZ On the Insuranceof Deposits of Individuals in the Banks of the Russian Federation, dated 23 December 2003 and FederalLaw No. 115-FZ On Combating Money Laundering and the Financing of Terrorism.5.16.1. Banking and Banking Operations5.16.1.1. Banking and Credit Organizations in the Russian MarketPursuant to Federal Law No. 395-1 On Banks and Banking Activities, dated 2 December 1990 (the“Banking Law”), there are two main types of credit organization: banks and non-banking creditorganizations. A bank is a credit organization that has the right to carry out such banking operations asopening and maintaining the bank accounts of legal entities and individuals, attracting deposits fromlegal entities and individuals and placement of those funds in its own name and at its own cost andexpense. Conversely, a non-banking credit organization is an entity that is allowed to perform a limitednumber of specified banking operations as set forth in its license.Both banks and non-banking credit organizations are entitled to carry out banking operations from themoment of receipt of a banking license issued by the Bank of Russia. Both types of credit organizationmay participate in banking groups (when the controlling company is a credit organization) and bankingholdings (when the controlling company is a non-credit organization).5.16.1.2. Foreign Participation in the Banking sectorAlthough foreign banks may not currently open branch offices in the Russian Federation, a localsubsidiary or a representative office may be established.(a) Foreign direct ownership A foreign bank may establish a subsidiary in Russia in the form of a Russian legal entity (a joint- stock company or a limited liability company) (see Chapter 5.3 Establishing a Legal Presence). The participation of foreign banks in the Russian market is subject to certain restrictions. In particular, non-residents need the Bank of Russia’s prior approval if they acquire 20% or more of the shares in a Russian bank or non-banking credit organization. When a non-resident acquires more than 1% but less than 20%, the Bank of Russia need only be notified. This is similar to the regulation that applies to Russian residents. Also, the Bank of Russia may not establish additional requirements for the subsidiaries of foreign banks related to mandatory ratios and minimal charter capital. However, additional requirements on reporting procedures, approval of management bodies and permitted operations of the representative offices and subsidiaries of foreign banks may still be introduced. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 181 St. Petersburg Foundation for SME Development
  • 182. (b) Representative Offices Representative offices of foreign banks are accredited by the Bank of Russia. A representative office of a foreign bank can be accredited for a term of three (3) years. Accreditation can be renewed an unlimited number of times. The Bank of Russia may grant permission to open a representative office to a foreign bank that meets all the following criteria: (i) the foreign bank has been operating in its country of incorporation for at least five years; (ii) the foreign bank has a good reputation in the banking system of its country; and (iii) the foreign bank has a stable financial position. Confirmation of the foreign bank’s compliance with these criteria should be requested from the relevant supervisory body in the country where the foreign bank is incorporated. Representative offices of foreign banks have limited legal capacity under Russian law. They are allowed to study the economic situation and standing of the Russian banking sector, to maintain and develop contacts with Russian banks, and to develop international cooperation81. While the representative office of a foreign bank may not solicit new clients for the bank, it may provide consultancy services to existing clients of the foreign bank. Representative offices of foreign banks are subject to the supervisory control of Bank of Russia, which may close the representative office of a foreign bank at any time at its discretion82.5.16.1.3. Banking ActivitiesUnder the Banking Law only credit organizations holding the respective license are allowed to carry outcertain activities, which are called “banking operations”. The list of banking operations includes thefollowing: Attraction of monetary funds for on-demand and term deposits and placement of such funds in the name and at the expense of the relevant credit organizations; Holding deposits and placement of precious metals; Opening and maintaining bank accounts for individuals and legal entities; Collecting money, promissory notes and bills of exchange, payment and settlement documents; Providing cash services to individuals and legal entities; Exchanging foreign currency; Issuing bank guarantees; and Transferring money (including e-money) with or without opening of bank accounts.Banks and non-banking credit organizations are also entitled to perform certain non-bankingoperations, inter alia: providing financial suretyship; trust management; performing operations withprecious metals and stones; renting out safe deposit boxes; participating in financial leasing operations;and providing consultancy and other informational services. Subject to compliance with respectivelicensing requirements credit organizations may act as professional participants on the securitiesmarket. Credit organizations are prohibited from engaging in any industrial, trade, or insuranceactivities.5.16.1.3.1 LendingOf course one of the major activities of a credit organization in Russia is lending. While lending toRussian corporate entities, a number of issues should be taken into account.The parties to a transaction with a foreign element (i.e. a foreign counterparty) may generally chooseforeign law as the law governing their contractual relationship. Thus, if financing is provided to aRussian company by a foreign bank the loan agreement is usually governed by foreign law (usually81 See Clause 1.2. of the Regulations on the Procedure for Opening Representative Offices of Foreign CreditOrganizations in the Russian Federation and for the Activities Thereof (endorsed by Order of the Bank of RussiaNo. 02-437 dated 7 October 1997), hereinafter, the “Regulations”.82 See Clause 3.7. of the Regulations. Doing business in St. Petersburg182 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 183. English law and LMA-style agreements are used). The choice of governing law for security documentshowever is generally determined by where the proposed collateral is situated or created.It is noteworthy that Russian law does not recognize the concept of trusts. Therefore, thestraightforward use of a security trustee in syndicated secured financing may not work in Russia, wherealternative structures are used.Although most of the currency control restrictions were removed in 2007, foreign banks should still takeinto account some currency control regulations when lending to Russian corporate borrowers, e.g. thenecessity of opening a transaction passport, repatriation of funds from export proceeds.Payments by a Russian borrower to a foreign lender under a loan agreement may, as the payer is aRussian taxpayer, be characterized as a Russian source income. In such case, the payments by theRussian borrower may be subject to Russian profits withholding tax at the rate of 20%, subject toreduction or elimination pursuant to the terms of an applicable tax treaty.5.16.2. Legal and Regulatory FrameworkThe foundations of the Russian banking system are provided in the Banking Law and Federal LawNo.86-FZ On the Central Bank of the Russian Federation, dated 10 July 2002 (the “Bank of Russia Law”).Bank insolvency is specifically regulated by Federal Law No. 40-FZ On the Insolvency (Bankruptcy) ofCredit Organizations, dated 25 February 1999. The Bank of Russia is responsible for regulating bankingactivities. Through its instructions, regulations, and other acts, the Bank of Russia establishes rules,standards, and obligatory requirements for banks and non-banking credit organizations throughout theRussian Federation.5.16.2.1. Regulatory AuthoritiesThe primary regulatory body governing the banking sector of the Russian Federation is the Bank ofRussia. The Bank of Russia is one of the few institutions under the control of the Russian legislative(rather than executive) branch. The State Duma must not only approve the nomination of the chairmanof the Bank of Russia, but also approve the resignation of the chairman. The Bank of Russia Lawprovides for the establishment of a special body within the structure of the Bank of Russia, the NationalBanking Council (the “NBC”), comprised of representatives of various executive and legislative bodies.The NBC exercises control over the Bank of Russia’s board of directors, and participates in establishingthe basic principles of Russian banking and financial policy.The Bank of Russia and the Government share authority over monetary policy. The Bank of Russia isresponsible for circulating monetary funds and ensuring the stability of the Russian ruble. As part of itsregulatory role, the Bank of Russia establishes state registration, accounting, reporting and licensingrules for credit organizations, sets minimum reserve requirements for lending operations, mandatoryratios (capital adequacy, liquidity, etc.) and requirements on the amount of charter capital. The Bank ofRussia maintains regional offices throughout the Russian Federation.5.16.2.2. Licensing and Banking SupervisionA credit organization must be registered in the Russian Federation further to a specific procedure andmust be licensed by the Bank of Russia. Newly established banks can receive licenses permitting alimited scope of operations. A bank that has held a license for a period of two years or more is entitledto apply for licenses permitting an extended scope of operations.The Bank of Russia may refuse to issue a banking license in the event of the following: Non-compliance of the application documents with Russian legal requirements; The unsatisfactory financial standing of the founders of the credit organization, or their failure to perform their respective obligations before the federal budget, the budgets of constituent entities of the Russian Federation or local budgets; Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 183 St. Petersburg Foundation for SME Development
  • 184.  The failure of a nominee for the position of chief executive officer or chief accountant of the credit organization (or their deputies) to meet the qualification requirements, or an unsatisfactory business reputation of a nominee for the position of a member of the board of directors (supervisory board) of the credit organization.The Bank of Russia has controlling powers over Russian Banks: it approves the appointment of thesenior management of all credit organizations, holds mandatory reserves placed by creditorganizations, and monitors credit organizations’ compliance with applicable requirements. If a creditorganization fails to comply with these requirements the Bank of Russia is entitled to exercise varioussanctions, which range from a warning and fine to suspension of certain banking operations andrevocation of its banking license, which triggers the dissolution or bankruptcy of the creditorganization.Under certain circumstances banks have to cooperate with the Federal Antimonopoly Service (“FAS”).For example, in case of mergers, banks are required to obtain preliminary clearance from FAS if thepurchaser will acquire more than 25% in the charter capital of a bank and at the same time the targetbank’s assets exceed RUB 33 billion (approx. USD 1.1 billion). Where the figure does not exceed theestablished limit, it is sufficient for the lending institutions concerned to notify FAS of the merger.5.16.2.3. Deposit InsuranceFederal Law No. 177-FZ On the Insurance of Deposits of Individuals in the Banks of the RussianFederation, dated 23 December 2003 (the “Deposit Insurance Law”) establishes an insurance system forthe deposits of individuals. It stipulates that all banks accepting individual deposits must be members ofthe deposit insurance system. The Agency for Deposit Insurance (the “Agency”) is responsible forsupervising this system.Banks that hold a valid retail banking license need to apply to the Bank of Russia to become registeredas a participant in the mandatory deposit insurance system. A bank is expected to pass a number oftests before it can be admitted. The Bank of Russia must be assured that: the bank’s financial accountsand reports are accurate; the bank is in full compliance with the Bank of Russia’s mandatory ratios; thebank’s solvency position is sufficient; and that the Bank of Russia has not cancelled the bank’s bankinglicense.If a bank fails the above tests or chooses not to participate in the deposit insurance system, it will not beable to attract deposits from, or open accounts for, individuals. Member banks have to makecontributions to a special deposit insurance fund. These contributions are calculated as a percentage ofthe average daily balance of individual deposits maintained with a particular bank, and beginning fromthe 4th quarter of the year 2008 are subject to an upper limit of 0.1%. All individual depositors withdeposits in member banks are entitled to 100% compensation for aggregate amounts up to RUB700,000 (approx. USD 23,000) for each bank. However, the deposit insurance would not cover e-moneydeposits.5.16.2.4. Countering Money LaunderingBased on recommendations made by the Financial Action Task Force on Money Laundering (the“FATF”), the State Duma adopted Federal Law No. 115-FZ On Combating Money Laundering and theFinancing of Terrorism (the “Anti-Money Laundering Law”), which came into force on 1 February 2002.The Anti-Money Laundering Law imposes certain requirements on credit organizations, professionalparticipants of securities markets, insurance and leasing companies, postal and other entities that dealwith the transmission of money or other valuables. These entities must: Identify clients and beneficiaries pursuant to a specific procedure; Require certain information on payers in payment orders; Report to the Federal Financial Monitoring Service on certain types of transactions of RUB 600,000 (approx. USD 20,000) or more (or the equivalent in foreign currency), and transactions with real Doing business in St. Petersburg184 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 185. property of RUB 3 million (approx. USD 100,000) or more (or the equivalent in foreign currency) and all complex or unusual transaction schemes that have no apparent economic or lawful purpose irrespective of their amount; Identify foreign public officials and the sources of their money and other property; pay increased attention to transfers of monetary funds and other property between foreign public officials and their close relatives.The Anti-Money Laundering Law disallows the creation and maintenance of anonymously heldaccounts.5.16.2.5. Capitalization and Basel II implementationRussian banks are required to comply with the capital adequacy requirements set by the Bank of Russia,which differ in some significant respects from the regulations applied in those countries that haveadopted the guidelines regarding solvency and capitalization set by the Basel Committee on BankingRegulations and the Supervision Practices of the Bank for International Settlements.Under Russian law, the minimum capital adequacy ratio that banks are required to maintain iscalculated (on an unconsolidated basis) as the ratio of a bank’s owned funds (its capital) to the totalamount of its risk weighted assets. From the beginning of 2012 the minimum capital adequacy ratiorequired by the Bank of Russia is currently 10% for banks whose capital is RUB 300 million (approx. USD10 million) or more and 11% for banks whose capital is less than RUB 300 million. If the capital adequacyratio of a bank drops below 2%, then the Bank of Russia should revoke its banking license.Pursuant to the recent amendments, existing banks are required to achieve the above amounts ofcapital by 2015. Should a bank fail to reach the above level of capital, the Bank of Russia will revoke itslicense. From the beginning of 2012 the minimal capital of newly registered banks must be RUB 300million (approx. USD 10 million).Introduction of the “Basel II” capital requirements, initially scheduled for 2009, has been postponed. Anew time-frame for the introduction of “Basel II” in Russia has yet to be announced.5.16.2.6. Financial Statements and Reporting StandardsAccounting and reporting requirements in Russia are not comparable to those in other (especiallyWestern) jurisdictions. All credit organizations in the Russian Federation must prepare RussianAccounting Standards (“RAS”) statutory accounting reports and, on an annual basis, their financialstatements according to IFRS.The Bank of Russia devises reporting forms for credit organizations and works out procedures forpreparing reports and filing them. Banks are obliged to submit a very large quantity of information tothe Bank of Russia with some of the reports to be filed on a regular basis. The list of information mayvary depending on the type of operations carried out by a particular credit organization and the numberof licenses it holds. Thus, all credit organizations should disclose information concerning their affiliates,file accounting statements, provide information on analogous claims and loans grouped in portfoliostogether with information on the quality of the credit organization’s assets and information onsecurities acquired by the credit organization, data on loans and market risks, information onobligatory norms and any deviation therefrom, information on forward transactions etc.If a bank is a joint stock company and a securities market participant, it must also disclose informationat various stages of each securities issue. Such information is disclosed in the form of an offeringstatement, quarterly securities issuer reports and disclosure of material facts affecting the bank’sfinancial and business activities. Information to be disclosed must be published by one of theauthorized services. In addition, a particular issuer may use its own or some other Internet site for suchpurposes. The rules covering this disclosure are set by the Federal Service for Financial Markets. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 185 St. Petersburg Foundation for SME Development
  • 186. 5.16.3. Regulation of the Insurance Market and ProductsThe Insurance Law contains a general description of the organization of the Russian insurance market,licensing requirements, operation and liquidation of insurance businesses, as well as regulation of otherparticipants of the Russian insurance market, such as insurance brokers and dealers.The Civil Code establishes the types of insurance, the concept and compulsory terms of insurancecontracts, the rights and duties of parties to such contracts, rules for the change of parties andbeneficiaries to insurance contracts, rules for termination of insurance contracts, as well as otherfundamental insurance-related regulation. In particular, Article 934 of the Civil Code establishes thebasis for personal (life and health) insurance and Article 929 the basis for property insurance (propertyinsurance, liability insurance and business risks insurance).5.16.4. Types of Insurance in RussiaRussian law provides for two basic types of insurance: personal insurance (such as life and health) andproperty insurance (property insurance, liability insurance and business risks insurance). Life insuranceactivity may not be combined with other types of insurance activities, i.e. an insurer may only offereither life insurance, or health and property insurance.The law also mentions the possibility of issuing insurance policies incorporating investment elements inthe case of life insurance; however, because there is no further regulation of such instruments and for anumber of other reasons, it is not clear how the investment provisions of such insurance policies wouldbe treated by courts. The fact that a number of major Russian insurance carriers offer packages for lifeinsurance with investment possibilities referred to as “elite” may be seen as the first step in theappearance of a market for such products. Doing business in St. Petersburg186 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 187. 6. Costs of doing business6.1. Costs of starting a company6.1.1. OverviewStarting a business in St. Petersburg involves completing a series of legal activities. Russian companies,as well as branches and representative offices of foreign companies in Russia, must be registered withseveral authorities. Companies must be registered with the State Registration Authority (currently, taxauthorities), which takes care of state registration and registration for tax purposes, as well as with theState Statistical Committee and three social funds. Branches and representative offices must beregistered with the tax authorities and accredited as well as registered with the State StatisticalCommittee and three separate social funds. In St. Petersburg registration is carried out through theUnified Registration Center, which registers companies with all required establishments andauthorities.83In the preliminary phase, it is required to gather and draft all documents, which are to be filed withcompetent authorities (notarized and apostilled corporate documents of a foreign company,constitution documents of the newly established Russian company or business, etc.).Additional steps are necessary for Russian companies, branches, and representative offices to be fullyoperational, e.g. opening of bank accounts, development of a corporate seal, registration of theissuance of shares (for JSCs only) with the securities authorities, etc.You can establish a company with your own financial and human resources, however it is highlyrecommended to refer to the services provided by consulting, law or special registration companies toexpedite the whole process.6.1.2. Costs and dutiesThe following state duties are applied while registering a company through the Unified RegistrationCenter in St. Petersburg:84 Individual entrepreneur / sole proprietorship State duty: 800 RUB Registration time: no more than 5 business days Legal entity (all types) State duty: 4,000 RUB Registration time: no more than 5 business daysThe following costs may be incurred while registering and starting a company in Russia: Notary services Some documents submitted for registration have to be approved by notary Cost: starting at 200 RUB83 For more information, please see Section 5.3 Establishing a Legal Presence84 Effective January 30, 2010 Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 187 St. Petersburg Foundation for SME Development
  • 188.  Stamp In order to run a business all legal entities in Russia are required to have a company stamp Cost: starting at 400 RUB Bank account In order to run a business it is necessary to have a bank account Cost: varies depending on the bank Certification and other issues Certification might be required depending on the nature of your business and products Cost: starting at 2,000 RUB6.1.3. ContactsAdministration of the Federal Tax Service in St. PetersburgUnified Registration Center at Interdistrict Tax Inspection #1510-12 Krasnogo Tekstilschika Street191124 St. Petersburg, RussiaTel.: +7 812 335 14 03, 335 14 00 | Fax: +7 812 335 14 02i784700@r78.nalog.ru | www.r78.nalog.ru Doing business in St. Petersburg188 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 189. 6.2. Human resourcesAccording to the Territorial branch of the Federal State Statistic Service (www.petrostat.gks.ru),average nominal salary in St. Petersburg constitutes 29,522 roubles (as of 2011). In 2011 real accruedsalary calculated with consideration of consumer price index constituted 100.2% to the level of 2010.6.2.1. Average salaries by industry (2011)Industry RUB In % to 2010Agriculture 26,412 114,9Mining 40,524 119,2Manufacturing 31,123 114,7Electricity, gas and water 109,8 38,118production and distributionConstruction 24,610 104,0Wholesale and retail trade; repair 106,4of motor vehicles, motorcycles 23,061and personal and household goodsHotels and restaurants 17,101 112,4Transport and communication 32,868 110,5Financial activity 57,528 109,0Real estate operations, rent and 111,1 35,107servicesPublic administration, military 108,3 32,587security, social insuranceEducation 22,753 110,4Health care and social services 25,465 108,0Other community, social and 115,2 27,580personal servicesSource: Territorial branch of the Federal State Statistic Service Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 189 St. Petersburg Foundation for SME Development
  • 190. 6.2.2. Salary and compensation survey Information for the current chapter was developed and kindly provided by AdeccoThe salary and compensations survey conducted by Adecco in spring 2012 covers 29 Russian andforeign companies. The total number of employees of the participating companies represents morethan 8,000 people. The survey studies more than 100 positions of different level and defines commontendency in salary policy, benefits and compensations policy, etc.6.2.2.1. Participants informationType of company Type of ownership 6% 28% 27% 100% Russian International capital 100% foreign capital National Joint venture 72% 59%Core activity in Russia, %Production: FMCG 17 DCG 28 Industrial goods 7Distribution: Wholesale distribution 52 Retail distribution 21 Promotion / Sales & Marketing 34Services: Legal entity 38 Individual person 286.2.2.2. Salary payment policySalary increase, as planned for 2012 (% of number of companies)Foreign companies 81%Russian companies 75% Total 79% Doing business in St. Petersburg190 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 191. Number of companies planning to increase salaries in 2012 and total value of salary increase, %Number of companies provided salary 52increase during 2012 (1 quarter) Average increase 8Number of companies provided 48salary increase in 2012 (2-4 quarters) Average increase 86.2.2.3. Bonus policyAvailability of fixed bonus Availability of non-fixed bonus 14% 34% Yes No Yes No 86% 66%Fixed bonus payment period Non-fixed bonus payment period Average factory personnel, 42% monthly Average factory 100% Sales department, monthly 79% personnel, monthly Basic level employees, monthly 32% Sales department, Middle management, quarterly 42% 50% monthly Senior management, 21% monthly/quarterly/undefined6.2.2.4. OvertimesNumber of companies providing By type of companycompensation for overtimes 14% Foreign companies 90% 10% Yes No 86% Russian companies 75% 25% Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 191 St. Petersburg Foundation for SME Development
  • 192. 6.2.2.5. Training programsTraining programs provided in companies, %Training courses Senior Middle Basic level Sales Average management management employees department factory personnelSales skills 7 14 7 76 7Presentation skills 28 28 14 55 7Supervisory skills 62 62 7 7 7Key account management 14 14 14 41 14Negotiation skills 34 34 14 48 7Communication skills 28 28 34 34 7Team building 21 28 28 28 7Interviewing skills 14 14 7 7 7Time management 21 21 14 14 7Foreign language courses 38 52 45 38 45Computer courses 17 17 17 17 17Performance management 21 21 7 7 7Other - 7 14 - 146.2.2.6. PersonnelNumber of companies planning to change the Planned change in staffingnumber of employees 45% 15% Increase in staff Yes No Reduction in staff 55% 85% Doing business in St. Petersburg192 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 193. 6.2.2.7. Salary for some positionsAverage monthly cash (base salary + bonuses + annual bonus), RUB, Gross 85 86Position 25 percentile 75 percentileExecutive management: Business development director 173,050 263,700 Branch Director/Manager 142,031 248,307Administration: Legal supervisor 171,450 183,109 Office Manager (with foreign 35,175 45,175 language knowledge)Accounting and Finances: Chief Accountant 100,580 201,183 Financial Analyst 27,356 59,698Marketing and PR: PR Manager 53,656 89,214IS & IT: Head of IT Department/ IT 81,845 125,265 Manage Programmer 59,595 76,795 System Administrator 52,563 71,459Sales: Head of Sales Department 81,258 118,438 Regional Sales Manager 67,219 88,481 Sales Representative 34,573 42,514Production & Engineering: Production Superintendent/Production 118,849 145,166 Manager Worker (skilled) 30,141 36,060Quality Control andStandardization: Head of Quality and 86,115 142,812 Standardization Department85 25th percentile is the rate that divides the exponents’ row into two parts: 25% of rates are lower than thepercentile, and 75% are higher. Thus 25% of researched employees/companies get salary lower than thepercentile, and 75% - higher.86 75th percentile is the rate that divides the row in two following parts: 75% of the row exponents are lower thanthe percentile, and 25% are higher. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 193 St. Petersburg Foundation for SME Development
  • 194. Retail sales: Store Director 57,360 101,503 Retail Specialist/ Shop Assistant 19,418 28,479Customer Service: Customer Service Manager 32,630 34,750 Service Manager 32,509 34,213 Doing business in St. Petersburg194 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 195. 6.3. Office, retail and warehouse market Information for the current chapter was developed and kindly provided by Jones Lang LaSalle6.3.1. Office market overview6.3.1.1. Supply The total modern office stock in St. Petersburg th.sq.m Class A&B stock dynamics increased by 124,890 sq m in the first nine months 2 500 of 2012 and reached 2,150,590 sq m. The share of Class A space is gradually increasing in the total 2 000 volume of quality office stock. Currently, it amounts to 27%. Completion levels are gradually picking up again 1 500 with around 200,000 sq m for 2012 in total, although they remain lower than figures in 2008- 1 000 2009, when over 300,000 sq m were delivered annually. Around 230,000 - 250,000 sq m of office space per year is announced for delivery in 2013- 500 2014. However, this forecast could be adjusted downward as project delivery is delayed or 0 canceled. Class A Class B6.3.1.2. Demand In the 3d quarter of 2012 occupier activity was th.sq.m. Completions and net absorption strong. Total net absorption during the first nine months of the year accounts for 190,000 sq m, 140 which is comparable to pre-crisis activity levels. 120 The share of the 3d quarter absorption amounted to around 30% (or 56,550 sq m in Class A and B 100 properties). Occupier activity was particularly high 80 in the Moskovskiy and Vasileostrovskiy districts on 60 the back of recently completed high-quality developments in these areas. In fact, Moskovskiy 40 district together with such central locations as 20 Central and Petrogradskiy districts represented the three leading directions of occupiers demand 0 in the city throughout the last nine months. Q3 2008 Q1 2007 Q3 2007 Q1 2008 Q1 2009 Q3 2009 Q1 2010 Q3 2010 Q1 2011 Q3 2011 Q1 2012 Q3 2012 -20 Overall, Mining and Exploration sector occupiers were the most active in 2012 so far, accounting for a 31% share of leasing deals, followed by the IT Completions Net absorption sector at 22%. Construction and Wholesale & Retail occupiers were also active at 13% and 8%, Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 195 St. Petersburg Foundation for SME Development
  • 196. respectively. The largest leasing deals on the market are mainly in the range between 6,000 –10,000 sqm. A recent market trend has been the purchase of entire office buildings by end-users.6.3.1.3. Market balance Rent and vacancy rate dynamics The overall vacancy rate remained virtually USD/sq.m/ unchanged at 9.7% during the last six months, year though it decreased from 13.5% registered in the 700 40% beginning of 2012. Recent data showed 600 35% decreasing availability of Class A space from 14.7% 30% to 12.2% over the quarter, while Class B choice 500 increased from 7.8% to 8.8% on the back of a 25% 400 number of large (state commissioned) 20% completions. Comparing current market with that 300 in the beginning of the year, the dynamics of 15% 200 available space will be sharper. In total, available 10% space in quality premises reaches 208,230 sq m 100 5% with Class A space at 69,490 sq m and Class B 0 0% space at 138,740 sq m (vs. 124,700 sq m and 2004 2005 2006 2007 2008 2009 2010 2011 Q3 148,200 sq m, respectively in the beginning of 2012 2012). Base rent, Class A Base rent, Class B Rental changes remain quite moderate. Average Vacancy rate, Class A Vacancy rate, Class B Class A rents increased by around 2-3% over the quarter, whereas Class B rents recorded a drop ofaround the same magnitude. Market rents are recorded at USD 350-420/sq m/year for Class A space,while Class B properties demand rents of around USD 250-330/sq m/year. Prime rents have remained atthe same level since the middle of 2011, at USD 450-550/sq m/year (excluding operating expenses andVAT). Landlord incentives usually include fit-out delivery. Anchor tenants with specific fit-outrequirements can acquire tailor made fit-out for its compensation. Rent free periods are used mainly foranchor tenants for the fit-out period (maximum 3 months for tenants over 3,000 sq m).6.3.1.4. OutlookOffice supply in the mid-term will remain split between central locations of the city and Moskovskiydistrict, where around 30% of all future supply is planned for completion next year. New office supplywill offer high-quality space to anchor tenants, and will stimulate average rents upward. Leasingactivity will continue to be stable, with IT and Mining/Explorations sector dominating the market in theshort-term. Further vacancy decrease will be dependent on completions, but the general trend of officespace absorption levels exceeding completions level will remain. 2004 2005 2006 2007 2008 2009 2010 2011 2012EStock at the end of 506.7 634.8 821.3 997.2 1,402.7 1,713.6 1,825.6 2,025.7 2,215year (thousand sq.m)Completions 192.3 128.1 186.5 175.9 405.6 310.9 111.9 170.08 190(thousand sq.m)Vacancy rate (%) 5.0 5.0 6.1 5.8 15.0 25.9 19.7 13.5 9Prime base rent 500 600 800 900 1,000 600 500 550 550(USD/sq.m/year)Source: Jones Lang LaSalle, 2012 Doing business in St. Petersburg196 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 197. 6.3.2. Retail market overview6.3.2.1. Supply The total volume of shopping center stock reachedth. sq.m. Shopping center stock 1.76 m sq m. The largest projects delivered to the 2 000 14% market in 2012 are SEC Piterland (GLA – 80,000 sq 12% m) and RIO (43,700 sq m). Total supply constituted 1 600 168,800 sq m. The opening of a luxury department 10% store – DLT (18,000 sq m), St. Petersburg branch 1 200 of luxury Moscow department store TSUM, which 8% opened in September after reconstruction, was 6% one of the most eminent retail events in 2012. 800 Such luxury brands as Gucci, Lanvin, Celine, Yves 4% Saint Laurent, Chloe, Marni, D&G, Ralph Lauren, 400 Roberto Cavalli, Tom Ford are represented there. 2% Primorskiy District remains the most popular area 0 0% in terms of new projects delivered to the market. 2012F 2004 2005 2006 2007 2008 2009 2010 2011 Its share is about 24% of the existing quality shopping centers, but this fact does not stop Annual completions Stock at the beginning of the year developers who want to realize projects in the Vacancy rate (R axis) most populated area of the city. In the 3d quarter SK Alice announced its regional projectHOLLYWOOD SEC (leasable area – 65,000 sq m) to be delivered to the market in Primorskiy District in2015. Construction works for frozen retail schemes are gradually resuming. However, the developershave changed for larger projects. For example, Fort Group resumed the construction of Evropolis SECin May and started construction of Pyat Ozer SC (former Dolgoozerny SC by Macromir Company) inJuly 2012. Total leasable area of new supply which will be delivered to the market in the 4th quarter of2012―2014 is around 440,000 sq m.6.3.2.2. Demand Retail turnover and personal income continued to Retail turnover and income demonstrate positive growth rates throughout dynamics January-July 2012, although recent values were 80% quite low due to seasonal drop. Personal income growth in January-June 2012 60% amounted to 2.8% in total. Currently we observe quite slow monthly growth which hardly exceeds 40% one per cent per month, or even lower. Retail turnover real growth for January-July 2012 reached 20% 8.3%, whereas absolute turnover figures being 0% registered at USD 15 bn in the same period. June/July growth figures demonstrate negative Jun 11 Sep 08 Sep 09 Sep 10 Mar 08 Mar 09 Mar 10 Mar 12 Mar 11 Dec 07 Jun 08 Dec 08 Jun 09 Dec 09 Jun 10 Dec 10 Sep 11 Dec 11 Jun 12 -20% values in comparison to spring months of 2012, however the total amounts are still higher than -40% that in the previous year (June/July 2011). While fashion retailers’ interest in St. Petersburg Real income growth, % YoY market still waivers, food retailers actively Retail turnover real growth, % YoY announce their expansion plans. Doing business in St. Petersburg St. Petersburg Government - Committee for External Relations 197 St. Petersburg Foundation for SME Development
  • 198. 6.3.2.3. Market balance Prime rental rates have not changed since the 2d Prime base rents, USD/sq.m/year quarter of 2010 and remained at USD 2,000/sq m/year. The average vacancy rate showed a slight Budapest decline from 5% to 4.6% in the 3d quarter of 2012. Hamburg We expect further decreases to 4% in 2013, although the volume of completions will be high in Warsaw the next two years. Turnover rent, as an alternative for fixed rents, is Berlin used as an option in leasing contracts. However, Prague the target turnover rent is rarely achieved, so fixed rate is applied more widely than that based onSt. Petersburg turnover. Rents denominated in USD or EUR often Paris specify a fixed lower limit of the exchange rate. Rental contracts usually include an annual increase London of 5–10%. Foreign developers are using LIBOR and Moscow HICP indices for rental indexation. 0 1 000 2 000 3 000 4 000 5 0006.3.2.4. OutlookThe major part of future projects will be delivered to the market in 2013. As a result the volume ofcompletions in 2013 will be the highest since 2006 but almost twice lower than in 2006. However, theaverage vacancy rate will continue to decline due to the high occupancy rate in new projects which willenter the market and slow filling of existing shopping centers. 2004 2005 2006 2007 2008 2009 2010 2011 2012EStock at the end of 117.6 186.2 809.5 101.5 1,194.8 1,234.8 1,380.5 1,581.1 1,770year (thousand sq.m)Completions 61.7 68.6 623.3 201.0 184.4 40.0 145.7 201 189.4(thousand sq.m)Vacancy rate (%) 0.5 0.5 0.7 1.0 3.0 13.0 7.0 6.0 4.5Prime base rent 2,000 2,100 2,400 3,000 3,000 1,800 2,000 2,000 2,000(USD/sq.m/year)Source: Jones Lang LaSalle, 2012 Doing business in St. Petersburg198 St. Petersburg Government - Committee for External Relations St. Petersburg Foundation for SME Development
  • 199. 6.3.3. Warehouse market overview6.3.3.1. Supply In the 3d quarter of 2012, quality warehouse stockth.sq.m. Stock and vacancy rate dynamics in St. Petersburg remained at the level of 1.85 m sq 2 000 25% m. Approximately 80,000 sq m of new quality warehouse space (in three projects) will be 1 600 20% delivered to the market during the next twelve months. However, the completion of these 1 200 15% projects will hardly add new available space to the market as long as the projects are already partially leased out. Less than 30% of these projects will be 800 10% offered to the market upon their completion. Construction pipeline is very limited with the 400 5% largest project, St. Petersburg Terminal Complex (leasable area of around 60,000 sq m), to be state 0 0% commissioned in the 4th quarter of 2012 – 1st 2012F 2004 2005 2006 2007 2008 2009 2010 2011 quarter of 2013. Existing stock Vacancy rate (R axis)6.3.3.2. Demand In the 3d quarter, net absorption volume wasUSD/sq.m/ Prime rental rates year almost the same as in the 2d quarter and amounted to 24,400 sq m. The total volume of net 160 absorption from the beginning of the year reached 140 almost 87,000 sq m. Take-up volumes in the 3d quarter reached 42,000 sq m which amounts to 120 30% of the total space leased in January- 100 September 2012, including pre-lease agreements in non-completed speculative schemes. The most 80 popular deal size remains at 2,000 – 5,000 sq m (i.e. one or two warehouse blocks). In the 3d 60 quarter of 2012, Manufacturing companies were 40 the most active on the St. Petersburg warehouse market. But the volume of deals in Retail and 20 Distribution sector, which was very active in the 0 first half of 2012, remained the highest throughout