Is Russia becoming even more “Anti Business” than before? Reviewed by Momizat on . [caption id="attachment_5426" align="alignnone" width="615"] The Russian government has just submitted to the State Duma a bill on the introduction of restricti [caption id="attachment_5426" align="alignnone" width="615"] The Russian government has just submitted to the State Duma a bill on the introduction of restricti Rating: 0

Is Russia becoming even more “Anti Business” than before?

The Russian government has just submitted to the State Duma a bill on the introduction of restrictions against foreign ownership. The document suggests that the Russian courts will have the power to limit the immunity of foreign states "based on the principle of reciprocity."

The Russian government has just submitted to the State Duma a bill on the introduction of restrictions against foreign ownership. The document suggests that the Russian courts will have the power to limit the immunity of foreign states “based on the principle of reciprocity.”

By Chris Weston, CEE Consulting Group

It seems a distant memory that President Vladimir Putin was hailed in many business circles as someone who would remove uncertainty on Russian markets, but fast forward to 2015 and falling oil prices, currency depreciation, war and sanctions paint a grim picture that is only getting worse.

First, a re-worked draft law on state control was introduced into the State Duma in June by the Russian Government.

The draft law envisages that, on January 1, 2016, Russia should introduce a three-year moratorium on planned inspections of small businesses – excepting those of them who have committed violations of the law over the course of the three previous years. It should be said, however, that half of inspections of small businesses belong to the category of unplanned checks, and it is well known that the reasons for such inspections have traditionally been rather vague.

Small businesses have historically been subject to “raiding” by parties well connected to higher authorities whereby the use of controls and inspections is used to acquire businesses “on the cheap” from their legitimate owners. The draft law may be viewed as a “step in the right direction,” but it is unlikely to be very effective in the light of informal practices adopted by state control bodies – called by one observer, Sistema, to gain leverage for such “raiding.”

Indeed, such “raiding” has not been limited to just small and medium sized businesses, large and extremely large businesses have also been subject to such practices.

One of the past notorious cases, Yukos – whose chief executive and principal shareholder, Mikhail Khordokovsky served almost a decade in jail, has “risen from the dead” to create a further headache for the government.

Under the Permanent Arbitration Court ruling from July 2014, it was held that the minority shareholders of the former Yukos should be compensated for the breakup of their company and the Russian government was told to pay them compensation of USD 50 bln (or almost 3 percent of the country`s GDP) – the largest arbitral award ever. The “piece by piece” expropriation of Yukos was achieved through a series of steps, which included paralyzing the Company (notably through the arrest, imprisonment and harassment of its management and employees) and manufacturing a pretext for the taking of the Company’s assets, namely, the fabrication of over USD 24 bln in tax liabilities.

Moves have recently been undertaken in a number of jurisdictions, including France and Belgium, to seize Russian assets in pursuit of this arbitration award.

The reaction? The Russian government has just submitted to the State Duma a bill on the introduction of restrictions against foreign ownership. The document suggests that the Russian courts will have the power to limit the immunity of foreign states “based on the principle of reciprocity.”

The government believes such foreign legal actions are “politically motivated” notwithstanding the decision was made by an (independent) arbitration tribunal and a Russian having been appointed by the government to the tribunal.

In the midst of a recession – the Russian economy is expected to contract by anything between 2.5 percent and perhaps as much as 4 percent, such a law, if passed, would only further exacerbate the significant decline in foreign direct investment in the country, which fell by almost 70 percent in 2014.

Indeed, it is left unclear whether such a law might be applicable to businesses such as oil and gas, where western energy companies, upon whom Russian energy sector companies are extremely dependent for knowhow, technology and cash, have already curbed investment due to sanctions; and manufacturing, including Western car giants.

Other recent events also point to a worsening climate:

  • In mid-June, the Government Commission on Monitoring Foreign Investment once again decided to postpone  consideration of international oil services giant Schlumberger`s planned USD 1.7 bln acquisition of Eurasia Drilling Company, although the Russian Federal Anti -Monopoly Service had earlier approved the preliminary terms of the proposed merger.
  • Also in June, Russian investigators opened several criminal cases against former senior executives of Domodedovo Airport over alleged security lapses in the run-up to a deadly 2011 bombing that killed 37 people.

This airport has grown rapidly in recent years, handling over 33 mln passengers in 2014 compared to 22.3 mln in 2010. It differs from Moscow’s two other air transport hubs, Vnukovo and Sheremetyevo, because it is not state-owned.

This criminal case, which it is alleged may extend to its private owners, represents the latest in a series of state authority actions spanning a decade against this generally well managed private business. “The Moscow Times” quoted Roman Gusarov, chief editor of aviation portal Avia.ru, as saying of this: “There are certain interests that want to get their hands on this very liquid and highly profitable business.”

So far, the Russian government remains determined to avoid initiatives to create a “better environment” for business. Come what may, business risks for multinationals operating in the country have just increased further.

Photo courtesy of Aivazovsky (Wikimedia Commons).

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