25 November 2020
A New Instrument for Protection and Encouragement of Investments in Russia | Oleg Ushakov, Dmitry Kabanov and Victor Radnaev for IBA Securities Law Committee publications

In March 2018, the Russian President instructed the government and the Bank of Russia to develop an action plan to accelerate growth of investments and their share in gross domestic product. Shortly afterwards, the Russian Ministry of Finance developed a draft law ‘On Protection and Promotion of Investment in Russia’, which was announced in October 2018. It was assumed that the adoption of this law would improve the investment climate and give impetus to the development of the country's economy.

In September 2019, Deputy Prime Minister D Kozak presented his alternative draft law ‘On Encouragement and Protection of Private Investment Activities in Russia’, which differed significantly from the draft law of the Russian Ministry of Finance.

About a month after that, the State Duma approved the draft law prepared by the Ministry of Finance in the first reading. Then the draft law was delayed by discussions, as not all participants were satisfied with the subject of its regulation (eg, it significantly affected concession agreements and public private partnership/municipal private partnership (PPP/MPP) agreements, standardised forms of state support, etc). As a result, a compromise version of the law was finally adopted.

On 1 April 2020, a new federal law ‘On Protection and Encouragement of Investments in the Russian Federation’ came into force (‘the Law’). The main purpose of the Law is to establish a new instrument in the Russian legal system, namely, a contract of protection and encouragement of investments in the real sector of economy (‘the Contract’, or collectively, the 'Contracts').

In October 2020, the Government of the Russian Federation adopted the legal framework necessary for the conclusion and implementation of Contracts (see resolutions dated 1 October 2020, No 1577 and dated 3 October 2020, No 1599). These acts provide a procedure for concluding, amending and terminating Contracts and a procedure to provide support measures from the federal budget in relation to various investment projects.

It should also be noted that the National Action Plan to Ensure the Recovery of Employment and Incomes of the Population, Economic Growth and Long-Term Structural Changes prepared by the Russian Government includes measures for supporting large investment projects based on the Contracts.

Parties to the Contract

The Contract may be concluded between an entity that intends to implement a new investment project (‘the Entity’) in Russia on the one hand, and one or several public law entities on the other hand (individually ‘the Public Party’ and collectively referred to as ‘the Public Parties’). Each constituent entity of the Russian Federation in the territory where an investment project is going to be implemented must act as the Public Party. Additionally, the Public Parties may also include the following public entities:

  • the Russian Federation, provided the Entity is obliged to invest at least RUB 10bn (circa $130m); and/or
  • municipalities.

To enter into the Contract, the Entity must be established in Russia by Russian or foreign investors.

Aim of the Contract

The aim of the Contract is to preserve the terms of the investment at the time the Entity entered into the project, ensuring that the Public Party does not carry out any acts that may have a negative effect on such terms, for example by:

  • increasing the time frames of the procedures necessary to implement an investment project;
  • increasing the number of procedures; or
  • increasing the payments (including taxes), that must be paid to implement an investment project.

The Russian Federation is responsible for not applying the aforementioned federal acts and decisions, whereas constituent entities of the Russian Federation are responsible for the regional acts, and municipalities for the local acts.

This provision is known as a ‘stabilisation clause’, because the scope of statutory provisions applicable to the Entity is fixed as of the date the Contract is entered into.

The Contract may not be entered into if an investment project is implemented in one of the following areas of activity:

  • the gambling industry;
  • alcohol and tobacco production;
  • production of wet fuel (with some exceptions);
  • crude oil and natural gas production, including associated petroleum gas (with some exceptions);
  • wholesale and retail trade;
  • the business of financial organisations regulated by the Bank of Russia; or
  • construction, modernisation and reconstruction of business and trade centres and residential buildings.

The Entity is obliged to implement an investment project according to the terms of the Contract. If the Entity breaches this obligation, the Contract may be terminated based on the claim of the Public Party by court or arbitration.

The procedure for entering into the Contract

The law stipulates two possible procedures for entering into the Contract. One of the procedures requires the Public Party’s consent, while the other does not; that is, where the Entity and the investment project meet all the requirements, the Public Party is bound to enter into the Contract.

The Public Party’s liability

The Public Party may be liable for breaching the stabilisation clause, that is, for carrying out legal acts and making decisions that violate the Contract, in the form of actual damages. However, this liability is limited to the amount of mandatory payments (taxes) the Entity pays during the implementation of an investment project.

The Entity’s liability

The Entity may be liable for misusing governmental budget funds if they were provided as a measure of governmental support.

Dispute resolution

The Law establishes several features of the statutory regime:

  • Even if the Parties opted for arbitration as a dispute resolution mechanism, there is still another alternative: by law, a claimant is entitled to start court proceedings in Russia. This might be helpful where there are doubts regarding the arbitrability of an issue;
  • There is a ‘fork-in-the-road’ rule: once the claimant makes a choice, all counter- and cross-claims of the parties must be adjudicated where the proceedings started (subject to arbitrability limits);
  • Russia is a mandatory seat of arbitration and Russian courts have exclusive jurisdiction relating to setting arbitral awards aside;
  • No ad hoc arbitration: Russian-based or non-Russian arbitral institutions licensed by the Russian Ministry of Justice are only eligible for administering disputes. Specifically, these include HKIAC, VIAC, the Russian Arbitration Center, ICAC (also known under its Russian acronym as MKAS) and several others; and
  • There is a mandatory cooling-off period of three months before litigation or arbitration starts.

Gratitude is expressed to Victor Radnaev, counsel in the International Arbitration and Litigation practice group of EPA&P, for his contribution to the section ‘Dispute resolution’ above.

By Сounsel Oleg Ushakov and Junior Associate Dmitry Kabanov, Banking & Finance, Capital Markets Practice.