Legal Reform in Russia

Russia has implemented or initiated a number of legislative reforms during the last strategy period. The most significant initiative is the current reform of the entire Civil Code, which contains rules governing all business entities and commercial arrangements covering virtually all areas of life.

 

Russia: Access to Finance

Within the warehouse receipts law reform, the EBRD, together with the UN FAO, has been supporting the Ministry of Agriculture with the development of a long overdue legal framework for grain warehouse receipts. The reform’s objective is to enable grain producers to safely store their crops in public warehouses that are properly managed and financially sound and, if they wish so, mobilise the grain as collateral to raise finance.
 
The EBRD is also discussing with the Ministry of Agriculture the launch of a new legal reform initiative within crops receipts, aiming at providing a legal framework for the issuing of a so-called ‘crops receipts’ by farmers – a note undertaking the delivery of agricultural products or a financial obligation vis-à-vis a creditor secured by a pledge over future crops. This instrument, inspired by the very successful Brazilian experience, would represent an important alternative mode of financing for crops producers in Russia. The Ministry of Agriculture has expressed an interest and it is hoped that work will start in the second half of 2012.
 
The EBRD has also been advocating the need to reform secured transactions (also referred to as pledge law) in Russia for many years and with various counterparts, in particular with the Central Bank, the Ministry of Finance, and more recently the Duma’s Committee on Credit Organisation and Financial Markets, with limited success. It is also, as a member of the Foreign Investors Advisory Council (“FIAC”), drawing the attention of Russian policy-makers to the importance of such reform.
 
As part of the secured transaction reform in Russia, the EBRD commissioned the writing of a legal commentary on the new provisions, written by the eminent Russia law professor, Roman Bevzenko. The article was originally published in Private Law Review (2015, No 2.) and has been republished here with permission of the author.
 
 
Between December 2010 and April 2012, the EBRD thus supported the MED by providing detailed comments on the draft Civil Code provisions related to pledge (and mortgage), putting forward alternative provisions, and discussing with a number of key stakeholders, in particular the relevant working group of the influential Moscow as International Financial Centre, for amending the draft. The draft Civil Code is now before the Duma and has passed the first reading. A number of key concerns remain.
 
In 2014 the EBRD conducted an assessment on secured transactions which examined the availability of collateralising different types of assets regardless of the underlying legal instruments used to achieve the establishment of secured creditor’s rights. In addition to the classic security interests (pledges and mortgages the assessment also covered usual types of quasi security, such as sale and lease back transactions. The assessment also covered related issues such as enforcement and syndicated lending. The links below take you to the assessment results for Russia.
 
 
 

Russia: Capital Markets

Throughout the last two decades, the Russian financial sector has undergone a remarkable
development, but policy-makers have also recognised that more has to be done if Russia, and
specifically Moscow, wants to establish itself as a truly international financial centre, serving the needs of the entire Central Asian Region and beyond. EBRD is supporting the development of the Russian financial sector by: policy dialogue (including a technical cooperation), issuing the local currency bonds in Russia and equity investments, including one in the Moscow Exchange.
According to the current regulatory and legal framework governing the local debt capital markets of Russia, the Bank of Russia (the “CBR”) is a mega regulator (following a merger with the Federal Service for Financial Markets in September 2013) responsible for the regulation and supervision of the local debt capital markets. Extensive laws and regulations have been enacted to provide this framework, including laws and regulations governing specific entities and areas.
 
 

Russia: Contract Enforcement and Judicial Capacity

Judicial power in Russia is exercised by the Constitutional Court, courts of general jurisdiction, and specialised commercial (“Arbitrazh”) courts. Arbitrazh courts have a three-tiered structure, comprising first instance and appellate courts, as well as the Supreme Arbitrazh Court, which operates as the final level of appeal. They have exclusive jurisdiction over disputes arising out of the application of legislation governing corporations, and consequently hear disputes involving companies and shareholders on all matters except for employment issues. Arbitrazh courts also have exclusive jurisdiction over the recognition and enforcement of foreign court decisions and arbitral awards for disputes arising out of commercial activity. These courts also consider
companies’ claims against the decisions of state authorities which are alleged to have infringed their rights and interests. This includes tax, land and other administrative disputes. Arbitrazh courts are regulated by the 1995 Federal Constitutional Law “On Arbitrazh Courts in the Russian Federation” and the 2002 Arbitrazh Procedure Code of the Russian Federation.
The EBRD’s Judicial Decisions Assessment conducted in 2010-2011 revealed that decisions of Russian Arbitrazh courts were of generally good quality and were overall highly predictable – the best in the CIS region. The general level of sophistication of judicial decisions is typically higher in Russia than elsewhere in the CIS. Nevertheless, some decisions showed a lack of commerciality and a tendency towards formalism in interpreting and applying laws. It was considered that some judges would benefit from greater experience in complex business disputes and specialisation in key areas, such as insolvency.
 
 

Russia: Corporate Governance

The main corporate governance legislation in Russia is found in the Civil Code dated 1 January 1995, as amended; the Federal Law “On Joint Stock Companies” (the “JSC Law”), dated 26 December 1995, as amended; and the Federal Law “On the Securities Market” dated 22 April 1996, as amended. The Federal Law No. 395-FZ “On Banks and Banking Activity” dated 2 December 1990, as amended, governs banks and their activities. In 2002, the Federal Commission for the Securities Market issued a Corporate Governance Code developed with the technical assistance of the EBRD. The Code is voluntary but listed companies are required to report compliance with the Code’s recommendations, according to the “comply or explain” mechanism.
In early 2008, the EBRD benchmarked the Russian corporate governance legislation against the relevant international standards (i.e., the OECD Principles of Corporate Governance). The results indicated that Russia achieved a “high” level of compliance these standards but with certain shortcomings in the regulation on the responsibilities of the board and the role of stakeholders in corporate governance being the strongest point of the Russian corporate governance legislation
 
 
 

Russia: Debt Restructuring and Bankruptcy

Basic legal provisions on insolvency are contained in the Civil Code of the Russian Federation. The main source of legislation regulating corporate insolvency and individuals registered as entrepreneurs with the tax authorities is contained in Federal Law No. 127-FZ on Insolvency (Bankruptcy) of 26 October 2002 (as amended) (the “Bankruptcy Law”). Applicable subordinate legislation on insolvency includes Federal Law No. 40-FZ on Insolvency (Bankruptcy) of Credit Organisations of 25 February 1999, Federal Law No.175-FZ on Additional Measures for Strengthening the Stability of the Banking System prior to 31 December 2011 of 2008 and Federal Law No. 229-FZ on Enforcement Proceedings of 2 October 2007. The Ministry of Economic Development confirmed to EBRD that on 28 June 2012 the Russian government approved a law on consumer bankruptcy, which will be put before the State Duma. The Insolvency Sector Assessment completed in late 2009 concluded that Russian insolvency law was of a generally acceptable standard – i.e. it was in “medium” compliance with international standards. The existing Russian insolvency framework is relatively comprehensive, in particular when it comes to the treatment of creditors; however there are a number of areas where improvements could be made, including reorganisation processes and treatment of estate assets.
 
 
 

Russia: Electronic Communications

The Federal Law on Electronic Communications No. 126-FZ of 2003, as most recently amended in 2011, and the Statute of the Ministry of Telecommunications and Mass Communications (MTMC) approved by Government Decree No. 418, of 2008, as most recently amended in 2011, are the main sources of legislation governing the electronic communications sector. Procedures for appointment to the regulatory authority are described in a 2009 decree “Provision on the Federal Service for Supervision in the Sphere of Telecom, Information Technologies and Mass Communications”. The Law on Competition provides a regime for market analysis and designation of dominance. Tariffs on electronic communication services are regulated by the Law on Electronic Communications,
Law on Natural Monopolies, Government Decrees issued in 2005 “On Approval of the Rules of Provision of Local, National and International Telephone Communication Services”, and “On State Regulation of Prices on Interconnection and Traffic Transmission Provided by Operators with Significant Market Power”.
Although the primary law does not define the separation of policy and regulatory functions, in practice, based on various decrees, the functions of regulation appear quite fragmented, with no overall consistency in approaching the increasingly convergent electronic communications sector.
While Russia has adopted some modern practices in the regulation of the sector, many of the competitive safeguards found in other jurisdictions are missing from the Russian sector framework. A summary of positive and negative aspects of the regime can be seen below. In the EBRD Telecommunications Regulatory Assessment 2008, the telecommunications regulatory framework of Russia has shown deficiencies in all six dimensions, with dispute resolution and appeal being the weakest pillar. The Assessment has further shown the fixed network penetration level at approximately 33%, below the EU average. Mobile network penetration is slightly less than 140% of population (see Chart 18(b)), above the EU average. Broadband penetration is still well below the EU average; standing at approximately 7%.
 
 

Russia: Energy and resource efficiency

Russian legislation in the energy efficiency and renewable energy sector includes: Federal law No. 35-FZ “On Electric Power,” (26 March 2003) (as amended), Resolution of the Government of the Russian Federation No. 426 “On the qualification of generating facilities which are powered by renewable energy” (4 June 2008), Resolution of the Government of the Russian Federation No. 1172 “On approval of the law of the wholesale market of electric energy and capacity and of amendment to certain acts of the Government of the Russian Federation on the organisation of the wholesale market for electric energy and capacity” (27 December 2010), and Federal law No. 261- FZ “On energy saving and greater energy efficiency and amendments to certain legislative acts of the Russian Federation” (23 November 2009).
Within the renewable energy sector, the energy policy of Russia is broadly outlined in the Energy Strategy for 2030, adopted in November 2009. The Strategy sets out key energy policy for the period up to 2030 and outlines three stages of sector development, although some of the planned reforms should be run concurrently. The first stage includes development and improvement of power capacities (2012-2015); the second stage is oriented towards improvement of energy efficiency (2015-2022); and the third stage is directed to development of the legal framework for and promotion of renewable energy (2022-2030).
As to the current or proposed reforms in the renewable energy sector, the government has stated that it plans to remove remaining cross-subsidies for regulated customers from 2014 onwards. However, it is uncertain what progress is being made in this field. The government also states that it plans to raise regulated prices such that domestic price matches export price. However, the final decision regarding time frame for adjustment has not yet been taken because of the widespread public opposition to price increases. Although initially planned for 2011, this has now been postponed until at least 2015.
 
 

Russia: Energy legal and regulatory reform

Russia performs reasonably well overall for both electricity and gas sectors. The institutional structure and the regulatory framework are considered quite modern, and the regulatory body, FTS, appears to be close to international standards in terms of authority. The recent EBRD energy law reform dimensions assessment has shown that the electricity sector performs quite well with respect to regulatory independence, transparency and private sector participation, while public service obligations is the weakest dimension (see Charts 7). In the gas sector, regulatory independence along with tariff structure have been considered strongest pillars, with significant deficiencies being found in the market framework and network access.
 
Russia’s efforts in the last decade to reform its electricity market offer a useful model for its neighbours. The former monopoly RAO UES has been unbundled, and 20 of the resulting companies were privatised in 2008 — several with foreign investor participation. The (60%) state owned RusHydro JSC manages the vast majority of the Russian hydro power plants.
 
 
 

Russia: PPPs / Concessions

The main source of federal legislation relevant to the sector is Federal Law No. 115-FZ “On Concession Agreements” adopted in 2005 (the “Concessions Law”). It was further completed with sector specific Model Concession Agreement regulations and with the Amendments and Additions of 8 November and 4 December 2007, 30 June 2008, 17 July 2009, 2 July 2010, and 19 July 2011. It is not supported formally by a general policy framework for PPP but a number of senior government representatives have announced on many occasions that concessions and PPP in general, are acknowledged and welcome in Russia.
According to the 2012 EBRD PPP/Concessions Laws Assessment Russian laws have been ranked in “high compliance” for their extensiveness (see Chart 2). The dimension of the definitions and scope of the law has been identified as the main strength of the country’s concessions legislation, with the PPP legal framework and the project agreement being on the weaker side.
According to the Assessment, implementation of the PPP / concessions laws has been scored “medium effectiveness” as compared to international standards, with the PPP law enforcement being a stronger pillar and the policy and institutional frameworks being identified as the weaker aspects (see Chart 4).
According to the 2012 EBRD PPP/Concessions Laws Assessment Russian laws have been ranked in “high compliance” for their extensiveness (see Chart 2). The dimension of the definitions and scope of the law has been identified as the main strength of the country’s concessions legislation, with the PPP legal framework and the project agreement being on the weaker side.
According to the Assessment, implementation of the PPP / concessions laws has been scored “medium effectiveness” as compared to international standards, with the PPP law enforcement being a stronger pillar and the policy and institutional frameworks being identified as the weaker aspects.
 
 
 

Russia: Public Procurement

Public procurement law in Russia is regulated by the Federal Law N 94-FZ “On Procurement of Goods, Works and Services for State and Municipal Needs”, adopted on 5 July 2005 (the “PPL”).
This law was substantially amended in 2009 in order to introduce mandatory electronic reverse auctions. Currently, a major reform of public procurement system is in progress: the Russian parliament completed a first reading of the draft public procurement legislation based on the 2011 UNCITRAL standards, intended to replace current laws by the end of 2012.
In the EBRD 2010 assessment the Russian legal and regulatory framework achieved medium to high compliance with international standards (see Chart 12). The system, however, displayed no major strengths, since it did not score well in any of the assessment benchmark indicators. Russian legislation provides for most of the basic features of the public procurement regulatory framework; however most of the efficiency instruments, recommended by international standards are not incorporated. Good compliance has been recorded in indicators for uniformity and enforceability of the legal.