Russian Federation: The Legal Regime And Regulatory Environment In Russia

Last Updated: 16 May 2008
Article by Leonid Zubarev

Russia is in the midst of economic and legislative reforms. Since 1990 the Russian government has put a statutory framework into place to bring the country up to modern standards and harmonise legislation. Although Russia does not yet have a stable and established legislative system, this issue remains one of the key priorities of the present Russian government.

The legal structure developed at a rapid pace during the 1990s, with significant reforms being attempted in almost every sphere of law. The process of consolidating and rationalising the legal framework of Russia's market economy remains ongoing, with major changes anticipated in a number of key areas.

Constitutional structure

Constitution

The Constitution of the Russian Federation ("the Constitution") was adopted by National Referendum on 12 December 1993. The Constitution defines the sovereign power of the Russian Federation, describes its federal structure, governing system and the principle human rights enjoyed by the citizens of Russia. The Russian Federation is governed by a political system modelled after many currently existing in Western Europe. The governing system is composed of three branches: the executive, legislature and judiciary.

Federal structure: local and federal government

The Russian Federation consists of 88 'subjects', including regions, ethnically based autonomous republics, territories and the federal cities of Moscow and St Petersburg. The Constitution granted these 'subjects' certain autonomy over their own internal economic and political affairs. Heads of the executive branches of 'subjects' are appointed by the legislative body of such 'subject', at the recommendation of the President of the Russian Federation.

The Constitution sets out a general list of powers reserved to the federal authorities. Other powers are expressed as jointly exercisable by the federal and local authorities. The regional authorities are then allocated all other powers not specifically reserved by the federal Government or exercised jointly. These powers include the power to manage municipal property, establish regional budgets, collect regional taxes, and to maintain law and order. Bilateral power-sharing treaties between the central government and the 'subjects' of the Russian Federation have become an important means by which the boundaries of their respective power and authority are defined and clarified. The Constitution gives regional bodies the authority to pass laws, provided those laws do not contradict the Constitution and existing federal laws. Many 'subjects', however, have adopted their own constitutions, which in several cases allocate powers to the regional government which are inconsistent with the provisions of the Constitution.

The President

Under the Constitution, the President, who is elected for a four-year term, is the head of the state. The Constitution does not provide for a vice president. The President has the right to choose the chairman of the Government (Prime Minister), with the approval of the State Duma (the lower house of the Russian parliament). The President, upon the recommendation of the Prime Minister, appoints ministers, who are responsible for the introduction of primary and secondary legislation in their respective fields.

Russia's President determines the basic direction of Russia's domestic and foreign policy and represents the Russian state both in domestic and foreign affairs. The President is commander-in-chief of the Russian armed forces; he approves defence policy, appoints and removes commanders of the armed forces and confers higher military ranks and awards.

The President has broad authority to issue decrees and directives that have the force of law, although the Constitution states that they must not contradict other federal laws or the Constitution. In certain circumstances, the President has the right to dissolve the Duma.

Executive branch and its structure

The executive branch of the Russian Federation is headed by the government of the Russian Federation (pravitelstvo), which comprises the chairman of the government (Prime Minister), vice-chairmen and ministers. Although formally the President is the head of the state and not the head of the executive branch, in actuality the government is subordinate to the President. For example, the key ministries and federal services (such as the Ministry of Foreign Affairs, the Ministry of Internal Affairs and the Federal Security Service, etc.) report directly to the President and not the government.

Following the major reform of the executive branch, which was carried out in 2004 (aimed at setting out a clearer and more efficient structure of the branch, in addition to reducing the amount of bureaucracy), current structure of the executive branch is as follows:

  1. the government,

  2. federal ministries (mainly responsible for legislative activity in their sphere and the coordination of subordinate agencies and services),

  3. federal agencies (mainly responsible for licensing, permits, etc. in their established sphere), and

  4. federal services (controlling functions). Federal agencies and services may be subordinate, either directly to the President (such as Federal Security Service), to the government (such as the Federal Anti-monopoly Service) or to a particular ministry.

Parliament and the basics of the legislative process

The legislative branch of the Russian Federation is the Federal Assembly (federalnoye sobraniye), which consists of the Federation Council (sovet federatsii) (176 seats, filled by representatives of the executive and legislative branches of each of the 88 federal administrative units) and the State Duma (gosudarstvennaya duma) (450 seats elected by proportional representation from candidates' lists. Members are elected by direct popular vote to serve four-year terms). The two chambers of the Federal Assembly possess different powers and responsibilities, although the State Duma is the most significant.

The Federal Assembly is a permanent functioning body, in that it is in continuous session, excepting the regular break between the spring and autumn sessions. Deputies of the State Duma work full-time on their legislative duties; they are not allowed to serve simultaneously in local government or to hold federal government positions.

Each legislative chamber elects a chairman who controls procedure. The chambers also form committees and commissions to deal with particular issues. They prepare and evaluate bills, report on bills to their chambers, conduct hearings, and oversee the implementation of laws.

Bills may originate in either legislative chamber, or they may be submitted by the President, the government, local legislatures, the Supreme Court, the Constitutional Court, or the High Arbitration Court. Bills are first considered by the State Duma and must pass three readings before being passed to the Federation Council. After adoption by a majority of the State Duma members it is considered by the Federation Council. If a bill is rejected by the Federation Council, a Conciliation Commission may be established, comprising representatives of the Duma and Federation Council, to review and amend it before it is presented again for consideration of the Duma. The establishment of a Conciliation Commission is the prescribed procedure by which differences in bills are considered by both chambers.

When a bill is adopted by the Federation Council, it must be signed (and therefore become law) by the President. The President has a final veto, which if exercised can be overridden by a resolution passed by two-thirds of the members of the Duma and Federation Council.

Judicial system

The judicial system in the Russian Federation is split into three branches: the courts of general jurisdiction (of which the federal Supreme Court is the court of last resort), the 'arbitrazhniy' or commercial court system with the High Arbitrazhniy Court as the supreme body, and the Constitutional Court. The judicial system is also divided into a federal system and a system of local courts of the various 'subjects' of the Russian Federation.

The Constitutional Court has jurisdiction to decide whether federal and local legislation and regulations comply with the Constitution. This court will also resolve jurisdictional disputes between the federal or local authorities, and may interpret and clarify provisions of the Constitution.

Criminal, civil and administrative cases involving individuals not engaged in business activity are dealt with by the courts of general jurisdiction. The initial stage in this system is the magistrate. Magistrates serve judicial districts. The entire system consists of the magistrates, district courts of general jurisdiction, military and specialized courts, Supreme Courts of the constituent 'subjects' of the Russian Federation and the Supreme Court of the Russian Federation. Decisions of the lower courts of general jurisdiction can be appealed through the intermediate courts and the Supreme Courts of the 'subject' of the Russian Federation, up to the l Supreme Court of the Russian Federation.

As established by the Arbitration Procedure Code, which came into force on 1 September 2002, economic disputes involving legal entities, individuals engaged in business activity and disputes between legal entities and its participants (shareholders) are dealt with by the 'arbitrazhniy' or commercial arbitration courts. The arbitrazhniy court system consists of the arbitrazhniy courts of the 'subjects' of the Russian Federation, arbitrazhniy courts of appeal, federal arbitrazhniy courts of districts and the High Arbitrazhniy Court of the Russian Federation. The High Arbitrazhniy Court is the highest court for the resolution of economic disputes.

The Ministry of Justice administers Russia's judicial system. The Ministry's responsibilities include administrating the court system, supervising court activity and organisation, the prisons, in addition to performing a number of other supervisory, administrative and systematic functions.

Law enforcement functions are performed by the General Prosecutor's Office (procuratura), which has local offices in cities and provinces, by the Ministry of Internal Affairs and by the Federal Security Service. The General Prosecutor's Office supervises the law enforcement agencies, investigates crime and prosecutes offenders. The Ministry of Internal Affairs controls all of the various police agencies and supervises. The Federal Security Service is responsible for counterintelligence and also investigates organised crime and terrorism.

Basics of the civil law system

Legal system and legislative subordination

The constitutional laws, federal laws and laws of the Russian Federation form the foundation of its legal system. Presidential Decrees, Orders of government and decisions of various ministries support and describe the provisions of primary legislation and, as a matter of constitutional theory, should not contradict them.

The Russian legal system is a civil law system in the Continental European tradition. Various Codes govern all major spheres of business activity, the principal ones being:

  • Civil Code of the Russian Federation (grazhdanskiy kodeks);

  • Tax Code of the Russian Federation (nalogovyi kodeks);

  • Custom Code of the Russian Federation (tamozhennyi kodeks);

  • Labour Code of the Russian Federation (trudovoi kodeks).

Civil and corporate legislation

Civil legislation of the Russian Federation is based on the Civil Code (Parts I, II, III and IV. Part IV should come into force on 1 January 2008). Pending coming in force of Part IV, some parts of the Civil Code of the Russian Soviet Federal Republic of 1964 remain in force.

Within the current decade Russia has developed comprehensive legislation covering all major issues of corporate activity.

Tax legislation

Russia is currently in the midst of significant tax reform. In August 2000 Part II of the Tax Code was made law and became effective in January 2001. However, many tax regulations are in transition. The main taxes currently are:

  • Profit tax. Profit tax is levied on an enterprise's gross profit. The general tax rate is 24 per cent of gross profit, though this is subject to various exceptions.

  • Value added tax ("VAT"). VAT is calculated on the sale value of goods, services or works at a general rate of 18 per cent, subject to certain exceptions. Imported goods are also subject to VAT.

  • Excise Tax. Excise tax is levied on the sale or import or export of certain goods (alcohol, tobacco, jewellery, cars, oil, gas, etc). The tax rate varies for each product.

  • Land and property taxes. Land and property taxes are levied by the local or regional authorities at a rate dependent on the property's location.

  • Personal income tax. Personal income tax is calculated at a flat rate of 13 per cent.

Property, currency, custom and international legislation

The Constitution gives Russian citizens general rights to own, inherit, lease, mortgage and sell property; however, there are many gaps and ambiguities in the relevant legislation. The Land Code, which came into force on 29 October 2001 purports to regulate the use and ownership of municipal and industrial land. Agricultural land, besides the Land Code, is regulated by a separate federal law on agricultural land, which came into force on 31 July 2003. This law provides that agricultural land cannot be owned by foreign legal entities or individuals or Russian legal entities if more than 50 per cent of their charter capital is owned by foreigners.

The Law on Currency Regulation and Currency Control has changed the main principle of Russian currency control from "everything which is not allowed is prohibited" to the opposite position of: "everything which is not prohibited is allowed". Instead of specific permissions for certain types of "capital operations" set by the previous version of the law, the new law establishes a liberalized approach to such operations. Currently, no special license from the Central Bank is needed for performance of a currency operation. Currency operations between residents of the Russian Federation and non-residents are carried out without any limitations provided requirements of the currency legislation are observed. No mandatory conversion is required in relation to foreign currency export proceeds.

The main legislative act governing the customs legislation of Russia is the Customs Code of the Russian Federation, of 28 May 2003 which came into force on 1 January 2004. Additionally, the customs sphere is regulated by other federal laws and legislative acts of the President, the government and the Federal Customs Service (formerly the State Customs Committee). Russian import tariff rates vary from 0 to 100 per cent, depending on the imported item. For example, the tariff rate for cars depends on its year of production and varies from 0.4 to 3 EUR per cubic centimetre of engine volume. The import tariff rates for tobacco vary from 5 to 30 per cent. In addition to import tariffs, VAT and selective excise tax are also applied to imports. Import licences are also required for certain types of goods (for example, alcohol).

The Constitution states that general principles of international law and international treaties are part of the legal system of the Russian Federation. If Russia is a party to an international treaty that contains provisions contradictory to the provisions of any domestic legislation, the provisions of the international treaty will prevail.

Foreign investment legislation

While the encouragement of foreign investment is a stated Russian government priority, there have been difficulties in creating a stable, attractive investment climate. Foreign investors' concerns about the legal system, corruption and taxation are key factors affecting foreign investment, rather than any explicit express restrictions imposed by the government.

Foreign investment law

The main legislative act governing the sphere of foreign investments is the law of the Russian Federation, "On Foreign Investment in the Russian Federation", of 9 July 1999 ("Foreign Investment Law"). The Foreign Investment Law provides the statutory basis for the treatment of foreign investment. This law states that foreign investors and investments shall be treated no less favourably than domestic investors and investments, subject to certain exceptions. Such exceptions may be introduced to protect the Russian constitutional system, the morality, health and rights of third persons or in order to ensure state security and/or defence.

Russian legislation may also introduce special rights promoting foreign investment. The Foreign Investment Law permits foreign investment in most sectors of and in all forms available in the Russian economy: portfolios of government securities, stocks and bonds, and direct investment in new businesses, in the acquisition of existing Russian owned enterprises, in joint ventures, etc. Foreign investors are protected against nationalisation or expropriation unless this is provided for by federal law. In such cases, foreign investors are entitled to receive compensation for their investment and other losses.

Restrictions on foreign investment

Currently, there are relatively few explicit restrictions on foreign direct investment.

The "Russian Law On Insurance", of 27 November 1992 (as amended) currently sets a ceiling of 25 per cent on the total amount of foreign investment in the domestic insurance industry, as a percentage of the total insurance capital in Russia. Insurance companies in which foreigners own more than 49 per cent of the charter capital may not engage in certain types of insurance business, including life assurance.

The Central Bank has the right to use reciprocity as a criteria to specify the types of business that foreign banks may be licensed to operate in Russia. A ceiling on the total amount of foreign bank capital, as a percentage of the total bank capital in Russia, may be imposed by federal law.

The following groups are not permitted to establish a telecasting company with a coverage area that extends to 50 per cent or more of Russia's regions or that extends to where 50 per cent or more of the Russian people live: a foreign citizen, people without citizenship, a Russian citizen with dual citizenship, a foreign legal entity, as well as a Russian legal entity for whom 50 per cent or more of shares are owned by foreign entities. It is prohibited for foreign participation in the charter capitals of telecasting companies that fall into the aforementioned groups to equal or exceed 50 per cent or more.

International treaties

Russia is party to a number of international treaties, which are aimed at the protection of foreign investments:

  • Bilateral investment treaties: these treaties generally guarantee non-discriminatory treatment for foreign investments and investors in Russia. They provide for compensation to be paid for expropriation or nationalisation, and allow disputes to be referred to international arbitration. Russia holds such agreements with the United Kingdom, Germany, Italy, Spain, the Netherlands, Finland, France, Switzerland and others. The treaty entered into with the United States is awaiting ratification.

  • Treaties for the avoidance of double taxation: these treaties generally provide relief from double taxation, guarantee non-discriminatory tax treatment and provide for co-operation between the tax authorities of the respective signatory countries. Russia has such agreements with Austria, the United Kingdom, Greece, Denmark, Ireland, Spain, Italy, Canada, Cyprus, the Netherlands, the United States, Germany, France, Switzerland and many other countries.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 05/03/2007.

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