UK: Recent Developments of Russian Law

Last Updated: 10 September 2010
Article by Oleg Shvander

The August issue of the Information Newsletter contains a number of interesting articles discussing the most recent changes in Russian legislation.

The recently adopted law on mediation which enters into effect from 1 January 2011 reinforces the practice that has been followed for some time by parties to disputes wishing to avoid court procedures. Tamara Benidze talks about some aspects of this law.

Dmitry Milyutin has prepared two articles for our readers this month. Thus, Dmitry writes about certain peculiarities of the new law on consolidated financial reporting which became effective on 10 August 2010. This law serves the purpose of enhancing the quality and transparency of financial reporting standards of Russian companies.

Dmitry also discusses the new law on mandatory civil liability insurance for owners of hazardous facilities against harm caused in an accident at hazardous facilities. The draft was signed into law by President Medvedev on 27 July 2010. The law defines hazardous facilities and establishes the levels of insurance cover under mandatory insurance contracts. The law will become effective from 1 January 2012, but some of its provisions will enter into effect at later dates.

The draft law on police expected to be adopted in 2011 is the reaction of the authorities to a series of high profile crimes committed by law enforcement officers in the last several years. This law, when adopted, should become the climax of the wide-ranging reform of the system of internal affairs in Russia. The draft contains a number of questionable provisions and has already created strong reaction in the society. Igor Orlov discusses in some detail various provisions of this draft law

Law on Mediation adopted in Russia

Law "On Alternative Procedure of Dispute Resolution with the participation of a mediator (Mediation Procedure)" will become effective in the Russian Federation on 1 January 2011. The Law introduces an alternative dispute resolution mechanism that involves an independent person acting as an intermediary in the process, i.e. the mediator. As a general rule, mediation procedure can be used to resolve disputes arising out of civil-law relations, including entrepreneurial activities and business affairs; as well as employment and family disputes.

The law defines the types of disputes that can not be resolved by means of mediation. These include collective employment disputes as well as disputes that affect public interest or interests of third parties that do not participate in the mediation procedure.

Mediation is conditional on the parties' volition and is based on the principles of voluntariness, confidentiality, cooperation between parties and equal rights of parties, and neutrality and independence of the mediator. Mediation is subject to an agreement between the parties, including inter alia an agreement to mediate. The mediation procedure can be initiated at any stage of a dispute, pre-action or during the litigation / arbitration proceedings. As a general rule, an agreement to mediate does not preclude a party from initiating litigation or arbitration proceedings, unless Russian Federal laws provide otherwise.

Where the parties agreed to use mediation procedure and undertook not to initiate litigation or arbitration during the mediation procedure, the Law requires that courts and arbitration tribunals recognize the legal effect of such undertaking until it has been complied with. However the Law contains an exception from this rule where a party believes that its rights need to be protected.

Parties to a dispute may resort to mediation at any point of time in the course of the dispute, whether or not the dispute was submitted to court, by entering into an agreement to use the mediation procedure. A judge can invite the parties to resort to mediation can. Where parties agree to start mediation, the judge will suspend proceedings for a certain period of time not exceeding 60 days. It should be noted that only professional mediators can be engaged to conduct mediation in a dispute that had been submitted to court before the parties decided to use mediation.

If the parties reach an agreement as a result of a mediation, this agreement must be made in writing. An agreement achieved by mediation is to be complied with on voluntary basis as a matter of good faith. An agreement that was reached via mediation after the dispute was referred to court can be approved by court as a settlement agreement within the meaning of the Russian procedural legislation. Where a mediation settlement agreement was reached without referring the dispute to court, such agreement will be deemed a civil law transaction governed by applicable rules and regulations of the civil law.

The Law addresses matters related to the timeframe of mediation. Parties are free to set the timeframe for the mediation in the relevant agreement. At the same time the mediator and the parties are encouraged to make their best efforts to ensure that the mediation does not exceed 60 days. Under exceptional circumstances, where the dispute is complex or additional documents or information need to be obtained, the mediation period can be extended subject to an agreement between the parties and the mediator's consent. As a general rule, the maximum term of mediation shall not exceed 180 days.

The law provides that both professional mediators and non professional mediators can participate in mediation. A person who is at least 18 years of age, with full legal capacityand no criminal record can act as a non-professional mediator. A professional mediator must be least 25 years old, have received higher professional education and completed a training course for mediators. In accordance with the Law public officials are not allowed to become mediators.

The law discusses organisations that work to facilitate the mediation procedures. These organisations are required to operate on a paid-for basis, while mediators are may act either on a paid basis or without payment.

The law imposes controlling functions over the mediators' activities on self-regulating organisations, whose functions also include developing and approving mediators' business and professional ethics rules.

While there was no legal framework for mediation until now, some practical experience of mediation has been accumulated in Russia. Some organisations practicing mediation as a method of dispute resolution have been operating for 5 years; however the procedure did not become popular due to the lack of regulation.

It is observed by professionals in the field that mediation is an effective tool for resolving disputes which the parties would not otherwise resolve without assistance. In the mediation process, the parties seek to find and agree on a mutually acceptable solution to the existing issues, and retain trust in their business relations after the dispute. According to mediation experts, wider application of mediation procedures should help the overburdened Russian courts by offering a more convenient, flexible, time- and costeffective way of dispute resolution.

According to the authors, the main objective of the Law is to create the necessary conditions for the development of a business culture based on partnership and business ethics rules and for achieving harmony in social relationships. Time will tell how effective mediation will be in Russian practice as a method of out-of court dispute settlement.

Federal Law "On consolidated financial reporting" became effective in Russia

Federal Law "On consolidated financial reporting" No.208-FZ dated 27 July 2010 (the Law) became effective in the Russian Federation on 10 August 2010.

This Law establishes general requirements for consolidated financial statements to be produced, submitted and published in accordance with the International Financial Reporting Standards. Drafts of this legislation have been debated in the Russian legislature for 6 years since the bill was first presented to the Russian parliament in 2004. The main point of disagreement was the category of companies which would be required to produce consolidated accounts in accordance with new standards.

In accordance with the version of the bill as signed into law, the Law applies to credit organisations (including banks), insurance and other companies which are listed or quoted on a stock exchange and/or another trading platform on the securities market.

The law provides that said companies shall produce, submit and publish consolidated financial statements to the extent they are required to do so by applicable Russian laws or their respective corporate constitutive documents. Consolidated financial statements shall be produced in accordance with the International Financial Reporting Standards (IFRS).

Notably, the consolidated financial statements according to IFRS need to be produced in addition to the Russian statutory accounts and reports prepared in accordance with the Russian accounting regulations.

The Law stipulates that, subject to the requirements of Russian laws, the IFRS and IFRS Interpretations issued by IFRS Foundation apply on the territory of Russia.

Consolidated financial statements are disclosed to participants of an organisation, including shareholders, as well as to the authorised administrative federal authority (with the exception of credit organisations who also disclose statements to the Central Bank of Russia).

Annual consolidated financial statements are disclosed before a general meeting of participants is held, but no later than 120 days after the end of the year, for which the statement is relevant. Annual consolidated financial statements are subject to mandatory auditing and should be published along with an audit report no later than 30 days after its submission.

The statutory requirement to prepare, disclose and publish consolidated financial statements in accordance with IFRS will apply starting with accounts for the year following the year in which IFRS became recognised for application in the Russian Federation. Companies whose securities are admitted for trading on a stock exchange and/or another trading platform and who make their financial statements in accordance with accounting standards other than IFRS, as well as companies whose bonds are admitted for trading as described above, will not be obliged to disclose and publish their consolidated IFRS accounts until the time when their 2015 accounts are due.

According to the author of the Law, it is aimed at improving the quality and transparency of the financial accounts of large Russian companies and should help attract investment in the Russian economy. Experts have noted that the majority of organisations covered by the Law already make their accounts to an international standard.

Russian Federation adopts the Law "On mandatory insurance of the owner of a hazardous facility against civil liability for harm caused by an accident at the hazardous facility"

On the 27th July 2010 President of the Russian Federation Dmitry Medvedev signed Law No.225-FZ "On mandatory civil liability insurance for the owner of a hazardous facility against harm caused in an accident at the hazardous facility" (the Law). The law had previously been adopted by the State Duma and further approved by the Federation Council on the 19th July 2010.

The Law obliges an owner of a hazardous facility to have their civil liability insured for any harm caused to the injured parties. The Law does not apply to legal relationships arising out of harm caused (i) outside of the Russian Federation; and/or (ii) to the environment; and/or (iii) whilst using nuclear energy.

The law determines which hazardous facilities must be insured by their owners on a mandatory basis. Such hazardous facilities to be insured on a mandatory basis include facilities registered in the state register of hazardous production facilities or in the Russian register of hydraulic structures. The latter in particular include dams, pumping stations, buildings of hydroelectric power stations, etc, while hazardous production facilities are deemed to include facilities producing metal melts and alloys based on them; facilities performing mining operations or underground works, production facilities with operating funiculars, escalators, lifts etc.

In accordance with the Law the level of cover under hazardous facilities mandatory insurance agreements shall be between RUR 10 million and RUR 6.5 billion, inclusively, depending on the maximum number of people that could be injured in an industrial accident at the hazardous facility.

Furthermore, the Law establishes the amount of insurance payments due under a mandatory insurance agreement: RUR 2 million is payable in the event of the death of an affected person (while not more than RUR 2 million is payable for damage to the health of an affected person); no more than RUR 360,000 is payable for damage caused to the property of an affected person (and no more than RUR 500,000 is payable where harm is caused to the property of a legal entity).

Where the extent of damage caused to the affected individual / legal entity exceeds the maximum insurance payment stipulated in the Law, the owner of the hazardous facility is liable to indemnify the affected for the difference between the statutory insurance payment and the actual extent of damage caused.

Pursuant to the Law, to be allowed to offer this type of civil liability insurance, an insurance company must hold a license for providing mandatory insurance issued in accordance with laws of the Russian Federation and be a member of a professional insurers' association. A professional association of insurers is a non-profit organisation that works to ensure liaison between insurance companies and develop professional rules and standards of practice in the mandatory insurance industry.

The Law contains some general provisions relating to the functions and powers of a professional insurers' association; the standards of professional practice; the duty of the association to pay insurance benefits; its property, membership fees, and other mandatory payments to be made by its members.

For the purpose of securing financial stability of insurance operations, members of a professional insurers' association create a reinsurance pool to reinsure the risk of hazardous facility owner's civil liability for harm caused in an accident at the hazardous facility. The reinsurance pool is created under an agreement made between the participants of the pool.

According to the Law the reinsurance pool may not accept any risks other than those insured by mandatory types of insurance. The Law also prohibits members of a professional insurers' association from reinsuring the risk of having to pay insurance benefits with the help of other insurance companies, i.e. those outside of the reinsurance pool. An exception is made for the case when such reinsurance is arranged on behalf of the pool in accordance with the reinsurance pool agreement.

The law will become effective on 1 January 2012, except for a number of provisions that will come into force on a different date. For instance, the provisions relating to the settlement of insurance claims and the duty of a professional association to make these payments will take effect from the 1st July 2012. Until 1 January 2013 the amount payable to the injured as an insurance benefit is determined in accordance with Chapter 59 of the Civil Code. In relation to hazardous facilities in state or municipal ownership whose operation is fully or partially financed out of the relevant public budget, and with regard to lifts and escalators in apartment blocks, the Law will apply from 1 January 2013.

A number of relevant amendments were made in some legislative acts of the Russian Federation in connection with the adoption of the Law.

Draft Bill "On the police" has been released and is in public discussion in Russia

On 7 August 2010 on the initiative of the Russian President a draft bill "On the Police" was posted on a website for public discussion. was created specially for this purpose. Any visitor of the website can post a comment about any of the chapters or clauses of the draft legislation. Following this, on 8 August the full text of the draft was published in the "Rossiyskaya Gazeta" newspaper. The bill will remain open for public discussion until the middle of September and is expected to be passed in early 2011.

The draft bill is in fact a revamped version of current Russian law "On Militsiya" (which is currently the name of the police force in Russia). Indeed, the proposed name change from "militsiya" to "politsiya", which had been announced by the President on the 6th August, is the most obvious change, which has become the bill's trademark and alone caused some public resonance. The proposed legislation consisting of 11 chapters and 57 clauses (it is slightly more extensive than the law presently in force) was drafted within a relatively tight time frame and is a part of a large-scale reform of the Interior Ministry, which was initiated by the government in 2009, after a series of notorious crimes were committed by law enforcement officers.

The reform is expected to result in a reduction of the size of police forces by 20%, the police losing some of its less characteristic roles, a more stringent recruitment system being put in place, law enforcement officers' rights and duties being more precisely defined, and so on.

It follows from the explanatory note to the draft legislation that the bill aims to eliminate inconsistencies between different pieces of legislation and to fill gaps in Russian laws regulating the operation of the police, including consideration being given to international practices. The key objectives of the new legislation have been defined, including the following: "to provide for a relationship model between the police and the society that is based on partnership, not domination; to clearly define obligations and rights of the police and the legal status of a police officer; [...] to reinforce anti-corruption practices in police work; to relieve the police from extrinsic functions and duplication of other public authorities' functions".

The growing lack of public confidence in law enforcement bodies is usually reported as one of the main problems in the relationship between society and the police in Russia. In an effort to restore this confidence, the draft bill expressly declares "openness and transparency of policing". It is the intention of the authors that public opinion should become one of the major criteria for the evaluation of police work.

The first comments on the bill started appearing on the website within minutes of its publication, and over the first ten days the number of comments reached 15,000, including comments of a general nature and those relating to specific clauses and provisions.

The comments reveal a mixed response to the proposed name change: saying that that the change of name is not likely to resolve any issues by itself; however the new name could become the sign and the symbol of the future reforms and the new approach to the relationship between the citizens and law enforcement authorities.

Many commentators note the sloppy drafting and imperfection of the bill in general and in specific clauses – the bill apparently needs further input (but, to be fair, identifying such flaws was one of the reasons for releasing the draft for public discussion).

It is also noted that there are inconsistencies between the Russian Constitution and provisions of the draft legislation enabling police to "freely enter (or penetrate) [...] residential buildings, as well as other private buildings and land; and the land and premises occupied by public associations and organizations".

A vast number of criticisms have been posted concerning the provisions of the bill that relate to the powers of the police, in particular, the right of a police officer to stop citizens in the streets or in public places and restrict "freedom of movement" for up to one hour for the purpose of a "document check", "obtaining on-the-spot explanations" and "deciding whether [...] coercive measures can or need to be used against the citizen".

Other provisions of the bill are also causing doubts and concerns, for example, the clauses authorizing the police to freely use means of communication belonging to companies or individuals for the purposes of police work; and the right to have free access to any documents or materials in companies' offices that the police consider necessary. According to the comments, the draft bill should pay more attention to the grounds on which the police may exercise such rights and a more thorough regulation of such police powers is needed.

It is to be expected that comments received from citizens will be reflected in the report, which will also be published. Following the public discussion and, possibly, scrutiny by the Constitutional Court, the bill will undergo significant change. The mere fact that the bill was published in draft for public scrutiny, and, specifically, in the Internet, is undoubtedly an unprecedented event for Russia and deserves a special mention.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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