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Investor is in the know

The main argument for a foreign entrepreneur to start a business in Russia is the possibility of obtaining quick income and super profits. Moreover, with the initial calculation, analysis of market conditions, these expectations are supported by financial indicators and mathematical analysis. However, it should be kept in mind that success depends on a whole set of factors.

«When in Rome do as the Romans do»

One of the main reasons for investors’ hesitation concerning the prospects of starting and doing business in Russia is the discrepancy between legal norms, customs of business practices, as well as attitude towards business and businessmen in Russia, where there had been a communist system for more than 70 years and there was no other form of ownership, except state ownership. Entrepreneurship in the USSR was inherently a criminal offense, it was prosecuted under the law and caused a very negative reaction in society. In the countries of the capitalist development model, such as England, Western Europe and the United States, existence of family business and private property was the most important state institution and a guarantee of successful existence not only of the person who carried out that activity, but also of his/her entire family.

Despite such input data, in spite of some similarity of modern Russian and foreign legislations (of the USA, the UK, Germany, France, Spain, etc.), the main condition for successful business in Russia for a foreigner can be:

–existence of state guarantees, for example, in a form of the public-private partnership, terms of which are reflected and fixed in the relevant regulatory document, the RF Government Regulation;

–existence of competent consultants, who are freely oriented in Russian legal and political systems;

–existence of a strong group of litigation lawyers specializing in Russian law, both «own» and involved.

In Russia at the same time, special attention should be paid to the fact that judicial system does not have a precedent character. This means that the court may adopt rejected decisions in two similar situations, moreover, by the same judge or judicial staff, for each of the cases - and this will be absolutely legal from the standpoint of Russia’s procedural legislation. Thus, taking into account a steady tendency to resolve all economic disputes during the last several years, a lawyer experienced in this category of cases is required to predict the outcome of the case effectively.

And I’d ask you to stay!

There is a special section of legislation in the Russian Federation, which regulates controlled foreign companies (hereinafter referred to as the CFC). (CFC). Under the Federal Law «on amendments being made to Part One and Two of the Tax Code of the Russian Federation (in Part of Taxation of Profits of Controlled Foreign Companies and Income of Foreign Organizations)» of November 24, 2014 No. 376-ФЗ, this law affects Russian legal entities, shareowner of which (owners of shares of the authorized capital) in the amount that allows influencing the decisions made by the company, is foreign company or foreign individual.

A foreign company not incorporated as legal entity (fund, partnership, society, trust or other form of collective investment / fiduciary management), which is controlled by an organization or an individual recognized as a tax resident of the Russian Federation, is also recognized as a controlled foreign company (CFC).

Taking into account existence of additional duties for not only the CFCs registered in the Russian Federation, but also for foreign legal entities and individuals, which control the CFCs (i.e. founders or owners of the CFC shares / equities) in terms of providing information to tax authorities, and duties on paying taxes not only by the CFC, but also by foreign entities, which control the CFC, it is necessary to calculate thoroughly the volume and timeliness of tax payments.

An error in calculation and payment of the tax, as well as incorrect or incomplete declaration of incomes by the legal entity - the CFC as well by a foreign owner of the CFC (legal entity or an individual) may entail great fines, and initiation of administrative, criminal proceedings against a foreign entrepreneur, that creates significant risks and clearly hinders business in Russia.

In order to exclude such risk, preliminary study of documents with a tax consultant and an auditor is required in order to understand falls a Russian company used by a foreign entrepreneur for business in Russia is suitable to be the CFC. And if it is, tax authorities should be informed about this fact, it is also important to properly prepare and timely submit tax reports and declarations. Compliance with these precautionary measures will prevent extremely negative economic and legal consequences.

Change of the system and rules on dispute handling

Since capitalism in Russia is an innovation in comparison with Western countries, and the judicial system of the Russian Federation is often subject to reasonable criticism, in order to protect one’s interests, a foreign entrepreneur needs to know and understand his/her capabilities and rights for judicial protection.

By analogy with Europe, there was a litigation alternative to the state one in Russia from 1992 to 2016 - the arbitration. This system allowed parties to shorten time for trying cases and elect arbitrators from the professional environment, which each of the parties could entrust resolution of disputes to. At the same time, the number of such formations exceeded one thousand in the country. However, in 2016 a bill was adopted, which required a special permit for activities of the arbitration court provided that certain requirements were met. At the same time, since the beginning of the reform until its end (actually 01/09/2017) only 2 out of more than 1,000 arbitration courts were authorized to carry out activities. Thus, a huge number of contracts containing conditions for consideration of disputes in arbitration courts had been untried and are to be resolved by state courts, which, in turn, do not immediately accept such disputes referring to the determined by the agreement jurisdiction.

Taking into account the established practice, foreign entrepreneurs should provide for a foreign entrepreneur to stipulate contractual jurisdiction in arbitration courts of European countries. For this purpose, it is necessary to add a point in the agreement that all arising from or in connection with the agreement disputes should be considered, for example, the Arbitration Institute of the Stockholm Chamber of Commerce.

Formation of initial equity

It’s not a secret that credit is a trap, and the deeper the trap is, the harder it is to get out of it. And if at first all the small profits are used for interest payment on credit, the enthusiasm of the beginning businessman is significantly reduced. Taking into account that in Russia the interest rate on loans (the average rate for the years of 2016-2017 was 13-15%) is an order of magnitude higher than in Europe (2-3%, accordingly), it’s not always efficient and economically justified to form starting capital for business only from credit funds.

One should not also put under risk money in business, which are used for family expenses, as well as money of relatives and friends. If business causes losses, you will not be able to return money to them, that will greatly worsen your relations and can create stressful situations (for example, in case of a sudden disease, when you need urgent return of business money invested in the start-up).

А taking into account the provided by the Russian Federation legislation possibility of unilateral change in interest on bank credits (if it is expressly provided for in the loan agreement) by the bank in connection with a change of, for example, interest rates of Russian Federation Central Bank, it is often appropriate to use own or not bank money.

The way out may be the accumulation of one’s own initial capital, or search for investors. Partial use of borrowed money is acceptable, but in this case, guarantees and conditions for its return must be foreseen.

And the main thing: one should have a clear and correctly calculated business plan that will not only be applicable in conditions of economic crisis, but also be subject to adjustment depending on the arising foreseen and unforeseen events.

«La donna è mobile»

The key to every successful business is a wisely- and well-organized business plan. It should take into account all factors: initial amount of profits and expenditure, number of possible buyers, presence of competitors in the market, demand and profit.

If at least one of these factors is not taken into account, a miscalculation can lead to negative consequences, losses and loss of business. In calculations it is necessary to take into account the possibility of the smallest profits and large expenditures, including unforeseen ones. Thus, the situation will be visible even in the worst case scenario.

But even taking into account the above factors, certain legal and economic stability is a guarantee of proper execution of the business plan. It is not a secret that currently in the period of economic recession and bilateral economic sanctions, Russian legislation has demonstrated some mobility, especially in regard to foreign participants. Thus, when formulating a specific business plan, it is necessary to take into account additionally internal and foreign policy risks.

One of the effective ways to prevent negative consequences is a short planning horizon. It allows easily changing the tactics and lines of business, fixing expenditure and shifting to a more profitable segment.

Fast and big profits

The main argument for a foreign entrepreneur to start business in Russia is the possibility of obtaining quick profits and super profits. Moreover, in the process of initial calculations and analysis of market conditions, these expectations are supported by financial indicators and mathematical analysis, however, one should remember that success depends on a set of factors.

First, the development of business requires a lot of money, nerves and time. It is more reasonable to expect that the profit will be insignificant at first, and the expenses will be huge, but then the period will follow, when profits and chances for business success will start to grow, it is even possible to become a leader in one’s market segment.

Secondly, the specificity of economic relations with Russian entities is often based on the impossibility of fulfilling obligations by the counterparty in the form, which they are accepted in. For example, construction of an object in term less than required by technology time or at a price less than the estimated one.

As a rule, such agreements are concluded with the intention not to fulfill them in the form, which the subject is formulated and signed by the parties in, but to get the volume or to «get involved in a fight». In future, quite an unconscientious party will try to blackmail the customer and demand changes in terms of the agreement and conclusion of additional agreements that would extend deadlines or increase the cost by motivating that it is longer and more expensive to attract another participant.

The way out of this situation is an extremely careful study of the counterparty’s capabilities and ability to finish work within the time and at a price agreed by the parties. Presence of any contradiction in this case should not be weighed in favor of the offering services party. Business is business and it is obvious that performers would not work at a loss or for free.

Fear has many eyes

Another peculiarity of Russian legislation, business law and customs of business practices that is surprising for foreign entrepreneurs is that not all the prescribed in the agreement conditions and points are subject to full and strict execution in case of a conflict or trial.

In particular, whatever penalties are prescribed by the parties of the agreement for delay in fulfilling obligations, they can be reduced by the court when resolving the dispute to amounts, comparable to the bank interest rate applied to the amount of debt.

For this purpose, the Civil Code of the Russian Federation has a special article 333, which stipulates that if penalties are noticeably not commensurate with the consequences of default, the court, which studies the case, may reduce them on their own conviction, but not less than the refinancing rate established for that period in a particular region.

In addition, Russian courts practically do not recover or recover extremely small sums as moral or reputational harm in favor of individuals - entrepreneurs, and in favor of legal (especially foreign) entities.

Promotion of goods

Often beginning entrepreneurs do not pay enough attention to marketing, do not fully understand the difference between the concepts of «sale» and «marketing». In simple terms, actions, which should be taken by the seller for the customer to buy, are sales. And actions, which should be taken for the customer to come, are marketing. The most important thing at the initial stage is precisely competent and effective marketing steps.

Where to find customers? Through advertising in newspapers? TV commercial? Leaflets in the street or in mailboxes? Site or a group in social networks? Avito? What method is more effective? There are many variants, but the effectiveness of every method for attracting customers depends on the specifics of the promoted product (service) and on the correct designation of the target audience. Who will use your product (service)? Where do these people come most often, what newspapers and magazines do they read, what TV shows do they watch and what websites do they visit?

Specificity of Russian promotion is targeting depending on the age group. If your audience is 40+, there is high probability of TV and print media. If younger – then Internet resources. If your business is of local importance, then announcements, billboards, or even «word of mouth», i.e. oral distribution of information within certain social groups.

For example, if a small store is opened in a residential area of the city, it is inappropriate to advertise it on central television, leaflets in mailboxes and posted near the store signposts will be more efficient.

Bilingua will help

For a foreigner, who is fluent in the Russian language and vocabulary, reading and analyzing constitutive and legislative documents in Russian cannot often be an easy task. Sometimes double meaning of the phrase or several paragraphs of the agreement costs considerable amounts of money that the entrepreneur will have to spend or not receive.

Special attention should be paid to the constituent agreements of the association that determine the status of managers, procedure for making decisions, form of voting, size of transactions that will require approval of the board of founders or other governing body.

In order to avoid complications, use the bilingual. Translate a text in columns formed within one document and pay attention to all the features of the text, as well as to what translation is preferable in case of inaccuracy - usually the one which is used by the foreign businessman.

Transfer of management functions to contracted managers

One of the most common and catastrophic consequences of foreign entrepreneur’s mistakes is transfer of managerial functions to contracted managers without defining «rules of the game.» For example, a certain enterprise engaged in the marketing of forests gives the contracted commercial director right to conclude agreements on the following terms: volume of monthly sales is 100 tons, the price is $ 100 per ton, the discount is 10%, but not more than 30% of the monthly sales volume.

The network of ephemeral companies created with the participation of the commercial director selects 30% of the amount on exclusive terms (immediate delivery and unloading) with a maximum 10% discount and then sells goods to the customers at a discount of 2% of the adopted manufacturing price. Obviously, the buyers will purchase goods of higher transport availability at a lower cost than that of the enterprise, and the enterprise will not receive its profit fully because of the ephemeral companies. In this case absence of «rules of the game», which oblige to argue the use of discounts and other preferences for «empty» intermediary companies at the expense of large sellers, is a mistake.

As a rule, this feature is treated by the owner’s attentive consideration of all stages of business, especially at time of construction. In this respect, dear investors, be more careful, and protect your rights, because if you’re drowning, you’re on your own.