International business partnerships in Russia By Maxim Popov 30 March 2004

Russian Investment Climate: PROVES CHANGING FOR BETTER

Snapshot of changes Gasoline line His parents received this bread in place of wages 1998: need to access your account in this bank? Line at the Children’s Store 2001: Moscow CityTower Internet café in Samara IKEA’s flagship store in Moscow One of BP’s landmarks in Russia Business center

The Name of the Game Any typical approach characterising a successful investment? Apply same care and diligence as in other countries Conservative Feasibility Study Backing Top Management Home Office People on the Ground Ensure Compliance with local rules from Day One Selection of Russian Management Emphasis on Distribution Network

Specific issues for foreign investments To invest or not to invest:

Specific issues for foreign investments Are Russians really afraid/hostile of foreign companies/control? Not afraid but unwilling to give away control Foreign ownership often means transparency Perception – foreign management does not automatically mean success

Specific issues for foreign investments If you have 5 million USD to use for: 76% of shares in a small size plant in Russia 51% of shares in a medium size plant 26% of shares in a big plant Something else What would be your choice? Create a 100% controlled subsidiary

Specific issues for foreign investments Ways of minimising risk/downside when establishing a company Contractual relationship is preferable compare to ownership participation Avoid JVs unless there is a good business reason to enter into one Tight cost control Build personal relationships Make sure all formalities are complete

Specific issues for foreign investments Minimum requirements/measures for an agreement/business deal if JV is required: “Waterproof” contracts, by-laws, etc. Availability of home office resources to support the deal especially at the early stage Strong local support from advisors Existence of the general (but flexible) plan Maximum ownership control (at least have a blocking vote) Financial control Staff control

Legal Issues Options for Establishing Presence in Russia Major Operational Legal Issues

Operating in Russia formal registration in Russia may or may not be required depending on extent of operations in Russia may need to be registered in Russia for tax purposes if have a permanent establishment in Russia establishing a legal presence in Russia may be necessary for operational reasons and legal recognition a number of options for establishing a legal presence in Russia

Options for Operating in Russia Limited Liability Company ("LLC") open JSCclosed JSC Joint Stock Company ("JSC") Russian Subsidiary Separate Legal Entity Representative Office Branch No Separate Legal Entity

Branch Office or Russian Subsidiary? Branch/Rep Office branch office and representative office often used for same purposes less regulatory control bookkeeping simpler Russian Subsidiary may be necessary for joint ventures certain operations may require Russian entity tax planning limiting liability of non- Russian parent

LLC vs. JSC General Features of LLC: based on French model simpler management structure and greater flexibility (e.g. fewer management bodies required) more private form of company General Features of JSC: similar to common law system an open JSC must make public its annual report, balance sheet and profit and loss statement subject to regulation under the Federal Law on the Securities Market

Joint Venture Associated Risks Always risk when enter into joint venture with other partners Russia has historically posed some significant joint venture risks, many due to problems with corporate governance, including: –dilution of shareholdings through issue of new shares –violation of shareholders rights on corporate reorganizations –asset stripping (moving profitable assets to other companies and leaving existing shareholders with liabilities) –transfer pricing: including funneling off funds to corporations not owned by all shareholders

Dispute Resolution still major problem for foreign investment in Russian: court system can be slow and corrupt Russian laws have many holes and uncertainties which makes resolution of disputes more difficult will require major revision arbitration is preferred route for most western parties using recognized arbitration rules Russia is a party to the New York Convention which permits enforcement of foreign arbitration orders from Convention members

Tax highlights Assets Received from the 50% Shareholder Are Not Subject to Profits Tax Income Gained From the Sale of Shares by Foreign Shareholder Is Not Subject to Withholding Tax (Except When More Than 50% of Assets Is Immovable Property) Reorganizations Are Not Taxable Events (Mergers, Associations, Split-ups, Spin-offs)

Dividends Withholding rates: –6% for Russian organizations and resident individuals –15% for foreign organizations –Double tax treaties Dividends paid to Russian recipients to extent received from other entities are tax free (Russian holding structures are possible)

Contact information Maxim Popov, attorney-at-law Internet: Tel: +7(812) Fax:+7(812)