LEGAL GUIDE TO INVESTING IN RUSSIA LEGAL GUIDE SECOND EDITION

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1 LEGAL GUIDE TO INVESTING IN RUSSIA LEGAL GUIDE SECOND EDITION May 2013

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3 Contents PAGE Introduction Herbert Smith Freehills Introduction to the Russian legal system Foreign investment restrictions Establishing a legal presence Due diligence Acquisition structures Joint ventures Shareholders rights and obligations Financial services regulation Corporate governance Raising debt finance from abroad Securities and capital markets regulation Derivative instruments Taking security Acquiring and investing in real estate Subsoil natural resources Merger control Employment Share options Tax Intellectual property Insolvency Litigation Arbitration Appendix 1: Bilateral investment treaties Appendix 2: Double tax treaties Appendix 3: Main conventions Appendix 4: Abbreviations and definitions Appendix 5: Contacts... 66

4 02 LEGAL GUIDE TO INVESTING IN RUSSIA HERBERT SMITH FREEHILLS Introduction Despite the global crises in other countries, the Russian market is developing very quickly and the economy is in excellent shape. Russia was the best performer amongst BRIC countries during September and, despite a recent softening, has the best GDP growth market in Europe. Russia also has one of the best budget balances in the world. However, Russia is not an easy place to do business, it can be expensive; the business operating environment can be challenging; paperwork and bureaucracy is endemic. At first glance, the legal system in Russia the way in which investment in companies is made, the restrictions on acquiring businesses and the rules on foreign investment can seem complex. We hope that you will find this Guide useful in explaining the key legal issues affecting your planned or existing investment in Russia. It aims to clarify those legal areas for an overseas investor and also act as a glossary or step-by-step guide for the reader. It is very much an introduction to the subject and is not intended to be a comprehensive guide to all legal issues. Of course, Russian law, like all legal systems, is subject to regular change. What you read in this Guide reflects the law as at the date of publication. We intend to update the Guide periodically, but please be careful to check with us, before relying upon it, that the law as stated here is still in force. In particular, significant changes are proposed to the Russian Civil Code which will impact on the contents of the Guide. The draft changes are currently being debated in parliament but it is expected that they will be passed by late An updated version of this Guide will be published in due course once the changes are finalised. We would welcome the opportunity to discuss any of these issues with you. Please feel free to get in touch with any one of the partners named in Appendix 5. With thanks to the large team of partners, professional support lawyers and associates who have made this publication possible. Herbert Smith Freehills CIS LLP May 2013 Second edition To download a printable version please go to:

5 HERBERT SMITH FREEHILLS LEGAL GUIDE TO INVESTING IN RUSSIA 03 Herbert Smith Freehills We are one of the world s leading law firms. We advise many of the biggest and most ambitious global organisations across all major regions of the globe. Our clients trust us with their most important transactions, disputes and projects because of our ability to cut through complexity and mitigate risk. Please visit to learn more about us. See Appendix 5 for contact details of our partners in Moscow and our other offices. For all full list of publications produced by our Moscow office, visit We can help you thrive in the global economy. With 2,800 lawyers in offices spanning Asia, Australia, Europe, the Middle East and the US, we can deliver whatever expertise you need, wherever you need it. Our Moscow office combines the international expertise of around 80 lawyers offering locally based full-service Russian, English and US law advice, with an in-depth understanding of the legal issues arising in Russia. We offer domestic and international investors and financial institutions market-focused advice on a range of complex matters. We opened our Moscow office in 1999 but have been advising on deals, dispute resolution and projects in Russia since The contents of this publication, current at the date of publication set out in this document, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication. Herbert Smith Freehills LLP and its affiliated and subsidiary businesses and firms and Herbert Smith Freehills, an Australian Partnership are separate member firms of the international legal practice known as Herbert Smith Freehills. Herbert Smith Freehills CIS LLP 2013

6 04 LEGAL GUIDE TO INVESTING IN RUSSIA HERBERT SMITH FREEHILLS 1. Introduction to the Russian legal system Since the fall of the Soviet Union, the Russian legal system has operated as a civil law system. The Russian Civil Code is the primary source of civil law for Russia and came into force in four parts between 1995 and The Civil Code sets out certain basic principles: equality of all participants guaranteed by civil law; inviolability of private property; freedom of contract; free exercise of civil rights; and juridical protection of civil rights. Under Russian law, foreign individuals and companies enjoy the same rights to sue and be sued in Russian courts as Russian individuals and companies. Which court has jurisdiction over a particular dispute depends mainly upon the nature of the dispute and the applicable Russian legislation. As a general rule, economic and commercial disputes will be considered by arbitrazh courts, whilst non-commercial disputes will be considered by civil courts. DOMESTIC SOURCES OF RUSSIAN LAW Constitution Since its adoption pursuant to a referendum in 1993, the Russian Constitution is considered the supreme law of the land. Article 15 of the Constitution reads that it shall have supreme legal force and have direct effect, and shall be applicable throughout the entire territory of the Russian Federation. Courts are guided by the Constitution and it prevails over federal, regional and local laws. Statute Statutes are the predominant legal source of Russian law and may only be enacted through the legislative process. Codes are the basis for law on a matter, and they are usually supplemented by further legislation to develop certain provisions. Codes are interpreted flexibly and interpretation may be based simply on general principles. The general principles are articulated in the first section of a code and outline the reason for the legislation. Judicial system The judicial system of Russia is made up of several types of courts: arbitrazh courts (that is commercial courts), courts of general jurisdiction, the Constitutional Court, justices of the peace and military tribunals. A special Court for Intellectual Property Rights has been recently established to consider disputes relating to intellectual property rights. Parties may also agree to submit their commercial disputes to arbitration tribunals. Arbitrazh courts Arbitrazh courts are specialised courts for settling commercial disputes. They are structured as a four-tier system and have special jurisdiction over disputes arising out of the application of legislation governing corporations, shareholders and participants in Russian companies on all matters, with the exception of 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. Courts of general jurisdiction The jurisdiction of civil courts includes, but is not limited to: all criminal cases; disputes between individuals; appeals of administrative and other state actions that do not fall within the jurisdiction of other courts; labour and employment disputes; and family law, probate and consumer protection issues. The Supreme Court of the Russian Federation is the judicial body ultimately responsible for those cases under the jurisdiction of civil courts. For certain categories of case, it can, however, act as a court of first instance (generally those which are considered to be of special importance or special public interest ). The Supreme Court also considers the validity of rulings of lower courts (including military courts) and provides clarifications on issues of court proceedings. The Constitutional Court of the Russian Federation The Constitutional Court of the Russian Federation commenced its activities in December 1991 and was the first judicial body of constitutional review in Russia. The legal status of the Constitutional Court is characterised by a number of peculiarities. It stands apart from the other courts and reviews cases that concern the constitutionality of laws, interprets the Russian Constitution and verifies the legality of presidential impeachment proceedings. The court always limits its considerations to matters of law and refrains from examinations of facts whenever such activity falls within the competence of another court or another authority. The rulings are final and may not be appealed and the provisions of any laws declared to be unconstitutional are deemed to be, de facto, null and void, since the Constitutional Court s rulings require no further confirmation.

7 HERBERT SMITH FREEHILLS LEGAL GUIDE TO INVESTING IN RUSSIA 05 Precedent Strictly speaking, court decisions are not sources of Russian law. However, judgments of higher courts have gradually gained large significance in Russia the lower courts must follow the positions established by the Supreme Courts. What is more, the Supreme Arbitrazh Court and the Supreme Court of the Russian Federation summarise lower court practice and issue court practice explanations in the forms of information letters and overviews. Such letters and explanations are used as interpretative recommendations and guidelines for lower courts when dealing with similar issues. Application of foreign law in Russia Whilst parties are free to select whichever laws they wish to govern their contracts, there are certain mandatory rules of Russian law which parties cannot contract out of. These mandatory rules are very wide in scope, covering almost every aspect of Russian law. This therefore has a significant bearing on parties freedom to contract and how contracts governed by foreign laws will be interpreted in Russia. This should always be kept in mind when entering into any contract which may ultimately come before the Russian courts. Bilateral Investment Treaties and Conventions Russia has an extensive network of bilateral investment treaties with other countries and is a signatory to a number of conventions which impact of the areas covered by this Guide. Please see Appendix 1 for a list of the countries with which Russia has entered into a bilateral investment treaty and Appendix 3 for a list of the main conventions to which Russia is a signatory.

8 06 LEGAL GUIDE TO INVESTING IN RUSSIA HERBERT SMITH FREEHILLS 2. Foreign investment restrictions Foreign investors considering making investments in Russia will need to be aware of the regulatory restrictions which apply in certain circumstances. The key foreign investment restrictions are summarised below. CURRENCY REGULATION AND CONTROL There are no restrictions in Russia relating to currency regulation and control affecting inward or outward investment. The former restrictions were removed such that from 1 January 2007: there are no special account requirements for currency operations; non-residents can purchase Russian securities with foreign currency; and mandatory conversion requirements were abolished. RESTRICTIONS ON INVESTMENTS IN STRATEGIC BUSINESS SECTORS General The Russian Strategic Investments Law provides that the acquisition of control by foreign investors of Russian companies operating in strategic business sectors (Strategic Companies) requires government consent. The Strategic Investments Law singles out certain business sectors that are strategic to the Russian economy. These include, amongst others, the development of subsoil fields of federal significance (Strategic Fields, as described in detail in chapter 15), the nuclear industry, natural monopolies such as oil and gas pipeline transportation services and operational services in the transportation sector such as rail roads, airports and marine ports. Also covered are the military industry, the aviation industry, space activities and significant mass media. A company incorporated in Russia will be presumed to be a Strategic Company and to fall within the scope of the Strategic Investments Law if it is engaged in at least one strategic sector. Generally, any company incorporated in a jurisdiction outside of Russia constitutes a foreign investor. Therefore, the restrictions of the Strategic Investments Law may apply not only to injections of foreign capital, but also to investments made by the offshore vehicles of Russian companies and to joint venture vehicles incorporated outside of Russia. The concept of control The Strategic Investments Law gives a broad definition of the concept of control of one company (or individual) over another. Pursuant to the Strategic Investments Law, control means the ability to influence, directly or indirectly, the decisions made by a Strategic Company, through: voting at general shareholder meetings of the Strategic Company; or participation in management bodies of the Strategic Company; or acting as the external management company of the Strategic Company. The Strategic Investments Law sets out examples of circumstances when the general test of control will be deemed to be met. These include situations where a person or entity: controls more than 50% of the voting shares or participatory interests in a Strategic Company; or has the power to appoint more than 50% of the members of the board of directors (or other management body) of a Strategic Company; or controls less than 50% of the voting shares or participatory interests of a Strategic Company, but the stakes of other shareholders or participants are such that the person or entity is still able to determine the decisions of that Strategic Company; or has the power to make decisions relating to the business activities of a Strategic Company on the basis of an agreement or otherwise; or is entitled to appoint the chief executive officer of a Strategic Company; or acts as the management company of a Strategic Company. However, the Strategic Investments Law makes it clear that these examples are not exhaustive, and the presence or absence of control is to be determined on a case-by-case basis. In order to determine conclusively whether or not a person or entity has control for these purposes, it is necessary to analyse the shareholder arrangements and any agreements in place. For Strategic Companies developing Strategic Fields (Strategic Subsoil Companies), there is a special test for control. Control over a Strategic Subsoil Company is deemed to exist where a foreign investor: controls, directly or indirectly, 25% or more of the voting shares or participatory interests of the Strategic Subsoil Company; or is able, or has the power, to appoint 25% or more of the board of directors (or other management body) of the Strategic Subsoil Company; or is entitled to appoint the chief executive officer of the Strategic Subsoil Company; or has the power to make decisions relating to the business activities of the Strategic Subsoil Company on the basis of an agreement or otherwise; or

9 HERBERT SMITH FREEHILLS LEGAL GUIDE TO INVESTING IN RUSSIA 07 is acting as the management company of the Strategic Company. Acquisition of control over Strategic Companies by foreign states, international organisations, (eg the European Bank for Reconstruction and Development) or entities controlled by them is prohibited. Foreign states and international organisations are also required to obtain prior consent for the acquisition of the right to control, directly or indirectly, more than 25% of the voting shares (or the right to block management decisions) of a Strategic Company, or more than 5% of the voting shares in a Strategic Subsoil Company. In 2011 the Strategic Investments Law was amended to exempt from the consent requirement (but not from the prohibition to acquire control) international financial organisations created in accordance with an international treaty to which Russia is a party and international financial organisations that entered into a treaty with Russia. A list of such organisations has been approved by the government and includes, inter alia, the International Bank for Reconstruction and Development, the European Bank for Reconstruction and Development and the International Finance Corporation. Exemptions The Strategic Investments Law does not apply to transactions between organisations controlled by the Russian Federation. Also, the Strategic Investments Law does not apply to investment by foreign investors in Strategic Companies: which are Strategic Subsoil Companies; and in which the Russian Federation controls, directly or indirectly, more than 50% of voting shares. In addition, the law does not apply to transactions between organisations controlled by Russian nationals who are Russian tax residents and at the same time do not have dual citizenship. A further exemption relates to cases where, at the time of the proposed investment, the relevant foreign investor already controls more than 50% of the capital of the target Strategic Company. This exemption does not, however, apply to Strategic Subsoil Companies. For Strategic Subsoil Companies, if a foreign investor already owns over 25% and intends to increase its share, it is likely that any subsequent acquisition will also require consent. The Strategic Investments Law does not apply in respect of transactions by a foreign investor that already holds shares in a Strategic Company where the transaction does not increase the foreign investor s overall stake in that Strategic Company. The Strategic Investments Law does not apply in respect of foreign investments regulated by other Federal laws or international treaties ratified by Russia. Obtaining consent The Federal Antimonopoly Service (FAS) is responsible for giving consent to investment in Strategic Companies. The ultimate decision-making responsibility is with a special governmental commission presided over by the Prime Minister. Consequences of a failure to comply Transactions entered into in violation of the Strategic Investments Law are void. If a transaction is declared void by the courts, the parties involved will be restored, as far as possible, to their original positions. In such cases, the authorities are entitled to seek either, or both of, the annulment of any voting rights held by the relevant foreign investor in respect of shareholders or participants meetings, and the annulment of any resolutions or transactions of a Strategic Company adopted or entered into after control was obtained (in violation of the rules) by a foreign investor. RESTRICTIONS RELATING TO INVESTMENTS BY ENTITIES CONTROLLED BY FOREIGN STATES OR INTERNATIONAL ORGANISATIONS Pursuant to a provision of the Federal Law on Foreign Investments in the Russian Federation (Foreign Investments Law), which was introduced in May 2008, where a foreign state, international organisation, or entity controlled by any such body, effects a transaction resulting in the acquisition of a right to control, directly or indirectly, more than 25% of voting shares or participatory interests of a Russian commercial entity or the ability to block decisions of the managing bodies of a Russian entity, consent to the transaction must be obtained from the authorities. The procedure for obtaining such consent refers back to the Strategic Investments Law. Exemptions Like the Strategic Investments Law, the Foreign Investments Law was amended in 2011 to exempt transactions by those international financial organisations included in the list approved by the government from the consent requirement. REAL ESTATE For restrictions relating to foreign investors acquiring title to real estate, please see chapter 14 of this Guide. INSURANCE Pursuant to the Federal Law on the Organisation of Insurance in Russia (Insurance Law), insurance organisations must obtain the permission of the Federal Service for the Financial Markets of the Russian Federation (FSFM) in order to conduct insurance activities in Russia. The Insurance Law establishes a maximum 50% limit on the participation of foreign insurance companies in the insurance industry in Russia at any given time. Permission will only be granted to foreign companies if this limit has not been exceeded which, in practice, has not been an issue to date. Insurance companies incorporated in Russia, but whose parent company or shareholders holding jointly more than 49% of the share capital are incorporated outside of Russia, may not perform the following types of insurance activities in Russia: life insurance; any forms of insurance which are mandatory pursuant to statute; any forms of insurance which are mandatory as dictated by the state; insurance related to the supply or performance of contractual work for state requirements; or accident insurance for state and municipal organisations.

10 08 LEGAL GUIDE TO INVESTING IN RUSSIA HERBERT SMITH FREEHILLS CREDIT ORGANISATIONS The permission of the Central Bank of the Russian Federation (CBR) is required to set up a credit organisation (the definition of which includes banks as well as non-banking credit organisations). The CBR may require that a certain number of supervisory board members are Russian citizens if the general director of the credit organisation is a foreigner. RESTRICTIONS ON FOREIGN INVESTORS ACQUIRING CONTROL OVER COMPANIES IN CERTAIN INDUSTRIES Air transportation Pursuant to the Air Code of the Russian Federation, foreign participation in Russian air carriers may not exceed 49%. Mass media Pursuant to the Federal Law relating to Mass Media: companies incorporated outside of Russia (ie foreign companies) and companies incorporated in Russia but which are more than 50% foreign owned may not establish radio, television or video networks; and foreign individuals, foreign companies and companies incorporated in Russia but which are more than 50% foreign owned may not establish organisations broadcasting over the territory of 50% or more of Russia, either by number of individual territories or by population spread.

11 HERBERT SMITH FREEHILLS LEGAL GUIDE TO INVESTING IN RUSSIA Establishing a legal presence When setting up a company in Russia, there are several structuring options available, as discussed below. Company A company is a separate legal entity incorporated in Russia in accordance with the laws of the Russian Federation. The most common forms of company are joint stock companies (JSCs) and limited liability companies (LLCs). Branch office A branch office is a separate subdivision of a company headquartered in another location. A branch can perform all the functions of a company. However, a branch office will not be appropriate in all circumstances and will not be an option if the business requires licences to be granted which can only be issued to companies incorporated in Russia. A company will be liable for the wrongdoings or debts of any branch office whereas companies will not generally be liable for the debts or wrongdoings of their Russian subsidiaries. Representative office A representative office is not a separate legal entity but an extension of a foreign company into Russia. Representative offices are not permitted to engage in commercial activity and their main purpose is to represent the company s interests and promote commercial relations between the company and its counterparties. Since a representative office is not entitled to be involved in commercial activity, it will be of limited value if the intention is to conduct business in Russia in any significant way. Simple partnership A simple partnership is an agreement between several parties to carry out jointly business in, or outside of, Russia. No new firm or business entity is formed; the partnership is in fact only a contractual arrangement. The simple partnership structure is not widely used. The liability of partners for claims arising out of the commercial activities of a simple partnership will be joint and several and this position cannot be changed by agreement between the partners. If claims are made, the partners will be liable to the full extent of all their assets (except in relation to individual entrepreneurs, for which there is a statutory list of assets against which recourse may not be sought). The legal framework The rules governing the establishment and operation of a legal presence in Russia are to be found in the following sources: Civil Code Part one of the Civil Code of the Russian Federation which came into effect on 1 January 1995; JSC Law Federal Law of the Russian Federation on Joint Stock Companies; LLC Law Federal Law of the Russian Federation on Limited Liability Companies; and Law on Registration Federal Law of the Russian Federation on State Registration of Legal Entities and Individual Entrepreneurs. Types of companies The two principal forms of a Russian company are: an LLC, where members hold participation interests ; and a JSC, where participation is in the form of shares. The only foundation document of a JSC or an LLC is its charter, which is similar to the memorandum and articles or constitutional documents of a company. JSCs issue shares which are subject to the requirements of Russian securities laws. An LLC is a more flexible alternative to a JSC. The charter capital of an LLC is represented by participatory interests, which do not constitute securities and so are not subject to the Russian securities legislation. As a general rule, for both LLCs and JSCs, the liability of its owners is limited to the nominal value of the shares or participatory interests issued to those members. However, the liability may be extended (a) in the event of the company s insolvency; or (b) in relation to transactions entered into by the company pursuant to instructions from the owner. Open and closed JSCs JSCs may be open (OJSC) or closed (CJSC). The main differences between an OJSC and a CJSC are: shareholders of a CJSC have pre-emptive rights in respect of a proposed transfer of shares; a CJSC may have no more than 50 shareholders; a CJSC may not issue shares to the public; and there are fewer public reporting requirements imposed upon a CJSC. If an OJSC is listed on a public stock exchange there will be additional filing requirements, which of course result in greater levels of transparency. Generally, a CJSC rather than an OJSC is preferred for joint ventures as the company s equity is usually intended to be closely held and not marketed.

12 10 LEGAL GUIDE TO INVESTING IN RUSSIA HERBERT SMITH FREEHILLS Proposed amendments As part of the proposed global amendments to the Civil Code, it is proposed that companies will be either public (public JSCs) or non-public (non-public JSCs and all LLCs), depending on whether their shares are offered to the public. If the amendments are adopted, existing companies will not be required to re-register immediately. Current CJSCs will be able to choose the form of LLC or will automatically become non-public JSCs. Existing OJSCs will become public JSCs if they indeed offer shares to the public; otherwise they will become non-public JSCs. LLCs will remain as they are. CJSC vs LLC In most respects, CJSCs and LLCs are similar: membership may not exceed 50 persons; shareholders and participants have rights of pre-emption that cannot be waived in the charter. Both CJSCs and LLCs may provide in their charter that the company also has the right to pre-emptively acquire any shares intended to be sold by shareholders or participants to third parties; both CJSCs and LLCs will have a two or three tier management structure the body of shareholders in attendance at a general meeting, an (optional) board of directors and an executive body responsible for the day to day running of the company (which may comprise a single individual or a management board); the minimum charter capital requirements are identical; and tax reporting, tax treatment and accounting requirements are essentially the same. One of the main differences between the two types of entity is that the charter of an LLC can impose restrictions on the transfer of participatory interests, whereas this is not possible in the case of a CJSC. Further, an LLC s charter may allow for weighted voting rights and disproportionate profit distributions. An LLC, therefore, offers greater flexibility regarding the imposition of super-majority voting and other tailored rights. However, any participant holding at least 10% of the participatory interests in an LLC has the right to apply to the court for another participant to be excluded (for further details on this right, see the end of this chapter). Participation in an LLC and a JSC An LLC or a JSC may be established by Russian or foreign natural persons or legal entities. The number of participants or shareholders in an LLC and a CJSC must not exceed 50 (otherwise the company must be reorganised into an OJSC within one year). An LLC and a JSC may not have as their sole founder another company with a sole shareholder. Charter capital The charter capital reflects the minimum level of assets that a company must have. An LLC s charter capital is formed of contributions made by participants. The charter capital of a JSC is comprised of the nominal value of the company s shares acquired by shareholders. Russian legislation stipulates the following minimum charter capital: for an OJSC RUR100,000 (approximately US$3,333); and for a CJSC and an LLC RUR10,000 (approximately US$333). Registration formalities A Russian legal entity is considered to be incorporated after it has been state registered. The registration of legal entities falls within the competence of the Russian tax authorities. General provisions relating to the registration procedure for legal entities in Russia are stipulated in the Law on Registration. When registering a Russian company, key corporate information (such as its official name, registered office, founders or participants, any registrations or licences made or granted and the name of the company s general director) is recorded in the Unified State Register of Legal Entities (the Register). While the company is in existence, it is obliged by law to register any amendments to the data contained in the Register with the tax authorities. The current status of a Russian company can be confirmed by an extract from the Register. Transfer restrictions A participant in an LLC has the right to withdraw from the LLC by putting its interests onto the LLC in return for cash or payment in kind (assessed by reference to book value) but only where such a right of exit is expressly stated in the charter of the LLC. Some vestiges of the withdrawal right remain in the form of minority protections. If the general participants meeting takes the decision to approve a major transaction (as defined in the LLC Law) or to make an equity capital call, then any minority which voted against the decision or abstained will be able to exercise their right to withdraw. There is no general right of exit in JSCs. A shareholder of a JSC may exit from the company either by way of sale of its shares to third parties (in CJSCs this is always subject to the right of first refusal of existing shareholders) or by requesting that the company acquires its shares in a limited number of circumstances, namely: reorganisation of the company; execution of a major transaction; introduction of amendments to the charter of the company which limit the right of the shareholders; or delisting of shares, provided that the exiting shareholder either did not participate in the general shareholders meeting where the decision was adopted or voted against the decision. The LLC s charter may require that a transfer to other participants or third parties is subject to the consent of all of the other participants. If such consent is required and is refused then the party wishing to transfer its participatory interests may put its interests on to the company itself. No such restrictions can be set forth in relation to transfer of shares in JSCs. Right of first refusal In respect of the disposal of existing interests (shares) in LLCs and CJSCs to third parties, there is a statutory right of first refusal, which cannot be excluded. Participants (shareholders) are entitled to purchase participatory interests (shares) at the price on offer to a third party pro rata to their holding (the charter of LLCs may also provide for a different procedure as mentioned below). There is no right of first refusal in OJSCs.

13 HERBERT SMITH FREEHILLS LEGAL GUIDE TO INVESTING IN RUSSIA 11 In both LLCs and CJSCs the charter can provide that the company itself has the right of first refusal if none of the participants (shareholders) have exercised their rights. In LLCs the price to be paid by a participant exercising the right of first refusal (and by the company if it has the right of first refusal) may be stated in the charter and may differ from the price offered to a third party. Notarial certification of transfer Certification by a notary of any transfer or pledge of participatory interests in LLCs is required. When certifying, notaries will have to check that the seller is entitled to dispose of participatory interests, which should help to mitigate the risk of transfer by unauthorised persons. Transfers or pledges of shares in JSCs are not subject to notarial certification. Title to participatory interests in LLCs will pass to the purchaser at the time of certification of the agreement by a notary, rather than when the company is notified that the transfer has taken place. Upon certification, the notary will send an application for amendment to the Register, which is the public register of title. LLCs have to create and maintain a register of members containing information on participatory interests belonging to the participants and the company. In case of discrepancies between the register of members and the Register, the latter will prevail. In relation to JSCs, title to shares will pass to the purchaser at the time when the relevant record of transfer is made to the shareholders register. Once all documents have been deliver to the registrar, the latter will have three days to effect the transfer, but in practice the transfer may even happen on the same day. Shareholders agreements Following amendments to the Russian corporate legislation in , both the JSC Law and the LLC Law permit execution of shareholders agreements (SHAs) in respect of JSCs and LLCs respectively. Although this is a positive step in the development of Russian corporate legislation, offshore alternatives to joint ventures remain a more attractive option for a number of reasons, as described below. The JSC Law and the LLC Law allow for majorities and minorities to waive their right to vote, or to agree in advance that they will cast their votes in a certain way, or to agree veto rights on business items not contemplated by the law. There is now therefore freedom to create a bespoke structure, with either total deadlock, relative minority block or majority control as required. clear that foreign-law governed SHAs are enforceable in relation to Russian LLCs or JSCs. One of the reasons why investors insert overseas holding companies into the ownership structures is to ensure that the foreign law choice of law in their SHAs is effective. Limitation period to challenge management decisions There is a two month limitation period for participants to challenge decisions of LLC management bodies (ie general meeting of participants, the board of directors, the general director, the management board or any external manager). In JSCs, the general limitation period is three months. The court may, in its discretion, uphold the decision in question if the relevant breaches are not material and the adopted decision did not result in damages or any other adverse consequences to the company or the shareholder (participant). Expulsion from an LLC A participant (or participants) holding at least 10% in the charter capital of an LLC has the right to apply via the courts for the expulsion of another participant. There is no such right of expulsion in JSCs. The grounds for expulsion are: material breach by a participant of its duties (including, presumably, pursuant to a shareholders agreement); or actions/failure to act by that participant that will lead to the inability of the LLC to conduct its business or which will significantly impede such activity. In the case of an expulsion, the participatory interest of the expelled participant passes to the company and the company is obliged to pay the expelled participant the value of the portion of the company s assets which correspond to that participant s interest in the charter capital or, with the consent of the expelled participant, to transfer to that participant assets of the same value. The value of the interest is established on the basis of the company s accounts for the last reporting period preceding the date of entry into force of the court decision on expulsion. The possibility of expulsion remains, in our view, the most significant drawback of an LLC. It should also be possible to require a commitment to sell in certain circumstances or a commitment to buy and it should be possible for participants of LLCs and shareholders of CJSCs to be explicitly subject to transfer limitations in addition to the statutorily prescribed right of first refusal. Notwithstanding these changes, Russian law is not as flexible as English law when it comes to SHAs. If parties are keen to include certain contractual provisions commonly seen in English law SHAs (such as reps and warranties, indemnities, put/call options, drag/tag along rights), it would be preferable for the SHA to be governed by English law which recognises these provisions. The parties may also be keen for the general comfort of the SHA being governed by foreign law. The choice of governing law will then in turn have a bearing on the form of corporate entity which will enter into the SHA since it is not

14 12 LEGAL GUIDE TO INVESTING IN RUSSIA HERBERT SMITH FREEHILLS 4. Due diligence Due diligence is one of the key pre-investment exercises that a potential investor needs to carry out. Due diligence investigations allow an investor to assess the legal and financial risks associated with the target business. Further, this process allows an investor to obtain sufficient information on potential partners and target companies, to evaluate the appropriate purchase price for the target and to evaluate alternative structures. As such, much of what follows applies to any investment in any jurisdiction, not just the Russian Federation. Procedure Generally, the process starts with an agreement between the investor and its legal advisors as to the scope and timing of the review and the determination of areas of major interest. A document checklist is then sent to the target company (or its owners). The review of documents usually results in requests for further information and consultations with the legal advisers of the target company. The review of documents can take place either in a physical data room or via a virtual data room. On-site due diligence generally takes place only in exceptional cases, usually in an attempt to expedite the acquisition process. In order to obtain the information required, the legal advisors of the investor may use publicly available sources (such as the State Real Estate Cadastre and the Register of Russian Trade and Service Marks). Publicly available data in Russia is of lower quality than might be expected and is sometimes inaccurate. Based on the results of the review, the investor s legal advisors will prepare a written report. Sometimes the investor will also request an outline of red flag issues prior to the report in order to understand the major issues affecting the transaction at an early stage. Scope The scope of due diligence usually depends on the type of business conducted by the target company and the thoroughness of the review expected by the investor. In general, it involves investigation of the areas listed below. Incorporation, status, licences and authorisations Verification of the due establishment of the target company involves a comprehensive examination of the incorporation documents. A Russian company may be created in a number of ways, including by the privatisation of state-owned assets, reorganisation of existing businesses or the incorporation of a new entity. The investor s legal advisors must review a set of the latest versions of the constitutional and internal documents of the target company in order to ascertain their compliance with legislation and understand the relevant management structure. Certain activities undertaken by a target company may be subject to licensing or require the authorisation of, or registration with, governmental bodies. Shareholding structure The investor should pay particular attention to various issues relating to the shares of the target company, including: issues of shares by the company: the issuance of equity in Russia is highly regulated by governmental bodies. A failure to meet the established requirements may result in the termination or cancellation of a share issue; share transfer history: the investor must ascertain the legality of the transfers and the validity of title to shares of the current shareholders of the target company in order to avoid possible challenges to title; existing encumbrances over the target s shares; any shareholders agreements; and information on the shareholders of the target company and relationships between the target and any affiliated companies. Antimonopoly and foreign control issues Russian antimonopoly and foreign control regulations involve a system of notifications and approvals required for entering into and executing transactions involving transfers of shares in Russian companies (specifically those triggering control over Russian businesses by foreign investors in sectors such as banking and insurance and in strategic enterprises). A due diligence exercise should focus on these issues since the controlling authorities may impose severe sanctions in the event of non-compliance (including the invalidation of a share transfer). Material contracts A review of the target s material contracts is undertaken to give the investor a full understanding of the matrix of relationships that underpin the business. This process will: provide details of the terms of existing contractual relationships; highlight any potential problems which may occur on a change of control; confirm the compliance of key contracts with the mandatory requirements of any relevant legislation and the enforceability of material terms; highlight any breaches and assess the potential consequences; and disclose the conditions for assigning, terminating or extending any agreements.

15 HERBERT SMITH FREEHILLS LEGAL GUIDE TO INVESTING IN RUSSIA 13 Financing and creditor indebtedness Prior to the acquisition of the target company, the investor must have a clear picture of the financial structure of the business. Legal advisors should carefully review the provisions of any loan agreements including termination and early repayment provisions and details of any security. Equally, the investor should be provided with information on amounts payable to the target company. Complete and accurate financial information is of particular importance for the investor since it will have a significant impact on the determination of a fair price for the business. Assets Prior to acquiring the target the investor should examine the target company s title to its assets. In particular, real estate and intellectual property must be considered. The legal advisors of the investor must examine in detail all documents confirming the rights of a target company to its facilities and any underlying land. This will involve tracing the history of title and looking into any transfers in order to ascertain the validity of title and evaluate the possibility of any challenges within the relevant limitation periods. Depending on the type of business, the target company s intellectual property rights (such as copyright, patents, trademarks, trade names and know-how) may be of considerable interest to the investor. The investor s legal advisors should examine the validity of such rights and the effectiveness of their protection. Where the business being acquired relies significantly upon the use of certain intellectual property rights which have been obtained from third parties, it is necessary to ensure that the purchaser is able to benefit from such rights after the acquisition has taken place. Taxation and accounting During the course of the due diligence process, an investor s legal advisors must ensure that the target company has no outstanding tax liabilities which will cause problems for the business going forward and, if any such liabilities are outstanding, ensure that they will be rectified prior to acquisition. This is a crucial area but one outside the scope of this Guide. Detailed and extensive tax due diligence, however, is usually conducted separately from the general legal review. Accounting matters may also be subject to an independent investigation by auditors. It is often the case that a target company will keep accounts only in accordance with the Russian accounting standards (which differ from international accounting regulations). Difficulties Given the lack or limitations of publicly available information, the effectiveness of a due diligence review is heavily dependent upon the co-operation of the target and the completeness and accuracy of the documents and clarifications provided. It should be noted that sellers are usually reluctant to disclose extensive information and that legal advisors may not be given an opportunity to interview, or have access to, key personnel of the target as part of the review, at least until late stages of discussions. Nevertheless, the due diligence process remains vitally important to an investor as a means of gathering information which may affect the acquisition price, the deal structure and the drafting of the transaction documents. Environmental matters If the target s business involves the operation of natural resource extraction or production facilities, the target s compliance with applicable environmental legislation, pollutant emission standards and decrees issued by monitoring authorities will be areas of particular concern for an investor. The due diligence process should involve careful analysis of the impact of failures to comply, particularly where there is a risk that licences or permits may be revoked or operations suspended. Employment Generally, it will be necessary to review a target s standard employment agreements, collective bargaining agreements, agreements with key employees and the target s major internal employment policies and procedures. Russian employment law is employee-protective, so the due diligence team should focus on the possibility of any claims from employees and the potential consequences of such claims. Proper performance of the employer s insurance obligations should also be covered by the review. Disputes and compliance with regulatory requirements Due diligence in this area does not significantly differ from similar procedures in other jurisdictions; the investor will always require, to the extent possible, knowledge of any pending or threatened litigation or arbitration by or against the target and any alleged breaches of regulatory requirements in order that the potential impact of such actions on the target can be properly analysed.

16 14 LEGAL GUIDE TO INVESTING IN RUSSIA HERBERT SMITH FREEHILLS 5. Acquisition structures As is the case in many jurisdictions, share purchases are the most common way to acquire a business in Russia. The major risk of a share acquisition is, of course, that a buyer will also be concerned with all of the target s existing liabilities. The impact of the lack of publicly available information as part of the due diligence process in Russia may mean that a target will come with unknown liabilities. An alternative method of investing in Russia is to incorporate a new company which can be used as a vehicle for the acquisition of those assets which are necessary in order to continue running the business of the target. Share purchases The main disadvantage of an acquisition of shares is that historic risks and obligations remain with the target company (subject to any contractual apportionment and post-acquisition risk mitigation strategies). This means that thorough due diligence of the historic activities of the company will usually be crucial. Russian law has not historically recognised the concept of warranties in share purchase agreements. The buyer can seek to protect itself by obtaining warranties in a foreign-law governed share purchase agreement, but potential difficulties of successfully recovering for loss or damage mean that this is not a substitute for thorough due diligence. the authorities may determine that an asset transfer constitutes a fraud on creditors if it is considered to be an artificial transaction designed to evade historic liabilities. In addition to the risks described above, the key disadvantages of a sale of assets are: administratively they are more cumbersome than an acquisition of shares; the acquisition may require obtaining new licences and permits, novation or assignment of contracts, transfer of employees, re-registration of IP rights; and the acquisition may lead to Russian VAT being payable. The suitability of each option will depend upon the particular circumstances of a transaction, including tax structuring considerations. Acquisition vehicle If the target company does not have a dedicated offshore holding company, it may be advisable to set up such a holding company to make the acquisition or, in the case of an asset transfer, to create an offshore holding company with a wholly-owned Russian subsidiary (the latter being the recipient of the transferred assets). The choice of jurisdiction will largely be driven by tax issues and corporate considerations. There are, nevertheless, numerous advantages to a share purchase structure, chief among which are: avoiding the need to reapply for licences and permits; a less complex and burdensome acquisition process; the absence of Russian VAT consequences; and avoidance of business interruption. Asset purchases Where a deal is structured as an asset transfer, the target s liabilities, including tax liabilities and penalties, should not (subject to careful structuring) transfer to the new company and the chances of avoiding historic liabilities is therefore higher. Moreover, an asset transfer affords the opportunity to start from day one with a clean business with identifiable liabilities. An asset deal is not, however, a panacea for the following reasons: there remains a risk that the Russian tax authorities could re-characterise the asset transfer as a sale of an enterprise under which historic liabilities would be treated as transferring to the new company. Further, such a transaction will be subject to additional civil law and regulatory requirements (eg notification of creditors and registration of the transaction with governmental authorities); or

17 HERBERT SMITH FREEHILLS LEGAL GUIDE TO INVESTING IN RUSSIA Joint ventures Many investors in Russia seek to harness the expertise of an established participant in the market by forming a joint venture (JV). The external investor benefits from its partner s existing relationships and experience of the market and the key market players, thus avoiding some of the potential downside associated with other investment structures. As JV arrangements have become relatively commonplace in Russia, the structures used and the principal features of the governing documentation have become familiar to the market, engendering a reasonably high degree of confidence in JV vehicles amongst the Russian business community. The typical JV structure involves holding the Russian investment through an offshore holding company, historically typically located in Cyprus or the Netherlands, although given the financial crisis in Cyprus other jurisdictions are now also used. The agreement between the shareholders of the holding company establishes the principles for the operation and management of the JV business. Where the JV is incorporated offshore, English law is commonly chosen as the governing law of the SHA. This is because the Russian legal system may not wholly recognise certain concepts (such as certain share transfer provisions) which are fundamental to SHAs. Disputes under the SHA should be resolved by arbitration, as arbitral awards (unlike overseas court judgments) are more easily enforceable in Russia. It is possible, however, that the Russian courts may decline to give effect to such awards for reasons such as public policy. It follows therefore, that the use of an English law governed SHA will not necessarily insulate the parties from some of the more general risks associated with investing in Russia (please also see the discussion on shareholders agreements in chapter 3 of this Guide). The two principal forms of Russian corporate entities that could be utilised at the operating company level are the LLC and CJSC (please see chapter 3 of this Guide for a detailed description of the differences between these entities). KEY FEATURES OF SHAREHOLDERS AGREEMENTS Pre-conditions It is essential for the operation of any successful Russian market-orientated JV that all necessary licences, consents or clearances are obtained before trading commences. Regulatory approvals from Russian governmental agencies will be necessary for the initiation of business activities and obtaining such approvals can take a significant amount of time. Approval may also be required for foreign investment (whether direct or indirect) into Russian companies (as described in chapter 2 of this Guide). Operation of a JV company SHAs normally contain detailed provisions regulating the conduct of the JV, including with respect to: dividend policy and the scope of the board s (or any Russian subsidiary board s) power to declare dividends; whether (and how) the JV should be able to accommodate the withdrawal of current participants and the arrival of new ones; minority protection provisions, including reserved matters requiring unanimous consent before action can be taken; restrictions on the authority of the members of the board of each company in the JV group structure; approval of budgets by shareholders; funding provisions to cover the manner and method of any future financing that is to be provided to the JV company; appointment rights of the shareholders to the board of the JV holding company and provisions for quorum; non-compete covenants restricting the ability of the JV partners to compete with the JV company or with each other (careful consideration will have to be given to the scope of such covenants to ensure that they do not infringe competition law); stipulation of the situations in which shares in the JV company may or must be transferred, including any rights of pre-emption and mechanisms for determining the price of shares in such circumstance. (see further below); deadlock provisions (also discussed below); default provisions to cover situations where a party to the SHA is affected by a change of control, becomes insolvent, or is in material breach of the SHA (such provisions often act as an incentive for the parties to the SHA to comply and may provide for the non-defaulting party to acquire the defaulting party s shares, so far as permitted by the applicable law, at a discount); and termination provisions. Exit The SHA should address whether the transfer of shares will be subject to any lock-in period and should contain detailed provisions regulating the transfer of shares. Frequently the non-selling shareholders will be able to exercise a right of pre-emption if one of the shareholders wishes to exit, and may also have a tag-along right under which a selling shareholder must procure that the purchaser of his shares acquires the shares of the tagging shareholder on the same terms.

18 16 LEGAL GUIDE TO INVESTING IN RUSSIA HERBERT SMITH FREEHILLS Particularly where one shareholder holds a substantial stake, the SHA may contain drag-along provisions under which that shareholder is able, upon exit, to compel the sale by the other (usually minority) shareholders of their interests to the proposed purchaser upon the same terms. This mechanism is designed to maximise value for the majority shareholder by enabling the purchaser to acquire the entire issued share capital of the JV. A common feature of JVs in the Russian market is the inclusion in SHAs of provisions which allow for the exit of a JV partner through the use of a put option (whereby one JV partner can require the other to purchase its shares) or a call option (pursuant to which one JV partner can require the other partner to transfer its JV interest to it). However, such options should be capable of being triggered at the offshore level as they are of questionable enforceability under Russian law in relation to Russian operating companies. In the context of the provisions regulating share transfers, consideration should be given to any requirement to obtain any Russian law consents (for example, due to the increase in a JV partner s indirect interest in a Russian company by way of the acquisition of further shares at the offshore level). Deadlock If any disagreement between JV partners regarding the operation of the JV cannot be resolved amicably, the SHA should provide comprehensive mechanisms to ensure that a resolution can be effected. The following provisions may be included as part of the deadlock resolution process (as a practical matter, these supplement the principles regulating share transfers because they can ultimately lead to the exit from the JV of one, or perhaps all, of the JV partners): the Chairman of the board of directors may be given a casting vote (this will clearly be unattractive in a 50:50 JV); if the deadlock arises at the board level, the matter may be referred for consideration by the shareholders; an escalation procedure may be employed, such that any disagreement may be referred to the Chairmen or CEOs of the JV s respective shareholders; reference to a mediator, expert or arbitration; the inclusion of a Russian roulette provision, whereby a shareholder may offer to buy the other shareholder s shares at a specified price. The recipient shareholder may elect to sell or to purchase the other s shares at that price (and this right to elect acts, of course, as an incentive for the party serving the Russian roulette notice to propose an appropriate price upfront); the inclusion of a Texas shoot out provision, a variant on the Russian roulette mechanism under which the recipient of a notice containing an offer for the purchase of its shares may elect to sell at the specified price or purchase the initiating party s interest at a higher price, leading to an auction or sealed bid process under which the highest bid ultimately wins; and the ability of either party to require that the JV company be wound up and that the proceeds be distributed to the shareholders, or that all of the shares be sold to a third party at an agreed price or a price based upon an agreed formula.

19 HERBERT SMITH FREEHILLS LEGAL GUIDE TO INVESTING IN RUSSIA Shareholders rights and obligations As explained in chapter 3 of this Guide, the principal forms of companies for carrying out business in Russia are JSCs and LLCs. The rights and obligations of shareholders in JSCs and participants in LLCs are regulated by the Civil Code, the JSC Law, the LLC La. and the company s charter. Shareholders or participants have numerous rights. The most important are: the right to receive a portion of distributed profits and the right to participate in the winding up of the company; the right to participate in the management of the company; and the right to information on the activities of the company. The right to receive a portion of distributed profits in LLCs and the right to dividends in JSCs arise only when the company makes a decision regarding profit distribution or dividend payment. A company may make such decisions quarterly, bi-annually or annually. Profit is distributed out of net profits of the company (and in the case of payment to owners of preferred shares in JSCs, may also be paid out of special funds created for this purpose). In a number of situations profit distribution is prohibited, for instance, until the charter capital has been fully paid up and where the company shows signs of insolvency or may become insolvent as a result of profit distribution. As a general rule, profit is distributed to shareholders or participants pro rata to their share in the charter capital of a company. However, for LLCs it is possible to set out a rule which allows a disproportionate profit distribution. The right to participate in the winding up of the company entitles a shareholder or participant to receive a portion of the proceeds in the event that the company goes into liquidation. The distribution of proceeds in JSCs is more complicated since the company may have to pay owners of preferred shares and shareholders who have demanded that the company buys out their shares (in accordance with the JSC Law). Shareholders or participants may propose candidates to the management and controlling bodies of the company. However, in JSCs this right may only be exercised by a shareholder or group of shareholders collectively holding not less than 2% of voting shares. Shareholders or participants have the right to access information and documents about the company. Both the JSC Law and the LLC Law set out a list of information which is open to all shareholders and participants and set out the procedure for accessing this information. JSC Law also sets out specific mandatory disclosure requirements to be complied with by open JSCs. Access to certain documents of JSCs, such as the company s accounts and minutes of its management board, is open only to a shareholder or shareholders collectively holding not less than 25% of voting shares. In addition to the above, shareholders in JSCs and participants in LLCs have certain rights which only arise once they hold shares or a participatory interest representing a certain percentage of the charter capital of a company. In terms of influencing the decision-making process, in a JSC a holding of 25% + one share is required to block shareholder resolutions which require qualified majority approval (such as amendments to the charter, decisions on reorganisation or liquidation, an increase in the number of authorised shares, a buy-back by the company of its own shares, an increase of the charter capital and the approval of certain major transactions). A holding of a 50% + one share allows the holder to take certain decisions at a general meeting (such as the appointment of the General Director). A holding of a 75% + one share allows the holder to take those decisions at a general meeting which require a qualified majority vote (as described above). The decisions of an LLC may be taken either by a simple majority, by a 2/3 majority or unanimously. The LLC Law allows participants either to vary voting thresholds or provide for weighted voting rights in relation to certain matters set out in the company s charter. The right to participate in the management of the company is exercised by attending the general meeting of shareholders or participants and voting on the issues on the agenda. The law sets out a number of provisions aimed at protecting the rights of minority shareholders or participants regarding management of the company. Provisions include voting thresholds (which allow the minority to veto certain decisions), a prohibition against interested shareholders voting on the approval of interested party transactions, election of the board of directors by cumulative voting (mandatory in JSCs, optional in LLCs) and the possibility to limit in the charter the number of shares or participatory interests which may belong to one shareholder or participant.

20 18 LEGAL GUIDE TO INVESTING IN RUSSIA HERBERT SMITH FREEHILLS 8. Financial services regulation Providers of financial services, such as credit institutions, insurance companies, broker-dealers, asset managers and depositories, are heavily regulated in Russia through stringent capital adequacy, behavioural and other licence eligibility and maintenance criteria. In addition, Russian legislation establishes special restrictions on the acquisition of licensed providers of financial services. BANKING REGULATION The Central Bank of Russia The Federal Law on Banks and Banking Activity (the Banking Law) and the Federal Law on the Central Bank of the Russian Federation (the CBR Law) set out the framework of the Russian banking regulatory regime and provide for the establishment, objectives and ongoing functions of the CBR, an independent regulatory body which is vested with exclusive authority to issue currency, manage currency circulation and regulate the Russian banking sector. In particular the Banking Law and the CBR Law set out: threshold conditions for authorisation and principles to be followed by Russian banks; prudential standards (including regulatory capital requirements and accounting standards); and the CBR s supervision and enforcement powers. These powers are set out in more detail in the numerous regulations adopted by the CBR. Banking licence issues Banking activities include: the opening and operation of bank accounts; currency exchange operations; the receipt of monies from companies and individuals by way of deposits and investment of these monies; the process of settlement; and certain other activities as stipulated in the Banking Law. These activities can only be carried out by a Russian legal entity holding a banking licence from the CBR with the exception of Vnesheconombank and the central counterparty in foreign exchange derivatives transactions. The options available to a foreign investor wishing to carry out banking activities in Russia are: establishing a new Russian bank; or acquiring an existing Russian bank; or entering into some form of contractual joint venture or equivalent arrangement. General A CBR banking licence can be granted to: a bank; or a non-banking credit institution. The principal difference between a bank and a non-banking credit institution is that a non-banking credit institution can only perform a limited number of banking operations. Minimum capital The minimum charter capital of a newly incorporated bank is RUR300 million (approximately US$10 million) or RUR3.6 billion (approximately US$120 million) if a newly incorporated bank applies for a licence to perform operations with individuals. There are special rules regulating which assets can be contributed to the charter capital of a bank. Foreign investment incorporation Incorporation of a Russian bank is document intensive and entails: CBR authorisation of the bank s proposed name; the founder s resolution to incorporate a bank; the submission of registration documents; bank registration and management approval; charter capital formation; and the issue of licences. In addition, in the case of foreign founders, prior to the licence application and bank establishment procedure, in principle consent needs to be obtained from the CBR, which is issued by the CBR at its sole discretion. After the submission of registration documents (which involves considerable work) the CBR has six months to consider the application and it would be prudent to allow nine months to one year for the application process to be completed. Foreign legal entities cannot obtain CBR licences and conduct banking operations. Nor is it possible for foreign banks to open branch offices in Russia. No system of sub-licensing exists in Russia.