Russia: legal news 2013

S.G. Pepeliaev, Managing Partner, PhD in Law Russia: legal news 2013 8th CIS Local Counsel ForumKyiv/Odessa, Ukraine 26-29 June 2013

Contents • Antimonopoly legislation ………………..…………………………………………………………………………….… 3 • Draft law to amend the Law on trade ………………………………..……………………………………….…… 6 • Mergers and acquisitions.….…………………………………………………………………………….…………….. 7 • Corporate law…………………………………………………………………………………………………………………. 9 • Land law and real estate……………..……………………………………………………………………….…………. 10 • Intellectual property ………………….………………………………………………………………………….………… 12 • Labour and migration law………….………………………………………………………………………….………… 13 • Tax law ……………..…………………………………………………………………………………………………….……… 14 • Customs law and the World Trade Organization……………..…………………………………………….…… 15 • Currency legislation…………….…………………………………………………………………………….…………….. 16 • Banking and finance legislation……………………...……………………………………………………..………… 17 • Medicines and pharmaceuticals…………………………………………………………………………….…………. 19 • Regulation of oil/gas production and processing…..…………………………………………………….……. 20 • The court system.....…………………………………………………………………………………………….………….. 22 • Recognition and enforcement of foreign court decisions…………………………….………….…………. 23 • Bankruptcy legislation………………..……………………………………………………………………………………. 24 • Administrative law regulation…………………………………………………………………………………………… 26 • Criminal liability……………………………………………………………………………………………………………….. 27

Antimonopoly legislation (1) • In April 2013, the Ninth Arbitration Appeal Court held to be lawful a decision of the Russian Federal Antimonopoly Service (FAS) in relation to members of a cartel on the market for liquid caustic soda. • The defendants werefined more than RUB 2 billion. • In relation to the fact that a cartel had been organised, the Russian Internal Affairs Ministry’s Main Investigative Division for the City of Moscow instituted a criminal case in relation to a suspected violation of sub-clauses (a) and (c) of article 178(2) of the Russian Criminal Code. • The Russian Federation’s Supreme Commercial (‘Arbitration’) Court (SAC) declined to refer to the Presidium of the SAC a case in which a review was sought of a resolution of the Federal Commercial (‘Arbitration’) Court for the Moscow Circuit which held that various distributors of pharmaceuticals had colluded in tenders for the purchase of medicines. • Administrative fines of around RUB 500 million were imposed on the defendants. A criminal case was instituted in relation to the breach of antimonopoly law.

Antimonopoly legislation (2) • The Federal Antimonopoly Service created and implemented in the day-to-day work of antimonopoly authorities special“tools”for collecting evidence of cartels, and these include: • unannouncedinspectionsusing procedures to examine the territories, premises, documents and belongings of the party being inspected (over three years more than 150 inspections have been conducted); • electronic evidence(including websites; internet service providers; operators of an electronic trading platform; telecoms operators; television and radio companies; audio and video recordings; computers; and special ‘search’ equipment); • requestingexplanations from individuals.

Antimonopoly legislation (3) • The Federal Law ‘On the contractual system of procuring goods, work and services to secure state and municipal needs’* • regulates the entire purchase cycle: from planning to the state order being implemented; • withdrawing from an open auction; under the draft law, the main ways of placing an order are: a competitive process (open, restricted involvement, two-stage, closed, etc.); an auction (electronic and closed); a request for quotations; and a request for proposals; • various anti-dumping measures; • a range of benefits for small business. • *Federal Law No. 44-FZ dated 5 April 2013 ‘On the contractual system for procuring goods work and services to secure state and municipal needs’ will come into force on 1 January 2014 with the exception of specific provisions which will come into force at other times.

Draft law to amend the Law on trade (published on 15 March 2013) • It is proposed to: • ban any fee not stipulated by the Law from being included in the price of a supply contract for foodstuffs; • ban any payment being charged for the right to supply food products in functioning or opened retail facilities, or for changing the assortment of goods; • ban expenses being reimbursed if they do not relate to the performance of a supply contract for foodstuffs and the subsequent sale of a specific consignment of such goods; • ban retail chains and suppliers of foodstuffs from entering into not only contracts of commission, but also agency contracts and contracts to delegate

Mergers and acquisitions • The courts have concluded that corporate disputes are not arbitrableand may not be referred to be considered by arbitral tribunals. (Ruling No. VAS-15384/11 of the SAC dated 30 January 2012, chapter 28.1 of the Russian Arbitration Procedure Code) • Result: when transactions are entered into in relation to Russian assets, the structure foracquiring or disposing of those assets should take account of the above position of Russia’s supreme judicial body regarding the examination of economic disputes. • The SAC applied the doctrine of ‘lifting the corporate veil’when it examined a dispute and approved the filing of claims t the location of representative offices of companies affiliated to the defendant which were actually carrying on business on behalf of the defendant(Resolution No. 16404/11 of the Presidium of the SAC dated 24 April 2012) • Result: those doing business in Russia need to take into account that the Russian legal system is becoming more and more capable of examining the substance of the relationship between the parties to the dispute, rather than taking a formal legal approach.

Mergers and acquisitions • A violation of the rights of shareholders when a transaction consummated by a company is challengedrequiresevidence of the obviously unprofitable nature of the transaction entered into by the legal entity. Such transaction may not be held to be invalid based only on non-compliance with formal legal requirements (Resolution No. 76/12 of the Presidium of the SAC dated 5 June 2012) • Result: The SAC demonstrated that in international disputes, the Russian system will not defend a Russian party which bases its position on using in bad faith domestic tools for legal protection. • When examining a dispute involving an offshore company, the SAC concluded that the offshore company itselfbears the burden of proofas to whether or not there are circumstances that protect such company (Ruling No. 14828/12 of the SAC dated 4 January 2013) • Result: when disputes are examined that involve companies formed in offshore jurisdictions, a court may compel a party to disclose information about such a company, including information about its ultimate beneficial owner.

Corporate law • Active work is underway to modernise corporate law to encourage the use of Russian law instead of foreign law; • Resolutions of meetings are officially included in the list of legal factors that give rise to rights and obligations; • A specific article has been introduced addressing the consent for a transaction to be undertaken (article 157.1 of the Civil Code). This makes it difficult to challenge in bad faith a transaction that has been entered into; • Case law is actively being developed in relation to shareholders’ agreements and agreements between members. The practice of entering into shareholders’ agreements is growing; • The obligation of each party to act in good faith has been enacted in legislation. There are increased risks in using loopholes to get round the law.

Land law and real estate (1) Main trends • An increasing number of disputes that relate to setting the cadastral value of real estate: • Not only land plots but all items of real estate are subject to a cadastral valuation • The cadastral valuation underpins the calculation of the planned tax on real estate as well as payments for land (land tax or rental payments) • If there is a market valuation, the cadastral value is equal to the market value (article 66 of the Russian Land Code, Resolution No. 913/11 of the Presidium of the SAC dated 28 June 2011) • Unjustified expansion of the ‘special simplified’ regime for requisitioning land plots: • Federal Law No. 43-FZ dated 5 April 2013 ‘On specific features of the regulation of individual legal relationships in connection with areas being incorporated into the constituent entity of the Russian Federation the city of Moscow and on amending certain items of Russian Federation legislation’ (No rational explanation was found for the need for a special regime in the so-called ‘new Moscow’ area) • The opposite example is when a law is passed in pursuance of international obligations: Federal Law No. 108-FZ dated 7 June 2013 "On Organising and Hosting the FIFA 2018 Football World Cup and the FIFA 2017 Confederations Cup in the Russian Federation and on Amending Certain Legislative Acts of the Russian Federation"

Land law and real estate (2) • Court practice has taken root in terms of whether transactions may be concluded in relation to future real estate: • Previously in 2011 (in relation to sale and purchase): Resolution No. 54 of the Plenum of the SAC dated 11 July 2011 “On certain issues of resolving disputes that arise from contracts dealing with real estate which is to be created or purchased in the future”, • In 2013 (also in relation to leases): new text dated 25 January 2013 of Resolution No. 73 of the Plenum of the SAC dated 17 November 2011 “On specific issues of applying the rules of the Russian Civil Code regarding a lease contract”. Amendments to the Civil Code (in terms of real estate) • The process is characterised by a "struggle" between developers and those enforcing the law, and by inconsistency: • Transactions with real estate must be certified by a notary: this was in the draft but was not included in the law dated 30 December 2012, • Elimination of the ‘double registration’ system (transactions and rights): at first, this was repealed, then was reinstated in relation to leases. • New aspects of the draft • A new system of rights in rem to real estate, • Rejection of the right to lease land plots for construction purposes, • A system of neighbouring rights (to a view, etc.)

Intellectual property • A Court for Intellectual Rights has been created; • The Civil Code has been amended in terms of revising the conceptual basis of civil law • there are new conditions for registering licence agreements, among other things. • A draft Treaty between Russia, Kazakhstan and Belarus on trademarks • unified registration of trademarks. • The fight against internet piracy • providers blocking access to sites with illegal content.

Labour and migration law • A separate chapter of the Russian Labour Code has come into force, regulating the labour of distance workers; • Seconded labour still faces the threat of a significant restriction (a draft law was passed in its 2nd reading in April 2013); • Mandatory certification of workplaces has been abolished in relation to labour conditions for standard office workplaces; • Since 2013, foreign nationals temporarily residing in Russia (i.e. those with a temporary residence permit) do not require a corresponding permit to work in Russia; • The law has enacted obligations of an ‘inviting party’ for migration law purposes, and it has set administrative liability for failure to perform such obligations; • Employers have been banned from hiring highly skilled foreign professionals for servicing purchasers in retail outlets, including selling pharmaceutical goods. An exception has been made for executives in these areas.

Tax law • The Russian Government’s promise not to increase the tax burden until 2018, save for excise duties on alcohol, tobacco and oil products; • The regime for conducting tax audits being made stricter by law (draft lawNo. 196666-6); • Expansion of discretionary methods: the first settlement agreements for tax disputes, preliminary pricing agreements and agreements on ‘horizontal monitoring’ have been concluded; • The trend of the tax authorities and courts refusing to apply protocols to double taxation treaties regarding the unlimited amount of interest and advertising expenses.

Customs law andthe World Trade Organization • An annual reduction in rates of import duty further to Russia’s obligations assumed on accession to the WTO. The reduction will be applied to more than 5,600 customs tariff commodity headings. The new rates will be applied from 1 September 2013; • It is planned to adopt the first set of amendments to the Customs Code of the Customs Union. It is anticipated that restrictions will be lifted on the use of conditionally released goods once 5 years have expired from the date when they are released; • From 1 January 2013 the customs authorities will have expanded powers to withhold and confiscate goods when the customs control of goods is carried out. • There is a sharply increased risk of criminal liability being imposed for avoiding making customs payments (draft lawNo. 19666-6).

Currency legislation • Currency control rules have been simplified: a so-called ‘transaction passport’ is not required for any currency operations with a value amounting to less than $ 50,000under a single contract; • Administrative liability has been tightened for violations of the regime for using accounts abroad (article 12.25(1) of the Russian Code of Administrative Offences). The provision is construed as extending the limitation period: among other things, it is regarded as a violation when funds are spent that have actually been transferred in violation of the established procedure. The fine is between ¾ and the entire amount of the unlawful currency operation; • It is proposed to tighten criminal liability (article 193 of the Russian Criminal Code) for failure to repatriate export proceeds to Russia: it is intended that criminal liability will result if RUB 6 million of funds is not returned, as opposed to RUB 30 million as at present. In addition, the cases of non-repatriation during a year will be added together.

Banking and finance legislation Creation of a mega-regulator based on the Bank of Russia (to oversee the banking, insurance and financial markets); The mega-regulator will appear in conjunction with a ‘mega-liquidator’ (the ICA – Insurance Contributions Agency); There is discussion of transferring part of the state’s administrative functions to SROs (self-regulatory organisations); Expanding the rights and obligations of banks to counteract the legalisation (laundering) of the proceeds of crime, and the financing of terrorism); The range of state bodies with access to confidential banking information is being expanded (draft law No. 196666-6).

Banking and finance legislation Banking regulation has been reinforced: the Bank of Russia’s prior consent is required for the acquisition of more than 10%, as opposed to the previous 20%,of the shares (equity in its issued capital) of credit institutions;requirements as to the business reputation of banks’ shareholders; consolidated supervision of banking groups, the Bank of Russia’s right to limit the pay of banks’ senior executives;the amount of the interest rate on deposits; and prohibiting the payment of dividends (directing them to ‘top up’ the capital of problem banks); Abolishing the restriction on the a bank’s shareholders/members being able to withdraw from the bank’s issued capital within three years after the bank is created; Setting a quota of 50% for foreign participation in the total banking capital of credit institutions operating in Russia; Unifying contractual documentation for the financial markets: the regulator developing SROs and approving standard documentation along the lines of the ISDA.

Medicines and pharmaceuticals • The new Rules for state registration of medical equipment have come into force. These clarify the registration procedure and require registration certificates for medical devices in Russia to be renewed; • The Russian Health Ministry has put to the Russian Government wide-ranging draft amendments to the Federal Law ‘On the circulation of medicines’, which affects the area of state registration of medicines, pre-clinical studies and clinical trials, insurance of those involved in research, regulation of the circulation of biological agents and follow-on biologics establishing mechanisms to protect the data on the results of original research drugs, and establishing mechanisms for protecting data regarding the results of research into original medicines; • The Health Ministry has issued for public discussion a draft law "On mandatory insurance of patients when medical assistance is provided". It is designed to protect consumers of medical services from doctors’ errors by providing for compensation of RUB 500,000 to RUB 2 million; • The Russian State Duma has passed in the first reading a draft law to tighten requirements for advertising biological supplements and liability for violating such requirements.

Regulation of oil / gas production and processing • It has been determined that tenders for the right to use subsoil plots of federal significance are to be held only in the form of an auction (amendments to the Law on the subsoil); • Additional requirements have been established to ensure the safe operation of artificial islands, installations and structures, underwater pipelines, drilling on the continental shelf in domestic marine waters and the territorial sea. In particular, it is mandatory for there to be a plan to prevent and liquidation oil spills, as well as to ensure financing and other forces and capabilities to enable this work to be performed; • From 1 January 2013 when more than 5% of the volume of associated petroleum gas is burned in flares and/or dispersed, the fee for emissions of harmful substances (pollutants) is calculated using an additional factor of 12, and if there is no method of a system for calculating the volumes of associated petroleum gas, using a factor of 120; • Provision is made for state regulation of the payment for connection to a gas-powered equipment distribution networks (amendments to the Law on gas supply);

Regulation of oil/gas production and processing From 1 January 2013, rates have been increased of mineral extraction tax for the production of oil (to RUB 470 per 1 tonne), of gas condensate (to RUB 590 per tonne), of gas (to RUB 582 per tonne with a coefficient applied for certain categories of taxpayers equal to 0.455); From 1 January 2012, there has been expanded application of the zero rate for the production of oil (in the Black Sea, the Sea of Okhotsk, and within the Yamal-Nenets Autonomous District save for the Yamal Peninsula) and of gas and gas condensate for the production of LNG (on the Yamal Peninsula); A right of the Russian Government has been introduced to establish a special formula for calculating the rates of export duty for extra-heavy oil, oil produced on the continental shelf within the bottom of the territorial sea and internal marine waters of Russia, and within the Russian part of the Caspian Sea; An exemption has been established for foreign goods from customs duties and taxes, if such goods are intended for the construction and operation of artificial islands, installations, structures or other objects located on the continental shelf and in an exclusive economic zone. The benefit is to be applied when these goods are placed under a special customs procedure.

The court system • Further development of the ‘electronic justice’ system in the State Commercial (‘Arbitration’) Courts (access via theInternet to all files of cases being examined in the context of simplified proceedings); • Amendments have been made that are aimed at having the State Commercial (‘Arbitration’) Courts apply the simplified proceedings mechanism more widely; • The structure of the courts of general jurisdiction has been brought into line with the structure of the commercial court system (appeal and cassation instances have been separated out).

Recognition and enforcement of foreign court decisions • If there is no international treaty, the Russian courts recognise and enforce foreign court decisions based on the principles of reciprocity and comity (e.g. the SAC’s Ruling No. VAS-6580/12 dated 26 July 2012 in case No. А40-119397/2011); • If a foreign court violates the exclusive jurisdiction of the Russian state commercial (‘arbitration’) courts, this in itself is a ground for refusing to recognise and enforce a foreign court decision, even if there is an international treaty regarding legal assistance (e.g. between Russia and Cyprus, see Resolution No. 7805/12 of the Presidium of the SAC dated 23 October 2012 in case No. А56-49603/2011 ); • The SAC’s Information Letter No. 156 dated 26 February 2013 ‘An overview of the practice of arbitration courts examining cases concerning a public policy stipulation being applied as a ground for refusing to recognise and enforce court and arbitral decisions’: • the purpose is to curtail abuses in the application of the doctrine of public policy as a ground for refusal, • the main idea is that a public policy stipulation should be used in exceptional cases rather than as a substitute for specific grounds for refusing to recognise and enforce.

Bankruptcy legislation (1) • Federal Law No. 144-FZ dated 28 July 2012 has substantially amended Federal Law No. 127-FZ dated 26 October 2002 ‘On insolvency (bankruptcy)’, and the amendments are aimed at: • making bankruptcy procedures more effective by simplifying them, cutting costs and making them ‘transparent’ : • rather than being mandatory, a valuation of the debtor’s property must be carried out only further to an application by a bankruptcy creditor or authorised body with at least 2% of the votes; • the list has been expanded of the information that must be published in the Unified Federal Register of Information on Bankruptcy: information about the results of the inventory of the debtor’s property and a report on the valuation of the debtor’s property (if there is one) must be published. • guarantees of creditor’s rights have been strengthened by: • a procedure being introduced to meet the requirements of the debtor’s senior executives in terms of increased compensation (‘golden parachutes’) being paid after the claims of creditors in the third order of priority have been met; • there being a mechanism for state commercial (‘arbitration’) courts reducing the amount of the remuneration of the debtor’s senior executives under employment contracts.

Bankruptcy legislation (2) Resolution No. 35 of the Plenum of the Russian Supreme State Commercial (‘Arbitration’) Court dated 22 June 2012 “On certain procedural issues relating to the examination of bankruptcy cases”has significantly expanded creditors’ procedural rights with a view to preventing ‘artificial’ debt from being included in the register of creditors’ claims, including: the right to appeal a court decision on which another creditor’s claim is based; the possibility of being involved in pending court proceedings in which the debtor is a party and which are ongoing when the bankruptcy case is initiated; the right to challenge transactions of the debtor based on which the claims of other creditors have been asserted or included in the register.

Administrative law regulation • An obligation has been established for companies to prevent corruption (from 1 January 2013); • The Russian Constitutional Court has confirmed that administrative punishments may be applied below the lower limit of an administrative penalty; • For violating the regime for undertaking currency operations, an administrative fine has been introduced which is a multiple of the amount of the currency operation (from 13 February 2013); • The exchange of financial information has been reinforced with the competent authorities in the USA and European Union countries.

Criminal liability for crimes in the area of economic activity • In article 140 of the Russian Criminal Code, a new part 1.1. has been introduced, which provides that there must be a specific reason for criminal cases to be instigated for tax offences (articles 198 – 199.2 of the Criminal Code): only materials sent by the tax authority in accordance with legislation on taxes and levies may serve as a reason for resolving whether a criminal case will be instigated (Federal Law No. 407-FZ dated 6 December 2011) • Law enforcement bodies are no longer able on their own to carry out inspections and instigate a criminal case if there is no decision of the tax authority. • In 2012, there was a significant (by more than 2.7 times) reduction in the number of persons convicted for crimes in the area of economic activity(articles 169 – 199.2 of the Criminal Code). The 2012 figure of 4,012 compared with 10,906 in 2009. • The result of the reform that took place in 2010 – 2011 to humanise criminal legislation (decriminalising various matters that previously constituted a crime, increasing by a multiple of 4-6 times the damage that needs to be caused for a criminal penalty to result).

Criminal liability for crimes in the area of economic activity • Certain matters that had previously been decriminalised again attract a criminal penalty. • Articles 173.1 (unlawfully incorporating a legal entity), 173.2 (unlawfully using documents to incorporate a legal entity) – previously article 173 (dishonestly carrying on business), which was repealed as Federal Law No. 60-FZ dated 7 April 2010; • Article 128.1 (defamation) – previously article 129 (defamation), which was repealed as Federal Law No. 420-FZ dated 6 December 2011; • Draft law No. 196666-6 – article 200.1 (smuggling cash) – previously 188 (smuggling), which was repealed as Federal Law No. 420-FZ dated 6 December 2011. • Is it just a trend towards humanising the law, or an objective need?

Pepeliaev Group employees involved in preparing this presentation: • Varvara Knutova, Head of Dispute Resolution and Mediation Practice Group • Pavel Kondukov, • Senior Associate, Head of Offshore Projects and PSA Group • Alexey Konevsky, Partner, Land Law, Construction and Real Estate • Maxim Koshkin, • Head of Criminal Proceedings Practice • Yulia Litovtseva, • Head of Dispute Resolution and Mediation Practice Group, PhD in Law • Ilya Bolotnov, Partner, Mergers & Acquisitions • Julia Borozdna, • Head of Employment and Migration Law • Yuri Vorobyev, • Head of Dispute Resolution and Mediation Practice • VadimZaripov, • Head of Analytical Department • Sergey Klimenko • Associate (Pharmaceutical Group)

Pepeliaev Group employees involved in preparing this presentation: • Elena Sokolovskaya, • Head of Antimonopoly Regulation Group • Nikolay Solodovnikov, • Head of Corporate Practice • Ivan Khamenushko, • Senior Partner, Currency Regulation, PhD in Law • Ivan Tsvetkov, Scientific Expert, Doctor of Laws • Igor Marmalidi, • Partner, Partner, Head of Banking and Finance • Oxana Migitko, • Head of Commercial Law Practice • Igor Novokshonov, Associate,Customs Law & Foreign Trade Regulation Practice • Elena Ovcharova, • Head of the Administrative Defence of Business Group, PhD in Law • Valentina Orlova, • Head of IP and Trademarks Practice, Doctor of Laws

Contact details • Russia: legal news 2013

Russia: legal news 2013