American companies investing in russia
Key Takeaways Russia is a country that can present challenges for foreign investors who are seeking huge returns. Investing directly in Russia's stock market may not be easy but foreign investors have access to the country through mutual funds, ETFs, and ADRs. Russia has enormous natural wealth in oil, gas, and minerals, including diamonds. Corruption and a lack of transparency are significant barriers to business. Its dependence on oil leaves it vulnerable to commodity price swings.
Bust to Boom in Russia Russia's economy ranks 11th among the world's largest economies. Russia's transition from communist world power to an emerging economy was not easy. The ruble was devalued in following a national economic crisis—the same year that its economy began growing after several years of contraction.
On April 6, , the Biden administration announced new economic sanctions that bar all Americans from making new investments in Russia. In , economist Jim O'Neill coined the acronym BRIC to refer to the four developing economies he predicted would dominate the global economy by the middle of the 21st century: Brazil, Russia, India, and China.
Plummeting oil prices and sanctions from Russia's annexation of Crimea in set off a financial crisis that plagued the country's economy until As a result, markets were closed for a month beginning the week of Feb. Russia's per capita GDP, a reasonable measure of the personal wealth of ordinary citizens, is about a third that of European Union nations. Russia's Challenges Russia is the largest country in the world by landmass, coming in ninth on the list of the world's largest nations by population, at around million.
Many of them have enjoyed some income growth over the past decade and are spending an increasing amount of their income on holidays and luxury goods and services. However, the country's reputation as a haven for oligarchs is not understated. According to the World Bank, Russia's economy grew 4. However, in December , the organization reduced growth forecasts for and to 2.
On March 2, , the World Bank announced the suspension of all of its active programs in Russia and Belarus. Russia's Natural Resources Investors are generally attracted to the Russian market for its natural resources. Oil and gas are a major part of the national economy.
In fact, Russia was the world's third-largest oil producer in after the U. Its primary market for its oil and petroleum exports is Europe, from which it derives the majority of its oil and gas revenues. Russia's continuing dependence on oil leaves its economy vulnerable to the volatility of global oil prices and other factors—notably economic sanctions from other countries. In , the U. Mineral Wealth Aside from its oil and gas reserves, the nation also sits on trillions of dollars in mineral deposits.
It is also believed to possess the world's largest diamond resources. That being said, energy and minerals are considered a partial blessing and a partial curse because Russia's heavy dependence on resources represents a risk. When you invest in Russia, you have to keep in mind the direction of commodity prices—just like energy. Human Capital Russia is rich in human resources as well. Its educational tradition is superb in mathematics and the hard sciences and excellent in languages.
As such, it produces plenty of brainy workers. Foreign companies may be required to notarize the originals of incorporation documents included in the application package. Since January 1, , the registration fee is waived for online submission of incorporation documents. The ranking acknowledged several reforms that helped Russia improve its position. Russia has improved the process for establishing connection to electricity by setting new deadlines and establishing specialized departments for connection.
Russia has also strengthened minority investor protections by requiring greater corporate transparency, and facilitated the payment of taxes by reducing the tax authority review period of applications for VAT cash refunds, as well as enhancing the software used for tax and payroll preparation. Outward Investment The Russian government does not restrict Russian investors from investing abroad.
While there are no restrictions on the distribution of profits to a nonresident entity, some foreign currency control restrictions apply to Russian residents both companies and individuals and to foreign currency transactions. Individuals who have spent less than days in Russia during the reporting period are exempt from the reporting requirements and restrictions using foreign bank accounts. This is provided that such states participate in the automatic exchange of financial account information with Russia.
As a result, from onward, Russian residents will be able to freely use declared personal foreign accounts for savings and investment in a wide range of financial products. Bilateral Investment Agreements and Taxation Treaties Russia is party to 64 bilateral investment treaties BITs in force and six trade and investment agreements with investment provisions.
The United States and Russia signed a bilateral investment treaty BIT in , but it was never ratified by Russia and is not in force today. As such, investors from the two countries must rely on domestic courts and have no recourse to international arbitration unless specifically written into contracts.
The EAEU signed an interim three-year FTA with Iran in May that came into effect in and reduced or eliminated tariffs on goods accounting for roughly 50 percent of trade between the parties. The U. Legal Regime Transparency of the Regulatory System While the Russian government at all levels offers moderately transparent policies, actual implementation is inconsistent.
Draft bills and regulations are made available for public comment in accordance with disclosure rules set forth in Government Resolution of Key regulatory actions are published on a centralized web site that also maintains existing and proposed regulatory documents: www.
Draft regulatory laws are published on the web site: www. Accounting procedures are generally transparent and consistent. Documents compliant with Generally Accepted Accounting Principles GAAP , however, are usually provided only by businesses that interface with foreign markets or borrow from foreign lenders. Reports prepared in accordance with the International Financial Reporting Standards IFRS are required for the consolidated financial statements of all entities who meet the following criteria: entities whose securities are listed on stock exchanges; banks and other credit institutions, insurance companies except those with activities limited to obligatory medical insurance ; non-governmental pension funds; management companies of investment and pension funds; and clearing houses.
Additionally, certain state-owned enterprises are required to prepare consolidated IFRS financial statements by separate decrees of the Russian government. Russian Accounting Standards, which are largely based on international best practices, otherwise apply. In particular, the EEC has the lead on concluding trade agreements with third countries, customs tariffs on imports , and technical regulations.
EAEU agreements and EEC decisions establish basic principles that are implemented by the member states at the national level through domestic laws, regulations, and other measures involving goods. Authority to set sanitary and phytosanitary standards SPS , however, remains at the individual country level.
Russian authorities require evidence of product testing and certification as key elements of the approval process for a variety of products, and, in many cases, there are no mutual recognition arrangements in place; only an entity registered and residing in Russia can apply for the necessary documentation for product approvals.
Consequently, opportunities for testing and certification performed by competent bodies outside Russia are limited. Manufacturers of telecommunications equipment, oil and gas equipment, construction materials and equipment, and pharmaceuticals and medical devices have reported serious difficulties in obtaining product approvals within Russia.
Technical barriers to trade TBT issues have also arisen with alcoholic beverages, pharmaceuticals, and medical devices. Russia joined the WTO in Although Russia has notified the WTO of numerous SPS technical regulations, it appears to be taking a narrow view regarding the types of measures that require notification that may not reflect the full set of technical regulations under the WTO TBT Agreement.
Russia submitted 16 SPS notifications in Legal System and Judicial Independence U. Embassy Moscow advises any foreign company operating in Russia to have competent legal counsel and create a comprehensive plan on steps to take in case the police carry out an unexpected raid. Russian authorities have exhibited a pattern of transforming civil cases into criminal matters, resulting in significantly more severe penalties.
In short, unfounded lawsuits or arbitrary enforcement actions remain an ever-present possibility for any company operating in Russia. Critics contend that Russian courts, in general, lack independent authority and, in criminal cases, have a bias towards conviction. In practice, the presumption of innocence tends to be ignored by Russian courts, and less than one-half of one percent of criminal cases end in acquittal.
In cases that are appealed when the lower court decision resulted in a conviction, less than one percent are overturned. Russia law is based on a system of legal code; the Civil Code of Russia governs contracts. Commercial courts are required by law to decide business disputes efficiently, and many cases are decided based on written evidence, with little or no live testimony by witnesses.
Tax-paying firms often prevail in their disputes with the government in court. As with some international arbitral procedures, the weakness in the Russian arbitration system lies in the enforcement of decisions, and few firms voluntarily pay judgments against them. A specialized court for intellectual property rights IPR disputes was established in The IPR Court hears matters pertaining to the review of decisions made by the Russian Federal Service for Intellectual Property Rospatent and determines issues of IPR ownership, authorship, and the cancellation of trademark registrations.
It also serves as the court of second appeal for IPR infringement cases decided in commercial courts and courts of appeal. Laws and Regulations on Foreign Direct Investment The Investment Code and Law on Foreign Investment FZ guarantee that foreign investors enjoy rights equal to those of Russian investors, although some industries have limits on foreign ownership.
In addition, a law on public-private-partnerships FZ took effect January 1, The legislation allows an investor to acquire ownership rights over a property. Amendments to Federal Law No. The new approach is more investor-friendly, since applying a stricter regime can now potentially be avoided by providing the required beneficiary and controlling person information. In addition, the amendments expressly envisage a right for the Federal Anti-monopoly Service FAS to issue official clarifications on the nature and application of the SSL that may facilitate law enforcement.
Competition and Anti-Trust Laws FAS implements antimonopoly laws and is responsible for overseeing matters related to the protection of competition. Over the past several years, FAS has opened a number of cases involving American companies. In February , FAS submitted its fifth anti-monopoly legislative package, which is devoted to regulating the digital economy, to the Cabinet. It also introduced data ownership as a set of criteria for market analysis. The legislative package is still undergoing an interagency approval process and will be submitted to the State Duma once it is approved by the Cabinet.
Expropriation and Compensation The Investment Code prohibits the nationalization of foreign investments, except following legislative action and when such action is deemed to be in the public interest. In such instances, the investor must be adequately and promptly compensated for the seizure of property. Acts of nationalization may be appealed to Russian courts. At the sub-federal level, expropriation has occasionally been a problem, as well as local government interference and a lack of ability to enforce court rulings protecting investors.
Despite legislation prohibiting the nationalization of foreign investments, investors in Russia — particularly minority-share investors in domestically-owned energy companies — are encouraged to exercise caution. Foreign investors can also be pressured into selling their Russia-based assets at below-market prices.
Foreign investors, particularly minority investors, have little legal recourse in such instances. If an international treaty or agreement of the Russian Federation fixes other rules than those envisaged by law, the rules of the international agreement shall be applied. Investor-State Dispute Settlement According to available information, at least 14 investment disputes have involved an American and the Russian government since Some attorneys refer international clients who have investment or trade disputes in Russia to international arbitration.
A Russian law confirms New York Convention obligations by recognizing foreign arbitration awards for enforcement in Russia.. Russian law was amended in to give the Russian Constitutional Court authority to disregard verdicts by international bodies if it determines the ruling contradicts the Russian constitution.
Civil and commercial disputes may be referred to either domestic or international commercial arbitration. Institutional arbitration is more common in Russia than ad hoc arbitration. Arbitral awards can be enforced in Russia pursuant to international treaties, such as the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the New York Convention, and the European Convention on International Commercial Arbitration, as well as domestic legislation.
Mediation is an informal extrajudicial dispute resolution method whereby a mediator seeks mutually acceptable resolution. However, mediation is not yet widely used in Russia. The requirement ostensibly combats the problem of dubious arbitral institutions set up by corporations to administer disputes in which they themselves are involved. The PAI requirement applies to foreign arbitral institutions as well. Until recently there were only four arbitral institutions — all of them Russian — which had been conferred the status of PAI.
In June , the Vienna International Arbitration Center became the second foreign institution licensed to administer arbitrations in Russia. Nonetheless, to date arbitral awards rendered by tribunals constituted under the rules of these institutions can be recognized and enforced in Russia. Bankruptcy Regulations Russia established a law providing for enterprises bankruptcy in the early s. A law on personal bankruptcy came into force in The court then convenes a meeting of creditors, who petition the court for liquidation or reorganization.
In accordance with Article 51 of the Law on Insolvency, a bankruptcy case must be considered within seven months of the day the petition was received by the arbitral court. Liquidation proceedings by law are limited to six months and can be extended by six more months art.
Therefore, the time dictated by law is 19 months. However, in practice, liquidation proceedings are extended several times and for longer periods. The total cost of insolvency proceedings is approximately nine percent of the value of the estate. In addition, persons who profited from the illegal actions by management may also be subject to liability through court action.
In the government changed the rules for concluding SPICs to increase investment in Russia by offering tax incentives and simplified procedures for government interactions. These contracts allow foreign companies in Russia access to import substitution programs, including certain subsidies, if they establish local production.
In principle, these contracts may aid in expediting customs procedures. However, in practice, reports suggest companies that sign such contracts find their business hampered by policies biased in favor of local producers. The key criteria for evaluating bids are speed of introducing technology, the volume of manufacturing, and the level of technology in local manufacturing processes.
Russia notified the WTO that it had terminated these automotive investment incentive programs as of July 1,
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After the Russian military invasion of Ukraine in March , certain countries, such as the United States, the European Union, and some other Western nations, decided to impose further sanctions, including restrictions on Russia's Central Bank, a total ban on the export of certain technologies, and even excluding some Russian banks from the international payments system SWIFT via Al Jazeera. But, as per Jeffrey Sonnenfeld from Yale School of Management for Time , the massive exodus of western companies from Russia was actually a consequence of an enormous public backlash, possible only in the time of social media, which demanded the companies to leave the Russian market.
Sonnenfeld believes that this is a sign of social responsibility: "They have these workers saying they were ashamed to be part of a firm involved in supporting the devil. There was an internal revulsion that led to a quick retreat.
But others didn't. These are the American companies still doing business with Russia. According to Ally Marotti for Crain's Chicago Business , the company did stop its import and export business with Russia but will continue to provide basic food to Russian people, as leaving them without necessities would be unethical.
The company is helping its employees, their friends, and families to flee Ukraine. The spokesperson for the company stated the company is offering their facilities in neighboring countries as shelters for Ukrainian refugees, although they didn't specify exactly which facilities or where they are. The company will continue to help "maintain continuity of the food supply" through basic offerings in Russia but will pause new investments and promotional activities in the country.
In light of this financial reality, the hotel chain closed their corporate office in Moscow overnight but will continue to keep the hotels in the country open. The company will put all the future hotel openings on pause, as well as other future investments. Similar to other hotel chains, Hilton suspended all new investments and future hotel openings — no additional hotel will be named Hilton in Russia for a foreseeable future. This is a major step for international hotel chains as well as American commercial real estate companies, explains The Street.
A massive amount of money is invested in international real estate development projects, so a decision like this, to discontinue already-running investment projects, could mean that company's decision makers believe this conflict will last for a long time. The company closed their corporate office in Moscow but will continue to provide work and payment for their employees. It is not known who owns the five hotels under Hyatt management in the country, but according to the former Russian resident and hospitality industry attorney Scott Antel, who spoke to Crain's Chicago Business, most hotels in Russia are owned by Russian legal entities and investors.
While Hyatt will have legal problems with the U. This could cause resentment toward the brand in the future: "People remember these things. It's just not good Customer goodwill takes a long time to rebuild," concluded Antel via The Real Deal. As per Hyatt's official statement , the company provided supplies and accommodation for Ukrainian refugees in their premises across Europe, along with job transfers and relief funds for Hyatt colleagues. They will continue to support their colleagues in Russia in line with the company's hospitality purpose — "to show care when people need it most and provide a place to stay and gather.
The company will "stay true to the humanitarian aspect of their business" and will continue to sell essential products, such as milk, baby formula, and baby food. They will also maintain business deals with 20, associates and 40, agricultural workers in Russia, who are a part of the company's supply chain.
PepsiCo paused all operations in Ukraine and is providing aid for Ukrainian refugees. They boosted food production in countries neighboring Ukraine, along with providing donations of food, milk, and refrigerators to different humanitarian institutions. But PepsiCo is threading a thin line in this situation, as the company experienced backlash in the past for their close ties to the Russian president Vladimir Putin.
Former PepsiCo CEO, Indra Nooyi — the same woman who stated that asking for a raise is "cringeworthy" — proclaimed Putin as a "great leader" back in , when Russia annexed a part of Ukraine, Crimea. Operating Russia since , the privately held company signed a new franchise deal in the country in It has partnered with Horeca Band Group and plans to open more than Sbarro restaurants in Russia by It did not respond to a request for comment.
It's not only food chains that are "digging in," according to Sonnenfeld. The owner of online dating services Match. Dallas, Texas-based-Match Group did not respond to a request for comment. Dating app Bumble made a different decision. Some companies regarded as among the worst offenders by Sonnenfeld and his team dispute the notion that they are conducting business as usual because they have not withdrawn from Russia.
Lake Forest, Illinois-based Tenneco, a supplier of automotive components, opened a manufacturing facility in Togliatti, Russia, in , and an emissions plant in St. Petersburg, Russia, four years later. The company now has four plants in Russia, with two idled. Tenneco is complying with international laws and sanctions and has suspended cross-border shipments, with no raw materials, components or finished products going in or out of Russia or Belarus, it said.
We will continue to provide updates and do what we can to help our team members, customers and suppliers get through this situation safely as we hope for a peaceful resolution," the company stated. Another company, Des Moines, Iowa-based food additives supplier Kemin Industries, defended its ongoing operations in Russia as doing its part to offset hunger, including in Ukraine and Russia. Domino's Pizza's nearly stores in Russia remain open, with DP Eurasia, the owner of the master franchisee for Domino's in Russia saying it has suspended additional investment for now and won't accept royalty payments from its Russian operations until further notice.
Trading from the group's stores continues and the group remains dedicated to the communities it serves. The board has, however, determined it prudent to limit any further investment into its operations in Russia and will keep this under review going forward in light of the geopolitical situation," the company said in releasing financial results in April. The stance places it in the "Buying Time" category devised by Sonnenfeld, with a "D" grade for its decisions.
Still in Russia Here's a rundown of the other American companies that are getting an "F" grade from Sonnenfeld for their decisions regarding their operations in Russia. Aimbridge Hospitality. The Plano, Texas-based hotel management company operates more than 1, properties in 49 states and 20 countries, including ongoing operations in Russia. Align Technology. The Tempe, Arizona-based medical device maker this month referenced the conflict in Ukraine as among the factors that could "adversely impact our commercial and research and development activities inside and outside of Russia.
Founded in Israel, the information technology company is headquartered in Jersey City, New Jersey, and is "still cooperating with Russian partners," according to Sonnenfeld. Amdocs complies with applicable U. The Thousand Oaks, California-based drugmaker opened an office in Moscow in , and the company's activities currently cover the entire territory of the Russian Federation, from Kaliningrad to Kamchatka, according to its website.
The information technology company is still supporting its Russian partners. The military conflict, sanctions and export controls imposed by the U. The San Francisco security and web performance services provider is complying with sanctions, but decided against terminating its services inside Russia. Donaldson Co. The Bloomington, Minnesota-based manufacturer of industrial air-filtration systems continues sales to Russia. The Atlanta-based provider of payment services for transportation companies has about employees in Russia, and continues to conduct business as usual.
Forever Living Products. The privately held multilevel marketing company based in Scottsdale, Arizona, is still operating in Russia. Huntsman Corp.
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They will also maintain business deals with 20, associates and 40, agricultural workers in Russia, who are a part of the company's supply chain. PepsiCo paused all operations in Ukraine and is providing aid for Ukrainian refugees. They boosted food production in countries neighboring Ukraine, along with providing donations of food, milk, and refrigerators to different humanitarian institutions.
But PepsiCo is threading a thin line in this situation, as the company experienced backlash in the past for their close ties to the Russian president Vladimir Putin. Former PepsiCo CEO, Indra Nooyi — the same woman who stated that asking for a raise is "cringeworthy" — proclaimed Putin as a "great leader" back in , when Russia annexed a part of Ukraine, Crimea.
Mars Inc. The company increased investments in one of their five factories in the country in , after finishing their Rostov Oblast plant — "one of Mars' biggest investment projects in Russia" — a year prior, reports Reuters. But in light of recent events, per Mars Inc. CEO, Grant F. Reid, the company halted all promotional campaigns in Russia and Belarus, as well as all social media activity.
All future investments are paused for the time being. As per Sarah Varney for Crain's Chicago Business , a majority of the companies not leaving Russia are "drugmakers, medical device manufacturers, and health care companies," as these companies don't need to comply with sanctions due to exemptions in U. These companies emphasize their purpose of serving people, claiming their business is, in many cases, life-sustaining. But corporate altruistic motives are always, without exemption, questionable, as described by Yale School of Management professor Jeffrey Sonnenfeld, "being misguided at best, cynical in the medium case, and outright deplorably misleading and deceptive.
They will provide access to accommodation and financial resources and donate medical products, such as hygiene kits, health packs, and other medical supplies. Closing down the sales could lead to the expansion of illegal trade, reports Bloomberg Quint. The company decided they will halt all planned future investments in Russia, as well as suspend new product launches and cease promotional activities for the time being. Manufacturing processes will be scaled down, but it is not specified to what extent.
The company has closed down the one factory in Ukraine due to safety reasons and will help different organizations with providing food, medicine, and other basic goods to Ukrainian refugees. Employees of the closed factory in Ukraine will continue to receive their monthly payments. Similar to other pharmaceutical giants, Abbotts found itself in the middle of this conflict.
Putin's plan to keep the enemies closer by conditioning foreign drug producers to build manufactures in the country in exchange for a market share worked — Abbotts is one of the several international companies which have manufacturing plants in St. Abbotts will not suspend their production or distribution activities in Russia. They also work hard to secure existing supply channels for delivering health care products to Ukrainian people , alongside making donations when appropriate via Abbott.
In , the company opened a manufacturing plant in Stupino, where they produce two Huggies diaper lines. Satisfied with the rapid expansion across the Russian market, their plans for the future were bright via Kimberly-Clark Corporation. Even before the expansion, the Stupino plant was the largest Kimberly-Clark Corporation's manufacturing facility in Central and Eastern Europe, according to Nonwovens Industry Magazine.
The company will stop capital investments in their Russian facility in Stupino but will not suspend manufacturing. They will halt advertisements and other promotional activities in Russia but will continue to sell its products on the basis of humanitarian reasons — they sell baby diapers and feminine pads, which are critical to the health and hygiene of women, girls, and babies. On Feb. The Russian locations are still operational and the company has yet to make any public comment regarding the crisis in the region.
The majority of its Russian locations are corporate-owned, but the company has resisted growing demands from consumers and elected officials to shut down its Russian eateries. PepsiCo Inc. Benzinga does not provide investment advice. All rights reserved.
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