1. Governing regulations

 Western-style regulation of banking and finance, including the asset management has gradually been developed in Russia during the past five years. Presently, in addition to certain laws, various rules and regulations, including government resolutions, presidential decrees and regulations of the Federal Commission on Securities and Capital Markets (hereinafter, the "Federal Commission") regulate the Russian market. It appears that the regulation of the Russian financial markets has not yet reached the level of predictability familiar in Western Europe and, therefore, it can be expected that the amendment of the laws, rules and regulations will continue in the future.

The main legislation governing the Russian financial market contains Government resolution NR 78 of December 28, 1991 which is titled "Regulation on issuance and circulation of securities and stock exchanges of RSFSR (Russian Federation)". The regulation provides, for example, definition of basic terms and rules related to capital markets including a definition of four types of "investment institutions", meaning organisations which are exclusively involved in activities with securities. These institutions are: brokers, investment consultants, investment companies and investment funds.

Further, the relevant legislation contains the Instruction NR 53 of July 6, 1992 issued by the Ministry of Finance on the registration of the securities transactions requiring that all transactions on securities to be concluded in writing.

The new Law on Securities Markets entered into force on April 26, 1996 and provides, for example, rules for disclose of information related to the activities of the issuers and investment institutions, regulates the activities related to the issuance and trading of securities and establishes requirements for the activities of professional participants of the securities markets. Also, the law stipulates the registration of securities issues, licensing of the activities of the professional participants of the securities markets and termination of the operations of unlicensed participants. The Law on Securities Markets provides the Federal Commission with the status of a federal ministry and an executive body authorised to regulate the capital markets, grant licenses and control and supervise the activities of the professional participants of the securities markets.

The Law on Joint-Stock Companies entered into force on January 1, 1996. It provides, for example, a division of the Russian limited liability companies into "open" (public) and "closed" (private) companies. Only the securities of a public company may be publicly traded.

Though the Law on Foreign Investments in RSFSR, effective from September 1, 1991, is still in force, it is not implemented by the Russian authorities. The draft version of the new Law on Foreign Investments is under discussion in the Russian Parliament but the content of such draft has not yet been published.

All Russian investment and financial institutions and stock exchanges are required to maintain internal registers of securities transactions which are carried out by these parties. The Federal Commission has the right to inspect these registers.

The legislation applicable to the operations of Russian parties is also applicable to the foreign entities entering the Russian market. Therefore, there is no additional legislation regulating foreign companies entering Russian capital markets.

Presently, the Central Bank of Russia has the right to restrict the money transfers from Russia to abroad. Consequently, a permission must be obtained from the Central Bank for such transfers. Our experience is that obtaining such a permission might be difficult and take time even more than six months. Also, it should be noted that the Law on the Central Bank of Russia requires that 50 per cent of a profit in a foreign currency must be reconverted into roubles and such foreign currency aimed to be transferred abroad must be repurchased with these roubles. This is a way for the Russian government to make money in connection with reconversions on the exchange rate difference.

2. License requirement

A party planning to carry out finance related operations in Russia, including asset management business, must obtain a license from the Federal Commission. Starting from July 15, 1996 the Commission has been granted the highest authority in the licensing of the operations of the market participants. The Federal Commission requires certain information, such as a certified copy of the establishment documents of the company carrying out activities in Russia, the state registration of the company, the document providing the appointment of the general manager and a calculation of the amount of the company's share capital, to be filed as appendices of the license application. The Federal Commission has also the right to require additional information on the company's activities to be filed.


Generally, the license is granted in two - three months time from the filing of the application.

3. Taxation

 The law on taxation of securities transactions was amended on October 18, 1995. The law provides that a tax is levied in connection with the issuance of securities but the securities trading is tax-free. The issuers of securities are taxed at the rate 0,8% of the nominal amount of the shares issued.

The issuers of the Securities must calculate the amount of tax and pay it at the time of applying for registration of the issue.

According to the Law on Tax of Profits, dividend and interest income paid to the owner of the relevant asset is subject to tax. Dividend and interest are paid out of the net profit on the asset after the deduction of the profit tax (the maximum rate is 38%). Additionally, dividends and interest are subject to a withholding tax of 15 - 18%.


4. Investing in Russian assets

 Presently, majority of the limitations on the foreigners right to purchase the shares of Russian joint-stock companies have been abolished. Certain limitations, however, still exist, particularly concerning the purchase of the shares of companies operating in the defence industry. Presently, there are no limitations on the foreigner's right to invest in the Russian real property.

Other investment instruments which foreigners may purchase, either directly or indirectly, include, for example, Russian treasury bills known as GKO's and Government notes OFZ's.


5. Market potential

 It appears that there may be potential for a successful asset management business in Russia. There is a fairly large number of companies with considerable cash funds particularly in the field of real estate, telecommunications and natural resources, such as mining, oil and gas sector. Further, it has been estimated that there are at least 700.000 inhabitants only in Moscow with a monthly income exceeding USD 10.000. Such companies and individuals could provide business opportunities to an entity having experience on asset management operations in Western Europe.

6. Competition

 There are over 2000 registered banks in Russia, but according to the Russian newspaper "Economy and Life", only approximately 50 banks offer customer services meeting Western standards. The largest commercial banks in Russia are still the former Soviet state banks, such as Sperbank, Vneshtorgbank and Agroprombank.

Many Russian banks have trading and brokerage arms or affiliates. Additionally, there is a large number of local brokers. Presently, several investment funds, such as Framlington Russian Investment Fund, Fleming Russia Securities, US-Russia Investment Fund, Pioneer Group, Ceenice Property Fund, Daiwa East and Eastern-Siberia Investment Fund, AIG-Brunswick Millennium Fund and New Century Capital Partners offer services in Russia. All the above parties provide also asset management services.

7. Co-operation with local parties

 There are no legal restrictions on co-operation with Russian parties, for example, in the form of a partnership. Russian Civil Code requires that all the terms and conditions of an agency relationship must be included in the agency agreement to be concluded between the parties. Since legal problems do not constitute the main hindrance concerning contemplated co-operation with a Russian entity the Western party should carefully evaluate the financial standing and the general reliability of the Russian party and, also, evaluate the importance of the evident cultural differences.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.