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Based in the analysis of the changes to the federal and Moscow city legislation, which affected the most strongly the general investment and business climate in Russia as a whole and in Moscow as a Russian Federation's subject, it is possible to conclude that the new legislative acts adopted during the last two years in the aforementioned areas can be conventionally divided into the five following topical groups:

a) separating bureaucracy from economy and removing unnecessary administrative barriers for the entrepreneurial activity;

b) regulating the land and real-estate market;

c) protecting rights of owners and investors and regulating investment activities in the country;

d) improving the taxation system;

e) regulating activities of the banking system and securities market in the Russian Federation.

Below brief comments on main changes to the national and Moscow city legislation, which have been made during the last two years in the aforementioned areas, are quoted including

1. legislative acts which aim at shaping positive investment climate in the country and removing unnecessary administrative barriers for the entrepreneurial activity (so called laws for the improvement of regulatory and legal framework for business in Russia).

It should be stressed that at the beginning 2000 the Federal Government declared separating bureaucracy from the economy one of the most important tasks for the executive power.

Indeed, during the last two years the legislator adopted a number of new legislative acts which aim at improving the overall business and investment climate in the country. The list of such acts includes:

1.1. The federal law No. 129-FZ dated 8 August 2001 “On State Registration of Legal Entities”(came in force on 1 July 2002).

This law sets a unified procedure for registering legal entities regardless of their organisational and legal forms and of the areas of their economic activity in the unified system of registering bodies and according to the unified rules which are in effect on the entire territory of the Russian Federation.

The procedure for submitting documents for registration has been significantly simplified as compared to the earlier procedure inasmuch as according to the new law the applicant can submit the documents either personally or by mail. The registering bodies are not allowed to request the applicant to submit any other documents than those set by this draft law.

According to the new rules, it is the registering body (and not the applicant) who must inform tax and other agencies about the legal entity's registration.

1.2. The federal law No. 134-FZ dated 8 August 2001 “On the Protection of Rights of Legal Entities and Private Entrepreneurs when Carrying out State Control (Supervision) Procedures” (became operative on 11 August 2001) sets the basic rules for conducting checks by officials on-site. The new rules aim at decreasing enterprises' losses related to the activity of control agencies of the executive power and at reducing possibilities for the abuse by the officials of the so called ‘administrative' resource for waging unfair competition in the interests of some companies.

Among others, this law sets:

- the maximum frequency of the checks which may be conducted at a single company;

- the mechanism for increasing control over the companies where violations have been found;

- the mechanism for reducing the intensity of control for the companies which observe specific conditions.

1.3. The federal law “On Licensing Certain Types of Business” adopted by the State Duma on 13 July 2001, which became operative on 10 February , and the related Decree of the RF Government No. 135 dated 11 February 2002 .

The Decree contains a closed list of licensed business activity types which has been significantly reduced. The Decree also establishes a unified licensing procedure for the entire territory of the Russian Federation and prohibits using so called reference norms.

The document stipulates reducing the number of licensed types of business activity to 104. Among others, it excludes from the list such type of activity as leasing performed on the territory of the Russian Federation by both residents and non-residents. Such changes to the Russian law will undoubtedly facilitate the inflow of foreign investments to Russian companies which purchase equipment abroad using leasing operations.

1.4. The law of the city of Moscow No. 64 dated 3 October 2001 “On City Planning Norms and Rules for the City of Moscow”.

The law sets forth the purpose, content and the procedure for the application of urban development norms and rules of the city of Moscow when performing city planning activities in the Russian capital in order to protect the rights of owners, users and lessees and also the rights of citizens and legal entities the interests of which may be affected as a result of violating the urban development norms and rules.

1.5. The Federal Government plans to implement before the end of 2003 the following legislative initiatives which have to further improve the regulatory and legal framework for business activities in the Russian Federation:

- to submit the draft federal law “On Certification” to the State Duma;

- to develop and submit to the State Duma the draft federal law “On Concessions” ;

- to submit the draft federal law “On Special Economic Zones in the Russian Federation” to the State Duma .

2. Legislative regulation of the land and real-estate markets.

2.1. The overall investment climate in the country was positively affected by the adoption of the “ Land Code of the Russian Federation ” No. 136-FZ dated 25 October 2001 which came into force on 30 October 2001.

This law is a basic regulatory norm for the investment activities in the real-estate area.

2.2. The Russian Federation's Government endorsed by its Decree No. 660 dated 6 September 2000 “ The Rules for the Cadaster Division on the Russian Federation's Territory ” and “ The Rules for Assigning Cadaster Numbers to Land Lots ” which facilitated the further improvement of the land-use system in Russia.

2.3. The federal law No. 143-FZ dated 11 October 2001 “ On Making Changes and Amendments to the Federal Law “On Mortgage (Real-Estate Pledge) ” which became operative on 13 November 2001.

This law stipulates that if a real estate object belonging to the state or municipal property, the construction of which has not been completed, is mortgaged the market cots of that property is assessed. The mortgage bond form has also been changed. According to the new law, the mortgage bond must contain the money value of the mortgaged property. In the cases when mortgaging is required by law, the money value of the property must be confirmed by the report of a certified appraiser. If an enterprise is mortgaged, the law stipulates that in the cases when the evaluation is mandatory by law the report on the evaluation of property related to the enterprise is an integral part of the agreement.

2.4. The Federal Government is currently developing the following legislative initiatives:

- a new draft law which regulates the land development procedures and sets forth, among others, the procedure for forming land lots as real-estate objects thus protecting the rights of land owners and facilitating the involvement of land in the civil turnover;

- a proposal regarding the improvement of the use of developed indivisible land lots owned by the state;

- a proposal on the legislative regulation of the process of buy-out by privatised companies of the land lots on which they are located thus increasing their investment attractiveness;

- amendments to the Civil Code of the Russian Federation which stipulates creating and including in the civil turnover of the so called unified real-estate object, which is based on the concept of equality between the rights on the land lot and on the real-estate located on that land lot, and also making impossible to include in the civil turnover of the aforementioned components of the unified real-estate objects separately from each other.

2.5. The Moscow city Duma is now considering:

- a draft law of the city of Moscow “On the Land Use and Development in the City of Moscow”.

The law on the land use contains basic concepts and terms of which an investor or any other legal entity interested in activities directly related to the construction (renovation) of objects on the city territory should be aware. The law also establishes such new concepts as a territory zone (part of the Moscow city territory within which urban development rules unified for all land lots is in effect) and city planning rules (a document which sets the types of land lot use and restrictions on the use). The law also establishes the basis for acquiring and holding proprietary and other rights on land and for cancelling such rights.

- a draft law “On Permits for Construction and Re-construction of Urban Development Objects in the City of Moscow”.

The law on the permits for the construction and re-construction of the urban development objects in the city of Moscow contains a list of concepts to be used by the parties when obtaining permits and endorsements of the city authorities, such as: urban development object and facility; preliminary assessment of urban development terms for the construction; city planning justification for the placement and construction of objects; initial documents and permits needed for the construction; decision on the construction and permits for the construction, etc. The law sets forth in detail the procedures for obtaining permits and the package of documents needed to start the construction or reconstruction of an object.

3. Legal protection of the rights of owners and investors and legislative regulation of the investment activities in the Russian Federation.

3.1. The federal law No. 120-FZ dated 7 August 2001 “ On Making Changes and Amendments to the Federal Law “On Joint-Stock Companies which came into force on 1 January 2002 significantly fostered the legal protection of the rights of shareholders including the state itself as the shareholder.

3.2. The federal law No. 116-FZ dated 7 August 2001 “On Making Changes and Amendments to the Federal Law “On Insolvency (Bankruptcy) of Credit Institutions” has come into force. This law regulates activities of bankruptcy commissioners appointed to credit institutions and, mainly, protects the rights of private depositors (so called first-priority creditors) whose economic interests were earlier damaged most often because of credit institutions' bankruptcy.

3.3. Currently the State Duma is considering a new draft federal law “On Rehabilitation of Insolvent Enterprises” which stipulates, in particular, the following:

•  simplifying the legal procedure for expropriation of property from inefficient owners;

•  removing opportunities for abuse in the procedure for expropriating property from the owners of sustainable enterprises (i.e. legal protection of the efficient owners' rights);

•  creating legal mechanisms for mergers and acquisitions of inefficient enterprises by efficient ones i.e. creating mechanism for the direct replacement of inefficient owners by the efficient ones;

•  defining the concept of ‘financial rehabilitation' which differs from the concept of ‘bankruptcy'; separating the concepts of ‘financial rehabilitation' and ‘bankruptcy' and legal procedures for ‘financial rehabilitation' and ‘bankruptcy'.

3.4. The draft federal law “On Nationalisation in the Russian Federation” (adopted for the consideration by the State Duma by the decision of the State Duma's Council No. 16) which, in particular, sets the reasons for and concepts of nationalisation of private property in Russia including forced nationalisation and determines the nationalisation object (an enterprise as a property unit or part of an enterprise); the draft law stipulates that a special federal law is to be passed for each nationalised object.

The adoption of this draft federal law will improve the investment attractiveness of the Russian Federation and will ensure rights and legal interests of the owners and will also prevent carrying our nationalisation in the interests of particular financial and political groups.

3.5. The draft federal law No. 105481-3 dated 21 December 2001 “ On Making Changes and Amendments to the Patent Law of the Russian Federation ” adopted by the State Duma in the first reading (Decree No. 2282-III GD).

The adoption of this draft law will create required conditions for the efficient legal protection of the rights on intellectual property in Russia thus facilitating the innovation activities in the country. The new version of the law significantly increases attractiveness and safety of patenting inventions in the Russian Federation inasmuch as it guarantees that the rights of applicants for patents and of paten holders will be observed in the country.

The basic provisions of the Patent law will be modified to comply with the Agreement on Trade-Related Intellectual Property Rights (TRIPS). Thus the adoption of this federal law will be a real step to the Russian Federation's joining to the World Trade Organisation which fully corresponds to the political and economic goals of the Russian Federation's Government.

Also the provisions of the federal law “On Copyright and Adjacent Rights” will be changed to comply with the Russian Constitution and provisions of the Bern Convention on the Protection of Pieces of Art and Literature which is required for the Russian Federation's joining to TRIPS required for the Russian Federation's joining to the WTO.

3.6. The federal law “ On Investment Funds ” No. 156-FZ dated 29 November 2001 is also to facilitate developing Russian financial institutions and attracting investments to the production sector of the national economy.

This law establishes unified standards for regulating relations in the area of mutual fund investments and removes some obstacles, which existed earlier for binding available cash assets on the organised capital markets in the Russian Federation.

The law establishes specific features for the creation and legal status of the joint-stock companies operating in the investment area and also for licensing activities of mutual investment funds and for their liquidation.

The law regulates the issues related to the creation and activities of investment funds; in particular, it sets the requirements to management companies; specialised depositary institutions; appraisers; brokers involved in the distribution and buyout of investment shares; prospectus for placement of investment shares; mutual funds' rules; procedures for registration of such funds and to the investment declaration. The law determines the procedures for the placement and buyout of mutual funds' shares and for the calculation of the investment share cost. It also establishes the procedures for the calculation of the cost of investment funds' net assets, requirements for the portfolio of assets, disclosure of information on the activities of investment funds and management companies and also the authority of the state agency regulating the security market in the area of the activities of professional brokers in the mutual investment system.

3.7. The draft federal law “ On Business Accounting ” has been developed. It aims at implementing a set of measures which improve transparency of financial reporting of Russian enterprises. The draft law stipulates the mandatory preparation and submission by affiliated legal entities of consolidated accounts and also establishes procedures for the independent audit of consolidated accounts.

The draft law establishes specific features for carrying out accounting in the process of re-organising and liquidating enterprises. The key element of the new procedures is that according to the draft law all of the enterprise's assets and liabilities are to be re-assessed based on the market cost.

In order to ensure improvements in the Russian companies' investment attractiveness the Russian Federation's Government has developed a schedule for implementing international standards of accounting and financial reporting in the three areas: 1) improving accounting methods; 2) ensuring trustworthy and comprehensive disclosure of accounts and 3) further developing the profession of accounting, training specialists in accounting and improving their professional skills.

In accordance with the aforementioned schedule the transition to accounting based on international standards is to be finally completed in the Russian Federation before 2004.

4. Changes to the Tax and Customs Legislation

4.1. Due to coming into force, on 1 January 2002, of Chapter 25 “ Tax on Income of Enterprises ” in the New Tax Code significant changes have occurred in the system of taxing income of enterprises and organisations. The main changes are as follows: (i)  necessary and justified business expenses can now be deducted from the taxable base and (ii) certain restrictions because of which some expenses, including depreciation expenses, could not be considered, for taxing purposes, as expenditures are now abolished.

Thus, this law stipulates abolishing the restrictions in effect which prohibit considering expenses on advertising; training the production personnel for operating new equipment and mastering new technologies implemented in the manufacturing process; expenses on some types of voluntary insurance, etc. as expenditures when calculating the taxable base for the tax on income of enterprises. The law also stipulates expanding options for deducting expenses for scientific research and development from the taxable base by using the mechanism of the capitalisation of expenditures with their subsequent depreciation and increasing the maximum amount of the expenses on training the personnel and improving the personnel's professional skills, calculated as percentage of other expenditures, when calculating the taxable base for income tax.

Also, Chapter 25 of the Tax Code envisages reducing from 1 January 2002 the income-tax rate from 35 % to 24 % and at the same time abolishing all privileges on income tax which were granted earlier to enterprises.

It should be noted that in relation with coming into force of Chapter 25 of the new Tax Code the Russian President on 29 August 2001 signed Decree No. 1088 “ On Making Amendments to and Declaring as Inept Some Decrees on Foreign Investments Issued by the President of the RSFSR and the President of the Russian Federation ”.

This decree has abolished the provision according to which newly adopted legislative acts regulating activities of foreign and joint ventures in the Russian Federation, during a three-year period are ineffective for the already established enterprises. According to new legislation such legislative acts become operative in accordance with the general rules established, among others, by the law on foreign investments in the Russian Federation.

The provision according to which enterprises with foreign investments involved in the production activities are granted privileges for paying income tax to the federal budget (they pay income tax according to procedures established for small business companies), provided that their paid share in the authorised capital is no less than 30 percent and, equivalently, no less than 10m USD, has also been declared inept. According to the new law such enterprises pay income tax similar to other companies.

4.2. Amendments to the federal law “ On Production Sharing Agreements ” No. 75-FZ became operative on 18 June 2001. The new law amends the provisions of legislation which was in effect earlier and adds a new taxing scheme for production sharing thus making it more attractive for foreign investors.

In particular, the law establishes a new procedure for sharing manufactured products between the state and investors in addition to the already existing one. This law establishes a simplified mechanism which stipulates replacing all taxes and payments by “direct production sharing” on the basis of the agreement made between the state and the investor.

Such an approach, in combination with the stabilisation exception concerning invariability of all production sharing agreements, which were made earlier, for the entire period of the filed development, makes it possible to reduce to the minimum the sovereign risks of foreign investors which carry out mining operations in the Russian Federation based on production sharing agreements and will stimulate an influx of direct foreign investments to the mining branches of the Russian economy.

4.3. The Russian Federation's Government on 18 October 2002 issued a Decree “ On Exempting Technological Facilities (Constituent and Spare Parts for the Facilities) not Manufactured in the Russian Federation from Value-Added Tax ”.

This Decree creates additional stimuli for Russian production companies to make investments in machinery assets by exempting state-of-the-art technological equipment, constituent parts, semi-finished products, etc. imported to Russia from VAT. This is needed to launch manufacturing of competitive products in the Russian Federation instead of importing finished products. This Decree will make modernisation of the Russian economy more rapid and efficient.

Also, with the same purpose the State Customs Committee decreed on 1 October 2002 to reduce the import duty (by five percent) on some types of high-tech equipment (up to the duty rate of five to ten percent).

5. Legislative Framework Regulating Activities of the Banking System and Stock Market

5.1. The federal law No. 82-FZ dated 19 June 2001 “ On Making Changes and Amendments to the Federal Law “On Banks and Banking Activities ” played an important role in organising and stabilising the Russian banking system's activities during the post-crisis period.

Credit institutions were allowed to pay the authorised capital increment using a foreign currency or by bank buildings; also a procedure for converting a credit organisation's liabilities into its participation in the authorised capital and for making payment to the authorised capital of credit organisations by government stocks has been established.

5.2. The further improvement of the banking system's activities in Russia will be positively affected by the implementation of International Accounting Standards which increase the transparency of Russian credit institutions thus allowing investors to make more accurate assessments of their financial state.

With this purpose beginning from August 2001 “ Facilitating Accounting and Reporting Reform ”, a project financed by the European Union's TASIS programme, and similar US-financed AMP project have been implemented in the Russian Federation.

These projects mainly aim at improving operations and increasing transparency of the Russian Federation's banking system by changing the Russian accounting standards to comply with the International Accounting Standards.

The new accounting rules to be used by the Russian credit organisations have been developed as part of implementing these projects.

During 2001 and 2002, the developed rules, after having been tested in eight ‘pilot' banks, will be used for creating the corresponding regulatory framework.

After the survey stipulated by projects has been completed the time plan for transferring the Russian banking system to the International Accounting Standards will be set.

5.3. A number of regulatory and legislative acts has been developed for the stock market. These acts stipulate more stringent administrative and criminal persecution of stock-market brokers for the violation of laws and also of heads of organisations for infringing rights of investors and shareholders.

Thus, on 27 December 2002 amendments were made to the federal law No. 46-FZ dated 5 March 1999 “ On Protecting Rights and Legal Interests of Investors on the Securities Market ”. Also the draft federal law No. 84807-3 “ On Making Changes and Amendments to the Criminal Code of the Russian Federation Regarding More Stringent Criminal Responsibility for Crimes Committed on the Securities Market ” was adopted by the State Duma in the first reading (Decree No. 1873-III GD). These laws establish more severe responsibilities for the heads of enterprises for submitting untrustworthy information (or information which misleads investors) about securities issuers and for other violations of rules at the securities market; criminal persecution for such violations of law is also stipulated.

5.4. In 2002, a law is to be adopted which stipulates payments to the accumulation part of the mandatory pension system.

Then the accumulation part of the labour pension will consist of the social security payments and the investment revenue accrued on the payments. The rate of the social security payments to the accumulation part of the state pension system will not be reduced during the entire period of the labour activity. The payments based on the unified social tax to the distributive pension system will be reduced by the amount of payments made to the accumulation system.

The pension reserves in the accumulation system which, according to the most cautious forecasts will increase to no less than 2bn USD before 2003, will be invested via the authorised investment companies. Those companies will be selected on the basis of tenders and will operate under direct governmental control. Considerable part of these investment resources is expected to be invested, after a short time period, to the stock market thus ensuring a new boost to the development of the capital market in Russia and expanding access to long-term investment resources for the large number of Russian companies.                

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