How investment projects have evolved - lawyers' views
After the economic boom years form 2005 and 2008, lean times and a shortage of cash have hit the economy across the board. Only the most decisive and best resourced investors have carried on with their projects or even begun new ones. There were investors who, before the crisis, were receiving returns thanks to stock exchange bubbles and short-term speculation. Now, most of these have lost the bulk of their funds (securities are worth more or less the cost of the paper they are printed on). This has once again led us to believe that it will be much safer and more promising to invest money in tangible assets and the real economy. Readers, we are certain, will agree that modernising by creating new high-tech advanced industries is a desperately needed and unavoidable stage in the development of modern Russia. How prudent and safe is it now to invest in Russia, to launch and develop a true, creative business? Is the legislative and regulatory base ready for such a challenge? We will seek an answer to these questions together with lawyers from Pepeliaev Group, using a hypothetical investment project as an example. In the next five issues of Legal Insight, we will feature an analysis of the finer points of how an investment project evolves - from the laying of the foundations until it is put into operation.
Sergey Spasennov
Partner and head of Pepeliaev Group's St. Petersburg office
We intend to offer readers a series of articles discussing the practical side of implementing an investment project, focusing on legal problems and solutions using the example of a company that we have 'created'. What rules are in existence, and how reasonable and practicable are they? Where are the obvious bottlenecks in legal regulation that need to be thought through once again, then reworked?
- Description of the project
An international team of enthusiastic investors from Russia, Kazakhstan and Finland is ready to build a plant to produce a special nano-bitumen in order to manufacture elastic, ultra-strong asphalt designed to tackle that age-old scourge of this country: its roads. Our new road surface has nothing to fear, either from the summer heat or the winter cold; it does not crack in freezing temperatures and does not break up under the weight of constant heavy loads. It is the worst nightmare of those who repair roads and a pipe dream for motorists. The secret formula and special production technology promise to make the product highly sought after across many markets. Would our businessmen be advised to pull out all the stops to start production in Russia, or is it simpler just to sell the technology to China and buy the ready product from there?
Our company is not over-endowed with assets. It is not affiliated to state corporations or to oligarchs. It wishes to play by the rules and to live inside the law. It has no desire to make use of administrative leverage. In the real world, it is precisely businesses like this that encounter the greatest problems and turn to us for expert legal support.
Read in JULY: Creating the corporate structure and financing the project: what do you need to bear in mind?
- Firstly, business decisions will be taken about the time scales and the need to build a factory to manufacture our innovative ingredient for super-asphalt, which is in great demand both domestically and on international markets. After this, the next stage is to lay down a corporate structure which both meets the owner's requirements and is suitable in view of the need to obtain bank or investor funding for the project. How can funding be arranged for the project, using all tools that are approved by the regulator and under banking legislation? Have shareholders' agreements yet taken root in Russia? Is it viable to use them to help guard against corporate conflict and avoid warfare between the beneficial owners? Nor do we forget about the tax structure. We bear this in mind in the financial model for the project, which will allow settlements to be made with creditors and profit to be generated. Moreover, all of this needs to be fitted around the current keynotes of the so-called 'deoffshorisation' of the Russian economy and the battle against capital flight. The investor also needs to determine whether a company founded by a foreign party will run the risk of facing increased fiscal scrutiny or whether we can be bold enough to use holding companies from popular low-tax jurisdictions.
Read in SEPTEMBER: Design and construction: the main risks
- The second step is to select the site and assess the risks from the standpoint of land law and town planning regulation. We analyse how things stand regarding access to the necessary infrastructure and obtaining consents from monopoly providers. We attempt to take into consideration the specific aspects of the contract with the design and construction company. These matters may have a major impact on the time frames for launching production and the quality of the business that is created.
We will also discuss the most significant issues that need to be resolved at the design stage: industrial safety requirements (especially if the facility in question is a hazardous production facility); the numerous harsh and capital-intensive requirements of legislation for dealing with production and consumption waste, as well as waste water discharges. Our experience of providing support for investment projects shows that there are lawful ways to minimise the costs of and outlay on meeting the numerous requirements. To find out exactly what these are, read the September issue!
Read in OCTOBER: Staff are the key asset!
- Qualified and loyal staff will be needed for the new factory: it is well known that they "are the key asset". Building relationships with staff is one of the most important issues in modern manufacturing. How is it possible to work with employment agencies in conditions where there is a ban on outsourced labour? Are there tools for fighting against corporate corruption, internal abuses and infringements of company policies on the part of employees? Is an 'Employee Code' capable of safeguarding an employer's rights? We will discuss the most sensitive points of employment and migration legislation. We will also share our experience of dealing with trade unions and of implementing a special assessment of labour conditions.
Read in NOVEMBER: How can a company's IP be protected?
- The fourth set of issues that really matter in high-tech production fall within the still-developing institution of protecting intellectual property rights. How can the company become able to lawfully use trademarks and commercial designations? Can patented inventions, encompassing various forms of technology, be protected effectively in Russia? In what situations does the risk arise of litigation with persons acting in bad faith, with those abusing their exclusive rights, and with those infringing the company's know-how and other confidential information? We will talk you through the Russian approach to such matters and whether it differs from that encountered in Europe.
Read in DECEMBER: Customs regulation and accessing foreign markets
- To organise production in Russia may require the relevant manufacturing equipment to be developed and made abroad. When the plant is then operated, the chemical components needed to make nano-bitumen may have to be imported. Moreover, the innovative nature of the product dictates that we may expect, with a fair degree of confidence, that it will be in demand in foreign states. This means that our new factory will actively be operating as an importer and exporter.Russia is now a member of the WTO, while the Customs Union of Russia, Belarus and Kazakhstan is being transformed into the Eurasian Economic Union. In these conditions, how can the company avoid infringing the customs and currency regulations that make trading operations so complex? What are the customs benefits and advantages open to a company manufacturing goods in Russia? What assistance may a Russian business receive from the state when it launches high-tech products on markets abroad?
- Once the St Petersburg Legal Forum has finished, our investors will start to move ahead with their project. We will objectively describe and analyse the most complex legal difficulties that may be faced, along with the most opportune solutions.
- Read Legal Insight and get the green light to cross the road every time.
See you in the next issue!