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Table of Contents
Table of Contents
Analysis of the Draft Law on Foreign Investment Activities in Nizhny Novgorod
Oblast. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
I. Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
II. Basic Elements of a Foreign Investment Law Aimed at Attracting Foreign
Investors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
A. National Treatment and Most Favored Nation Treatment. . . . . . . . . . . . .3
B. Prohibition of Performance Requirements. . . . . . . . . . . . . . . . . . . . . . . . .4
C. Freedom of Transfer of Profits and Other Payments Relating
to the Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
D. Expropriation and Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
E. Dispute Settlement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
F. Policy Concerns. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
III. Constitutional Issues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
A. Filling the Gaps in the Law of the Russian Federation. . . . . . . . . . . . . . 10
B. Overregulation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
C. Specific Commitments by the Oblast Government. . . . . . . . . . . . . . . . . 12
IV. Enforcement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
V. Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
A. Definition of Foreign Investor and Foreign Investment. . . . . . . . . . . . . 14
B. Foreign Investment and Foreign Investment Activities. . . . . . . . . . . . . .14
C. Objects of Foreign Investment Activities. . . . . . . . . . . . . . . . . . . . . . . . 15
D. Subjects of Foreign Investment Activities. . . . . . . . . . . . . . . . . . . . . . . .16
VI. Procedural Issues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
VII. Property Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
VIII. Promotion of Free Market Policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
IX. Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
X. Bookkeeping and Accountancy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
XI. Drafting Issues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Biographical Statements of Experts Assessing the Draft Law. . . . . . . . Appendix A
The World Bank Group, Legal Framework for the Treatment of Foreign
Investment, Volume II, Report to the Development Committee and
Guidelines on the Treatment of Foreign Direct Investment, 1992,
pages 35 through 44. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Appendix B
N. Stephan Kinsella, Lithuania’s Proposed Foreign Investment Laws: A Free Market
Critique, Russian Oil and Gas Guide, April 1994, at 60. . . . Appendix C
Government of Sri Lanka (Ceylon): Policy on Private Foreign InvestmentAppendix D
An Act Amending the Investment Incentive Code of the Republic of LiberiaAppendix E
Paul E. Comeaux and N. Stephan Kinsella, Reducing Political Risk in Developing
Countries: Bilateral Investment Treaties, Stabilization Clauses, and MIGA &
OPIC Investment Insurance, 15 New York Law School Journal of
International and Comparative Law 1. . . . . . . . . . . . . . . . . Appendix F
Draft Law on Foreign Investment Activities in Nizhny Novgorod OblastAppendix G
Analysis of the Draft Law on Foreign Investment Activities in Nizhny
Novgorod Oblast
I.Introduction
The draft Law on Foreign Investment Activities in Nizhny Novgorod oblast is a
commendable effort to promote a favorable legal environment for foreign investment in the Nizhny
Novgorod oblast. The strong pro-investment policy of Nizhny Novgorod should help persuade
investors to seriously consider Nizhny Novgorod as a leading candidate among the various regions
of the Russian Federation in which to invest and undertake economic activities. The intent and the
objective of the drafters have been to attract foreign investment to the oblast by creating a
transparent, stable, and non-discriminatory legal environment.
The draft provides for all the components of an emerging market system keen to attract
foreign investors. The law contains provisions on ownership of private property and offers a
privatization program for foreign investors. The draft specifies the types of activities that enterprises
with foreign investment may undertake. The law provides for the acquisition of shares in enterprises
by foreign investors and gives foreign investors the right to land use and acquisition. The draft
contains a package of investment incentives, such as privileged tax rates and so forth. These
incentives are designed specially to attract foreign investors. The draft also dismantles the strict
exchange rate control system that existed in Russia. This sort of legal regime is similar to those
found in countries such as the United Kingdom, South Korea, China’s export processing zones, and
Egypt. Furthermore, the draft guarantees the rights of foreign investors. These rights include the right
to national treatment, the right of repatriation of funds after payment of taxes, the right to reinvest
funds in the oblast economy, the right to intellectual property, and others.
In particular, the provision for an oblast security fund,
from which to draw in the event of nationalization, confiscation, or other exigencies, is an
important feature. Similarly, the flexibility and incentives given to foreign investors with respect
to intellectual property rights, export and import of goods, profit remittances, labor relations,
and so forth will likely be attractive to foreign entities interested in investing in Nizhny
Novgorod.
The draft does attempt to provide a full range of protections and incentives, such as
providing for (1) ownership and protections against discrimination, nationalization, changes of
law, and illegal acts of government bodies and officials; (2) tax incentives; (3) financial
assistance; (4) express permission for transfers of funds internationally; and (5) conversion of
currencies. Certain relevant topics, such as police and judicial protections and registration of
ownership, are not covered, but one would expect these topics to be covered in other laws rather
than here.
However, there are various concerns with the draft law. First, it is not clear how much
independent authority the Nizhny Novgorod oblast has vis-à-vis the federal government. Second,
foreign investors may not see the additional protections contained in the draft as offering
anything of real value. Another concern is whether the draft adequately takes into account long-term economic growth and social and political stability. Other key provisions that are crucial and,
if adequate, provide the necessary impetus for an investor to invest in a foreign country are: (1)
the standard of treatment for investments; (2) the standard of treatment for expropriation and
unilateral alteration or termination of contracts; and (3) the process for the settlement of
disputes.
In addition, the draft contains a number of provisions that have no legal effect because
they simply reference legislation of the Russian Federation and appear to be there only for
comprehensive reference. To the extent the oblast has influence over laws of the Russian
Federation or the applicability of federal laws to the oblast, the oblast should seek to have the
laws of the Russian Federation similarly amended.
The explanatory note demonstrates that a great deal of thought has been given to the
practical issues of concern to business people and the policies that necessarily underlie such
legislation. These considerations are critical, and the apparently thorough review that preceded
the drafting is a positive sign. The explanatory note to the draft law explains that the legislative
assembly’s main objective in considering the enactment of a law modeled after the draft is to
render the oblast as attractive as possible to foreign investors within the bounds of Russian
Federation laws. The explanatory note properly recognizes that various factors tend to attract
foreign investment, including a stable political and economic situation, that is, a low political
risk, convertibility and stable rates of national currency, low taxation, and reliable government
guarantees of private property rights. Another factor, not explicitly mentioned but that also
attracts foreign investment, is a healthy economy.
Low political risk, low taxation, and a healthy economy are extremely significant factors
in attracting foreign investment. The draft generally favors these factors, but more could be done
to bring these things about. The draft should be amended to clarify and strengthen the security of
a foreign investor’s property rights in view of these factors. Many changes to the legal and
political climate of the oblast and the Russian Federation itself could be suggested to contribute
to these factors. Constitutionalism, limited government, low taxes, respect for private property,
the free market, and civil liberties contribute to both a healthy economy and a low political risk.
II.Basic Elements of a Foreign Investment Law Aimed at Attracting Foreign
Investors
A.National Treatment and Most Favored Nation Treatment
Two of the basic elements of a foreign investment regime are national treatment and most
favored nation (“MFN”) treatment, i.e., an obligation to treat foreign investors and foreign
investment no less favorably than nationals and an obligation to treat foreign investors and
investment from one country no less favorably than foreign investors from any other country. The
draft contains such provisions in Article 7. It is suggested, however, that those principles be spelled
out more clearly, since the current text, while intended to be as comprehensive as possible, creates
ambiguity.
First, it should be emphasized that these two simple and unqualified obligations, namely,
national treatment and MFN treatment, are among the most essential guarantees foreign investors
will seek. There is no need to add further qualifications to the terms foreign investor and foreign
investments, e.g., to define investment as a “right of the foreign investor[ ]” or to define the national
treatment as applicable to “property, property rights as well as activities of foreign investors.”
This qualification immediately raises questions relating, for example, to the treatment of non-property rights. Once foreign investment and foreign investor are defined in the draft, the clearest
guarantee provided to foreign investors would be that they will enjoy: (1) treatment no less
favorable than the treatment provided to local persons and (2) treatment no less favorable than
the treatment provided to any other foreign investors and investment.
Second, there should be no discrimination between foreign investors on the basis of
nationality. It should be stated that all foreign investors and investments will enjoy equal, i.e.,
MFN treatment. Whatever “special privileged regime”
the oblast administration creates in
sectors of primary importance should extend to all foreign investors without discrimination. In
this respect, a common standard of treatment provision could foresee for “treatment no less
favorable than that which it accords its own nationals or companies or nationals or companies
doing business in the Nizhny Novgorod oblast of Russia, if the latter is more favorable.”
Unless this principle is clearly spelled out in the draft, foreign investors coming into the
oblast will be concerned that competition between them will not be fair. To the extent that the
oblast government finds it necessary to provide incentives to foreign investors, this should be
done on a nondiscriminatory basis—in specific sectors of priority to the oblast economy but not
to specific projects or to specific investors. Any preferential treatment provided on a case-by-case
basis will, by definition, be discriminatory and will, therefore, not serve to create a favorable
foreign investment climate in the oblast. On the other hand, it might be preferable to delete the
fourth paragraph of Article 7 to prevent discrimination and also to reduce the chance that the
oblast government will engage in inefficient determinations of which types of investment are
“most important.”
Third, national treatment should be interpreted as treatment no less favorable than that
provided to local persons. The draft refers to Russian legal entities and citizens. Foreign investors
may not know whether the oblast can discriminate against Russian persons from outside of the
oblast and treat local, that is, oblast, persons more favorably. It should therefore be clearly stated
that foreign investors will enjoy a treatment no less favorable than the treatment provided to local
persons, meaning persons of the Nizhny Novgorod oblast. That would ensure that any incentives
provided to local companies would also extend to foreign investors. It is essential that any
exemptions from national treatment be specifically and narrowly defined. On the other hand, the
draft contains no incentives for the development of businesses by Russian nationals themselves;
thus, the draft may serve to hurt Russian nationals by putting them at a competitive disadvantage.
This may force local companies to joint venture with foreign nationals.
The draft should specify that the oblast will not impose any additional requirements or
restrictions on foreign investors in addition to the requirements and restrictions imposed by the
law of the Russian Federation.
Thus, a foreign investor who has met the requirements of the
Russian Federation law will not need to comply with any additional permission or registration
requirements to make an investment in the oblast; once having made the investment in the oblast,
the foreign investor will be subjected to no additional requirements and restrictions in operating
it. It is important to make it clear that the national treatment and the MFN treatment provided to
foreign investors in the oblast refer to both the pre-establishment stage, that is, making the
investment, and the post-establishment stage, namely, operating the investment.
Article 6 could, in principle, lend great comfort to a potential investor, since the so-called
guarantees are in addition to those provided by the Russian Federation’s legislation. However,
without assessing the Russian Federation’s law on foreign investment, it is difficult to conclude
that there is adequate protection provided for foreign investors, since the basic guarantees offered
by the Russian Federation are unknown. In Article 6, the oblast is stated to have an obligation to
ensure proper fulfillment of terms on which foreign investments were attracted. This obligation
should be asserted more directly and forcefully and its nature clarified; for example, is it an
obligation under international law, Russian Federation law, or only oblast law? Also, there seem
to be no consequences to the oblast if it does not fulfill this obligation; for example, is the oblast
subject to lawsuit by a foreign investor?
B.Prohibition of Performance Requirements
A domestic law aimed at attracting foreign investment should specifically state that no
performance requirements are imposed on foreign investors. Thus, foreign investors will not be
required to export a certain percentage of output, give preferences for domestic sales, achieve a
certain level of domestic content, transfer technology, or balance domestic sales with exports or
foreign exchange earnings. If the foreign investor decides to make such commitments, for example,
in a joint venture contract with a local partner, such a decision should be dictated by business
considerations and not by obligations imposed by the law. In such a way, trade distortions are
eliminated and fair competition is ensured in the market. To the extent that this is within the
jurisdiction of the oblast, the law should clearly prohibit the imposition of any performance
requirements.
C.Freedom of Transfer of Profits and Other Payments Relating to the
Investment
Article 13 of the draft is not satisfactory in that the article covers free transfer of profits only.
The guarantee should extend to the free transfer of all proceeds and payments relating to the foreign
investment in the currency of the initial investment or other freely convertible currency. Thus, the
guarantee would cover not only profits but also returns, including dividends and other distributions
on account of an ownership interest, and interest; royalties and other payments deriving from
contracts, licenses, franchises, concessions, and other similar grants of rights; repayment of loans;
proceeds from liquidation or sale; payments for maintaining or developing the investment project;
earnings of expatriate staff; compensation; and payments arising out of the settlement of disputes.
The drafters also might wish to consider adding preferential treatment for domestic reinvestment to
Article 13.
As a constitutional matter, the competence of the oblast administration to provide substantive
guarantees to the freedom of transfer of profits and all other payments may be limited. In this regard,
the reference to the law of the Russian Federation is understandable. The reference to the legislation
of the oblast, however, makes this guarantee meaningless; such reference in essence allows the oblast
government to adopt restrictions to the freedom of transfer of proceeds and payments. The draft
should contain an unconditional commitment by the oblast government not to create any obstacles
to the free transfer outside of the oblast of any proceeds relating to foreign investments and to
facilitate such transfers within the limits of its competence.
The requirement that taxes be paid before transfers are allowed is incompatible with a
guarantee that proceeds and payments relating to a foreign investment can be freely transferred. It
is ambiguous even in the context of the provision as it is in the current draft. There must be other
ways of enforcing the Russian and oblast tax laws. If, however, the provision is kept, it is suggested
that the language be changed to “any non-disputed” taxes.
D.Expropriation and Compensation
Certainty as to real property ownership is a real concern among foreign investors.
The draft should contain a clear and explicit obligation by the oblast government not to
expropriate, either directly or indirectly through measures that amount in their consequences to
expropriation or nationalization,
except for a public purpose, in a nondiscriminatory manner, in
accordance with due process of law, and upon payment of prompt, adequate, and effective
compensation.
Compensation should be equivalent to the fair market value
of the expropriated
investment, be paid without delay,
include interest
from the date of expropriation, and be
transferable outside of the oblast and of Russia at the prevailing market rate of exchange. A
typical provision commonly found in other foreign investment legislation provides that:
Investments shall not be nationalized or expropriated except for a
public purpose and against prompt, adequate and effective
compensation. Such compensation shall amount to the market
value of the investment expropriated immediately before the
expropriation or impending expropriation becomes public
knowledge, and it shall be effectively realizable and freely
transferable.
Although Articles 8 through 20 set out many of the obligations undertaken by the oblast
that aim to create an environment conducive to foreign investment—through a series of
incentives, guarantees, and procedures—these articles do not adequately address the issue of
compensation. In fact, an investor must know what kind of compensation and what type of
guarantee coverage will be provided: will it be eighty percent, ninety percent, or one hundred
percent? The procedure, the criteria for, and the process of compensation should also be outlined.
A typical provision setting out the compensation standard provides that: “compensation will be
full and effective and payable in the currency of the origin host country. The amount of
compensation will be transferred to the country of origin of the investor within a period of three
months.”
Furthermore, there should be specific assurances that the real property that the foreign
investor’s business rests upon will not revert back to the state in the event the business shuts
down for a period of time or even completely. This is an issue that may not be fully answered by
the current Russian Federation law on foreign investment. If possible, a specific provision should
be included dealing with the issue of whether the investor still owns the real property on which
his or her enterprise rests in the event that it is closed.
Article 12 states that compensation for nationalization or confiscation will be calculated
and processed in accordance with federal legislation.
Thus, here too, federal rather than local
law seems to be determinative of the rights of foreign investors. It is significant, however, that,
pursuant to Article 9, sources of compensation may include “real estate and other property” and
“natural and raw material resources” owned by the Nizhny Novgorod oblast. To the extent that
the relevant federal legislation does not provide for the same, this would represent for foreign
investors in Nizhny Novgorod an important additional assurance. In Article 12, foreign investors
“have the right for compensation of losses ... which they suffered from illegal actions of state
authorities ... and also in case of infringing the implementation of investment project.”
Compensation is also provided for “improper fulfillment of the duties provided by legislation.” It
seems that the quoted language, to the extent it goes beyond illegal activities clearly specified as
such in the legislation, is overbroad.
E.Dispute Settlement
Article 21 seems to require that all disputes relating to an expropriation and the payment of
compensation be referred to the local courts and that all other disputes with government bodies be
resolved through arbitration in the Arbitration court of Nizhny Novgorod. Foreign investors are
generally reluctant to submit disputes to the local courts. Directing foreign investors to settle a
dispute with a government agency in a local court is a significant disincentive. To guarantee to
foreign investors that such disputes would be resolved fairly, the draft should provide for binding
investor-state (local government) arbitration under internationally recognized rules and procedures.
Furthermore, Article 21 is inconsistent as to which disputes are to be decided by a court and
which are to be decided by arbitration, especially in connection with disputes with governmental
officials. Article 21 contemplates suits in court, but the draft should be clarified to clearly provide
for judicial review, that is, the power of a court to overturn actions of the legislature or executive that
are considered illegal under the draft or other laws of the oblast or Russian Federation. Also, the type
of court is not specified: is it Russian, a court of the oblast, or a court of a neutral third-party forum?
Presumably, the second paragraph of Article 21 is subject to the terms of the first paragraph. In other
words, disputes may be settled in court only if there is no superseding Russian Federation legislative
provision or international agreement.
Article 21 refers to the Russian law on foreign investment, making it difficult to assess the
adequacy of this provision due to the inaccessibility of the latter for this analysis. According to the
1995 Annual Report of the International Centre for the Settlement of Investment Disputes (“ICSID”),
the Russian Federation has signed but has not yet ratified the ICSID convention. However, it would
be in its interests to do so because more security is offered to a foreign investor when he or she
knows that, should a dispute arise, the dispute will be settled via international arbitration and not
through the local courts. In this respect, the Russian Federation should be urged to take the necessary
steps to ratify the ICSID convention, and subsequently the draft can then benefit from a provision,
commonly found in foreign investment legislation, which foresees that “in the absence of amicable
arrangement or conciliation through diplomatic channels within three months of the date of its
notification, the dispute shall be submitted to conciliation or arbitration of the International Centre
for the Settlement of Investment Disputes (ICSID).”
F.Policy Concerns
The most important policy concern left unaddressed in the draft is the investor’s fear of
private corruption in the oblast. Many would-be investors in Russia may be dissuaded due to the
strength of the Russian mafia and the control the mafia presently exerts over many foreign and
domestic businesses in Russia. This being the case, assurances must be given in the draft against
such corruption. Indeed, throughout the draft, assurances are made against “illegal acts” of
government officials, but it is important that the legislation demonstrate how these assurances will
actually be enforced.
Bribery and corruption of public officials is well-known in many developing countries.
However, American investors are prohibited by the Foreign Corrupt Practices Act
from engaging in such activities. If bribery and political corruption are widespread in the
oblast, American investors will be at a competitive disadvantage with respect to investors from
other regions, such as western Europe.
Thus, given the existence of the Foreign Corrupt
Practices Act, the existence of widespread bribery and corruption would tend to reduce American
investment in the oblast.
III.Constitutional Issues
Nizhny Novgorod is an oblast, and, as such, its laws are subject to national legislation by the
Russian Federation.
Ideally, Russian Federation law would be settled and subject to only minor alterations. As is
frequently observed in the explanatory note, the various relevant Russian Federation laws are
dismaying combinations of obsolete and current provisions. Moreover, Russian Federation law is
likely to change in potentially significant ways, and it is likely to do so sooner rather than later.
Foreign investment and involvement in domestic business is a particularly sensitive issue in a
nation that has more than its share of political instability. Since the ideal situation does not exist,
drafting useful oblast legislation is problematic.
Under the circumstances, it is somewhat easier to understand the lack of specificity in the
draft. The supremacy of Russian Federation law and its presently disruptive state are the reasons
for the lack of particularity in the draft. A surprising amount of the text is precatory; although
general policy considerations may be commonly cited in oblast legislation, there is a large
amount of text that is either devoted to non-legal matters or to language that is too general to be
helpful or even serve a practical purpose. Most of such writing is clearly related to the aims of
the law but is of little, if any, legal consequence. In fact, most of the second half of the law,
beginning with Article 24, is so dependent upon Russian Federation law as to offer little of
substance to a foreign investor.
At a minimum, the draft, or a covering explanation, should delineate the details of the
existing Russian Federation law governing foreign investments in Nizhny Novgorod and the
powers of the Oblast Legislative Assembly to supplement the federation law. At this time, this is
apparently an impossible task because of the conflicting and obsolete nature of the federation
laws governing foreign investment. In other words, the draft may be premature. What foreign
investors seek is certainty: what are the rules governing their investment, who administers those
rules, and how protected against arbitrary action are they likely to be? Unfortunately, with the
uncertainty of the Russian Federation’s laws regarding foreign investment, Nizhny Novgorod, as
a sub-unit of the federation, is impotent to solve the problem by fiat of the oblast legislature.
Nizhny Novgorod must, therefore, depend on the federation’s legislature to resolve certain
matters.
For example, most of Article 8 relates to various obligations “taken” by the oblast
government. They are important issues but, treated in the future tense, are not the content of
practical legislation. To the extent that there are exceptions—that is, notions expressed that
should be contained in a law like this—they are so vague as to offer only the coldest of comfort.
Thus, for example, the oblast promises that it will “compensate for losses” suffered by foreign
investors.
The general concept that is expressed will be welcome to investors, but it contains
nothing concrete or specific. Anyone offering legal advice to a prospective investor on the basis
of this provision would be likely to counsel extreme caution. It is suggested that these obligations
be made subject to international law if possible.
Article 8 contemplates legal measures taken by the oblast against “unfair competition,”
which presumably includes Western-style antitrust type laws. While a legal monopoly, such as
the government’s monopoly over the printing of money or the building of roads, is a true
monopoly, the concept of a non-legal monopoly has always been problematic, and legal systems
could be well-served to abolish this concept.
Typically, “monopoly power” or “economic
power” is attributed to successful companies that grow and prosper due to innovation,
efficiencies, and satisfaction of customer demands. To punish firms for being “monopolistic” is
to punish success and prospering. The oblast should not persecute successful companies but
should instead encourage success to attract foreign investment. Furthermore, Article 8(1),
concerning the creation of a “favorable” image in the region for foreign investment, is vague;
with regard to this, the oblast could consider setting up a Web Site on the World-Wide Web to
promote itself. Article 8(3) is unclear in meaning.
There are other examples of this approach in the draft. Article 10 simply lists a variety of
means to encourage foreign investment. Even more, the article explicitly states that the oblast
“may” undertake those measures, thereby only acting as a hollow promise. A foreign investor is
well-advised to ignore this language for, if the oblast chooses not to pursue one of the listed
measures, there is no recourse for the investor. This points up one of the graver aspects of this
draft: it is often necessarily vague because of its relationship to Russian Federation law—one
assumes it would supplement any similar federal measures in a concrete and specific way—but
even when the oblast could offer detail, it fails to do so. The article does not contain any
standards or procedures establishing how the benefits described therein will be bestowed,
including protections against favoritism. The financial measures, such as provision of loans,
surety, and so forth, should not be handled by the oblast but should be allowed to be serviced by
firms on the market. Government involvement in such activities is unnecessary and can distort
the market. The availability of private insurance is a better indicator of the true riskiness of
investing in the oblast.
Article 22 addresses in general terms the types of legal structures that foreign investors
may wish to use for their local organizations. Without a copy of the Russian Federation law on
the subject, it is hard to know, but it seems that this must be largely duplicative. Moreover, it
would be surprising if the Russian Federation law would defer to oblast law on this particular
subject. Indeed, Article 23 states that these procedures are “defined by the RF legislation.”
Finally, a presumption of legality should be included to the effect that any type of investment not
specifically prohibited by the draft is legal. Article 26 appears to contain a similar presumption
but, if so, this should be clarified.
A.Filling the Gaps in the Law of the Russian Federation
The purpose of the draft, as correctly stated in the explanatory note, is to fill in the gaps in
the current Russian Federation law on foreign investment. The draft cannot be comprehensive, since
certain areas are regulated by the law of the Russian Federation and are not within the jurisdiction
of the oblast. To avoid discrepancies and contradictions, the drafters have included in the text of the
draft numerous references to the law of the Russian Federation. It is unnecessary to repeat the
relevant provisions of the law of the Russian Federation in the draft. It is equally unnecessary to
specify with respect to each provision of the draft that it applies in conformity with the law of the
Russian Federation. It is clear that foreign investors should carry out business activities in the oblast
in conformity with the law of the Russian Federation as it applies in the territory of the oblast.
Furthermore, repetition of Russian law provisions or repeated references to such provisions create
confusion in terms of their interpretation, which regulatory agency will implement and enforce such
provisions, and at what level—the Russian Federation or the oblast.
The regulatory agency is the Oblast Administration of Nizhny Novgorod. The administration
establishes procedures for the registration of foreign investors and the liquidation of enterprises. It
also has a fairly open screening law, but its powers are limited because the Russian Federation
authorities play a part in determining who should be given the right to invest. Denial of registration
may be appealed against in a court of law. Reasons for refusal can only be given by the Russian
Federal authority. Other than references to the “Oblast Administration”—without indicating its
composition and functions—there is no mention of any agency or other government entity
exclusively responsible for encouraging, promoting, and overseeing foreign investments on the
territory of Nizhny Novgorod. Where do the prospective investors apply? Who will control foreign
investments? It is imperative that such an agency or a government organization to administer the
draft be foreseen. Further legislative involvement is time-consuming and political and should,
therefore, be limited. Of course, if there is already such an organization established by the Russian
Federation, it would probably have the jurisdiction to oversee foreign investment in the oblast;
however, it is unclear if it has the explicit mandate to do so. In addition, what seems to be lacking
in the draft is an enforceable framework of laws and institutions that define and ensure both the
rights and duties of all players in the economy of the oblast. For example, there are no laws dealing
with economic crimes, such as investment scams, money laundering, counterfeiting, and bribery.
Finally, the jurisdiction and the powers of the oblast government in the area of regulating
foreign investment should be explicitly defined in the draft. The role of the oblast government in the
implementation and enforcement of the rights and obligations of foreign investors should be clearly
stated. The draft attempts to do that in Part 2. It is not, however, clear what guarantees to foreign
investors are provided by the oblast law in addition to the guarantees and protections provided to
them by the law of the Russian Federation.
B.Overregulation
An attempt to draft a foreign investment law that would be a comprehensive code of conduct
of foreign investors is harmful. Once subjected to national treatment, the foreign investor will need
to look at the relevant provisions of Russian law applicable erga omnes to find out how the type of
activities in question are regulated and what his or her rights and obligations are. Any attempt to
spell out the rights of foreign investors and the types of business activities available to them will
inevitably lead to restricting those rights and activities; it is impossible to summarize Russian
law—or any domestic law—in a single foreign investment statute. The objective of a foreign
investment law is to lay down the basic principles, such as national and MFN treatment, and to
provide certain specific guarantees to foreign investors. For the rest, domestic law should apply to
foreign investors as it applies to nationals.
One illustration is provided by Article 3, specifying that foreign investors “independently
determine directions, forms and volumes of investments, conduct on the territory of the oblast” and
other activities that are not directly prohibited by Russian law. There is hardly any doubt that foreign
investors should carry out their activities in the oblast in accordance with federal and local law and
that they can engage in any activities not prohibited by federal and local law. Article 3, however,
raises the issue whether foreign investors can “determine independently” other aspects of their
activities, in addition to the “directions, forms and volumes of investment”; if so, why are only
“directions, forms and volumes of investment” specifically referred to?
C.Specific Commitments by the Oblast Government
One way to encourage foreign investment and to facilitate foreign investors doing business
in the oblast would be to create an office to assist foreign investors in deriving the full benefits of
the foreign investment climate in the oblast in connection with their investment and related activities.
Such an office could serve as the coordinator within the oblast administration and the problem solver
for investors experiencing difficulties with registration, licensing, access to utilities, and regulatory
and other matters. The office could also provide information on current national and local business
and investment regulations, including licensing and registration procedures, taxation, labor
conditions, accounting standards and access to credit. The office could notify investors of proposed
regulatory or legal changes affecting them or regulatory changes already entered into force. The
office could also facilitate the resolution of disputes. In addition, the office can identify and
disseminate information on investment projects and their sources of finance that would facilitate
attracting investors. The office could also assist investors experiencing difficulties with repatriating
profits and obtaining foreign exchange.
The United States government and a number of western European governments have sought
the creation of such offices in various Central and East European countries in their bilateral treaties
for the protection and encouragement of investment. Foreign investors will be encouraged by the
creation of such a “one stop shop,” where they can obtain all necessary information and assistance
in connection with their investment.
IV.Enforcement
There is a serious concern about whether the substantive provisions of the draft would be
enforceable. In view of the extensive federal regulation of foreign investment activity in Russia, does
the oblast have the legal authority to grant additional rights and privileges to foreign investors?
Specifically, it is noted that the draft guarantees foreign investors greater latitude in the types of
activities they can pursue and also purports to grant foreign investors access to the courts. To the
extent these topics are already regulated by federal law, which is understood to be supreme, the
oblast draft would appear to be invalid. If the oblast indeed has the authority to legislate in this
manner, then the source of that authority ought to be specified.
It is recognized that the drafters attempted to deal with this issue by including language
throughout the draft to the effect that rights conferred by the oblast are valid only to the extent they
do not conflict with federal law, by specifying that foreign investors may undertake any activity not
prohibited by federal law, and further by stating that other existing federal legislation will remain
in effect. However, relatively few foreign investors possess the expertise necessary to determine
whether rights or privileges granted pursuant to the draft would, in fact, conflict with federal laws
or, more fundamentally, whether an oblast has the authority to fill gaps in federal legislation in this
manner. Foreign investors often need to be convinced that the legal environment in which they will
be operating is simple and stable. By enacting a statute as a supplement to federal law, the oblast
would be adding an additional layer of complexity to the already confusing array of laws and
regulations governing foreign investment and business activities in the Russian Federation. As a
result, the draft could, in fact, be somewhat counter-productive.
Moreover, with regard to topics such as investment registration, customs, export, import,
accountancy, repatriation of profits and guarantees against expropriation, confiscation, and so forth,
the draft appears duplicative of existing federal law. Indeed, the draft specifically refers to “existing
legislation” and states that such existing legislation shall remain in effect. There seems to be little
value in acknowledging and referring to such other existing legislation absent reason to question its
validity. The draft could be shortened and simplified considerably if specific references to existing
legislation were eliminated.
In short, the oblast needs to reconsider whether to enact actual legislation respecting foreign
investment. To the extent the draft is duplicative of existing legislation, the oblast should refrain
from promulgating legislation respecting the same topic. To the extent the draft is inconsistent with
existing legislation, the draft is likely invalid. Consequently, it is suggested that the oblast could
better achieve its stated goals of attracting foreign investment and eliminating uncertainty in the law
by issuing a proclamation of official oblast policy that includes the substantive provisions of the
draft, such as the investment agreement. This course of action would send a strong message to
foreign investors that the oblast views foreign investment favorably, that the government will
cooperate with investors and champion their cause, and that the government will grant investors
incentives and will guarantee stability in legal regulation.
As noted above, it is not always clear that the various oblast guarantees in the draft offer real
additional protections or benefits over and above what federal legislation already provides. For
example, Article 11 begins by stipulating that foreign investment cannot be nationalized or
confiscated “except for the decision of the authorized Federal bodies in conformity with the RF
legislation.” Much turns, then, on the content of the relevant federal legislation. If federal legislation
generally prohibits nationalization or confiscation at the federal level, then Article 11 provides
something of value, at least in theory, namely, an assurance that nationalization and confiscation will
not occur at the oblast level either. On the other hand, if the federal legislation does not generally
prohibit nationalization or confiscation, then, for reasons that follow, the oblast guarantee may add
little of value.
Article 11 also states that the oblast will protect the rights of foreign investors vis-à-vis the
federal government by contesting acts by the federal government “violating ... the rights or legal
interests of foreign investors.” The resulting decision of the federal government
can be “appealed to court.” A foreign investor would properly be concerned about the ability of
the oblast government to challenge or reverse any acts of the federal government. The draft is
very vague about the process through which the oblast would go about trying to protect the rights
and interests of foreign investors on its territory. It is also unclear how an appeal would be
submitted; which court would hear the appeal, whether an oblast court or a national court; or how
likely it is that such an appeal might ultimately be successful. In addition, the procedure is not
stated: is it governed by extant civil rules or are separate rules to be devised for foreign
investors? What remedies are available? How will they be enforced? In short, it is not clear that
Article 11’s guarantee “from illegal actions of governmental bodies” has much bite.
V.Definitions
A.Definition of Foreign Investor and Foreign Investment
One of the purposes of the draft, as evidenced in the explanatory note, is to be as
comprehensive as possible. However, it is extremely difficult to draft a comprehensive definition of
investment and investor by enumeration. The definition of foreign investment could contain an
illustrative list of what is covered by the definition but should also contain a general part that would
make it clear that (1) the list is not exhaustive and (2) the definition is open and inclusive rather than
exclusive. The current definition in Article 2 does not include certain rights, such as mortgages and
pledges, claims to money or to performance, and contract rights, while intellectual property rights
are qualified. In addition, the definition of foreign investor is unclear about the relationship to
registration requirements, and the definition of foreign investment omits personnel and management
contracts as possible forms of contribution to equity.
The approach used in bilateral investment treaties to draft a comprehensive definition of
foreign investment is to define foreign investment as “every kind of investment” in a certain territory
owned and controlled directly or indirectly by foreign nationals and then to give examples of the
types of such investment. Such a definition, while defining foreign investment by “investment,” is
comprehensive and inclusive. It is important that these definitions be defined clearly because they
serve as an important first step of admissibility of all potential investors and investments.
B.Foreign Investment and Foreign Investment Activities
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