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
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.
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).”
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.
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.
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.
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.
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
There should be no distinction between foreign investment and foreign investment activities. Such a distinction creates confusion throughout the draft. Creating two separate regimes, one for foreign investment and another for activities relating to such investment, is dangerously ambiguous. As defined in Article 2, foreign investment activities cover the making or allocation of an investment and the operation or management of an investment. This is precisely what national treatment and MFN treatment should cover. The treatment of foreign investors and foreign investment includes all “activities” of foreign investors relating to the investment. Separating “investment” and “activities” makes no sense at all; by creating two separate regimes, such a distinction creates new restrictions, uncertainty, and ambiguity.
Once a comprehensive and inclusive definition of foreign investment is drafted, it will be
clearer that “foreign investment activities” are included in such a definition. The types of foreign
investment activities described in Article 4—joint ventures, “complete” ownership, establishment
of subsidiaries, acquisition of existing companies, franchising, leasing, and so forth—are covered
by a comprehensive definition of foreign investment.
C.Objects of Foreign Investment Activities
Article 5 is harmful to the stated objective of the draft, namely, attracting foreign investment,
and has no other effect than to impose additional restrictions on foreign investment. Even if the
purpose of Article 5 is to impose additional restrictions on foreign investment, Article 5 should
nevertheless be redrafted. The article should specifically state that, in addition to the restrictions
imposed by the law of the Russian Federation on foreign investment, the draft restricts foreign
investment in certain specifically enumerated sectors.
This will not, of course, be conducive to attracting foreign investment. However, the current
approach is even less attractive. By designating areas, the so-called “objects of priority,” where
foreign investment is somehow encouraged or less restricted, the draft provides for exceptions
from a general principle of restricting foreign investment instead of providing for narrowly
defined exceptions from a general principle of freedom of investment.
If the draft intends to provide restrictions in addition to those provided under the law of the Russian Federation, the draft should (1) specifically list such exemptions from national treatment, (2) define them as narrowly as possible, and (3) contain an obligation not to expand the list by adding new exemptions and not to broaden the scope of existing ones. Otherwise, the draft will serve to deter foreign investors from doing business in the oblast instead of attracting investors. If, however, the objective of the draft is to attract foreign investment to the oblast, the draft should provide for no restrictions on foreign investment in addition to those already existing under the law of the Russian Federation. The law of the Russian Federation provides for certain exemptions from national treatment. It will be desirable for the draft not to add to those exemptions and to specifically state that no exemptions from national treatment, other than those provided for in the law of the Russian Federation, will apply to foreign investment in the territory of the oblast. Any additional restrictions imposed by the oblast will divert investors to other regions of the Russian Federation where only the restrictions of the Russian Federation law apply.
Article 5 is troubling in that it provides the oblast government with the right to approve sectors and geographic areas “which have priority for foreign investments.” Thus, there will be no transparency, stability, and predictability. No criteria are specified, thereby opening the door to arbitrariness. At the same time, the criteria for prohibiting foreign investment in certain sectors are extremely elastic: an investment is prohibited if it causes or may cause damage to the rights of citizens, legal entities, the oblast, and the Russian Federation or if the investment violates sanitary-hygienic, ecological, technical, or other standards. There can hardly be anything more arbitrary than such broadly formulated criteria: anything can be prohibited under this provision. There is, therefore, no need for such a provision in the draft. National treatment means that Russian and oblast law applies to foreign investors as it applies to Russian, that is, local, persons. Thus, sanitary-hygienic, ecological, technical, or other standards apply to foreign investors as they apply to nationals and are enforced in the same way. A foreign investor breaching the law of Russia or causing damage to rights and interests of nationals, the oblast, or the federation should be treated the same way as a Russian party would in like circumstances. In other words, the foreign investor cannot do what the Russian cannot do; if the foreign investor breaches Russian law, he or she will be sanctioned as the Russian investor would be. The sanction will not necessarily amount to a prohibition to make the investment; the foreign investor may, for instance, be required to pay damages or fines to comply with the standard breached.
D.Subjects of Foreign Investment Activities
Article 3 is problematic for it attempts to regulate who the local counterparts of foreign
investors should be. Such an attempt is unnecessary and is by definition restrictive. There is
absolutely no reason for any domestic law to restrict foreign investors in terms of who their local
partners can be. Again, once the concept of national treatment is understood and implemented, the
absurdity of a provision on “participants” in foreign investment activities becomes apparent.
The provision in Article 3 stipulating that “[t]he basis for foreign investment activities ... is [an] investment agreement” may be an unnecessary restriction that foreign investors will find puzzling. Any relationship between a foreign investor and his or her Russian, or oblast, counterpart has to be based on an investment agreement. The provision virtually requires that any transaction, however it is otherwise regulated under Russian law, be carried out on the basis of an investment agreement if one party to the transaction is a foreign investor. Such a rule in itself flies in the fact of national treatment.
Furthermore, any of the various types of “investment activities,” e.g., leasing or franchising, must be based on an investment agreement, not on a franchising or a leasing contract. It is thus unclear to what extent Russian law regulating franchising or leasing contracts would apply to an investment agreement on which the foreign investment activity of franchising or leasing is based. This Article 3 provision would thus create two levels of rules: rules applying to transactions between Russian parties and rules applying to similar transactions between Russian parties and foreign investors. This is a denial of national treatment.
On the other hand, the investment agreement
provided for in Article 3 may be an
excellent idea. This document would stipulate the rights, duties, and responsibilities of the parties
involved. Presumably, the special incentives provided for in later articles would be incorporated
into this document which, pursuant to Article 19,
the oblast governor would sign. Providing
foreign investors such written guarantees gives investors a sense of security against unforeseen
changes in the legal environment. One idea the drafters might consider would be for the oblast to
commit to rendering a legal opinion stating that the investment agreement is legal and
enforceable and that nothing contained therein contradicts Russian Federation legislation. The
legal opinion could be appended to the investment agreement. Such an opinion would help
alleviate foreign investors’ concerns about whether the rights and privileges stated in the
agreement are valid and enforceable.
In conclusion, therefore, if the draft is to attract foreign investment to the Nizhny Novgorod oblast, the draft should abandon the concepts of “foreign investment activities,” its “subjects,” and its “objects.” The draft should: (1) contain comprehensive definitions of foreign investor and foreign investment, (2) guarantee national treatment and MFN treatment with no restrictions other than those already imposed by the law of the Russian Federation, (3) provide for guarantees, such as the prohibition of performance requirements and guarantees relating to expropriation and transfers, (4) facilitate the activities of foreign investors by creating the appropriate institutional mechanisms and guarantees, and (5) to the extent possible, provide foreign investors with an impartial third party mechanism for settlement of disputes with the oblast government.
Although the draft sets out certain procedural issues, it does not delineate who will do what and what their mandate will be. Furthermore, at times the law is so cumbersome with unnecessary detail and incentives void of any substantive meaning that it reads more like a regulation than a law. With regard to detail, for example, in Article 9—which concerns funds for the oblast’s “state guarantees security”—the sources are unnecessary because the investor is only interested in the fact that there is a guarantee and not on the government’s financial sources for granting it. In addition, this article is unclear and seems to be insufficiently integrated with, and related to, the rest of the draft. It is not clear whether these funds are for paying damages resulting from expropriations of property and the like. If that is the case, provision should be made to place such funds with a neutral third-party escrow agent located outside the Russian Federation’s jurisdiction. Furthermore, Article 9 not only unnecessarily ties the hands of the oblast if, for unexpected reasons, changes are needed but also offers little to foreign investors except an expression of support.
In general, lack of procedural specificity is a problem throughout the draft law. Article 16, which provides for additional benefits for foreign investment projects of “particular economic or social importance” is a good example. Although this appears to be an important step in the right direction, there is concern whether these unenumerated “additional tax privileges and guarantees” actually offer investors something valuable. Article 16 is very vague about the process and criteria through which foreign investors may receive such additional benefits. Interested parties are asked generally to submit a “written application ... to the oblast Administration.” The application is then assessed by “authorized State bodies” or by “independent expert (consulting) institutions.” Who these state bodies or independent experts are is not at all clear. There is no further discussion as to who decides what projects are eligible, according to what standards, what the terms of the exemption or postponement are, who decides which one applies, and so forth. Article 17 addresses some of the criteria to be used but raises more questions than it answers. Foreign investors—who are often worried about hidden transaction costs in the form of “unofficial” governmental fees or payments—would probably take Article 16’s incentives more seriously if the article specified the relevant application, selection, and appeals procedures more clearly. A final point regarding Article 16 is whether a Russian participant is always required. Assuming it is not, the phrase “information on the Russian participant” should probably be edited to avoid confusion.
Promulgating a pro-foreign investment law that provides for government guarantees that property rights will be respected can play an important role in attracting foreign investment. However, as investors are all too aware, even a pro-investment law may be changed at a later time by the legislature due to the government’s legislative sovereignty. A new government may desire to nationalize certain industries, for example. Thus, the ability of the Russian Federation or of the oblast to promulgate new laws that might override property rights previously guaranteed to investors tends to reduce the attractiveness of any government guarantees that are made. Especially for a developing economy such as Russia and its component units, such guarantees should be made more effective by reducing the chance that the laws will change to investors’ detriment.
One way to increase the likelihood that such a guarantee, once granted, will be respected by future governments is to implement a constitutionally limited government, with an independent judiciary having the power of judicial review. Another way is to make the guarantees binding under international law, since states are often reluctant to be seen as clearly violating international law. An investment agreement executed between the host state and investor accordingly may be “internationalized,” so that the state’s obligations contained therein are binding under international law. For example, the agreement may contain both an international arbitration clause, which grants jurisdiction to a neutral third party, such as the International Center for the Settlement of Investment Disputes, and a stabilization clause. A stabilization clause provides that the law in force in the state on a given date is the relevant law for purposes of interpreting the investment agreement, regardless of future legislation. This effectively freezes the legal regime in place on a certain date so that any future changes in law contrary to the state’s guarantees are without effect, at least under international law. Since it is understood that the oblast is not a state under international law but is, instead, a political subdivision of the Russian Federation, the cooperation of the Russian Federation would appear to be necessary in order to properly provide for any internationalization of agreements. Likewise, any constitutional changes in favor of limited government and a free-market economy would presumably require appropriate authorization from the Russian Federation.
A Statement of Principles in Article 1 should clearly indicate that the oblast recognizes the importance and sanctity of private property and that the purpose of the draft is to protect the private property rights of foreign investors. Such a statement may be useful in persuading investors that the oblast is serious in its commitment to protecting and respecting investors’ property rights. This statement would also increase the chance that the draft, in cases of ambiguity, would be interpreted in favor of investors’ property rights. Furthermore, it is often unclear whether contractual rights are considered to be property rights on an equal footing with other types of property rights. The draft should clearly provide that “property” and “property rights” include immovables and movables, corporeals and incorporeals, intellectual property rights, and contract rights.
Article 14 begins by generally guaranteeing protection of most kinds of foreign investment activities, “regardless of the types of property,” and prohibiting certain types of legislation. In the second paragraph, however, there is introduced the possibility of “changes in legal norms,” which will be announced to foreign investors “in advance ... through publications in mass media and on TV.” The third paragraph states that in the event the oblast passes legislation that affects the legal rights of foreign investors, such investors will be given three-years notice. Alternatively, the need for a “grandfather” clause is understood, but this is not necessarily the best way to achieve the desired effect. Thus, Article 14 appears to attempt to “stabilize” the legal regime so that laws cannot be enacted to the detriment of an investment. However, the stabilization lasts only three years, far too short a time for investors who often calculate the feasibility of an investment on the scale of decades.
The first and third paragraphs of Article 14 are clearly inconsistent and, arguably, neither approach is correct; the legislation needs to address changes in law in terms of normal regulations versus regulatory takings. Article 14 should clarify that it applies only to pre-existing investment, which necessitates specification as to precisely when an investment is considered to have been made.
On the other hand, the guarantee that changes to the foreign investment law would not take effect for at least three years after being enacted, is impressive. This grace period could give foreign investors an additional feeling of security. It is noted that the law is silent regarding how such changes to the law would be brought about in the first instance. In order to eliminate uncertainty, the drafters should consider stating how such changes would be made and by whom. Also, if permissible under governing law, the drafters might wish to consider including a provision to the effect that no changes will be made absent a super-majority vote of the legislature or another similar restriction on the government’s ability to change the law. Such a concession would undoubtedly be viewed as a serious commitment on the part of the oblast to promote and support foreign investment.
VIII.Promotion of Free Market Policies
The draft is obviously intended to promote foreign investment and market policies in general. With suitable modifications, it may well succeed in doing so. It is, however, suggested that the draft take into account long-term economic growth and social and political stability. There are two specific concerns in this regard.
First, the drafters are urged, either in revising or implementing the law, to be cautious about
the extent to which Nizhny Novgorod’s land or natural resources are offered to foreign investors as
enticements or guarantees.
History throughout the developing world indicates that insensitivity to issues of sovereignty
and nationalism, particularly with respect to precious or symbolic minerals and resources, can
over time give rise to powerful xenophobic reactions on the part of the local population. Such
reactions, especially in countries without long-standing democratic traditions, can be
economically and politically destabilizing. It is not suggested that real estate or natural resources
should never be offered as security to foreigners—indeed, an oblast such as Nizhny Novgorod
may have little choice if it wishes to attract foreign investment—but the point is that the long
view of things should be adopted to the extent possible.
Second, it is recommended that provisions specifically aimed at ensuring long-term benefits for Nizhny Novgorod be included, such as:
Sharing of Technology and Technical Expertise. Many developing country investment
codes provide incentives for foreign investment projects that will “assist in
permanently implanting” new technology in the host country. Thus, under the Sri
Lanka Code, proposals for private investment are more likely to be accepted to the
extent that they foster local “technology producing capacity.”
Employee Training Requirements. Under the Liberian Code, foreign investors are obliged
“to employ Liberian manpower and to select and train Liberians on a systematic basis
in skills required at all levels in the Operation of the Approved Investment Project.”
Local Capital Participation. Many investment laws provide inducements or requirements
for joint ventures with local investors. Under the Sri Lanka Code, the general rule for
foreign investment in the private sector “will be that local collaborators should hold
the greater part of the shares and retain effective control.”
Development of Underdeveloped Areas. Some investment codes provide incentives for foreign investment in less industrialized or less developed parts of the host country.
While these suggestions run counter to the unfettered free market policies currently in vogue, they may be preferable from the point of view of long-term efficiency and modernization.
The draft purports to have Nizhny Novgorod establish a foreign investment insurance
scheme; it is doubtful, however, that any foreign investor would be willing to rely on one oblast’s
purported insurance against expropriation. Article 20 does not address what the insurance is
supposed to cover, what premiums will be required of the foreign investor, or what role the oblast
will play. Investors are unlikely to take such insurance seriously when offered by the place receiving
the investment because the continuity, dependability, reliability, solvency, and integrity of the
insurance is changeable at the whim of the local legislature; foreign investors are likely to take such
insurance seriously only when it is offered by their own country or multilaterally, for example, the
World Bank’s MIGA. Obviously, insurance of the type provided by the United States Overseas
Private Investment Corporation, such as against civil disturbance, may be desirable but may require
some funding by the oblast.
Article 30 states that, for the purpose of balance estimation and bookkeeping, the amount of investment is tied to the exchange rate at the Central Bank of the Russian Federation. Although the article does not state exactly how important such an accounting actually is, it is quite possible that the instability of the ruble may hurt the foreign investor in this process. Possibly, this accounting should be based at least temporarily on the dollar until the ruble becomes more stable.
From a drafting viewpoint, the draft is too lengthy a document, and it is not always clear
and well-organized. In this respect, the draft’s complexity neither encourages foreign investors
nor promotes foreign investments. In fact, the detail provided in many articles is strictly
regulatory information that, at times, is more suitable for a regulation than for a foreign
investment law. Succinct articles with one theme are preferable to a cross-reference of subjects
addressed within one given article. Clarity is critical in all legislation but especially so in a
foreign investment law, which does not usually benefit from abundant judicial interpretations of
its provisions rendered by national courts. After all, in the foreign investment arena, if a law is
poorly understood, it will simply not serve to attract foreign investment and, thus, its raison
d’être will cease.
Because some sections of the draft are ambiguous or seemingly inconsistent, they may
have a discouraging effect on potential investors.
For example, it is unclear what inexpedient
means in Article 18. Furthermore, what protection do investors have against the administrative
body acting arbitrarily? Article 27 is unclear as to areas such as foreign trade zones, where the
products are brought in for handling and processing with the ultimate objective of sending them
back overseas.