BISNIS Bulletin, December 2002/January 2003

 

Legal Corner: The Shifting Sands of Licensing in Russia

 

by Michael Malloy

 

This is an excerpt from “Ten Considerations for a Tough Market,” published in Capital Perspective (Moscow) in June 2002. The full article is at http://bisnis.doc.gov/bisnis/country/rusfed.cfm.

 

One of the issues that makes Russia a tough market for investors is the confusion surrounding licensing of activities. A major player in the Russian market exclaimed to me once that it seemed that one needed a special license even to breathe in Russia. Licensing is one of the most vexing problems for foreign investors for four basic reasons: (1) it can be difficult to determine whether a specific activity requires a license, (2) regulation often overlaps between authorities, (3) rules keep changing, and (4) management of companies often do not give adequate or early consideration to licensing issues.

 

Most of the rules for licensing of activities are set forth in Russia’s Law on Licensing of 2001. However, there are exceptions in that law for banks and credit institutions and for some other activities for which the licensing rules exist in other laws. Aside from these exceptions, the licensing law seeks to set forth the exclusive list of activities for which licenses are required. However, that list is not entirely clear, so it can be difficult to determine whether a license is required for a certain activity or set of activities. Regulations are also published for certain activities, but even these regulations may not provide conclusive information. Ultimately, the best way to tell whether a specific activity is subject to a license is to first look at the law and regulations, and then pay a visit to the relevant authorities. In many cases, the actual practice of the licensing authorities differs from what one might expect from reading the law or regulations alone. Moreover, since the granting of a license is often a relationship-based endeavor, it is important to establish a positive relationship with the relevant authorities from the start, so a visit to them will be helpful in a number of ways.

 

Overlap of regulatory authority can occur between levels of government as well as between ministries. While changes to the Licensing Law have placed the lion’s share of licensing authority in the hands of federal ministries and agencies, when it comes to most licenses for undertaking specific activities, regional and local authorities still have significant permitting and licensing authority for various aspects of projects. Therefore, one should always check at all levels of government to ensure that all issues for licensing, permitting, and similar requirements are covered.

 

As one would expect anywhere, the regulation of certain activities may involve more than one authority so that different aspects of what is the same activity may involve licenses from more than one regulator. Again, the best way to sort this out is to check the rules and then discuss the matter with the relevant authorities. Many ministries work closely with consulting bureaus with experienced employees who should be able to provide useful guidance. These consulting bureaus are not parts of the ministries, but they have excellent contacts within the ministries. They will charge a fee for their assistance but, in most cases, their assistance is well worth the money spent.

 

Like many other aspects of Russian society, the rules for licensing have been changing for the past several years. The new licensing law came into force in the autumn of 2001, replacing the licensing law of 1998, which had replaced earlier rules set forth by the government. While it is understandable that these rules will be in flux to some degree, such frequent changes make it difficult to keep up with new requirements. The only ways to manage this situation are to keep on top of the changes either directly or through advisors and to maintain an active relationship with regulatory authorities to be able to work through any changes that arise.

 

The final consideration is perhaps the most important and the easiest to avoid. For some reason, licensing requirements are often not considered by a company operating in Russia until the regulated activity is already undertaken. This clearly leaves the company with a degree of exposure that usually could have been avoided. Adequate planning for an operation in Russia should include an effort by management to sort out licensing issues before any activity is undertaken. This is important because the penalties for operating without a license may include confiscation of income received from the unlicensed activity, not to mention the disruption to operations and the shadow that may be cast over a later license application.

 

Michael Malloy is head of the Corporate and Commercial Law Department at the Moscow office of Gowlings International, Inc. He can be reached at michael.malloy@gowlings.com.

 

For more information on legal, tax, and regulatory issues in Eurasia, visit http://bisnis.doc.gov/bisnis/isa/isa-legal.cfm.