What are the reasons for Russia’s damaged reputation as a country that rarely upholds the law? Thomas Heidemann: It is essentially due to Russia’s recent history. After the Soviet regime fell apart, it became necessary to completely overhaul the Russian judicial system and adapt it to the new political and economic environment. However, laws cannot be written and implemented overnight and changing the public perceptions of sensitive issues is a slow process. This explains the judicial vacuum that prevailed for a certain period of time and caused the West’s perception of a situation out of control.
Max Albers: As is so often the case, clichés are hard to dispel and often don’t correspond with reality. Over the past 15 years, Russia has made enormous progress in judicial matters. Huge efforts were undertaken to implement an orderly judicial system which, in view of the Soviet limitations at that time, is now favourable for the development of a thriving market economy. When we arrived in Russia in the early 1990s, the country was experiencing genuine judicial chaos; however, this is no longer the case today.
But isn’t there sometimes a discrepancy between having laws and actually enforcing them? Can the Russian judicial system truly be trusted? TH: Inspired by German and other mainly European judicial systems, Russian laws are in general well drafted and enforced. The current legal system is reliable and court cases are dealt with far more swiftly, i.e. three times as fast as in a country like Germany.
MA: The majority of the West’s negative experiences in Russia can mostly be attributed to Westerners’ own ineptness. It is important to take enough time to understand the mechanisms in Russia before hastily setting up businesses. For example: privatization of land, after the Soviet era, was an issue that was not ideally managed and it was often difficult to ascertain who the real owner of a particular property was. Therefore, when purchasing real estate, it is imperative to verify with a number of different sources, that the property in question does indeed belong to the vendor. Documents and deeds, official looking as they may be, are not necessarily always sufficient proof of ownership. This type of problem can be avoided by careful gathering of all necessary information and proceeding with due caution.
Some people complain about administrative red tape and even ill-intentioned officials. What is the true picture? MA: The situation in Russia varies depending on particular areas, but contrary to popular belief, many regions are making enormous efforts to attract foreign businesses and to encourage investors from abroad. For instance, Kalouga is a good example of a region that has been successful in creating a favourable business environment. Numerous companies have set up business there, including Volkswagen and Peugeot.
TH: In respect to abuse of power, it cannot be denied that there are some illintentioned civil servants who take advantage of their positions. By endlessly delaying construction permits, cutting electrical supplies to a factory etc, they hope to persuade frustrated businessmen to secretly pay them certain amounts of money in order to “speed things up”. However, succumbing to that kind of pressure is a monumental error, because once you start paying for such demands, you will find yourself forced to continue to do so. The Russian legal system provides ways and means to counter such types of harassment and it is advisable to anybody to search for solutions through the existing legal channels. Although, invariably such official legal procedures will mean loss of time, it is still infinitely preferable to any illegal conduct as this may have unfortunate long term repercussions.
And what about taxes? Some years ago, the situation was described as chaotic. What is your current analysis of the situation? TH: The public’s perception of taxes was one of the major problems faced by the Russian government in the 1990s. An accumulation of various taxes and the lack of fiscal transparency led to widespread tax evasion. When Vladimir Putin came to power, one of his first moves was to end fiscal anarchy by setting a maximum rate of 13% for personal income tax. This became very effective in fighting tax evasion and bringing whole sectors of the economy out of their previous existing semi legal status. Therefore, contrary to public belief, taxation in Russia can be favourable. Even non-domiciled individuals, i.e. foreigners living and working part of the year in Russia, pay only 30% personal income tax, which still compares favourably to many other European tax laws.
MA: The system is currently working fairly well; 90% of tax litigation cases taken to court is won by the individual taxpayers, which is further proof that today law and order in Russia are respected.
How would you advise entrepreneurs who want to establish businesses in Russia? And what you would you say to Russian businessmen who are tempted to setup in Switzerland? TH: I would advise Western businessmen to study the Russian mentality and business mechanisms in Russia, before embarking on a business venture. Hiring legal experts is strongly recommended for those who are seriously contemplating doing business in Russia.
MA: Russian entrepreneurs have a tendency to avoid working with the authorities, whereas in Switzerland businessmen are actively encouraged to present their projects and interact with government officials. In fact, Switzerland seeks to maintain a favourable economic environment and local authorities are more than willing to encourage new businesses. For instance, provided the project is serious and attractive, it may in many cases result in advantageous fiscal conditions. However, in order to achieve this type of support, appropriate steps must be taken, such as obtaining necessary clearance from the governmental authority (e.g. tax rulings, etc.) and adhering to strict deadlines, so that these projects can be concluded successfully.
