Russian entrepreneurs try not to make significant deals within Russian legal system preferring foreign jurisdictions. Leading Russian law companies having held a survey amongst their clients found out that the reason for such conduct was not just corruption, protection of property rights, attempts to hide beneficiaries in offshore zones or reduce taxes.
The main reason is that the Russian legislation does not allow of making transactions on the terms suitable for business. But the western legislation does. Russian lawyers intend to seek proper amendments to the Civil Code.
As a result of a survey held by a group of leading law companies shocking data was obtained. The survey shows that Russian companies try to make 90% of their significant transactions under foreign (mainly English) law. Therefore disputes on such matters are often referred to arbitrations or courts of foreign countries.
Leaving to foreign jurisdictions is possible in different ways. For instance by attracting foreign investors or forming foreign holding structures. And registration of offshore companies, including Seychelles company registration, is often applied. Practically the research has shown that the problem of leaving of Russian companies to offshore jurisdictions is not only connected with the wish for optimization of tax costs but also with avoidance of risks of Russian legislation.
It is mainly about complex and financially significant transactions: amalgamation and merger, formation of joint ventures, debt restructuring as well as transactions connected with investment. According to Prosperity Capital Management, in 2010-2011 IPO’s of RUSAL, X5, Evraz, AFI Development, Mail.ru and many others were held under foreign law. Nearly 100% of such transactions of Russian companies are subject to foreign law. Or for example it turned out that most venture capital funds operating in Russia are registered in offshore jurisdictions and make their transactions under English law.
Lawyers believe that the leaving of Russian companies to foreign jurisdictions brings a lot of negative consequences right up to the threat to the country’s national security and sovereignty. More often than not direct consequence of such leaving is consideration of disputes in foreign courts or arbitrations. In other words foreign courts settling disputes between Russian companies (or Russian beneficiaries of companies) with regard to Russian assets determine the legal effect that will occur in Russia.