State regulation of investment projects in Russia

Mainstream

Government regulation of an investment project is not a set of administrative barriers, but an environment in which a project is either protected and stable, or loses money due to unforeseen rule changes.

The question is not whether a building permit can be obtained. The main question is how to build the project into the regulatory system so as to fix the rules of the game for the entire period of return on investment.

Effective regulatory support begins with three checks:

• Whether the project is subject to special restrictions or tolerances.
• What kind of government support is really applicable and beneficial?
• How to protect investments from non-commercial risks, especially from abrupt regulatory changes.

If these three issues are not resolved before the start, the investor may successfully build a plant and lose the project economy due to new taxes, quotas, requirements or sanctions restrictions.

When there is a need for deep regulatory support

The need goes far beyond obtaining permits if:

• You are launching a greenfield project or a major upgrade.
• the project is related to subsoil use, energy, transport, communications, strategic industries;
• The investor is a foreign company or structure with foreign control.
• You are eligible for tax credits, subsidies or a stabilization clause;
• it is necessary to conclude a SPIC, a SPC, a concession or enter a special zone;
• The state is a counterparty, co-investor or regulator whose decisions directly affect revenue.
• The project requires numerous approvals at the federal and regional levels.
• There is a risk of sanctions pressure, export controls or blocking transactions.
• You are planning to exit the project by selling the stake to a strategic investor.

The mistake most investors make

Many companies start with the question:

What documents to apply for a construction permit?

That's the wrong first question.

The right question is:

What regulatory model will provide the maximum legal stability, predictability of taxes and the ability to protect investments throughout the project lifecycle?

Sometimes the best result is SPIC 2.0. Sometimes - SZPK in combination with entering the TOP. Sometimes it's a concession. Sometimes it is a structure with a Russian project company that is not subject to strategic restrictions. Sometimes active GR is at the stage of regulatory framework formation.

Regulatory support does not require cabinet compliance, but a project strategy sewn into the business plan.

Step 1. Qualify the project and identify the limitations

The first thing that starts legal work is not a list of benefits, but a classification of the project.

Key questions:

• Is the activity strategic for the defense and security of the state (Law No. 57-FZ)?
• Is the Foreign Investment Control Commission required?
• Does the industry fall under special regulation (subsoil, communications, broadcasting, water supply, strategic infrastructure)?
• Are there any restrictions on the share of foreign participation, on the corporate structure, on the place of registration of the holding?
• Are sanctions, export controls or restrictions on the admission of foreign goods to public procurements extended to the project?

An error at this stage can stop the project a year after the start, when it turns out that the deal required prior approval.

Step 2. Collect a regulatory map of the project

Before the investment begins, it is necessary to form a full regulatory map – a document combining:

• a list of mandatory permits, licenses and approvals;
• the time of their receipt and the authorities responsible for the extradition;
• requirements for the project company (licensee, operator, subsoil user);
• land and urban planning restrictions;
• environmental and industrial requirements;
• commitments on localization, technology transfer or export revenue, if they arise from industry regulations or the forthcoming SPIC;
• applicable technical regulations and standards.

The map becomes the basis for the calendar schedule for obtaining all regulatory tolerances. Without it, deadlines break down systematically.

Step 3. Select the instrument of state support and fix the conditions

This is where the economic sustainability of the project is built.

In Russia, key tools are:

• SPC – stabilization clause, fixing regulatory and tax conditions for up to 20 years, compensation for violation of stabilization;
• SPIC 2.0 – a special investment contract with fixing regulatory and tax conditions for up to 20 years, with obligations to localize the technology;
• TOP – benefits for taxes and insurance premiums, simplified administrative procedures;
• SEZ – tax and customs preferences, ready infrastructure;
• regional investment projects – reduced income tax rates;
• Concessions and PPPs are stable rules for infrastructure projects with the participation of a public partner.

Each instrument has its own requirements for the minimum investment volume, timing, localization and industry affiliation. The choice should not be based on an advertising booklet, but on a risk-based financial model.

Step 4. Ensure sanctions and export compliance

For projects with an international element, this is not a support function, but a condition of survival.

It is necessary:

• Analyze the status of ultimate beneficiaries and counterparties;
• Check products and technologies for export control;
• to exclude the hidden application of foreign sanctions bans to operations inside Russia;
• to build into the project settlement mechanisms that are not blocked by sanctions restrictions;
• Consider a ownership structure that allows you to continue operating under any scenario.

In some cases, licenses or permits from OFAC, BIS, the Ministry of Finance of other jurisdictions are required, as well as the accounting of Russian counter-sanctions decrees.

Step 5. Antitrust and strategic coordination

If the project involves the acquisition of shares, interests, property or rights that determine control, the applicability of:

• The Law “On Protection of Competition” (consent of the FAS or notification);
• Law No. 57-FZ on Strategic Societies (preliminary approval of the Board of Directors);
• industry requirements for disclosure and transaction structure.

The practice of recent years has shown: Even restructuring within a group with a foreign element may require passing a Governing Body Commission if the object is strategic.

Step 6. To build interaction with government agencies as a system GR

Getting permissions is a tactical task. The strategic goal is to build a predictable dialogue with regulators.

A strong GR includes:

• preliminary informing of the profile FOIV about the parameters of the project;
• obtaining written explanations on the controversial rules;
• participation in working groups and discussion of NPA projects;
• management of the terms of administrative procedures;
• prevention of conflicts at the inspection stage;
• Creation of coalitions with industry associations.

In Russia and several CIS jurisdictions, a significant part of the regulatory risk is removed not by formal law, but by the correct administrative positioning of the project.

Step 7. Getting key permits and licenses without critical delay

Every month, downtime during construction or waiting for commissioning directly hits the IRR. Therefore, the permitting block should be managed as an independent working flow:

• urban planning plan, project documentation, expertise;
• construction permit;
• technical connection to networks;
• licenses (subsoil, communications, hazardous production facilities, waste management, etc.);
• Conformity conclusion and entry permit;
• registration of rights and cadastral accounting.

At each stage, we need not just “documentary lawyers”, but specialists who understand the practice of a particular region and department.

Step 8. Establish investment protection mechanisms

Relying on the goodwill of the state is not a strategy. Legal protection is provided in advance:

• the inclusion of a stabilization clause with a compensatory mechanism in the NPC or SPIC;
• use of bilateral investment treaties (Russia has BITs with dozens of countries, a number of treaties allow arbitration against the state);
• Political risk insurance (OPIC, MIGA, national agencies);
• arbitration clause with the possibility of a dispute being heard in a neutral jurisdiction or in investment arbitration;
• the right to compensation for damages caused by illegal actions or inaction of state bodies through administrative and judicial appeal.

If the protective mechanisms are not laid at the start, it is almost impossible to add them later.

Step 9. Prepare for inspections and potential administrative pressure

A project in a regulated industry will inevitably face scrutiny.

The best protection is a pre-prepared system:

• a register of all regulatory requirements applicable to the facility;
• internal regulations reflecting mandatory requirements;
• Documentation of all key operations;
• A dedicated officer for interaction with inspectors;
• algorithm of actions in case of presentation of orders, suspension of activity or initiation of administrative case.

In critical situations, the immediate involvement of lawyers capable of challenging the actions of bodies in court and administrative order is required.

Step 10. To ensure exit from the project without regulatory blockages

The exit strategy should take into account:

• the need to coordinate a transaction with the Board or the FAS;
• currency control and procedure for repatriation of investment income;
• Possible restrictions on the sale of a stake in a strategic company;
• SPC/SPIC conditions when changing investors;
• Taxation of the transaction taking into account international agreements.

An exit that is not planned by the regulator is either disrupted or closed at a substantial discount.

WWPC, SPIC or SEAN: pick

The choice is determined not by general recommendations, but by a specific industry, ownership structure, investment volume and planned payback period.

How to strengthen your position before starting a project

The best regulatory strategy is laid down in the pre-feasibility stage.

Preferably before entering the project:

• Regulatory due diligence of the site and industry;
• to obtain preliminary conclusions of the profile FOIV;
• to model several regulatory scenarios (basic, tough, sanctions);
• lay in the shareholder agreement mechanisms in case of change of regulation;
• assess the applicability of BIT and political insurance;
• structure the project through a Russian legal entity that meets the requirements for beneficiaries of benefits;
• Create a “regulatory reserve” in the project schedule and budget.

A project that has not received such training is vulnerable to the first rule change.

Common mistakes in structuring investment projects

1. Not to check strategic status. The transaction may be considered void if the consent of the Board of Directors is not obtained.
2. Ignore the FPC and the stabilization clause. The company remains unprotected in case of deterioration of the tax regime.
3. Rely on the verbal assurances of officials. Without a documented fixation of conditions, the risks are entirely on the investor.
4. Putting unrealistic approval deadlines into the model. Puffs are bad for IRR.
5. Not to take into account the sanctions restrictions. The project may be paralyzed due to the inability to calculate or deliver.
6. Not to build compliance at the start. When the system is tested for maturity, the risks of fines and suspensions increase dramatically.
7. Skip the statute of limitations for appeal. Administrative and judicial time limits for challenging the actions of the authorities are limited.
8. Mix the regulatory function and GR. Without professional legal work, even a strong administrative resource does not save from systemic risks.

Investor checklist

Before entering the project, you must answer 15 questions:

1. Is the investment subject to Law No. 57-FZ?
2. Is the prior approval of the Board or FAS required?
3. Is foreign participation in the industry limited?
4. What licenses and permits are required at each stage?
5. What kind of state support tool is applicable and most profitable?
6. Does the financial model meet the requirements of the chosen instrument?
7. Have the stabilization clause and the compensatory mechanism been fixed?
8. Does the project have the sanction risks of the investor’s jurisdiction?
9. Is it possible to settle and deliver in any sanctions scenario?
10. Is there a BIT between the investor state and Russia/CIS country?
11. Is the corporate structure a possibility of judicial and arbitration protection against the state?
12. Is there a GR support plan at the federal and regional levels?
13. Have procedures and time limits been set for appealing against the authorities?
14. Is the crisis response plan ready in case of project suspension or asset seizure?
15. Is there a regulatoryally clean exit from the project?

What a strong regulatory strategy looks like

A strong strategy includes five levels:

1. Regulatory Qualification Project classification, industry and strategic constraints, permit map.

2. Incentive Structuring Selection and legal registration of SPIC, SZPK, SEZ, TOP or concession with fixation of stabilization conditions.

3. GR & Permitting Systemic interaction with bodies, obtaining permits, prevention of administrative conflicts.

4. Protection Architecture International Guarantees, BIT, Arbitration Clause, Political Risk Insurance.

5. Dispute & Crisis Management Appeal, administrative claims, investment arbitration, non-commercial exemption protection.

Without a fifth level, the first four can be destroyed by a single regulatory decision.

FAQ

Does my project fall under the Strategic Societies Act?It depends on the type of activity and the structure of control. Even a minority deal that gives the right to block decisions may require approval. Legal qualifications are required at the pre-deal stage.

Yes, through the SZPK, SPIC 2.0 or a regional investment project, subject to the established requirements. Stabilization may include income tax, property tax, transport and land taxes, and regulatory conditions.

What to do if the state body delays the issuance of permits?Necessary administrative appeal and judicial coercion, as well as GR-escalation. Passive waiting increases the damage.

Yes, if the applicable BIT allows investment arbitration, or if the contract with the state provides for such a clause. In purely domestic relations with Russia, such opportunities are limited, but structures through a foreign project company sometimes allow a dispute to be withdrawn beyond the perimeter of national courts.

Include in the agreement with the state (SWPC, SPIC) a stabilization clause and a compensation mechanism. In the absence of such an agreement, rely on BIT and political risk insurance.

Yes, provided that the project is implemented through a Russian legal entity that meets the criteria. Sanctions restrictions can affect the practical implementation of benefits, so a comprehensive check is required.

Is it possible to withdraw from the project by selling the share to a foreign investor without approval? In other cases, FAS consent or notification may be required. The sale of a stake in a company that has a SPC or SPIC may also be limited by the terms of the agreement.

More importantly: For a long-term capital-intensive project, the stability of the rules is always the priority. The benefits received could be devalued by a single regulatory change.

Related services

• Government Relations & Regulatory Advisory
• Investment projects and public-private partnership
• Special Investment Contracts (SPIC) and SPC
• Sanctions Compliance and Export Control
• Strategic transactions and coordination with the Board
• Permitting documentation and licensing
• Investment Arbitration and Protection against Expropriation
• Corporate structure and asset protection in the CIS

Related material

• How to choose between SPC and SPIC for an industrial project
• Strategic Societies: What a foreign investor needs to know
• Seven levels of investment protection in Russian jurisdiction
• How to Build a Regulatory Risk Reduction Function
• Investment Arbitration against the State: when it works
• Sanctions Compliance for Investment Projects in Russia
• Regulatory due diligence of the site: Check before the deal
• Exiting a project in a regulated industry without losing an asset

Conclusion

State regulation of an investment project is not an administrative necessity, but an environment in which a protected project economy is formed, or risks that can stop business are imperceptibly accumulating.

Successful investors don’t try to circumvent regulation. He puts it into the project early on: It fixes stable conditions through legally binding mechanisms, builds predictable relations with the state and prepares in advance the tools of protection in case of changes in the rules.

In a regulated economy, the winner is not the one with the most ambitious business plan. The winner is the one who structured the project correctly and protected the investment before it became vulnerable.