Country Business Briefing

Imagine how big is the territory of a state in which one of the presidential residencies is located in the most northerly capital city in the world, St. Petersburg, where you can actually see the aurora borealis in the polar night, and in which his other living quarters is in Sochi, a subtropical climate zone. Surprised? Incredibly, the extension of the Russian Federation from north to south is insignificant compared with its extension from east to west.

To travel from Kaliningrad, the Russian enclave in Europe, to the main city in the Russian area near the Pacific Ocean, Vladivostok, it takes half a day by plane. In this vast territory we find magnificent natural resources: forests of taiga rich woods, fertile black soil, marine and fluvial fishing zones, oil, gas, diamonds and precious minerals too.

However, this vast territory generates serious problems for the country. The 140 million inhabitants it possesses are clearly insufficient to dominate all the wealth it houses. Even in the two most important cities in Russia, the population density is the lowest among all European capitals. For this reason, Russia has always been hospitable to foreigners who are willing to invest in the development of the country. Many years of Russian history confirm this fact.

Business Forecast or Why Mundo Loves Russia

The Real Russia is opposite to what you will find in Hollywood movies. The west wants you to view Russia badly although they hide the fact that many public enterprises and even Sberbank are owned by foreigners.

Perhaps you are surprised by what we tell you in this article about Russia? Possibly this picture does not match what you had heard about this country? The truth is that today's Russia differs considerably from the stereotypes that it used to have. In fact, positive changes in the country continue to develop. An international entrepreneur has recently declared that Russia grows five times quicker than other countries on a yearly basis.

Now we will see in detail some myths and prejudices that Russia, its market and its economy are usually associated with.

Are you under the impression that the Russian economy depends on external factors, and for this reason you consider it is not worth investing in?

This is false!

Mundo´s Freedom Index

The Mundo freedom index is in essence an index of freedom with which our team of experts evaluates countries through a combination of indicators that include personal security, financial and business freedom in the face of high tax burdens and state interference, in special, before socialism and communism.

Political stability (absence of socialist and communist tendencies): 7.5

The basis of Russian political stability is the national consensus and the general desire of the population to increase their well-being. Although the country continues an evolutionary transition from the communist regime to the market economy, the general development vector is linked to liberal values in its classical understanding: the protection of private property, freedom of religious ideas and beliefs, and the right to privacy.

These freedoms can be limited only by reasonable national security interests, since a country that occupies a territory of this magnitude, with a considerable population and great natural wealth, is obliged to play an active role in international affairs. 

Expat Living in Russia

Many people who come to work or study in Russia are worried about the language barriers. The truth is that in the Russian business environment you will find that is possible to communicate using English language. However, if you really want your business to be successful in Russia, then knowing the language is extremely important. If you have a team working in Russia, for example, when it´s time to face some difficulties then it will be much more effective if you can talk to your team in their own native language. It is necessary that you become not only their work role model, but also their role model in life.

If you are trying to be an expat in Russia, then you should be aware of the dangers you will be exposing yourself to:

  • To fall in love and start a family in Russia.

  • Start to feel amazingly free and, on the contrary, feel very limited in other countries with stricter social rules.

Residence and Nationality in Russia

Russia is continuously putting in place a residency and eventual citizenship regime to attract wealthy or expert foreigners into its borders. If you have capital, talent or ideas Russia will find a way to grant you a visa and eventually permanent residence and citizenship. Like everything in Russia, you need however the right connections, the right legal team and the right approach in order to thrive.

It is possible to obtain Russian citizenship by presidential decree. However, only French actor Gerard Depardieu, American actor Steven Seagal and wrestlers Roy Jones and Jeff Monson have been able to achieve it through this very unlikely method. If you know Vladimir Putin personally and you are a film or sports star, your migration problems could be solved relatively quickly. It should be noted that the Russians forgive Putin for this little weakness.

Contribution to the economy is another less complex path to obtain Russian citizenship, though not much more realistic. Following the legislation in force, those investors who have a minimum participation of 10 % in the shared capital of a legal entity of the federation, have access to a simplified procedure to achieve citizenship.

Tax Residence

Individual taxes in Russia are applied under the principle of residence, therefore, foreign citizens legally residing in this nation for more than 183 days a year become tax residents. Tax residents in Russia are foreign specialists who work on an employment contract basis, regardless of the length of their stay. The tax on the income of foreign citizens who are not tax residents of Russia is 30%, whereas this tax is only 13% for Russians. This measure serves to protect the labor market from unskilled labor in countries such as Moldova, Ukraine, and the Central Asian countries.

However, there are legal ways in the country's legislation to reduce the tax burden on foreign citizens, and in some cases, to avoid taxation altogether.

For example, if you sign a contract with a Russian company as a highly qualified specialist (which includes managers), your tax will be 13%, regardless of the number of days you reside in Russia. 

The Russian Banking System

It is a well-kept secret that Foreign companies and individuals can open a bank account in Russia through a foreign company or representative office and there is a special zero tax regime if your profit is earned outside Russia. Russian banks are large, mainly safe for foreign investors with a high level of services. Because many banks have not had much experience with foreigners you need a specialized lawyer to guide you through the bank opening process. 

The Russian banking system has gone through several stages of development. At the present time, it finds itself in a transition stage, leaving behind the days of an inefficient and sly market. This process is actively stimulated by the Central Bank of Russia, which over the past five years has increasingly tightened the criteria for banking stability.

As a result of the tough policies of the Central Bank, even some of the banks included in the TOP 10 banking structures were forced to close. Today, all Banks of Russia included in the TOP 10 show excellent results according to stability criteria and are distinguished by the presence of high reserve levels, liquidity and a high-quality loan portfolio.

Russian Special Economic Zones

Right now, there’s about 26 special economic zones in Russia, distributed all across the country. You may be wondering: what´s so special about these special economic zones?

Well, we could start by telling you they’re made to last for 49 years, and are used to develop technological economic areas such as tourism, port and transport infrastructures, spas, the development of technologies and the commercialization of their results, and the production of new types of products. According to the Russian Ministry of Economics and Development, there are more than 730 foreign investors from 38 different countries already working in these special zones, where more than 32,000 jobs have been created.

In each special economic zone, there are typically leading companies that make important economic attractions. You have, for example, the case of the Titanium Valley Special Economic Zone, in the Urals, which has two Ural Boeing manufacturing plants producing titanium parts for all Boeing’s civilian aircrafts. Within this same economic zone, there is another company that produces composite materials for the Russian aviation industry.

Kaliningrad Special Economic Zones

The Kaliningrad Special economic zone represents one of the best investment opportunities in Russia today with very low labor tax, reduced profit tax and sometimes full exemption and multiple start up opportunities in Russia’s gateway to Europe.

This platform for entrepreneurship appeared in 2018, and it aimed to create a fiscal haven to promote the return of capital to Russia. However, the legislation in Russia is not discriminatory, so the same conditions designed to draw back Russian capital apply to foreign companies wishing to enter the jurisdiction of these special administrative regions.

Some mistakes made during Russia's transition from a communist to a market economy during the last decade of the 20th century led the most significant Russian companies down the path of complex offshore schemes. The jurisdictions of the UK, USA, and the island of Cyprus were the preferred ones for Russian business. 

Russian Corporate Structures

Any investor set to work in the territory of the Russian Federation will have to make a decision, that is, choose which of the three existing methods of doing business is suitable for him: either open a Russian legal entity, create a joint venture, or open a branch or representative office of a foreign legal entity. Each of the forms has its own advantages.

The opening of a legal entity in Russia can be carried out either in the form of a limited liability company (LLC) or a joint stock company (JSC). These legal forms of a legal entity conduct their activities according to their own charter. These forms are usually used to create subsidiaries, as they may be 100% owned by foreign founders. Many issues related to the registration of an LLC and a JSC are the same. Therefore, we consider the conditions, terms and cost of opening a company using the example of an LLC, as the most common form of doing business in Russia.

Investment in Russia

The Russian securities market is in the second place in terms of capitalization of world stock markets, which borders on the cost of Spain, Singapore, Saudi Arabia and Thailand.

Pretty much like Russia itself, the Russian stock market is full of contradictions. According to Alexei Afanasyevsky — founder of one of Russia’s securities markets— the peculiarity of the Russian stock market is that it is not a tool for regulating the economy or even influencing it; the Russian state has far simpler and effective tools for this.

On the one hand, this does not allow stock markets to develop, their capitalization remaining low. There is a clear underestimation, but the same factor protects stock markets from external influences and macroeconomic trends. For example, the macroeconomic statistics of Russia, such as consumption or employment, are almost not affected by the stock market.

On the contrary, the conclusion or breakdown of trade negotiations between China and the USA affects the Russian market, as it creates an informational occasion for short-term speculative variations. But one cannot say that the stock market has degraded; it remains an effective tool for corporate borrowing and profitability.

Investment Funds in Russia

Few People know that Russia has its own managed fund structure which is a hybrid between a trust and a Fund guaranteeing full UBO confidentiality and tax optimization. Russian call this the PIF or Unit investment fund. Using this structure, you can invest in all classes of Russian assets with full control and tax optimization, and yes, it is fully open to foreigners. 

You can reach a high level of government protection through mutual funds and closed-end mutual funds, as well as all the other advantages we mentioned earlier. These asset-based approaches are similar to trusts and investment funds, as well as many other perks that often attract investors to offshore jurisdictions.

If there’s something closed mutual funds are known for, it’s their high confidentiality level.

This is mainly because the owners’ registry of such funds is closed, and the direct information exchange on closed mutual funds within the structure of the CRS can’t be done because of the legislative quirks of the Russian Federation. In any case, to open bank accounts and perform other operations, all you’ll ever really need is the name of the trustee.

Tax Structure in Russia

Tax structuring is usually the number one reason for creating closed-end PIFs (most often, real estate PIFs).

Indeed, as long as the property is in the fund, income from operations with it is not subject to income tax or any other similar tax. However, as soon as the funds are withdrawn from the PIF (payment of income to the shareholders), this tax saving is not possible.

Therefore, it is advisable to create a PIF when it is clear where the income “within the fund” will be reinvested. Only aspects of different taxation regimes can be discussed, depending on who is the holder of shares (resident / non-resident, taxation regime, etc.).

In PIFs there are two levels of taxation. The first is the income of the PIF itself and they are completely exempted from taxes. The second level is the taxation of the shareholder, in these cases the tax rates will depend on the shareholder´s country of residence (from tax benefits to full exemption).

Creating a Family Office in Russia

There’s a running joke among Russian financiers: “Who created the first family offices in Russia? Why, the Royal Family of Saudi Arabia and the Emir of Qatar, of course!” Well, to be honest, there just might be some truth to that.

In recent years, the Russian Direct Investment Fund has practically become the groundskeeper for a lot of money from these countries, which they chose to invest in Russian raw materials, high-tech industries and tourism. So, you see, sometimes it’s just like the saying goes: “There’s a grain of truth in every joke!”

Ever since first-generation Russian businessmen started going on vacation, the creation of family offices has become a bit of a problem, a problem Russia seeks to solve quickly. Family office services are provided by both banking institutions and law firms, as well as trust management companies.

Since the financial sector has been developing at a faster pace for many years, many qualified consultants, both Russian and foreign, work in this area. Many of them now actively participate in the creation and management of family offices.

What Types of Business Opportunities can be Found in Russia?

Investing in medium-sized enterprises is perhaps the most promising and, at the same time, most difficult part of direct investment in Russia, believe it or not. Statistics say that medium-sized enterprises are the weakest link in the Russian economy, due to one of Russia’s main headaches: the lack of people necessary to develop such a large behemoth of a country.

The main problem of this sector is the lack of skills in management: this is reflected in providing medium-sized businesses with investments, problems with business organization, searching for sales markets, etc.

There are, of course, cases when all the prospects for development are met; but there are also cases when a company on its death throes may be acquired by a competent entrepreneur and turned into a prosperous one in the blink of an eye. And, more often than not, it’s a foreign investor the one who ultimately becomes the almighty savior of the company.

Country experts
View All

Bank accounts and financial services Financial and banking

Years of practice in his field: 15

Financial incentives Special Economic Zone

Years of practice in his field: 10