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RUSSIAN LAW OUTLINE FALL 1993

I. The Communist Party and the Law
1917 Revolution had a disastrous effect on the technical side of
the law.
tzars laws were thrown out
many lawyers were thrown out of the profession

Today, the legal profession is doing poorly because:
1) rapid changes in the law
2) inflation has caused law professor to enter private practice
because they do not get paid enough to eat as professors. This
threatens legal education.

In 1920's private business was abolished.

New laws were established in the 1930's to run the state sector.

Stalin had Kirov assassinated because he was the worst rival.
Stalin then blamed other who he then eliminated as well.

Labor camps served several purposes:
1) penal purpose
2) enemies of state locked up
3) slave labor provided

Essentially under Stalin, there was no freedom of labor.
30 million farmers couldn't go to cities
60 million urban workers couldn't leave the cities
6 million people were in labor camps
4 million people were in the military

Today, labor camps have to bid on jobs against free enterprises

Bolsheviks shifted focus from industrialization to collectivism in
farming and in industry. Focus was shifted to heavy industry and
state planning.
This caused rapid growth and helped win the war, but it also
resulted in massive inefficiencies.
In 1980's Russia begun to give churches back to the church.

In Spring of '93 Russian Parliament passed restrictions on foreign
missionaries. Yeltsin vetoed it and amended with compromise and
Parliament agreed to now rich, foreign missionaries will not be
restricted, but Orthodox and Muslim churches will be subsidized by
state to compete with western missionaries.

II. The Trial of the Communist Party

In fall of 1991, Yeltsin issued two decrees:
1) To ban the Communist Party
2) To seize the property under the control of the Communist Party
These two decrees were the first issue before the Constitutional
Court.
Yeltsin's advisors claimed:
1) Congress gave Prez broad powers to rule by edict.
2) Implied powers by Prez's oath of office to uphold Russian
Federation and rights of citizens of federation.
pro Communists said that these decrees were nonconstitutional

Structure of Cts:
In Russia, Constitutional Ct. decides Constitutional Issues.
Cases are brought
before the Constitutional Ct. by petition.
Regular Supreme Ct. decides issues of statutory interpretation.
Supreme Arbitration Court decides commercial cases.
Military Courts appeal to the regular Supreme Court.

Issue two before the Constitutional Court was that the Communist
Party was unconstitutional.
Prez's advisors claimed:
1) A lot of property in CP Possession was government property
which CP had just been using as its own.
2) In banning the CP, such property became ownerless and the
government could appropriate it.
This issue was complicated because some of the property was
properly purchased with Party dues.

The Constitutional court looked at misdeeds of the CP to show its
engagement in destroying individual rights and through the coup
establishing a dictatorship.

Ct. held that there was plenty of evidence that top level of CP
were engaged in conspiracy to destroy citizens' rights and
overthrow lawfully elected government.

HOLDINGS OF CONSTITUTIONAL CT:

1) Central Party apparatus was unconstitutional and properly
banned. The ct. thus accepted the concept of powers thru the
Prez's oath of office.

2) Local party organizations had no voice in making policy and
had minimum involvement in coup, so they were innocent and Prez's
ban on local organizations was improper.
Anything that locals claimed to own must go to local courts to
reclaim property or get compensation from the government. Not many
have done this because it is not popular to be a CP member.

This decision greatly enhanced the stature of the Constitutional
Ct. hearing allowed both sides to have strong legal counsel
Ct. asked for several dozen expert opinions

Trial of Coup plotters:
Defense was that they were trying to save the country and not
destroy it.
How can you be tried for the overthrow of a country that doesn't
exist?

Issues 1 and 2 are substantially the same issue. If the communist
party was opposed to Constitution and Democracy, then the
President had a right to ban it.

The problem was that Yeltsin did not go through the proper
procedures to ban. Where did Prez get power to ban?

The Russian Commission on Constitutional Review disappeared after
the coup:
1) had to review statutes for constitutionality
2) commissioner went 1st to media with his impressions of
constitutional issues.

Constitutional Ct. lost some stature in March when it responded to
Yeltsin's warning to Parliament that he would disband them if they
did not shape up with a TV response by the Chief Justice of the
Constitutional Court, saying that such a move by Yeltsin would be
unconstitutional.

Disbanding of the CP left Russia with basically no political
parties. This vacuum continues today despite provisions allowing
the establishment of parties.

III. Soviet Criminal Law

DINA KAMINSKAYA, Final Judgment
She represented several dissidents quite well in the 1970's.

Much of the legal culture traits seen here are still true today.
1) prisoners held incommunicado and they couldn't meet with their
attorney
2) attorney's fees were strictly controlled and fixed at a low
amount
3) still very detailed preliminary investigation

Today, the investigator branch is independent. Investigator writes
a detailed written record which is available to the prosecution
and defendant, thus there are few surprises. There is no plea
bargaining at trial.

Reasons for decrease in number of acquittals after Stalin from
10,,15% to .3%:
1) many incompetent prosecutors under Stalin. By 1970's and
1980's they were highly trained and educated.
2) criminal justice became part of the state planning. Goal was
to increase convictions.
prosecutors didn't bring up weak cases.
courts were scared to acquit.

The people's prosecutor was named by the community. This was not a
' very successful experiment.

Investigation is quite formalized

Testimony is typically worded and rephrased by the investigator to
fit his case.

Prosecution uses threats of discipline against defense counsel.

Police misconduct is not grounds for the inadmissibility of
probative evidence.

No evidence got in automatically

Experts (impartial) called by the Court, not by each party.

Lay assessors sat with the judge to help make decisions. The
assessors typically did whatever they were told.
This system was established when trial by jury was eliminated.

Current law reforms suggests judges would hear only minor cases,
while a judge and jury would hear serious cases.

TODAY:
there is more access to client during the preliminary
investigation.
when investigation ends, defense has access to investigative
matters.

Typically in a Russian trial:

Judge read indictment.this looked bad for the defense.
Witnesses called and instead of oath they sign statement that they
understand perjury.
can cross,,examine by attorney, defendant, and victim.
at end of case after closing arguments, the defendant was allowed
to make a statement.

FIRST TRIAL IN Final Judgement

,,Judge was under pressure to convict, but the evidence was
lacking, so he sent it back for more investigation.

Russia has no institution of bail.
Minor crimes, let out on own word
Serious crimes, kept locked up

DIVISION OF COURTS:
Russian Federal Supreme Court
Civil Division
Criminal Division
Appeals Division
Trials Division (complex cases_
Appellate Court (Provincial Court (city court)
first instance for serious cases.
Trial Court (people's court)

Russian judges are promoted up the system (like in Europe)

Russian law prevents witnesses from sitting in the courtroom
before testifying themselves.

Russian Ct. has traditionally been an independent investigator of
facts. It is probably ok that judge went to see the scene of the
crime for self.

Today, there is a public perception of a substantial increase in
the crime rate.

Two levels of crime:
1) White collar (cheating on taxes, etc.)
2) Robbery, Burglary, etc.

The criminal law system has changed only slightly since the
1970's. Some procedural stuff is still the same.

IV. Civil Rights

There has been a continuing fight between the president and
parliament over control of publicly owned mass media.
Prez's office has managed to keep control of TASS and TV and kept
Izvestia independent.

There is plenty of unbiased news such as CNN.

The Mass Media licensing law hasn't been followed much and this
restrictive law hasn't caused many problems.

Registration of Political Parties:
Until a party is registered, it cannot own property or have a
bank account.

RUSSIA U.S.

formation FREE FREE

charter register FREE

get on ballot ? moderately difficult

Liberal Democratic Party is a reactionist (neo,,Nazi) party

submitted fake registration materials
this gave a good reason to Yeltsin to cancel the party

KGB. Bakatin wanted KGB to become counter,,espionage organization.
He was a popular appointment as KGB head but was forced out by
hardliners.

ANTI SEMITISM:
Jews were forced out of the professional schools.
Today, there has been a sharp decrease of official anti,,Semitism
but an increase in popular anti,,Semitism.

GAY RIGHTS:
Shows the Americanization of Russia's civil rights struggle
Russian government puts no obstacles in the way
Liberal views on gay right are much more in minority than in U.S.

MISSIONARIES:

,,Absolute freedom of religion proclaimed a few years ago.
The result is the instantaneous appearance of televangelists with
lots of $. There has also been a greater popular backlash by
leaders of Russian Orthodox Church and leaders of Muslims.
Legislation was adopted which restricted foreign missionaries, but
Yeltsin opposed this. The compromise was to subsidize Orthodox and
Muslim churches.

V. The Constitutional Court

COPYRIGHT CASE:
Copyright agency was:
1) censorship agency
2) property confiscation agency. The money earned by Soviet
authors abroad was taken by the Agency.

Russia created a successor to Soviet Copyright Agency. The
Constitutional Ct. said that this was legislating without going
through the legal process. Thus, the new agency was thrown out.

Hidden agenda behind the case:
old law suits were still on books against the Agency (largely due
to its predecessor) So, it was in Agency's interest to get
themselves retroactively dissolved

A new copyright agency has been set up and it is definitely not a
successor

Law on Monopoly in the markets was an attempt by Parliament to
take power from the President The Constitutional Ct said that this
was unconstitutional

CAR VOUCHERS CASE
Moment of glory for the Constitutional Ct
Savings measure was used to entice people to work on Railroad in
Siberia and they were allowed to get a car without a wait Late in
1991 people wanted to cash in on these cars and were told that it
was delayed Because of inflation, the money that the workers had
saved for the car was worthless Workers sued for deprivation of
basic property rights Constitutional Ct said that they should get
the cars

Yeltsin's ban on National Salvation Front:
This Front was dedicated to imposition of the old Communist System
Constitutional Ct said that Yeltsin cannot ban this group

Yeltsin said on TV that he was going to rule by decree:
Yeltsin backed off, but in meantime, Constitutional Ct said
Yeltsin's remarks were unconstitutional, based on the TV address
,,The Ct was attacked for acting politically
,,later, the Ct gave a more balanced decision

Izvestia was upheld as independent

TV stations were independent unless had Yeltsin's signature

Yeltsin began to cut back on privileges
Makes leaders look weak because they loose their status
sets up means to rule by decree and take over because of their
weakness

Elections for Parliament in December New parliament will have 2
Houses, patterned on U S Congress Lower house is the Duma

VI Overview of Russian Business Law

There are two ways to calculate GNP/capita into dollars:
1) Find out what exchange rate is on black market (1200=$1)
2) Use purchasing power parity exchange rate
what is the purchasing power of dollars?
this gives a better picture of the economy

Over the past 4 or 5 years, the GNP has decreased by 35%
,,This does not means that the standard of living has decreased
35% because many items once produced are no longer necessary (i e
tanks or collected works of Lenin )

1992 Inflation: 2600%
1993 Inflation: 800%

The jump to 2600% was really a one time adjustment so it wasn't as
bad as it looks

One of the main problems is that there is no working banking
system

Price Controls have been removed This lessens demand for
government subsidies because noone is expected to keep prices low

PRIVATIZATION:
can solve some of the problems of excessive government subsidies
creates diverse centers of power
private market economy is more efficient than a planned economy

Small businesses have moved toward privatization, but large
businesses have been more slow to do so

Each member of the public has received a voucher stamped with
10,000 ruble This is used to purchase a stock in business, etc

Russia has copied German business law (similar to U S law also)

They have not reached the stage yet of publicly owned, publicly
traded companies
need laws on insider trading
securities regulation commission to make sure there is no fraud

FOREIGN INVESTMENT:
small in quantity
N-E)5 Many of tax breaks have disappeared, but it is
easy to set up a Russian company

"Ofshorsky" company allows foreigners to get around taxes on
foreign investments

Legal Protection:
Ownership rights are fairly well protected
enforcement of contract rights is weak

Bankruptcy law needs to be worked out There has been a tendency to
subsidize old, bankrupt companies

Anti,,trust law: Does Russia need one?

VII Legal Regulation of the Soviet Economy
a
Joffe and Maggs, The Soviet Economic System A Legal Analysis
(1989)

LEGAL SYSTEM (most still true today):
Soviet economy was regulated by each branch of Soviet law
"State law" (equivalent of Constitutional Law) was leading branch
in Soviet
Legal System
Important economic legislation was approved by the Politburo
GOSPLAN (State Planning Committee) controlled production and
distribution of products Prices were fixed and unrealistic They
also did not reflect market needs
Land had no price attached to it and was not bought or sold It
was all a property of the state Decisions over land were
completely administrative

Banking disputes typically cannot be taken to court

Two systems to adjudicate economic disputes:
1) Arbitrage when neither party is private citizen or collective
farm
2) Ct system - at least one party is private citizen or
collective farm
most go to arbitrage There are two kinds:
1) Departmental arbitrage: disputes between 2 organizations with
same superior
2) state arbitrage: disputes between organizations, with
different superiors
Punishment was by criminal law Administrative violations received
a lesser punishment

PLANNED ECONOMY:
Planning of production
Planning of distribution
Building construction was centrally planned
GOSPLAN (State Committee on planning) : Production Planning
GOSSNAB (State Committee on Supply) : Implements Distribution
MINTORG (U S S R Ministry of Trade) (Consumer goods)

With fall of Communism:
January 1, 1992, price controls were lifted and rationing system
was eliminated Today, stores can charge what they want

Most steel mills have demand for only one third of their capacity
because in the past they used to primarily supply tank factories

There are still price controls on bread and energy

VIII Market Economy Institutions
LEGAL FORMS OF DOING BUSINESS IN RUSSIA"

,,In U S , there is sole proprietorship, partnership (full
partners, limited partners), corporation (and S corporation) and
limited liability company

In Russia, there is sole proprietorship, partnership, corporation,
open joint stock company (freely transferrable shares), closed
joint stock company (no shares can be sold without permission of
owners),,,,this is similar to the limited liability company in the U
S

Choice of forms of business pretty much the same as in the U S

"Shelf Companies": Attorneys set up companies and when individual
wants to set up a company, they just get an established one This
saves time

DIFFERENCES:
Tax Uniform Business Tax
Raising capital Different markets for loans and stock
Stock markets have not developed Haven't's convinced the public
that they would be honest
There have been no minority rights established

Existing operations are still largely non privatized
State/collective farms either remain as they were or become
different in form but not in substance Some converted to stock
companies but were not necessarily privatized

FOREIGN INVESTMENT:
Used to have to be in joint venture, but this has disappeared
because now foreigners must choose Russian form

Very few incentives for foreign investors anymore

Antimonopoly legislation has been copied from the west, but it
still has to be determined More serious problem is to help the
unemployed from such former monopolies as tank factories

U S Foreign Aid Proposal includes U S advisor on anti monopoly
policy

IX Privatization

Vouchers
In some privatization, preference was given to insiders
Auctions are held where citizens could buy directly

Vouchers can be bought and sold

Three methods of privatization:
1) Complete employee buyout
2) Employee buyout of 20,,30%
3) Employee buyout of 51% (many cases of this type)

Employees can pay in rubles for vouchers
non cash rubles
cash rubles
voucher rubles (worth face value of voucher @ buyout)

80% of buyout price must be paid in vouchers

N-E)5 Price of vouchers vs dollar:
October 1992 $35
January 1993 $10
March 1993 $6
October 1993 $9

When they were $6, this was a major political embarrassment for
Yeltsin

Yeltsin attempted to increase the value of vouchers by:
1) pushing for lots of actual auctions
2) closing out lots of insider buying with cash

Second stage of privatization involves state enterprises

June 1993:
Yeltsin ordered 80% of shares must be sold for privatization, and
20% must be sold to the public
Parliament vetoed this decree twice
Yeltsin won by blowing up Parliament

Checkoslovakia, for example, privatized in 6 months to get it over
with

In March of 1993, all the vouchers in Russia were worth only $1
billion

X Land

Before 1860's there were large estates and those that farmed were
serfs

After Revolution, land declared to belong to Commonwealth

1930's collectivization (state effectively took over all the land)

In the final days of the Soviet Union, there was a vague attempt
to divide land between state and local governments plus the
government said that land belonged to those residing on it

After 1991 Coup, 2 yr struggle with Parliament as Yeltsin tried to
rush privatization in face of obstacles

Russia is broken down into regions (oblasts & Krais) and Republics
Yeltsin has not told Republics how to run their governments
because of threats to secede
Yeltsin's goal is that he would appoint governors to regions and
regions would appoint governors to provinces This is a return to
czarist methods, with strong centralization

Many cities are trying to milk money out of privatization

Yeltsin said that those who privatize can buy the underlying land
This has been resisted by cities

Transferability has been restricted You must own land for five
years before you can sell it

Theory of Reform:
State/collective farms (joint stock company)
any farmer can take its share of land and secede (2% have done
this)
If you secede, there isn't much done for you

In U S , you:
make downpayment to build house
bank assesses value of house by comparing to similar property
title search and title insurance
bank sells mortgage

In Russia, there are no comparable elements Recently, property has
become an inalienable right Bank loans are a problem because noone
knows what will happen with inflation

Rate paid to savers in Russia is very low, so noone saves
There is no variable interest rate
There are no title insurance companies
There are no title recording systems
Credit rating system is virtually nonexistent
appraising system began to be reformed as other properties are
appearing which one can use to compare

Today, all sales are illegal because they are for hard currency or
wire transfer to foreigners

XI Environment and Natural Resources

The fundamental concept is that each piece of property has its
purpose
was one of the major causes of decline of the Soviet economy
no means of transfer of property from one use to another

Today, there is a lack of Urban Use Planning Law

Environmental Protection law protects a little, but not very much

Adopted a pollution tax (typically 3 times one months' minimum
wage salary)

During Soviet period, there was no environmental pollution
because:
1) self policing: the polluting industries controlled pollution
regulations in their fields [no EPA]
2) there was pressure to increase output
3) state planning of inputs planning of production planning of
distribution
4) no E P A type agency

TODAY:
1) an E P A replaced self policing (but it is small and weak)
2) pressure to increase profits
3) free to make/input environmental stuff

Nature preserves and environmental parks are quite well kept

OIL Exports were by a single company Price of oil was fixed at a
small portion of its market price

Government's response to loss of income in oil:
1) export taxes
2) export licenses
3) recreating about half dozen monopolies

XII Secured Transactions and Bankruptcy

There is no real zoning in Moscow

You cannot get financing to get an apartment

Question: If Russian wants to borrow from an individual to get
apartment, what kind of security interest in apartment could
Russian offer to lender?

One possibility is that lender could form a company and buy the
apartment and rent to Russian (so lender has title)

Security interests are generally well defined (see Materials p
149,,50)

Under Article 9 in U S , you protect security interests by
registering the interest with a state office

German method to protect security interest is for businesses to
keep a corporate file on any security interests (honor system)
This works in Germany because of tradition of obedience to law and
personal liability of person who puts in false entry

The advantages of the German system is that it is easy to set up
and is cheaper

Russia has adopted the German method (P 151 Materials

If there is a state registry for a particular type of object,
then must register with state, otherwise, individuals keep own
books)

If you don't get paid, you can attempt to get property
One comes out ahead as secured in bankruptcy

Article 26(4) security interest protects you in bankruptcy

See article 10 for additional requirements
getting something notarized is difficult and expensive

PROCEDURES FOR BANKRUPTCY:
In U S , Chapt 7 (shut down and auction off)
Chapt 11 (get chance to restructure)
In Russia,
1) Outside administration (from England)
2) arrangement ,,,,sort of like reorganization
3) liquidation
4) settlement

Under option 1, an outside administrator comes in and runs your
business This is not popular with management

There are three ways one can get into bankruptcy:
1) company applies
2) creditors that are not paid apply
3) Procurator applies

Secured creditors come out well

Article 30 says if get injured on job, could get huge damage award
which is paid over time

Article 32 says still must pay wages and taxes and creditors

Bankruptcy law is quite well drafted Today, there have hardly been
any bankruptcies filed

It is important to get bankruptcy going:
1) Inflation Caused by government subsidizing loosing enterprises
If stop subsidies, need bankruptcy
2) would speed up the privatization process

Strong forces in Russia oppose bankruptcy:
Big enterprises held whole infrastructures of huge resorts and
schools A result of bankruptcy is to require them to shred the
infrastructure and cities do not want this responsibility

Sending in outside administrator is unpopular because someone
will lose their job as managers

Why have creditors refrained from initiating bankruptcy
proceedings?

Creditors generally owned a fixed amount of money and starting
legal proceedings will require a long term monetary commitment
These proceedings are long and with inflation, debt will be
worthless by the time they are awarded the money

Bankruptcy law does not deal with:
Inflation
Social Services run by huge enterprises
Spinning off parts of enterprises
High structure of managers who must be replaced with outside
administrators

XIII Anti,,Monopoly Legislation

Russia is not nearly as competitive as the U S The problem is how
to break up single unit monopolies into separate privatized
companies In the interim, the problem is how to prevent monopoly
pricing

Anti monopoly committees' goal is to force break up of monopolies

In Russia, one goal is to set limits on profitability and break up
monopolies

U S Division of Power:
Dept of Justice
FTC
50 State Atts General
Private lawsuits
In Russia:
President
Russian Anti,,monopoly committee
Local Anti,,monopoly committee (private suit is brought thru this
committee)

This structure is probably doing more harm than good

XIV Regulation of Stock and Commodities Markets

Moscow stock exchange never got a big chunk of the market About 80
stock exchanges have formed, each doing a small amount of business

Thus, it is hard to market stocks (no organization) Also, hard to
regulate

Law on Commodity Markets and Exchanges: 2 stage process (boom and
bust)
1) Commodities Exchanges
list of goods auctioned
matches buyer to unplanned goods
-,*5 2) Have wholesalers, retailers, dealers
commodity exchanges have now been replaced with normal market
institutions
some commodity exchanges have turned themselves into real futures
markets (i e futures market in rubles and hard currency)

The purpose of securities regulation is to state: "You can sell
rotten eggs, but you must tell the buyer that the eggs are rotten"

Russia does not have any operations securities regulations

Russia could set up a national on line computer trading system
which would be government regulated

An alternative is to leave regulations to private parties This
would decrease transactional costs and avoid governmental
corruption as well as eliminated need for specially trained people
(regulators, attorneys)

Minority shareholders do not really have any rights They might not
even get dividends

XV Rights of Employees - Labor Relations

Russian law closer to German/European than U S law

U S European

freedom of K state takes more active role in dictating terms of K
and in collective bargaining

minimum wage minimum wage
anti discrimination vacation
public policyfired only for cause

union mgmt Freedom of K
collective bargaining agreements

In U S , states compete for investment by:
rt to work law, restricting power of unions
low rates of workers compensation and insurance
high state spending for worker training

Russia would prevent this competition by saying that areas cannot
decrease employment protection

Russian labor unions have become more involved and the numbers
have increased, but there are many non union shops

COLLECTIVE AGREEMENTS:

Individual contracts between workers and employers
Systems of keeping individual records
1) U S keeping a file
2) German ,, soldiers carry books Lower number of support
personnel required Provides immediate access to info Russia uses
this method (modified)

Article 52: termination of job must be necessary and justified
(list of justifications are in the article)

dismissed workers get severance pay (i e like unemployment)

also get reinstated when possible

Article 64 governs work hours and time

Article 84 provides for an annual vacation Much of the rules here
are specified by government, similar to Europe

Article 101 governs overtime, for which your are paid double

Russian OSHA is very weak and safety is generally very poor

Russia has a liberal maternity leave policy and allows father or
other caretaker of child to take leave

LABOR DISPUTES:
collective bargaining, arbitration, and courts
Russian trial procedure is simple and many people represent
themselves

SOVIET SYSTEM:
Government owned all productive enterprises
turnover tax (excise tax on vodka)
unable to control budget (printed more money)

Today, there still are inadequate tax revenues and enforcement

Other republics are no longer allowed to print rubles Now they
must either print their own kind of money or give up authority to
Russian Central Bank

TAX STRUCTURE:

PERSONAL BUSINESS

federal income tax profits tax
(no local income tax) income tax

local taxes (low) Value Added Tax (VAT)
(see Materials, p 72,,3)

In VAT, as parts are put together, each has a tax but purchaser
gets credit for all taxes paid previously The idea is that taxes
for integrated manufacturers should be the same as for
non,,integrated who buy parts from elsewhere VAT is refunded when a
product is exported, because the goal is to keep the money at home

Attractions of VAT:
1) Economic theory: unlike social policy of income tax, to soak
rich and aid poor, business not run that way because unsuccessful
business should not get free help
2) VAT is easy to enforce because it is based on ultimate retail
price, which we know This is easier than income tax, which must be
documented along the way
3) VAT relatively invisible because it can be concealed in price
of goods, so government can more easily increase revenues with VAT

Lack of local taxes is a serious problem because this limits local
independence

Yeltsin has tried to get control of local governments and collect
taxes All money goes to Moscow and then some is funnelled back to
localities if they are "good"

Localities are not interested in privatizing land because they
would lose income to taxes, which go to Moscow

XVI Income and Gift Tax
,,
Everyone is liable for income tax unless not present for 183 days
in the year This is standard international tax law, because you
can tax the person where he is for most of the year

Exemptions from tax:
social security payments
pensions
interest on deposits
interest on treasury bonds
casual receipts (i e sell house to move to another)
disabled veterans
charitable deductions
deduction for children

Tax Rates: very from 12% to 60%

"Bracket creep" occurred where inflation made incomes of people
rise to increase brackets and pay higher taxes but purchasing
power was less Thus, there were many amendments to fix this
problem
Problem was solved by making everything turn on minimum wage

Today:
using computers to have income tax like in U S
withholding tax goes straight to government
estimated taxes paid
file annual tax return

In Soviet system, there were no estate taxes Today, there are
estate and gift taxes like in U S
these are enforced when people go to change title to car/house,
etc They must first pay the inheritance tax

Taxes only account for 10,,15% of money made, so there is tax
evasion or the money
is going elsewhere

XVII Taxation of Business Enterprises

VAT, profit tax, income tax

Advantages of VAT Treats businesses relatively equally
neutral
adjusts automatically for inflation because it is a percentage of
price and prices reflect inflation

There was a loophole that gave unfair advantage to imported goods
because there was no VAT on imports This year, VAT is applied to
imports to solve this

You can avoid VAT by smuggling goods in or by not reporting
assembly and manufacturing However, the tax police have some
strong powers to search and audit books

Corporate Profit Tax Law
Cannot deduct wages more than four times the minimum wage,
because really are receiving the profits of the company

Russian accounting system:
Money loses value quickly

Profit tax (Materials P 82,,83)
not paid on stock owned in other enterprises
not paid on casinos, video parlors, etc (special tax on them)
separate tax on insurance, banking, and sin tax

Item 10, standard rules of Russian accounting:
1) Authorized capital corporations
in U S you do not need capital to start a corporation
in Russia must have some minimum corporate charter capital

Article 3, how to tax a MNC?

2 methods:

1) Unitary Tax Add up all income, figure % of sales in each
place, and tax that & Income is prorated to each country based on
sales, not profits because it is too easy to manipulate profits
2) Examine each transaction Look at "transfer pricing" where
charge is more at the place of lowest tax rate

Article 5(Tax Rates) is prejudiced against people who do not
produce goods

Article 7 1(a) allows major deductions for new investments in
food, fuel, etc because last ones are subject to price controls

(c) allows deductibility of preschool, elderly homes This
reflects social policy

If a foreigner has Russian bank account with dollars and value of
ruble decreases, then Russia will tax the change in rubles (from
inflation) Thus, it is better to keep your account abroad

CORPORATE PROFIT TAX:
taxes profits, like in U S
Cannot deduct wage expenses, so the incentive is to decrease
number of employees This really hits foreign companies hard
because they pay higher wages

Investment tax credit law
to encourage investments for small companies
can deduct investments

Tax Police
made up of extra KGB people
in Regions, head of tax police reports to central Government
have good powers (Materials, p 111)
given special privileges similar to those formerly given to KGB

Survival of government over next year will rely on ability to
collect taxes, balance budget, and bring inflation down

U S government set up OPIC, an overseas private investment company
to negotiate with other governments over investment)

XVIII International Tax

,,Tax treaties are to avoid:
double taxation
getting out of paying taxes
tax fraud

treaty with Russia is a generic tax treaty

Treaty turns on the concept of being a resident
each country taxes its own residents
exception: diplomats

Residence:
for individuals, it is your permanent home
also deals with dual citizenship, etc

"Permanent Establishment"
even if you don't found a Russian company, still subject to
Russia's tax if go over and open a branch office/restaurant
if just ship frozen pizza to Russia, not "establishment"
Today, there is some problem with whether long term construction
projects = "permanent establishment "

183 Day Test:
If you have income from employment, you are taxed by state where
you are employed for 183 or more days

Russian income tax is about double the U S tax

U S companies try to avoid higher Russian tax consequences by
paying employees enough more to result in same net income after
tax (very expensive)
A company could just deposit money in U S account and pay U S
tax, but under the Treaty, IRS can turn you in to Russian Tax
Authorities since Russian tax law requires you to report and pay
tax on all income related to Russian income

If you do not get a refund back quickly in Russia, inflation
basically makes the money worthless

You only get tax credit for foreign income tax (8(b) P 147) So, if
Russian income tax is changed to a profits tax (cannot deduct
expenses), then this is not income tax and IRS can say no to
foreign tax credit

Options: U S can change its own tax law
,,U S could tell Russia to change its tax law to match ours to
deal with this problem
U S could tell Russia that if it is a U S company, Russia must tax
it so that can get a tax credit in U S

8(c) Permanent Establishments

Today, there is no problem to establish a representative office
Russian tax regulations tax rep office or perm establishment
U S oil companies are looking for concession agreements with
Russia to get tax privileges from the government

XIX Foreign Investment

Risks for foreign investors:
1) ordinary business risk (market forces, exchange rate
fluctuations, changes in laws)
2) political risk (confiscation of property without compensation,
non convertibility of currency, non protection of property rights,
especially intellectual property)
3) discrimination (higher rent, etc)

Foreign investment treaties are intended to help protect investors
against political risks and foreign investors being treated worse

Bilateral Investment Treaty:
Where there is discrimination, US gets MFN status (ie U S first
even under discrimination policy, before other nations)

Article 6, Foreign investor can force arbitration by international
independent body Russia and U S are members of international trade
arbitration agreement Therefore, enforcement of arbitration ruling
is done by one of the party members outside the requested country

An appeal of arbiter's decision is reviewed like a 2nd trial of
facts

Annex lists exceptions to this, such as national security and
banking & interest

FREE ECONOMIC ZONES
low taxes
good business laws
no customs duties

Russia is moving toward getting good business laws

biggest problems is sudden changes in taxes and export control
regulations

XX Intellectual Property Law

You must make sure that the Russian you buy from has title

Must make sure that the privatized corporations were properly
privatized (check succession claims)

Employer/Employee problems:
Patent & Trade Secret Law: who owns invention depends on law of
place of employment
US : if employee hired to invent, employer gets right to
invention, but under the regular employment contract, the employee
has rights, unless they are contracted away
Russia: employer gets right to inventions in ordinary employment
contract, but must pay the fair share of profits
labor law generally invalidates contracts that worsen employee
situation
if employer fails to apply for a patent within a time period, the
rights are essentially transferred to employee

Copyright Laws:
U S : Author of a "work for hire", employer gets it U S law
applies in Russia also
Russia: Employee is author and employer gets certain rights
to determine, you have to look at Russian business and determine
if author is factually an employee (ie shows up for work each day,
employer pays social security for him, etc )
If he is an independent contractor, you must get the license from
him
If he is an employee, you can get the license from the employer

Basic Rule Regarding Patents:
Must file application in country where you want a patent
Patent Cooperation Treaty says that every member country agrees to
accept a form application

Copyright law:
Universal convention
Berne Convention: more strict, Russia expected to join this one
soon
under this, once a copyright is perfected, work protected world
wide

Trade Secrets: Only a trade secret if it's kept secret If
information gets out anywhere, no longer a trade secret

Types of protection (largely untested laws in Russia)
1) legal rights to prevent employees and former employees from
leaking secret
2) preventing government agencies from coming in, getting secret
and releasing to public
3) industrial espionage protection

Trademarks:
mainly national in character (ie Stolichnaya vodka is a trademark
in US, but in Russia, it is a generic term
trademark can be lost if it becomes generic

Patents: If invention is described in a printed publication, after
1 year can no longer get patent on this invention in U S

Russia used to have "inventor's certificates" which state right to
invention and inventor received money for it (but now, inventor
must pay a fee on it)

Under law, patent given to first party to get to patent office
Paris Convention: get one year to file patent in other countries
after you file patent in country one, and application is backdated

US: give patent to first to invent instead of first to file

Technical Data Export Controls: Must get license each time you
export an improvement on an import

XXI Civil Procedure in Business Cases

Russia has regular courts and arbitrage courts
foreign parties are heard in regular cts unless they choose to go
to arbitrage cts

arbitrage cts hear all commercial cases

Commercial Ct Procedures
Art 20: kinds of disputes ct can hear (between individuals)

Art 23: very touchy disputes go before Supreme Ct of Arbitration

Art 36: very liberal
Individual can have any representative
Corporation can be represented by officers or attorney

Art 41: Rule of Evidence (if it is relevant, they let it in)

Art 66 "Stamp Tax" (filing fee)

Art 69, para 2:
if seeking damages, 10% of amount sought must be paid as filing
fee
sometimes can get around this by suing for interpretation of
contract rather than damages
regular courts have similar filing fees

Art 97: disputes must be resolved within two months from start of
case

Enforcement of money judgement is easy because a company must
have a Russian bank account to start and you can attach that
account
specific performance can't really be enforced
Art 157: to get writ of execution in domestic arbitrations to
enforce result of arbitration by Ct

LAW on INTERNATIONAL COMMERCIAL ARBITRATION

UNCITRAL (UN) This is the model law on international commercial
arbitration

Why businesses use arbitration:
1) people do not trust the courts in some countries
2) easier to enforce foreign arbitration award than a foreign
judgment

UNCITRAL Model Law and New York Convention: most have signed this
and it calls for enforcement in each country that has signed the
convention

2 Types of Arbitration Exists in general:
1) Institutional Arbitration: i e American Arbitration Association
2) Ad hoc arbitration: parties set up the rules

Russia's law makes a few minor changes in UNCITRAL
Enterprises with international investment (at least 30% in foreign
money) can take advantage of arbitration

Four grounds on which you can prevent enforcement of arbitration:
1) never agreed to arbitrate
2) outside scope of arbitration clause
3) gross procedural violation (i e bribe)
4) against public policy

Regular Cts enforce arbitration decisions
Art 16 last paragraph is the separability/autonomy of arbitration
clause
Prevents breach of substantive part of contract from resulting in
the arbitration clause being void

Under Russian law, they left out that arbitration should be based
on equity and fairness
They left in that arbitrators can decide law of which country to
apply
the law is ok, but:
1) hope you get money judgment because specific performance is
difficult to get
2) if go to regular/commercial cts, may get inexperienced judge,
so arbitration may be better

XXII Corruption
Ministry of Internal Affairs controls the local police
Subdivisions of the Ministry deal with corruption:
Economic crimes
investigative committee
organized crime

There is a special commission on corruption
Some local officials/police are selling privatized land for
personal profit or giving it to relatives
Huge temptation for corruption and bribery in renting office space
by municipalities
Central Bank granted lavish credits to local private banks who in
turn granted these credits to family/friends

However, it is probably the case that privatized land (even if
achieved through corruption) is better than state ownership
Problem with counterfeit vouchers
Many problems in fighting this corruption

The Ministry of Justice ran the court system
Now, judges have life tenure and the Ministry has lost power over
them

Courts would like to take Ct Administration out of the hands of
the Ministry of Justice and have the Supreme Ct run it

Ministry of Internal Affairs is good, centralized police
Solution of corruption must come from restructuring the present
system
Merely more cops will not help
No major reforms are foreseen in structure of justice system

Foreign Corrupt practices Act: it is illegal to pay bribes to
foreign officials

Two major trials: 1991 coup plotters, and Khazbulatov/Rutzkoi

COUP PLOTTERS:
1) Virtually impossible to convict on treason because country
supposed to have violated no longer exists (USSR) and Yeltsin
really overthrew it
Attempt to seize power provision requires intent to dissolve
Soviet power, which they clearly didn't want to do They could get
indicted under "official forgery" since they said Gorbachev was
sick They will probably be set free or can get time served because
already spent time in prison during the investigation

KHAZBULATOV/RUTZKOI, October 1993 2) facts should be sufficient to
convict these two because they organized armed attack

XXIII Yeltsin's Constitution
No compromise here, since Parliament no longer a threat
Under Soviet Union, Constitution said it was a federal system like
Canada but was run by the party as a unitary system like France
Article 4 makes this look largely like Unitary state
Russia has about 20 republics and 69 or so regions
Art 5, para 2, charter of republics called constitution and
charter of regions called charter (no difference in legal rights
placated regions)

Art 9 eliminates prohibition against private ownership of land,
although it doesn't automatically privatize land
Art 10 is the separation of branches, although less of a check and
balances system than in U S Russian constitution has a super
strong Presidency
Art 11 says that the Federation treaty prevails over the
Constitution
Art 13 no political ideology rules
Art 15 3 is deficient U S Federal Register Act protects private
citizens and businesses from unpublished laws, but Russian
constitution does not protect businesses

Chapter 2 is Civil rights (equal rts for men and women)
Art 20 1 Anti abortion law
Art 23 Right to privacy
Art 26 abandons the tsarist and Soviet principle of requiring a
national identity
Art 27 says residence permits no longer necessary with intrastate
travel passports
Art 28 freedom of religion
Art 29 freedom of thought, although hate speech banned
Art 35 is the right to private property
Art 37 is the right to work freely
Art 39 social security and pensions guaranteed
Art 40 is a somewhat socialistic right to a home
Art 47 calls for jury trials
Art 48 confirms right to lawyer from moment of detention
Art 49 is the presumption of innocence
Art 51 protects against self incrimination like U S 5th Amendment
Art 52 promises to compensate crime victims This creates real
problems because the state won't want to take cases if they would
have to compensate the victim
Chapter 3 is on Government Structure
Art 71 and 72 attempt to define the powers of the states and the
federal government The joint jurisdiction created is somewhat
illusory because of Article 76(2), which says that federal law
shall be issued in accordance with state law
Article 81(2) says that no one over 65 may be elected President

Chapter 7 is on the Judicial branch
The Constitutional Court will have 19 members
Yeltsin now has 4 or 5 votes out of 13 So, 6 more will give him a
majority This is a better political move than simply dismantling
Constitutional Court and appointing 13 new Judges
Yeltsin has also made it more difficult for cases to get to the
Supreme Court by requiring petition by President, 1/5 of Duma, or
if it goes there through the Courts
Yeltsin gets to appoint the Procurator General, who used to be
appointed by Parliament

Art 135 makes it very difficult to amend constitution:
For Chapt 1,2,9, have to call a constitutional assembly to amend

for all others, like in U S , has to be ratified by 2/3 states
There are also concluding and transitional provisions:
they repeal Brezhnev constitution of 1978
provide that constitution prevails over federation treaties
keeps prior regulations in force
Article 3 says Yeltsin stays in power
Article 5 says judges who serve less than a life term will be
replaced
Article 6 deals with phasing in the jury system
Article 7 provides a two year term for Parliament
Article 9 allows government officers to be members of Duma

New Congress will try to push through a number of laws:
Civil Code, including corporate law, contract law, tort law,
inheritance law
there will also be a need for other laws that provide details,
such as corporations law, something like the Uniform Sales Act,
Bank Deposit and Collection laws, Secured Transaction laws,
Mortgages and Real Estate finance laws
"Constitutional Law" are special laws adopted by 3/4 majority and
prevail over other laws

by: Ross E. Kimbarovsky

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