By James Burgess, Senior Commercial Manager at Atradius
Businesses need not to be afraid to trade with Russia, despite the country being in the midst of a recession. Our new economic report, Trade With Russia, found that Russia can still provide export and investment opportunities for businesses providing that adequate precautions are taken.
Businesses may have been burned by the global recession but their domestic experience should not deter them from seeking out trade opportunities in Russia. While the Russian economy is in recession, there is still demand for many imported products and services. In particular there is opportunity in sectors such as luxury consumer goods, engineering products and pharmaceuticals. Meanwhile, Russia’s investment and modernisation programmes provide opportunities for foreign investment, expertise and technology.
Of course we would advise that exporters do their homework up front so that they understand the legal and cultural differences, and are aware of typical payment practices but with robust risk management in place there is significant potential to do business with Russia.
There are several important principles for businesses looking to trade safely within Russia. Firstly, it is important to get the basics right. Ensure your written agreements are comprehensive and robust. There are cases where supply agreements are not enforceable due to basic omissions. For instance, it is not unusual to find more than one legal entity using the same corporate name so the business must be clearly identified. The agreement must also contain sufficient details about the specification, quantity, quality, price, payment provisions and specific terms of the supply.
Secondly, keep things simple; use simple and transparent supply arrangements in the form of direct deliveries to the customer and direct payment. Avoid indirect import schemes which may unwittingly involve evasion of customs duty or import tax as such schemes are coming under increasing scrutiny by the Russian authorities. Businesses should also choose the law they feel comfortable with. You may not know but in cross-border relationships, the parties are entitled to choose the law that should govern their supply relationship. UK suppliers can therefore choose to be governed by English law.
Getting paid is never something businesses should take for granted. Supplies should only be made to creditworthy entities with sufficient assets for payment claims to be enforceable. If this cannot be guaranteed, seek additional security from a sufficiently solvent affiliated company or third party guarantor. In addition, define payment obligations – in writing and in advance.
A further consideration is to be aware of corporate approval requirements. Supply agreements are usually signed by The General Director of a Russian company. To verify, it is common practice to request the company’s charter and shareholders’ resolution on their appointment. Corporate approvals may also be required on the Russian side under specific circumstances.
Next is a reminder to comply with competition laws. Any supply agreement is subject to mandatory Russian competition rules. There is a safe harbour exemption for vertical agreements that do not hold a market share of 20% of any of their markets. Where one party has a market dominating position, special rules apply.
Looking at regulations, there are three guidelines to follow. Firstly, if your arrangement is more than just the supply of goods/services, it may be subject to additional requirements under Russian law, for instance, if it contains features of a franchise relationship or relates to intellectual property rights. Next, comply with the sanctions; the EU and USA have imposed comprehensive sanctions on Russia which restrict certain imports and exports. The supplier should monitor prohibitions, restrictions and licensing requirements and keep up to date with any changes. Thirdly, ensure that you consider the dispute resolution forum in advance: Contractually agree on the dispute resolution forum as decisions of a foreign court cannot normally be enforced in Russia and vice-versa. For cross-border supply agreements, parties must include an arbitration clause.
The final principle which is key to all international trade is to be insured. As a trade credit insurer, Atradius not only provides protection against the risks of not getting paid but can advise its customers on the opportunities and risks of trading in Russia and around the world.