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Business Risk in Russia

Sergey Matyunin, editor of the indispensable RussianLawOnline.com, has an article in The Moscow Times on the president’s proposed reforms to the Civil Code, which will raise minimum capital requirements for companies by 50 fold, thereby impacting liability and risk of doing business in Russia.

Last week, the Supreme Arbitration Court published on its web site the new version of the Civil Code proposed by the president’s council to improve civil legislation. The amendments to the code are expected to become law in the near future. If this happens, the minimal capital requirement for companies registered in Russia will surge 50 times — from 10,000 rubles ($320) to 500,000 rubles ($16,000).

According to the limited liability principle, a private business owner’s financial liability is most commonly limited to his investment in the company. Therefore, if the new amendments are passed, private business owners’ liability will essentially increase by 50 times. For many, this will mean a return to the 19th century. (…)

Clearly, Russia’s amendments to the Civil Code are an attempt to prevent abuses and crimes committed by fly-by-night companies. But if the reform works out as planned, there will be fewer companies to control, and the army of taxmen — one of the biggest in Europe — will be able to collect whatever is needed. It will mean the end of relatively low taxation in Russia.

The World Bank, which believes that capital requirements should be as low as possible — or even better, abolished entirely — will probably drop Russia from it current 123rd place to an even lower position if the capital requirements are indeed raised to 500,000 rubles. But Russia doesn’t seem to care.