Falk Tischendorf - Guide for Investors

Complaints remain about corruption and discrimination against foreign enterprises in government purchasing. However, the businesspeople surveyed note significant progress in issues of respect for the law and relations with government agencies. In any case, the digitalization of administration in Russia has already begun, a fact that is not yet being taken seriously by the German authorities. No one disputes that Russia has a problem with corruption; however, there are only a few who will admit that a corrupt arrangement always involves a person who enables this phenomenon with their voluntary contribution. For this reason, it’s fairly simple to deal with corruption – don’t participate in it, and state this position whenever a hint is made. Experience shows that the position taken on this issue quickly becomes well known, and attempts to “sell” certain services are immediately reduced to zero.

Naturally, it should always be kept in mind that here we are talking about Russian law, which defines the legal framework for business activity. Despite the fact that in many respects Russian law took shape under the influence of our legal system, and is therefore even similar to it in certain respects, nonetheless it they cannot be equated. The Russian “tax inspectorate” is not the same thing as the German tax inspectorate speaking Russian, and Russian law still differs in many aspects from German law. All the same, these differences do not mean that we are talking about “bad” law for business people and their activity. It means only that you must work more intensely with the law of the country in which you intend to do business. There are competent consultants for these purposes.

Those who have heard horror stories of business failures (and of course they do happen) should follow the advice of re-examining the situation with a more critical eye, and studying the reasons for the failure: poor choice of a partner, change in personal relationships, inappropriate work with employees, negligence in risk management. These are not the fault of the Russian legal system or tax system, but are on the shoulders of the investor, even when entrepreneurs attempt to locate the reason for their failures in everything but their own actions. Entrepreneurs take a very self-critical attitude when researching the reasons for unsuccessful projects, however in case of failures in Russia this analysis is apparently prematurely abandoned. In this regard, you can only protect yourself from the unexpected consequences of emotional decisions by factoring in a possible “out” from the project and setting aside the required expenses. These expenses are almost never considered in practice.

5. When an investor finally decides to organise production facilities in Russia, with due account of its available financing, the current political and economic environment, and the existing legal framework, this still does not mean that it is ready to implement its plans as quickly as in, say, Germany. The following practical examples show the problems that an investor might face when implementing its plans. There is no need to be frightened, as all the given situations were ultimately resolved in line with all compliance rules, and all the corresponding investments ended up being successful. Some solutions were not found as quickly as the investor might have hoped, however, and in some cases previously unknown individual paths had to be found. In any case, what was left was unplanned time, and time is money for an investor (in this case, losses). Therefore, reserves must be stipulated in the investment budget for these types of unforeseen situations.

The existing legislation on construction offers a compelling and important example when it comes to the placement of production facilities: roof structures in Russia must by law be able to withstand a higher snow load than in Germany. The standards on fire resistance of construction materials and soundproofing also differ from German requirements. For this reason, it is recommended that a local design bureau be engaged in a timely manner for design work, instead of trying to adapt finished projects to meet Russian standards as is often the case. After all, the design projects of foreign architects and construction engineers cannot receive the consent of the state authorities without being reviewed by a Russian design bureau.

The developer’s risks do not depend on construction legislation. They depend on how carefully it checks the site to be developed, on which, for example, the floor of a workshop with heavy installations will be placed together with the imposed additional load from presses and machine tools. The same applies to the expansion joints in a roof with a large surface area, where it is necessary to take into account the extreme variations in temperature in Siberia between daytime in the sun and sub-zero temperatures at night. So, there are reasons why an expansion joint in Siberia must look different than in the Rhine valley.

Those who entrust these tasks exclusively to their construction division that has made a name for itself in Germany or their own engineering firm, and believe that local specialists do not need to be engaged, may repeatedly observe how the floor of their 205-meter workshop gets flooded by a centimeter of water or wonder how and if they can use an additional foundation or rebar to maintain their heavy presses in a horizontal position on a workshop floor that is covered in cracks. Again, the country in which the production facilities are to be placed cannot be blamed for this problem, the real problem is insufficient investment planning and, in many cases, a certain degree of disregard for local expertise.

6. Not only the construction itself, but the installation of infrastructure also involves certain specifics that need to be managed: those who, for example, do not have experience with Russian utilities companies and believe that the latter are deeply interested in acquiring each new client and, therefore, will bring the utilities at least up to the boundaries of the land plot, cannot even imagine how long this might take or the costs that will have to be incurred before they receive, for instance, natural gas at their production facility. And they certainly do not think that the gas supply company’s network expansion plans may change without the entrepreneur having any say whatsoever: sometimes so much time goes by between the selection of the site, design, and receipt of approvals to the start of construction, that the utilities company may no longer consider the territory previously stipulated for connection to the grid as a priority, and for this reason may put off the corresponding plans for decades.

Those forced in this way to switch from natural gas to liquified gas unexpectedly find themselves in a completely new situation that presupposes certain expenses: another utilities company, at triple the price, with completely different logistical requirements due to transportation being performed by railway in tank cars instead of by pipeline, with the entirely unplanned need to create reserves, for which a special storage facility with enhanced safety features must be built.

Many entrepreneurs have had to admit that a power supply company cannot be forced to connect transformer substations and cabin substations to its grid, even if they meet all Western standards: the assumption of the utilities company that this equipment could lead to a short circuit or to a power outage throughout the entire existing grid in the region for which the utilities company is responsible would be enough for the investor to be left without electricity. It can take a long time to overcome these assumptions. Sometime so long that it is easier to switch to the equipment offered by the utilities company. So, those who inquire not about what they need for production, but about the technical requirements and conditions for connection established by the power supply company, come out ahead in the end.