Konstantin Kroll, Partner and Head of Russian Corporate and M&A Practice at Dentons in Moscow, reports that the Russian economy has experienced a rise in M&A transactions and that the government has taken steps to curb offshoring, regulate convertible loans, and increase the number of international arbitration tribunals in the country.
“The market is booming and our Corporate and M&A practice has been very busy,” he says, but notes that the majority of deals are made by Russian companies. He points to three main factors behind the increase in economic activity: “Firstly, demand kicked in this year after a hesitant 2020; secondly, oil and metal prices are quite high, Russian exporters are making a lot of money that, in turn, trickles down into the budget; thirdly, governments around the world are pumping money into their systems, which has also impacted Russia.” Kroll adds that the influx of cases has been noticed across the board and says that his firm advised on acquisitions ranging from banks, to TV channels, to non-governmental pension funds. Kroll and his team also advised on the formation of a strategic joint venture and sale of a 75% equity stake in Russian publishing house JSC Prosveshcheniye to Sber, VEB, and RDIF (as reported by CEE Legal Matters on July 5, 2021), as well as VTB Capital’s acquisition of a minority stake in car-sharing company Delimobil (as reported by CEE Legal Matters on June 28, 2021). Following the rise in transactions, Kroll adds, Russia’s FAS published a 100-page guideline on merger controls, which offers an in-depth review of its policies and numerous clarifications invaluable to doing business in the country.
Moving on to legislation, Kroll reports equal, if not greater, activity. According to him, Russia is taking great strides to curtail Russian-owned offshore companies. “Russia has quite a number of double taxation treaties,” Kroll says. “The government imposed strict rules on offshore taxation and has demanded that treaties be renegotiated,” he continues. He lists Cyprus and the Netherlands as examples. The former accepted to renegotiate, while the latter refused. As a result, according to Kroll, Russia denounced its treaty with the Netherlands. He also reports that the tax authorities are improving tax policies so as to help curb offshoring.
Kroll also adds that the Russian Ministry of Justice recently accredited two international arbitral tribunals, the International Chamber of Commerce International Court of Arbitration and the Singapore International Arbitration Centre, as “Permanent Arbitral Institutions” (PAI) for Russian law purposes. “As a matter of Russian law, certain types of disputes, such as corporate disputes, are only arbitrable if administered by an accredited PAI in Russia,” he says. According to Kroll, the Hong Kong International Arbitration Centre and the Vienna International Arbitral Centre were previously accredited in 2019. “The addition of two new arbitration institutions will provide more options to local businesses and will increase the number of cases that can be resolved by arbitration.”
Furthermore, Kroll reports that new legislation was passed aiming to regulate convertible loans for the first time: “even though it was done in practice before, how lenders convert debt into equity is now formally regulated.” In addition, Kroll says that Russia’s Central Bank (CBR) announced its intention to lift the limit on the percentage of shares Russian public companies can offer abroad. Kroll explains that the limit, which was originally put in place in the early 2000s, currently caps the number of shares sold abroad in one offering to 50%, while also limiting the number of same-category shares offered abroad to 25%. Another important proposal by the CBR is to re-write the regulations on mandatory tender offers and squeeze-out rules, which will have a significant impact on the Russian M&A market and should improve the rights of minority shareholders.
Finally, Kroll notes that the increase in M&A work alone might not be enough to keep the legal market sated, in the absence of sufficient foreign investment. He says that although local firms are growing, some international ones seem to be on the decline. He points to King & Spalding as an example, which recently announced it will be closing its Moscow office (as reported by CEE Legal Matters on May 31, 2021).