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On 16 December 2011, the WTO Ministerial Conference in Geneva approved Russia’s WTO accession package and issued a formal invitation for Russia to become the WTO’s 153th Member. Once the Russian Parliament ratifies the accession package (which should take place in summer 2012), Russia will be a fully-fledged WTO Member.
To be sure, Russia’s membership in WTO brings a great opportunity for foreign investors and trading partners in many different industry sectors to ride the wave of the growing Russian economy. The country holds a vast wealth of highly educated and talented people, an enormous store of natural resources and unparalleled capacity for development of its valueadded economy. There is no doubt that Russia will make wise use of state-of-the-art technological advances based on its Soviet scientific legacy. For investors in the financial services sector, one of Russia’s most promising and growing sectors, this has a special meaning. International trade and investment relations will now become based on a full-scale WTO regulation and subject to enforcement through WTO dispute
Until Russia’s accession to the WTO and the completion of ratification procedures, trade
relations with the EU, USA and other countries will remain regulated by international trade bilateral agreements.
settlement. This is likely to result in a more predictable and stable environment for trade and investment relations with Russia. The accession package is an Accession Protocol (the “Accession Agreement”) running to over 1,000 pages. It lists the specific market access commitments in goods and services, including financial services agreed between Russia and WTO Members. Also adopted was a 600page Working Party Report spelling out how Russia will bring its national legislation in line with WTO requirements. But will restrictions be imposed on foreign banks and insurers doing business in Russia? Can foreign banks expect the doors to open up for branches, for example? Will prior restrictions on access to the Russian insurance market for foreign insurers drop away completely? Given the still fledgling nature of the Russian financial services sector, the country’s WTO negotiation team made special arrangements which will impact on these and other issues, including in respect of European and US financial service providers. Understanding the rights and obligations of companies and of public authorities arising from Russia’s entry into the WTO system will thus be essential for anyone doing business in Russia, and in particular the financial services sector. The author highlights below some key issues of which bankers, insurers and other financial service providers will wish to take note.
Russia and the EU WTO
By ratifying the Accession Agreement Russia will accede to GATS (the General Agreement on Trade in Services) and will bring its national
Upon entry into force of the Accession Agreement, Russia will accede to the Marrakesh
Agreement Establishing the World Trade Organization (the “WTO Agreement”) and other WTO Multinational Trade Agreements annexed to the WTO Agreement, including the General Agreement on Trade in Services (the "GATS").
regulation of market access to services in line with the basic principles of WTO - market access, national treatment (the “NT”) and most-favored nation treatment ( the “MFN”).
GATS provisions to some extent improve the market access for EU insurance companies and banks (e.g. allowing 100% foreign ownership of Russian insurance companies, insurance branching). However, according to the GATS rules, Russia (as other WTO Members) took advantage of the carve outs known as “list of exemptions from MFN treatment” and “schedules of specific commitments” which allow a Member to deviate from GATS rules and identify to which services sectors and under what conditions the GATS rules and principles will not apply. List of Exemptions from MFN Treatment A WTO Member may maintain particular measures inconsistent with MFN treatment, in principle, for not more than ten years and subject to review after not more than five years. Russia did not specify any particular measures relating to the financial services sector that will not receive MFN treatment. However, there is a general all-sector MFN exemption in respect of measures based on any existing or future international agreements concerning investment activity or movement of natural persons supplying services.
Schedule of specific commitments Russia has the following specific commitments schedule in respect of financial services:
NT means that imports of goods and services must be treated no less favorably than
like goods and services produced domestically.
MFN means that imports of goods and services originating from one member country
must be treated no less favorably than imports of goods and services from any other country.
The latter applies to all parties of the Partnership and Cooperation Agreement signed
between EU and Russia and also to CIS countries.
The Accession Agreement spells out a number of horizontal commitments that Russia will apply to all service sectors, including financial services: (i) participation of foreign entities in privatization and/or through participation in Russian companies to be privatized may be limited, however, this limitation does not apply to foreign financing of privatization which does not result in acquisition of control and/or property rights; (ii) representative offices are not allowed to perform any commercial activity, including the supply of services; (iii) only natural persons permanently residing in Russia and having the Russian qualification certificate of professional accountant may hold a position as a chief accountant or an acting chief accountant; (iv) foreign natural persons are allowed to supply services though a foreign legal entity established in the territory of Russia for a maximum period of 3 years (which, however, may be extended) provided that such foreign natural persons meet the following base criteria: they are considered as key personnel; they are temporarily transferred (i.e. inter-corporate transfer) to work in a foreign subsidiary established in Russia, which is effectively engaged in the supply of respective services in the territory of Russia; they have been employed by the legal entity performing such intra-corporate transfer for no less than 1 full year immediately preceding said transfer; (v) foreign natural persons are allowed to represent a foreign legal entity through a representative office established in the territory of Russia for a maximum period of 3 years (which, however, may be extended), provided that such natural persons hold the position of head of a representative office or serve as senior managers of the representative office of a legal entity of another WTO Member performing such intra-corporate transfer; are temporarily transferred into a representative office in Russia; have been employed by a 4
foreign legal entity performing such intra-corporate transfer not less than 1 full year immediately preceding said transfer. With respect to intra-corporate transfer to a representative office representing a foreign legal entity supplying financial services, the total number of natural persons (including the head of the representative office) shall not exceed 5; and with respect to banking, shall not exceed 2. (vi) A 90-day period of stay is allowed to foreign business visitors. b) Measures Applicable to Financial Services
The Accession Agreement lists measures that apply to all sectors of financial services (i.e. insurance, banking and other non-banking financial services), which, for instance, include the following: (i) all financial services licenses will be issued on a non-discriminatory basis; (ii) the conditions or scope of activity set out in a license or other form of authorization issued to a foreign-owned or affiliated financial services supplier prior to the date of accession shall not be made more restrictive than those in effect on the date of accession, without prejudice to prudential regulations. (c) Insurance and Insurance-Related Services
In respect of insurance, Russia has made the following commitments: (i) foreign providers of life and non-life insurance as well as reinsurers are initially allowed to establish a commercial presence in Russia only in the form of a subsidiary domestic legal entity (in lieu of a direct presence of the foreign insurer via a branch office); (ii) foreign capital participation in the entire Russian insurance/reinsurance sector is capped at 50 %;
Foreign capital will not be included in the computation of the 50% ceiling if invested
in acquisition and/or creation of Russian insurers/re-insurers by foreign owned Russian legal entities or invested prior to January 1, 2007 (Report of the Working Party on the Accession of the Russian Federation of the World Trade Organization, para 1393, p. 355), however, the foreign capital of branches established in Russia is included (see Section II (c) (vii)).
prior authorisation is required to increase the charter capital of a Russian insurer/reinsurer by funds of a foreign investor and/or its subsidiary and/or to alienate stakes in a Russian insurer/reinsurer in favour of a foreign investor and/or its subsidiary;
the rights of foreign subsidiary insurers/reinsurers already established in Russia and with foreign shareholding greater than 49% will be grandfathered in accordance with their existing operation licenses obtained to provide life insurance/reinsurance, state procurement and mandatory insurance/reinsurance;
in respect of foreign subsidiary insurers/reinsurers established after the date of Russia’s accession to the WTO and with foreign ownership greater than 51 % (for insurers) and 49% (for reinsurers), Russia retains the right to impose limitation on the issuance of licenses to provide mandatory personal insurance of passengers, life and civil liability insurance/reinsurance for up to 5 years after the date of accession;
in respect of foreign subsidiary insurers/reinsurers established after the date of Russia’s accession to the WTO and with foreign shareholding greater than 49%, Russian retains the rights to impose restrictions on the issuance of licenses to provide state procurement insurance/reinsurance. Also, Russia establishes a requirement for the foreign investor who is the parent company of a Russian subsidiary insurer/reinsurer that the former shall have been authorized for the respective type of insurance/reinsurance services in its own country of registration for at least 5 years;
(vii) 9 years after the WTO accession date, foreign insurers of life and non-life insurance and reinsurers (except for insurance/reinsurance of risks connected with state procurement and mandatory insurance other than mandatory insurance of civil liability of automobile owners) are allowed to establish branches, subject to licensing, financial soundness and guarantee deposit requirements;
To open a branch a foreign insurer/reinsurer must: have been authorized to operate in the same types of insurance or reinsurance in its country of origin for at least 5 years (for non-life insurance) and at least 8 years (for life insurance); have not less than 5 years of experience operating a branch in foreign markets; have total assets of more than US$5 billion at the end of the calendar year preceding the application; and have its legal address and actual address in the same country. A branch of a foreign insurer must have separate capitalization for purposes of calculation of the ratio of foreign capital holding in the total charter capital in Russian insurers/reinsurers. Therefore, Russian authorities may deny a branch license if the ratio of total foreign participation in the entire Russian insurance system is greater than 50%. (viii) on intermediation (such as brokerage and agency), Russia does not allow the conclusion and distribution of foreign insurance contracts in the territory of Russia (except for certain types if insurance, e.g. international insurance relating to maritime transportation, commercial air transportation, transportation of goods by international transport, commercial space launching and some others); (ix) services auxiliary to insurance, such as consultancy, actuarial, risk assessment and claims settlement enjoy full market access, except that Russia reserves the right to establish certain limitations in the future on the presence of natural persons supplying such services subject to general limitations of “horizontal commitments” (see section II(a) above). (d) Banking Services
The Accession Agreement provides for the following market access rules for foreign banks:
foreign capital participation in the entire Russian banking sector is capped at 50 %;
foreign banks are allowed to establish a commercial presence in Russia only in the form of a subsidiary or a representative office; no comment is made in respect of branches, and therefore it is understood that branches of foreign banks will not allowed;
foreign banks (through their subsidiaries established in Russia) are allowed to provide banking services in accordance with a banking license issued by the Central Bank of Russia on a non-discriminatory basis. Such services may include accepting deposits, providing all kinds of lending, financial leasing, payment and money transmission services (including credit, charge and debit cards, travelers checks and bankers drafts), issuing guarantees and commitments, trading on an exchange or over-the- counter (including money market instruments, foreign exchange, derivative products and securities) and asset management;
the main founder or participant of a Russian bank being a subsidiary with foreign investment must be a foreign bank duly licensed and existing under the laws of the country of its registration;
Foreign capital will not be included in the computation of the 50% ceiling if invested in
acquisition and/or creation of Russian banks by foreign-owned Russian legal entities and if invested in potentially privatized banks or if invested prior to January 1, 2007 (Report of the Working Party on the Accession of the Russian Federation of the World Trade Organization, para 1392, p. 354).
However, in the Report of the Working Party, Russia’s representative confirmed that
“the Russian Federation would come back to consideration of granting market access to direct branches of foreign banks and companies which were professional participants of the securities markets in the context of future negotiations on the accession of the Russian Federation to the OECD or within the framework of the next round of WTO multilateral trade negotiations, whichever comes earlier.” (Report of the Working Party on the Accession of the Russian Federation of the World Trade Organization, para 1396, p. 356).
to guarantee a level playing field, Russia shall ensure that foreign banks established in Russia participate in the Russian deposit insurance scheme and enjoy the same level of guarantee from state for deposits as all other Russian banks;
prior authorization is required to establish a foreign bank (i.e. subsidiary of a foreign bank) or representative office in Russia and/or to increase the charter capital of a Russian bank by funds of a foreign investor and/or its subsidiary and/or to alienate stakes in Russian bank in favour of a foreign investor and/or its subsidiary.
(vii) the chief accountant, the CEO or one of the chief officers of a collegiate executive body of the credit organization being a subsidiary of a foreign bank, who is not a citizen of Russia, must provide a document confirming their knowledge of Russian language. (e) Financial Services Other than Banking
The Accession Agreement also sets forth Russia’s specific commitments and limitations in respect of foreign legal entities qualified under Russian law as professional securities market participants (“PSMPs”) supplying financial services other than banking, such as brokerage, depository operations, clearing on the securities market, maintaining registers of holders of inscribed securities. The limitations and specific requirements are as follows: (i) the commercial presence of foreign PSMPs in the securities market will be allowed in Russia only in the form of a subsidiary or representative office; no comments are made in respect of branches, and accordingly it is understood that branches of foreignbased PSMPs are disallowed; and (ii) foreign participation in the charter capital of a PSMP engaged in maintaining registers of holders of inscribed securities and depository operations under transactions made through a trade arranger is capped at 25%; also, Russia establishes a 3 year 25% cap for foreign participation in the charter capital of specialized depositories of investment funds, unit investment funds and nonstate pension funds. 9
2. The Partnership and Cooperation Agreement (the “PCA”)
The financial services trade between Russia and the EU will be regulated by WTO rules in conjunction with the existing international treaty between Russia and EU - the Partnership and Cooperation Agreement (the “PCA”). Signed in 1994, the PCA aimed to create an appropriate framework for political dialogue with Russia after the breakup of the USSR and also to establish the principles for cooperation in the legislative, economic, social, financial, scientific, civil, technological and cultural fields, encouraging trade and investment with a view to creating a future free trade area between Russia and the EU. The PCA also established specific rules of market access to the financial services sector. However, regrettably the PCA provisions regulating international trade are considerably less detailed than those in the WTO treaties. It is worth noting that in the last 20 years, the trade relationship between EU and Russia has gone far beyond the scope of the PCA. Therefore, the PCA is currently being revised to provide a comprehensive framework for EU-Russia bilateral trade, including in financial services, within the new WTO environment. The current provisions of the PCA with regard to financial services (i.e. banking and insurance services) are as follows: (i) the parties agreed to accord to one another MFN treatment for the establishment of companies supplying insurance and banking services and national treatment in respect of their operation; (ii) Russia applies MFN only to subsidiaries of foreign banks, excluding foreign branches, which means that bank branches are not allowed; (iii) Russia reserved the right to apply a cap
on overall foreign capital
participation in the entire Russian banking system; and
The scope of financial services covered under the PCA is identical to that in
the GATS and includes all insurance and insurance-related services (life, non-life insurance, reinsurance and retrocession, insurance intermediation and services auxiliary to insurance), banking and other financial services.
Russia applies MFN only to subsidiaries of foreign insurance companies, excluding branches, meaning that establishment of branches of foreign insurance companies in the territory of Russia is not allowed.
Although the PCA is silent on any foreign equity ratio, Russian insurance legislation provides for a cap of 25% on foreign participation in the total charter capital of Russian insurance companies.
Also, PCA allows on a reciprocity basis inter-corporate-transfers of employees from one country to another for temporary employment with a foreign subsidiary, branch or joint venture of the transferring legal entity. Such transfers are possible for key employees of the legal entity making the intra-corporate transfer who have been employed by the entity for at least 1 year immediately preceding such transfer. The PCA does not provide further details, stating that such employees will then be employed in accordance with the legislation of the host country. As already mentioned, upon Russia’s accession to WTO the PCA will remain in full force and effect, However, its provisions must not contravene WTO rules.
It is worth noting, that the foreign equity ratio, first established in 1993 in the amount
of 12% by a Decision of the Board of Directors of the Central Bank of Russia, has never been adopted as a federal law, as required. On November 4, 2002 the foreign equity ratio was abolished by the Instruction of the Central Bank of Russia N 1204-U and currently no cap limiting the share of foreign capital in the Russian banking system exists.
Other limitations, like, for instance, a higher minimum capital requirement for the
subsidiaries of foreign banks, restricted number of branches established by subsidiaries of foreign banks operating in Russia and some other limitations set forth in the PCA have already expired and were abolished by Russia in its national laws.
Other limitations like, for example, the maximum foreign shareholding limit of 49% or
limited accesses of foreign-owned subsidiaries to certain classes of insurance have been abolished in Russia law, however, under the WTO regime Russia reserved the right to impose limitations on the issuance of licenses to foreign insurers/reinsurers for providing certain types of insurance/reinsurance (see Section II (1) (b)).
Article 6(3) of the Federal Law No. 4015-1 on the Establishment of Insurance dated 27
November, 1992 (as amended).
The PCA also provides for adjustments to be made by Russia upon its accession to WTO in order to re-establish the balance of obligations between the parties under the PCA. For instance, in respect of services, the PCA states that from the day one month prior to the date of Russian accession to WTO and the entry into force of the relevant obligations of the GATS, the treatment granted by either party to the other under the PCA shall in no case be more favorable than that accorded under the provisions of the GATS.
Russia and USA
Russia’s accession to WTO may also be an opportunity to broaden the bilateral US-Russian trading relationship, including in the banking and insurance sectors. All Russia’s commitments under GATS, as mentioned above, will apply to US companies entering the Russian financial market, provided that US Congress abolishes Title IV of the U.S. Trade Act of 1974, the so-called Jackson-Vanik amendment, which does not grant Russia unconditional MFN status (so-called “permanent normal trade relation” (or “PNTR”) status under U.S. trade law). As mentioned earlier, the WTO requires each Member to extend to other Members “immediate and unconditional” MFN status. Since JacksonVanik applies conditions to Russia’s status which are not applied to other WTO Members, the USA would not be in compliance with WTO rules without abolishing the Jackson-Vanik amendment. Therefore, US companies will not benefit from the concessions that Russia makes upon accession to WTO. The WTO rules allow the USA to “opt out” of its WTO obligations in respect of a new WTO Member (i.e. an obligation to grant an MFN status) under Article XIII of the WTO Agreement. In case of this scenario, Russian-US trade relation will be regulated by the provisions of the 1992 “Agreement on Trade Relations between the United States and Russia” (the “Trade Agreement”), which provides for MFN and nondiscriminatory treatment in the application of tariffs and other customs duties as well as technical barriers to trade. Therefore, any commitments on tariffs and the application of technical barriers Russia made on joining the WTO would 12
still apply to its trade with the United States per the MFN provisions of the Trade Agreement. However, Russia will not be obligated to apply the range of other commitments, such as those regarding financial services, which are not specially regulated by the Trade Agreement.
For further information please contact:
financial service providers are hopeful that the political issues driving the current impasse on the abolishment of Jackson-Vanik are resolved,
allowing this Cold War legacy to be put behind us. This would certainly open the door as wide as possible for US investors wishing to benefit from the vibrant, growing Russian financial services sector. Edward Borovikov, Managing Partner, Brussels Co-Head of Russian Competition Practice E: email@example.com
Timothy Stubbs Partner, Head of Russian Banking/Finance Practice E: firstname.lastname@example.org
Distribution We hope that you find this Alert useful. If, however, you would prefer not to receive any or all Alerts, please let us know at email@example.com and we will update our mailing list accordingly. If you wish to sign up a colleague to this list, please send their contact details to the above address. This Alert does not constitute legal advice with respect to any matter or set of facts and may not be relied upon for such purposes. Readers are advised to seek appropriate legal advice before entering into any transaction, making any determination or taking any action related to matters discussed herein. No part of this Alert may be copied or quoted without the prior written consent of Salans. © 2012. All rights reserved
Varvara Runiva, Associate, Salans Moscow E: firstname.lastname@example.org
CRS Report for Congress “Russia’s Accession to the WTO and Its Implications for the
United States” William H. Cooper, November 16, 2011.