Foreign business in Russia: legal insights for those staying or planning a return

March 2025 | EXPERT BRIEFING | RISK MANAGEMENT

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We are entering a new historical era, one that is markedly different from the past five decades. The age of globalisation – both in everyday practice and in law – is giving way to fragmentation. This shift is reflected in events such as Brexit and the abolition of the ‘non-dom’ regime in the UK, the tightening of migration, tax and criminal legislation across the globe, and the emergence of new virtual ‘iron curtains’, this time erected on both sides of state borders.

Today, sanctions law has become a driving force behind transformations in both international public and private law. In this context, compliance – once viewed as a curious atavism – has evolved into a significant factor shaping state policies and influencing the global application of law. Far from enhancing efficiency, it often disrupts natural business processes and the established order, introducing a layer of complexity that can undermine longstanding frameworks.

The Russia-Ukraine conflict that erupted on 24 February 2022 prompted most Western companies to either leave Russia entirely or suspend their operations in the country, despite their previous success in the market. However, foreign entrepreneurs – mainly from China, the Emirates, Hong Kong, Asia and the Commonwealth of Independent States (CIS) – are showing growing interest in doing business in Russia.

Even as Russia has tightened its controls on foreign businesses, overseas companies actively pursue opportunities to enter the Russian market or safeguard their foothold. Several factors make Russia an appealing investment destination: reduced competition due to the exodus of Western companies, the high purchasing power of the population, the significant market size across various sectors, and comparatively low taxes relative to the EU.

It is evident that future geopolitical shifts could prompt businesses that exited Russia to seriously contemplate returning, in one form or another. This process is likely to begin in the medium term. Legally, however, the path back has already become incredibly complex due to highly aggressive regulatory frameworks established on both sides of the border. As a result, foreign entrepreneurs must be fully aware of the legal and operational hurdles they are likely to encounter if they choose to re-enter the Russian market.

Since February 2022, Russia has deployed a series of counter-sanctions imposing restrictions on foreign companies. The primary criterion for applying Russia’s counter-sanctions regime to a foreign company is its registration in an ‘unfriendly’ jurisdiction or its control by a citizen of an ‘unfriendly’ country. Russian legislation has also introduced the concept of ‘unfriendly persons’. Foreign persons are considered ‘unfriendly’ if they are affiliated with foreign states engaged in unfriendly actions against Russian legal entities and individuals, and this includes cases where foreign persons are citizens of these states, are registered there, have their principal place of business, or generate the majority of their profits in such states. The Russian government has established a list of ‘unfriendly’ states, which includes EU member states, the UK, the US and other countries that introduced sanctions against Russia.

Russia’s counter-sanctions legislation is notably intricate, largely unsystematised, and comprises a mix of statutory instruments issued by various authorities, each with a different legal force. Specifically, it includes presidential decrees, acts of the Government Commission on Control over Foreign Investments, acts of the Central Bank, information letters of the Ministry of Finance, and other secondary legislation made by various agencies and departments. Court decisions concerning the application of counter-sanctions are still scarce, and a consistent judicial approach to such cases has yet to be established.

The counter-sanctions primarily target transactions involving persons from ‘unfriendly’ countries. Certain transactions are outright prohibited, such as the transfer of ownership in aircraft, sea vessels and inland waterway vessels to parties from these countries. Russian legislation also prohibits persons from ‘unfriendly’ jurisdictions and their controlled entities from participating in public procurement of goods, works and services under Federal Laws No. 44-FZ and No. 223-FZ.

Furthermore, some transactions have become subject to approval by the Government Commission on Control over Foreign Investments. For example, approval is required for transactions concerning shares in Russian companies, if such transactions directly or indirectly establish, modify or terminate the rights of ownership or control of shares in these companies and if at least one party to the transaction is an individual or company from ‘unfriendly’ foreign states. Additional examples include the provision of foreign currency-denominated loans by residents to non-residents, provision of rouble-denominated loans by Russian ‘foreign currency’ residents to persons from ‘unfriendly’ countries, and transactions with Russian securities acquired from persons from ‘unfriendly’ countries after 1 March 2022. Moreover, ‘unfriendly’ persons must also obtain approval to engage in certain types of activities, including banking, insurance, management of securities, handling radioactive waste, activities in defence-related industries, and so on.

Yet another measure was the introduction of foreign currency restrictions driven by Russia’s efforts to strengthen the national currency, prevent capital flight and ‘de-dollarise’ the national economy. For example, non-residents from ‘unfriendly’ countries are prohibited from transferring money abroad until 31 March 2025, and Russian residents must comply with a special temporary procedure for fulfilling their obligations to ‘unfriendly’ persons.

Counter-sanctions legislation has also affected corporate governance by limiting the ability of ‘unfriendly’ persons to take part in the governing bodies of Russian entities. Specifically, if a company’s governing body includes individuals from ‘unfriendly’ states or individuals nominated (or elected) as candidates proposed by ‘unfriendly’ persons, the remaining members may choose to disregard the votes of the ‘unfriendly’ persons when determining the quorum or voting outcomes. In this case, decisions on all matters will be considered passed by a majority of the votes of those members who are not from ‘unfriendly’ states.

Notably, an ‘unfriendly’ company can legally gain recognition as ‘friendly’ by relocating to one of Russia’s special administrative districts – territories offering a flexible tax and foreign currency regime for companies transitioning from foreign jurisdictions to Russia. To take advantage of this option, a foreign company must apply for the ‘international company’ status which is available only to commercial entities established before 1 March 2024 that opt to change their law of incorporation. An international company must undertake to invest in Russia at least RUB50m within one year of the date of its registration in a special administrative district.

Foreign persons from jurisdictions outside the ‘unfriendly’ category enjoy unrestricted access to the Russian market. This has led to instances where businesses from ‘unfriendly’ jurisdictions attempt to present themselves as entities from ‘friendly’ countries. The Russian authorities consider this practice a significant concern that requires legislative intervention.

However, the Ministry of Finance has recently drafted several bills that seek to make it easier to register legal entities in Russia for investors from ‘unfriendly’ countries. The Ministry outlined its approach as follows: “If foreign investors, even from ‘unfriendly’ countries, wish to establish legal entities in Russia and invest their money, the approval process should be simplified.”

Finally, foreign entrepreneurs operating in Russia should remain mindful not only of the restrictions imposed by Russian legislation, but also of sanctions regimes applied by Western countries. This is essential for two primary reasons.

First, foreign persons may risk exposure to Western sanctions if they engage in Russia-based transactions involving a foreign element, for example if Russian entities make payments in the currency of an ‘unfriendly’ country, include foreign nationals in their governing bodies, or work with foreign counterparties. For instance, Swedbank AS (Latvia) agreed to pay a settlement of US$3.4m to the Office of Foreign Assets Control (OFAC) for processing US dollar transactions involving persons from the Crimea via US financial institutions.

Second, even in the absence of a foreign element, foreign persons still face the risk of secondary sanctions. Secondary sanctions are most often used by the US, making the US the primary jurisdiction to consider. Specifically, section 228(a) of the Countering America’s Adversaries Through Sanctions Act (CAATSA) imposes sanctions for facilitating significant transactions with persons from the Specially Designated Nationals (SDN) list. Under Executive Order 14024 and other orders that set out the criteria for the imposition of personal sanctions by the US, a person may be added to the SDN list for having “materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of” individuals or entities subject to the US sanctions.

The EU and the UK followed the example set by the US and introduced the extraterritorial application of sanctions in 2022 and 2024, respectively.

In Russia, an additional risk arises from a bill currently under consideration in the State Duma, which introduces criminal liability for individuals who hold managerial positions in legal entities and use their powers in order to carry out sanctions deployed against Russia by decisions of foreign states, unions of states or international organisations. If enacted, the bill will not only pose significant challenges for directors of foreign companies operating in Russia but will also inevitably subject them to uncontrollable legal risks.

Managing these risks requires a strong focus on sanctions compliance and, more broadly, regulatory compliance, which have become essential components of foreign companies’ operations in Russia. The extensive scope of sanctions imposed on Russia underscores the critical importance of maintaining robust compliance measures.

Against all odds the statistics are tilting to the optimists: as many as 48,000 companies with foreign capital were registered in the country during the first nine months of 2024, surpassing the 43,000 which registered across the whole of 2023. Russia often defies prediction and generality. Yet previous experience proves that success in Russia in the long run belongs to those who are willing to endure tough times preparing for the best or simply be more adventurous than the others.

What, if anything, can be realistically done in the current legal environment? The answer is straightforward: when state policies shift and external political risks subside, the businesses most likely to thrive will be those that are the first to return and that engage legal advisers with the specialised expertise required to navigate the minefield of today’s complex regulatory landscape.

Konstantin Dobrynin and Anton Imennov are senior partners and Sergey Uchitel is a partner at Pen & Paper, Attorneys at Law. Mr Dobrynin can be contacted on +7 812 740 5823 or by email: k.dobrynin@pen-paper.com. Mr Imennov can be contacted on +7 812 740 5823 or by email: a.imennov@pen-paper.com. Mr Uchitel can be contacted on +7 495 234 4959 or by email: s.uchitel@pen-paper.com.

Konstantin Dobrynin, Anton Imennov and Sergey Uchitel

Pen & Paper, Attorneys at Law