University of Economics, Prague International Business
Doing Business in Russia
Author: Alexandra Zimonina
Thesis instructor: doc. Ing. Ludmila Štěrbová, CSc.
Scholar year: 2018/2019
Declaration:
I hereby declare that I am the sole author of the thesis entitled “Doing Business in Russia”. I duly marked out all quotations. The used literature and sources are stated in the attached list of references.
In Prague on ... Signature
Alexandra Zimonina
Acknowledgement
I hereby wish to express my appreciation and gratitude to the supervisor of my thesis, doc. Ing.
Ludmila Štěrbová, CSc.
1 Table of Contents
Introduction ... 4
1. Macroeconomic Situation ... 5
1.1. Main Economic Indicators ... 5
1.2. Trade — Export and Import ... 7
1.3. Foreign Direct Investment ... 9
1.4. Impact of Crisis ... 11
2. Business Environment ... 14
2.1. Political Environment ... 14
2.2. Economic Environment ... 18
2.3. Social Environment ... 22
2.4. Technological Environment ... 24
2.5. Legal Aspects ... 26
2.5.1. Forms of Business Entity ... 26
2.5.2. Taxation ... 29
3. Potential Risks of Doing Business in Russia ... 35
3.1. Competitiveness Report Evaluations ... 35
3.2. Risks to Be Faced at the Market ... 36
Conclusion ... 38
Bibliography ... 39
2 Table of Figures
Figure 1 GDP growth (annual %) ... 5
Figure 2 EUR to RUB average annual exchange rate from 2004 to 2017 ... 12
Figure 3 GDP structure ... 18
Figure 4 Main branches of the Russian manufacturing industry ... 19
Figure 5 Country comparison: Russia ... 23
Figure 6 Top 10 risks in Russia ... 37
Table of Tables Table 1 Trading partners of Russia ... 9
Table 2 Main trading partners of Russia among non-CIS countries ... 9
Table 3 FDI into the Russian economy by major investing countries (mln. US dollars) ... 10
Table 4 Main investing countries in 2017 ... 11
Table 5 Gross value added by industry and service sector (2014–2016), billion rubles ... 21
3 List of Abbreviations
APEC Asia-Pacific Economic Cooperation
CIS Commonwealth of Independent States
CPRF Communist Party of the Russian Federation EAEU Eurasian Economic Union
EU European Union
FDI Foreign Direct Investment
GCI Global Competitiveness Index
GDP Gross Domestic Product
ILO International Labor Organization
LLC Limited Liability Company
OPEC Organization of the Petroleum Exporting Countries
PPP Purchasing Power Parity
RSFSR Russian Soviet Federative Socialist Republic
RUB Russian Ruble
TFR Total Fertility Rate
US United States
USA United States of America
USD United States Dollar
USSR Union of Soviet Socialist Republics
VAT Value-Added Tax
WEF World Economic Forum
4 Introduction
Being the largest country, Russia has great potential and a favorable business climate. The country continues to advance in the annual ranking of Doing Business, ahead of all the BRICS countries.
The experience of developed countries proves the need for a highly developed and efficient business sector. However, there are problems entering the Russian market for companies.
This topic is particularly relevant today, as entrepreneurship plays a large role in the Russian economy, and its development affects the economic growth of the country. The implementation of the thesis on this topic will help to consolidate the theoretical knowledge gained during studies.
The research will give the experience and skills that can be applied in real life.
This determines the theoretical and practical significance of this research. The method of the research is an analytical study.
The bachelor’s thesis is divided into three parts. The first part provides a macroeconomic overview of Russia. The second part is the analysis of aspects of the external environment that affect the business using the PEST analysis, and consideration of legal and tax issues that are important for those who plan to do business in Russia. The third part of the project focuses on the risks of entering the Russian market.
The goal of the thesis is to examine the business environment in Russia and identify the strengths and weaknesses of doing business in the country.
To achieve this goal, it is necessary to solve the following tasks:
1. Analyze the macroenvironment.
2. Examine the impact of crisis on Russian business.
3. Identify political, economic, social, technological and legal aspects of doing business.
4. Consider the diversity of types of legal entities in Russia at the present stage.
5. Explore the role of the state in the regulation of entrepreneurship.
6. Assess the risks of entering the Russian market based on the research and competitiveness reports.
5 1. Macroeconomic Situation
1.1. Main Economic Indicators
The Russian Federation is a multinational state in Eastern Europe, Central and Northern Asia. The territory of Russia is 17 125 191 km². The country’s population is 146 880 432 people (Trading Economics, 2019). Russia ranks sixth in terms of GDP (PPP) (The World Bank, 2017), and ninth in terms of population (The World Bank, 2018).
In the Russian economy, GDP growth was observed, as well as growth in industrial and agricultural production, construction, real incomes of the population.
Figure 1 GDP growth (annual %)
Source: Author based on data from the World Bank.
There was a decline in the proportion of the population living below the poverty line (from 29%
in 2000 to 13% in 2007) (Federal State Statistics Service, 2018).
At the end of 2010, Russia’s GDP growth amounted to 4.5%. In 2011, Russia’s GDP growth was 4.3%. Investments in the Russian economy reached a record level of $370 billion per year in the past 20 years. Inflation fell to a low level since the collapse of the USSR (6.6%) (Federal State Statistics Service, 2012).
At the end of 2012, the economy growth began to slow down and amounted to 3.3%, inflation — 6.6%. In total, in 2012, Russian industrial production grew by 2.6% (for comparison, in 2011 — by 4.7%, in 2010 — by 8.2%). In 2013, economic growth in Russia declined under the influence of structural problems and a decrease in investment activity. In 2014, there was a further slowdown
4 4,5 5 5,5 6 6,5 7 7,5 8 8,5 9 9,5 10
2000 2001 2002 2003 2004 2005 2006 2007 2008
GDP growth (annual %)
6 in the economy, GDP grew by 0.7%. In 2014, the rate of inflation rose sharply (to 11.4%), the growth of industrial production was 1.7%. At the end of 2015, Russia’s GDP fell (by 2.8%), for the first time after the 2008–2009 crisis. Inflation rose to 12.9%. Real incomes of the population decreased by 3.2% (The World Bank, 2017).
In 2016, there was a slowdown in the rate of decline in Russia’s GDP — a decline for the year was only 0.2% (Federal State Statistics Service, 2019). The industry moved to growth — the industrial production index grew by 1.3%. The growth of agriculture has accelerated. The processes of import substitution, a good harvest of crops and a number of other factors contributed to a sharp drop in the rate of inflation.
In 2017, Russia’s GDP growth, which began at the end of 2016, continued. The situation on the labor market has improved — the unemployment rate dropped to the lowest level since the middle of 2014, real wages increased, while real incomes of the population declined. In 2017, the Russian economy entered a stage of recovery growth after two difficult years.
Another key economic indicator is the average wage in the country. The average monthly nominal accrued wages of employees of organizations in the Russian Federation in October 2018 amounted to 42 332 rubles (Trading Economics, 2019). In January 2017, the average nominal monthly salary in Russia in nominal terms of the year was 35 369 rubles, or 30.8 thousand rubles after deducting income tax of 13%. The nominal average salary for 2016 was 36 746 rubles (Federal State Statistics Service, 2019). There has always been a big gap between average wages in Russia among the regions. In recent years (2016–2018), the tendency of increasing the gap between the indicators has only intensified. This is primarily due to the onset of the economic crisis, as a result of which the rate of foreign currency sharply increased. The biggest salaries in Russia are in Moscow and St. Petersburg. In dollar terms, the average salary in these cities ranges from $700 to $1 000, while the average salary in all regions is only $570 (Federal State Statistics Service, 2018).
The subsistence minimum for the working-age population in Russia as a whole is 10 187 rubles, which is a decrease (as decided by the government) compared to 2015, when in the 2nd quarter of the year it was 10 792 rubles for the able-bodied. It was also reduced for children from 9 806 rubles to 9 197 rubles, and pensioners from 8 210 to 7 781 rubles. In 2016, the Government of the Russian Federation, by its decree, reduced the average cost of living for all categories, setting it for the fourth quarter of 2015 in the amount of 9 452 rubles. It decreased by 221 rubles compared to the third quarter of 9 673 rubles (Oficial'nyj internet-portal pravovoj informacii, 2016).
The employment rate of the Russian population is quite high since the Soviet times, when the birth rate has decreased, and the number of women involved in the economy has increased dramatically.
In November 2018 labor force aged 15 years and older amounted to 76.2 million people, of which 72.6 million people were classified as engaged in economic activities and 3.7 million people as
7 unemployed using the ILO criteria (i.e., did not have a job or a profitable occupation, were looking for a job and were ready to start) (Trading Economics, 2019).
The unemployment rate in November 2018 amounted to 4.8% without exclusion of the seasonal factor (Trading Economics, 2019). The employment rate of the population in November 2018 amounted to 59.9% (Trading Economics, 2019).
The total number of unemployed people classified according to ILO criteria is 5.5 times higher than the number of unemployed registered with the employment service. At the end of November 2018 in the State Employment Service 661 thousand people were registered as unemployed, which is 4.7% more compared to October 2018 and by 9.7% less than in November 2017 (Mintrud Rossii, 2018).
1.2. Trade — Export and Import
Russia with a total population 146 million people, having huge mineral, energy and highly skilled labor resources, developing unique technologies in various sectors of the economy, is a large market for both export and import of various products. In terms of the volume of natural resources in the international economy, Russia is at the forefront.
Foreign trade in goods and services has a significant impact on the economic development of Russia.
According to customs statistics, in January–June 2018, Russia’s foreign trade turnover amounted to $330.6 billion and increased by 21.6% compared with January–June 2017.
The trade balance was positive in the amount of $98.0 billion, which is $31.0 billion more than in January–June 2017 (Federal Customs Service, 2018).
In 2008–2018, the seasonally adjusted export dynamics of the country was affected by two crises:
the global economic crisis of 2008–2009 and the recession in the Russian economy of 2014–2016.
Both GDP and Russia’s exports dropped sharply during the 2008–2009 crisis, but practically recovered to the pre-crisis level in 2011–2012. The impact of the 2014–2016 recession on the country’s foreign trade was more severe than in the previous crisis, due to the prolonged fall in export prices for energy resources.
In January–June 2018, Russia’s exports amounted to $214.3 billion and increased by 26.5%
compared with January–June 2017. The share of non-CIS countries accounted for 87.8% of total exports, while the CIS countries accounted for 12.2%. The main reason for the high growth rate of the value of exports is the rise in commodity prices (Macrotrends, 2018).
In the first half of 2018, the basis of Russian exports has traditionally been fuel and energy products, whose share in the commodity structure of exports was 63.9% (in January–June 2017 —
8 62.6%). In the commodity structure of exports to foreign countries, the share of these goods amounted to 67.6% (in January–June 2017 — 66.9%), to the CIS countries — 37.6% (33.9%).
The largest contribution to export growth in the six months of 2018 was made by an increase in export earnings from the sale of crude oil, petroleum products and natural gas. In value terms, in January–June 2018, exports of fuel and energy products to non-CIS grew by 29.2%, and to CIS countries — by 30.9% in annual terms.
In the first half of 2018, the growth in the value of the exported crude oil from Russia amounted to 31.4%, and that of petroleum products — 24.2% in annual terms. This was due to the increase in oil prices in January–June 2018, despite the decline in exports in physical terms in the same period (crude oil exports decreased by 1.0%, and petroleum products — by 3.1% in annual terms).
The slight reduction in the physical volumes of exports of oil and oil products is dictated by Russia’s obligations to restrict oil production in the framework of the OPEC plus transaction.
In January–June 2018, export revenues from the sale of crude oil amounted to 60.3 billion dollars, and oil products — 38.3 billion dollars. Russia’s imports amounted to $116.3 billion and increased by 13.6% compared with January–June 2017. The share of non-CIS countries accounted for 88.9%
of total imports, and the CIS countries — 11.1%. The dynamics of imports is due to the revival of economic activity and the growth of consumer demand for imported goods and services.
In the commodity structure of imports, the largest share was accounted for by machines and equipment and remained at the same level of last year and amounted to 46.9%. In the commodity structure of imports from non-CIS countries, the share of these goods, as in the previous year, was 50.2%, and from the CIS countries — 20.6% (22.0%) (Federal Customs Service, 2018).
The dynamics of Russian imports of goods in 2008–2018 partly repeat the dynamics of exports: a decline at the end of 2008 — the beginning of 2009, stagnation in 2011–2013, a deeper decline in the recession of 2014–2016, and a revival since 2017. After the recession of 2014–2016, imports from the APEC countries were the first to return to growth, having reached the average annual level of 2010 in August–September 2016. Due to the increase in imports from the APEC countries, in May 2017, the total volume of goods imported into Russia in value terms exceeded the 2010 level for the first time after the recession.
The recovery of imports of goods from the EU countries took place at a slower pace: the volume of imports only in November 2017 reached the value of 2010. After a deep fall in January 2016, the value of imports from the CIS countries has not yet recovered (The Observatory of Economic Complexity, 2017). In the middle of 2017, after the cumulative import indicator reached the level of the average monthly volume of 2010, its dynamics was subject to fluctuations and did not show stable growth. However, in November 2017, imports began to grow steadily, and in June 2018 exceeded the monthly average level of 2010 by 4.9% (Federal State Statistics Service, 2018).
9 The European Union, as the largest economic partner of the country, occupies a leading place in the country structure of Russia’s foreign trade.
Table 1 Trading partners of Russia
Total Trade
January–June 2018 January–June 2017
European Union 43.8% 43.9%
CIS 11.8% 12.5%
EAEU 8.3% 8.9%
APEC 29.8% 29.9%
Source: Author based on data from Federal Customs Service.
The main trading partners of Russia in January–June 2018 among non-CIS countries were (Federal Customs Service, 2018):
Table 2 Main trading partners of Russia among non-CIS countries
Country Total Trade
China $50.0 billion
Germany $29.2 billion
Netherlands $22.8 billion
Turkey $13.3 billion
Italy $12.5 billion
United States $11.8 billion
Republic of Korea $10.5 billion
Poland $10.4 billion
Japan $10.1 billion
France $8.7 billion
Source: Author based on data from Federal Customs Service.
1.3. Foreign Direct Investment
The main role of investments in economic development is determined by the fact that they contribute to the accumulation of social capital, the introduction of the achievements of science and technology, thereby creating a basis for expanding the productive capacity of the state and their economic growth. Foreign investment in the Russian Federation should give an additional
10 impetus to the development of the economy. Russia has many advantages for investment, namely:
high accessibility from Europe, Asia by land, sea, and air; professional, low-cost working personnel; an affordable resource base; professional and relatively cheap working personnel; an accessible resource and raw material base; a favorable USD/EUR to RUB exchange rate for foreigners. According to the 2017 Ernst & Young European Investment Monitor, Russia ranks seventh in Russia ranked seventh among European countries by FDI projects (Ey, 2017).
Table 3 FDI into the Russian economy by major investing countries (mln. US dollars) 2016
Foreign direct investments — total
of which from countries:
32539
Singapore 16274
Bahamas 5802
Bermuda 2551
France 1997
Switzerland 1842
Austria 1071
Virgin Islands (British) 1010
Jersey 608
Sweden 530
United Kingdom 478
Source: Author based on data from Russian Statistical Yearbook.
According to statistics, provided by the Central Bank, the inflows of foreign direct investment in the Russian Federation amounted to $27.9 billion, they decreased by 14.3% over the year and outflows — $38.6 billion, they increased by 73.1%. Thus, the net outflow of FDI from the Russian Federation for 2017 was at the level of $10.7 billion, which is equal to their net inflow in 2016 ($10.2 billion). The inflow in 2016 actually showed up for the first time since 2008. It is explained by the repatriation of capital amid the growing threat of new sanctions against Russian business (The Central Bank of the Russian Federation, 2017).
In 2017, the inward FDI stock of the Russian economy was $446.595 million, accounting for 28.6% of GDP (UNCTAD, 2018). As of December 31, 2017, Russia is in 19th place in the world in terms stock of direct foreign investment at home (Central Intelligence Agency, 2017).
11 The main investing countries were (Santandertrade, 2017):
Table 4 Main investing countries in 2017 Main Investing Countries, in %
Cyprus 32.7%
Luxembourg 10.1%
Netherlands 8.8%
Bermuda 5.9%
Ireland 5.9%
Bahamas 4.8%
Great Britain 3.7%
Germany 3.5%
Source: Author based on data from Santandertrade.
The key sectors of the Russian economy for investment in 2017 were mining and quarrying, the manufacturing industry, trade, repair of motor vehicles, financial activities and insurance, real estate (Santandertrade, 2017).
The distribution of foreign direct investment across regions of the country is extremely uneven.
There are three main levels of regional attraction of foreign investment in Russia: Moscow, raw materials regions and large industrial centers and regions (Rossijskaja gazeta, 2018). Also, special economic zones are being created in the country to attract foreign investors to the priority sectors for Russia, on the territory of which there is a special mode of doing business (Oficial'nyj internet- portal pravovoj informacii, 2005).
1.4. Impact of Crisis
The Russian currency remained strong and maintained the rate of 35–40 rubles for 1 euro from the beginning of 2004 (Statista, 2018). In December 2014, with the collapse of the ruble against the US dollar and the euro, the financial crisis began in Russia caused by the rapid decline in world oil prices (Macrotrends, 2018), on the export of which the revenues of the Russian budget is so heavily dependent, and the introduction of economic sanctions against Russia in response to the events in Ukraine.
12 Figure 2 EUR to RUB average annual exchange rate from 2004 to 2017
Source: Author based on data from Statista.
The weakening of the ruble was one of the main factors for increasing inflation and, as a result, contributed to a decrease in real incomes of the population, a long-term decrease in consumer demand, an economic decline, an increase in the level of poverty (Ministry of Economic Development of the Russian Federation, 2015).
Throughout the year, there was a decrease in GDP growth rates, and by the end of the year, for the first time since 2009, this economic indicator turned negative (The World Bank, 2017).
At the end of 2014, consumer inflation in Russia amounted to 11.4%. Inflation began to pick up the pace in August 2014, after the introduction of counter-sanctions by Russia to limit food imports. Subsequently, the effect of the devaluation of the ruble, which sharply intensified at the end of the year, was added to this. As a result of the impact of the above factors, in the second half (especially at the end) of 2014, food inflation sharply increased. The introduction of restrictions on food imports from a number of EU countries, Norway, the USA and Canada led to a reduction in supply, weakening competition and market imbalance. In the last two or three months of the year, the devaluation of the ruble also began to exert inflationary pressure on prices. At the end of 2014, food inflation amounted to 15.4%, including in October–December, prices rose by 6.5%
(Ministry of Economic Development of the Russian Federation, 2015).
In 2014, the European Union, Canada, the United States, New Zealand, Australia expressed disapproval over the annexation of the Crimea to Russia and developed economic sanctions. This
20 30 40 50 60 70 80
2004 2006 2008 2010 2012 2014 2016
EUR to RUB average annual exchange rate from 2004 to 2017
13 led to a decrease in investment attractiveness and a rapid outflow of capital from the country, which weakened the Russian economy.
Russia imposed retaliatory restrictive measures against those countries that supported sanctions against Russia. The main measure in the framework of these counter sanctions was the Russian food embargo: products from the countries that imposed sanctions were banned from importing (President of Russia, 2014). The food embargo had consequences for Russia. A positive point was the increase in agricultural production and food industry and the reduction of food imports. The negative consequences were a significant increase in food prices, a problem of finding new suppliers and the need to develop own production in conditions of limited funding.
The crisis also had a significant impact on the real estate market. Crisis trends had a negative impact on the dynamics of real estate prices: its value decreased, and the level of sales decreased.
One of the main reasons for the decline in consumer activity was a serious weakening of the ruble against the US currency. Nevertheless, despite the internal economic risks and ongoing foreign policy complications, at the beginning of 2014, the demand remained quite high.
In 2015, the Russian economy entered with the same problems: declining oil prices and the preservation of economic sanctions.
The year 2016 began with the weakening and extreme instability of the ruble exchange rate amid falling oil prices. In January, the exchange rate of the ruble against the dollar several times updated the minimum values from the so-called “black Tuesday”, collapse of the ruble against the US dollar and the euro on December 16, 2014, but subsequently stabilized at the level of 2015.
14 2. Business Environment
2.1. Political Environment
The Russian Federation is a social state whose policy is aimed at creating conditions that ensure a decent life and free development of a person (The Constitution of the Russian Federation, 1993).
The bearer of sovereignty and the only source of power in the Russian Federation is its multinational people. The people exercise their power directly, as well as through government bodies and local governments. No one can appropriate power in the Russian Federation. Russia is designated as a secular state, that is, no religion can be established as a state or obligatory state, and religious associations are separate from the state and equal before the law (The Constitution of the Russian Federation, 1993).
The head of state is the President of the Russian Federation, currently Vladimir Vladimirovich Putin. In the performance of the duties of the head of state, the President is assisted by the Chairman of the Government of Russia, and currently is Dmitry Anatolyevich Medvedev. The Chairman of the Government of the Russian Federation holds the presidency in the event of the death or resignation of the latter.
Many of the powers of the president are either directly executive in nature or are close to the executive. Along with this, the president does not belong to any one branch of power, but rises above them, since he has coordinating functions and has the right to dissolve the State Duma.
The President of the Russian Federation is the guarantor of the Constitution of the Russian Federation, the rights and freedoms of man and citizen. The president takes measures to protect the sovereignty of the Russian Federation, its independence and state integrity, ensures the coordinated functioning and interaction of government bodies. He determines the main directions of the state’s domestic and foreign policy. As head of state, the president represents the Russian Federation within the country and in international relations (The Constitution of the Russian Federation, 1993).
The President is elected on the basis of universal, equal and direct suffrage by secret ballot. The same person may not hold the office of President for more than two terms in a row.
Initially, in 1991, the President of Russia was elected for 5 years. In the 1993 Constitution of the Russian Federation, the term of office of the President was reduced to 4 years (The Constitution of the Russian Soviet Federative Socialist Republic, 1978). Based on the amendments to the Constitution of the Russian Federation, which entered into force on December 31, 2008, since the elections of 2012, he is elected for a six-year term of office (Oficial'nyj internet-portal pravovoj informacii, 2008).
15 According to the constitution, the balance of the executive and legislative authorities is structured in such a way that Russia is defined as a mixed republic (also this form of government can be designated as presidential-parliamentary, semi-parliamentary or semi-presidential republic), combining the features of presidential and parliamentary republican rule. The legislative, executive and judicial authorities are independent (The Constitution of the Russian Federation, 1993).
Executive power
The main purpose of the executive branch in the Russian Federation is to organize the practical implementation of the Constitution of Russia and the laws of the Russian Federation in the course of management activities aimed at meeting the public interests and needs of the population. It is carried out through the implementation of state authority by methods and means of public, mainly administrative, law. The composition of the executive is recruited on an elective basis with the possibility of subsequent appointment. The structure of the executive branch of Russia is made up of civil servants and the legal structure — the system of norms determining the degree of competence of government bodies and officials.
The Prime Minister heads the government. It includes deputy chairmen of the Government (supervise several ministries and departments), federal ministers (supervise various government programs and carry out special assignments) and heads of departments that do not have ministerial posts, but officially equal to ministers by status. The quantitative composition and structure of the government are not regulated by law and are determined by the President. (The Constitution of the Russian Federation, 1993)
Legislative power
According to the Constitution, the legislative power is exercised by the Federal Assembly — the parliament. The functions and powers of the Federal Assembly are distributed between two chambers — the State Duma (the lower house of the Federal Assembly) and the Council of the Federation (the upper house) (The Constitution of the Russian Federation, 1993).
The Council of Federation consists of two representatives from each subject of the federation: one from the representative and executive bodies of state power (in the Russian Federation there are 85 subjects, therefore, 170 members of the Council of the Federation). In 1993, members of the Federation Council were elected by the population, in 1995, their places were taken directly by the governors and speakers of regional legislative assemblies, and since 2000 — appointed and elected representatives of the executive and legislative bodies of the subjects of the federation, respectively. The Federation Council does not have a fixed term for its legislature. The State Duma
16 consists of 450 deputies elected by popular vote on party lists for a period of 5 years (up to December 31, 2008 — for 4 years) (Oficial'nyj internet-portal pravovoj informacii, 2008) (The Constitution of the Russian Federation, 1993).
The same person cannot simultaneously be a member of the Council of Federation and a deputy of the State Duma (The Constitution of the Russian Federation, 1993).
Judicial power
Judicial power is exercised by the courts: The Constitutional Court, courts of general jurisdiction headed by the Supreme Court and arbitral tribunals, also headed by the Supreme Court. In some subjects of the Russian Federation there are constitutional (statutory) courts. The judicial system of the subjects of the federation also includes magistrates.
Control over the observance of human rights and freedoms in the activities of state bodies and officials is called upon to be carried out by the ombudsman in the Russian Federation. The Commissioner for Human Rights is appointed by the State Duma and acts in accordance with federal constitutional law. The Commissioner, in exercising his powers, is independent and unaccountable to any state bodies and officials (The Constitution of the Russian Federation, 1993).
The Constitution establishes that Russia recognizes political and ideological diversity, a multi- party system, and equality of public associations before the law. No ideology can be established as a state or mandatory. The creation and activity of public associations whose goals or actions are aimed at changing the foundations of the constitutional system and violating the integrity of the Russian Federation, undermining the security of the state, creating armed groups, inciting social, racial, national and religious hatred are prohibited (The Constitution of the Russian Federation, 1993).
As of February 4, 2019, 64 political parties were officially registered in the Russian Federation (Ministerstvo justicii Rossijskoj Federacii, 2018). After the creation of the United Russia party and the 2003 State Duma elections, a party system with a dominant party actually took shape in the country, in which only one party has real political power, with a majority in the federal parliament, and in the representative bodies of the regional and local levels, as well as controlling the executive power in almost all regions, cities and regions.
Four parties are represented in the State Duma (Gosudarstvennaja duma, 2019):
• United Russia;
• Communist Party of the Russian Federation;
• Liberal Democratic Party of Russia;
• Just Russia.
17 The party “United Russia”, founded in 2001 as a result of the unification of political movements
“Unity” and “Fatherland — All Russia”. It stands on the positions of conservatism. The size of the party 2 million people (2012). In the elections to the State Duma in 2016, it gained 340 seats, keeping the position of the dominant party.
The United Russia party is the most influential Russian political force that makes major political decisions and supports the general political commitment of the President of the Russian Federation (Edinaja Rossija, 2019).
The Communist Party of the Russian Federation is a left-wing political party in the Russian Federation. Founded in 1993 as a restored Communist Party of the RSFSR. The size of the party is 156 thousand people (2012). In the elections of 2016 won 43 places. In the long run, its strategic goal is the construction of renewed socialism in Russia.
The CPRF sets itself the tasks: the coming to power of patriotic forces, the nationalization of natural resources and strategic sectors of the Russian economy while maintaining small and medium-sized businesses, strengthening the social orientation of state policy. Since its inception, the party has positioned itself as an opposition to the current government (KPRF, 2019).
Liberal Democratic Party of Russia is an opposition political party in the Russian Federation.
Founded in 1992. The size of the party is 247 thousand people (2016). In the 2016 elections won 39 seats. In the social sphere, the party adheres to the ideas of nationalism and liberalism, and in the economic sphere they adhere to the theory of a mixed economy (LDPR, 2019).
Just Russia is a center-left political party in Russia, declaring the ideology of social democracy and modernized socialism. The number of the party is 160 thousand people (2016). In the elections of 2016 won 23 places (Just Russia, 2019).
18 2.2. Economic Environment
Russia’s GDP mainly consists of three sectors: the agricultural sector, the industrial sector and the service sector (Central Intelligence Agency, 2017).
Figure 3 GDP structure
Source: Author based on data from Central Intelligence Agency.
Russian agriculture is one of the most actively and successfully developing branches of the Russian economy. Agriculture in the country almost completely ensures the food security of Russia, and also makes it possible to export significant volumes of agricultural products abroad.
The leader in the production of agricultural products in all categories of farms — Krasnodar Kraj
— 320 195 million rubles. The second place is occupied by agriculture of Rostov Oblast with a total value of 256 600.6 million rubles. The Republic of Tatarstan is the third agricultural region of the Russian Federation in terms of the total value of the products produced. Agricultural products were produced in the amount of 235 427.4 million rubles (Federal State Statistics Service, 2018).
Russia is a huge country located in different climatic zones and in its southern Russian regions, the climate for agriculture as a whole is very favorable.
The main branches of agriculture are horticulture and animal husbandry.
Horticulture in Russia is the main branch of the country’s agriculture. The total volume of crop production in all categories of farms (commercial sector, which includes agricultural organizations and peasant farms and non-profit sector — households) of Russia in 2018 in value terms was estimated at 2 569 billion rubles (Federal State Statistics Service, 2019).
Service Sector 63%
Industrial Sector
33%
Agricultural Sector
4%
GDP structure
Service Sector Industrial Sector Agricultural Sector
19 By the end of 2017, animal husbandry in Russia accounted for 49.1% of all agricultural output in value terms. Accordingly, the crop production industry in Russia accounted for 50.9%.
The volume of livestock production in all categories of farms of Russia in 2018 in terms of value is 2 550.8 billion rubles (Federal State Statistics Service, 2019).
The largest cattle-breeding region of Russia is the Belgorod Oblast. The region’s share in the total value of livestock products produced in the Russian Federation is 6.3% (products produced in the amount of 157 440.4 million rubles). The Republic of Tatarstan is on the second place — 116 329.2 million rubles (4.6% of the total Russian cost of livestock production). The third place is occupied by the Krasnodar Territory with a share in the total cost of 4.2% (104 549.8 million rubles) (Federal State Statistics Service, 2018).
Russian industry is represented by many industries and enterprises. Russia is one of the major industrial powers in the world and one of the few countries capable of producing industrial goods of almost any type. Despite the fact that in the 1990s there was a serious decline in production, since 2000, the industry has been showing quite steady growth.
For 2017, the share of industry in Russia’s GDP was 32.4%. Russian industry is divided into three main categories (Federal State Statistics Service, 2018):
• manufacturing — 52.3%;
• mining and quarrying — 35.9%;
• electricity, gas, steam and air conditioning supply — 11.8%.
The manufacturing industry is a leading industry in Russia.
Figure 4 Main branches of the Russian manufacturing industry
Source: Author based on data from Federal State Statistics Service.
Engineering 25%
Oil refining Metallurgy 23%
19%
Food21%
Chemical 12%
Main branches of the Russian manufacturing industry
Engineering Oil refining Metallurgy Food Chemical
20 The Russian defense industry is one of the most important industrial sectors in Russia. Russian defense enterprises make up the second largest defense industry in the world, providing their products to the Russian Army (second in the world) and creating a solid foundation for Russia’s security, and also allowing the country to consistently rank second in arms exports in the world.
Russia’s share of the global arms market is 22% and is second only to the share of the United States (34%) (SIPRI, 2018).
The service sector of Russia, together with the industries and agriculture, is one of the most important components of the country’s economy. In the service sector, specific goods are created in the form of a commercial and non-commercial good that do not have a tangible form and are directly consumed in the process of their creation. The products of the economic activity of this sphere are services designed to meet the personal needs of the whole society or its individual members, organizations and households.
The service sector includes a wide range of industries, which are usually divided into three groups:
consumer (education, health care, social assistance, tourism, culture, etc.), serving the interaction of economic agents and government services, security and law enforcement.
Since 2005, Russia has a classification of types of economic activity in accordance with international standards, in which nine types of services are distinguished (Ministry of Economic Development of the Russian Federation, 2014):
1. Wholesale and retail trade, repair.
2. Hotels and restaurants.
3. Transport and communication.
4. Financial activities.
5. Real estate activities.
6. Public administration and defense; compulsory social security.
7. Education.
8. Human health and social work activities.
9. Other service activities.
21 Table 5 Gross value added by industry and service sector (2014–2016), billion rubles
Industry and Sector 2014 2015 2016 2016/2014
Wholesale and retail trade; repair 9 456 8 798 8 304 0,88
Hotels and restaurants 496 484 462 0,93
Transport and communication 4 092 3 983 3 966 0,97
Financial activities 2 755 2 582 2 767 1,00
Real estate activities 10 036 10 175 10 318 1,03
Public administration and defense; compulsory
social security 3 941 3 977 4 094 1,04
Education 1 319 1 309 1 296 0,98
Human health and social work activities 1 867 1 881 1 858 1,00
Other service activities 826 859 858 1,04
Total 34 788 34 048 33 923 0,98
Source: Author based on data from Federal State Statistics Service.
The volume of gross value added by sectors of the economy and sectors providing services in recent years (2014–2016), show a decline, which averaged 2%. The largest increase in value added was achieved in the general government sector (1.04) and other service activities, such as the provision of other community, social and personal services (1.04), and the largest decline was in trade services — 12% (Federal State Statistics Service, 2019).
In 1990 the retail trade turnover amounted to 253.5 billion rubles, in 2000 it was already 2.35 trillion rubles, and by 2016 it had increased to 2.98 trillion rubles (Federal State Statistics Service, 2019).
Current wholesale growth rates are not much lower than retail growth rates. Thus, over the period of 2000–2017, the turnover of this sector increased by more than 16 times. The turnover of wholesale trade in 2000 amounted to 4.25 trillion rubles, having increased by 2016 to 70.5 trillion rubles (Federal State Statistics Service, 2019).
However, due to the economic crisis that began in 2014, retail trade in Russia is experiencing a decline.
In Russia, more than 58% of the working-age population worked in the service sector. Of this share, a large part is engaged in trade (more than 27%), 16% work in the services of the education system, and 15% of all those employed in the service sector in the services of transport and communications (Federal State Statistics Service, 2018).
22 2.3. Social Environment
According to the 2018 census of the population of Russia, the number of Russians has declined (Federal State Statistics Service, 2019).
Losses of the Russian population at the moment are largely due to the high mortality rate, especially of the rural population. In Russia, there is a decrease in the number of births, and the number of deaths has exceeded the number of births (Federal State Statistics Service, 2018). Of the two types of demographic aging: declining fertility and increasing longevity — as a consequence of increased life expectancy, Russia, definitely, belongs to the first.
Since the birth rate in Russia for a long time is kept below the level of simple reproduction, there is an aging population and a decrease in the number of women of childbearing age. To stabilize the number, a higher TFR is required.
More than 200 nationalities live in Russia. About 80% of the population of Russia are Russians.
Russians are spread unevenly across the country: in some regions, such as Chechnya, is less than 2% of the population (Federal State Statistics Service, 2010).
The peoples of Russia speak more than 100 languages and dialects. The most popular language in Russia is Russian. It is also the state language of the Russian Federation. Republics have the right to establish their own state languages. All state languages of the subjects of the federation must have a written language in Cyrillic.
Christians (mainly Orthodox), Muslims, Buddhists, Jews, and also representatives of other religious movements live in Russia. In Russia, there are no official statistics of membership in religious organizations, as the law prohibits the demand from citizens of statements about their religious affiliation.
In an attempt to understand the business culture of Russia, it is necessary to refer to the system of identification of cultures proposed in 1980 by Geert Hofstede. As a result of his research, Hofstede proposed six universal dimensions applicable to the cultures of the whole world.
These dimensions are (Hofstede Insights, 2019):
• Power Distance
• Individualism
• Masculinity
• Uncertainty Avoidance
• Long term orientation
• Indulgence.
23 Figure 5 Country comparison: Russia
Source: Hofstede Insights.
Power distance
The power distance index determines the perception of power, the extent to which members of a society, institution or organization with relatively lesser power expect and allow for uneven distribution of power. The population of Russia received a high rating (93) for this indicator, which corresponds to the acceptance of the uneven distribution of power by citizens who do not possess it (Hofstede Insights, 2019).
Individualism
As opposed to collectivism, individualism determines the identity of personal goals, self- awareness as “I”, protection of private interests, ties between individuals, not burdened with strong obligations to act together; group goals, self-awareness as “we”, maintaining relationships, norms are inherent to collectivist culture. Russia, with 39 points, is a collectivist society, where family, friends, social circle, neighbors, belonging to a social group is significant for a person (Hofstede Insights, 2019).
Masculinity
Masculinity means aiming at achieving a result. Countries with a large value of this indicator are referred to as “masculine type”; they are characterized by such qualities as rivalry, self-confidence, purposefulness, and commitment to material values. Countries with low values are referred to as
“feminine type”. They are characterized by honoring relationships, cultural values, caring for the quality of life. Russian culture is characterized rather by feminine qualities: caring for others,
24 maintaining quality of life and cooperation. Russians tend to play down their accomplishments in a team or when meeting new people. Russians are patient, often on the verge of humility, which is proclaimed virtue in the dominant religion — Orthodoxy (Hofstede Insights, 2019).
Uncertainty avoidance
Avoiding uncertainty determines the degree of perception and response to unfamiliar situations.
Russians are guided by rules or instructions, characterized by a need for formalized instructions and standards of behavior, a high level of anxiety, a tendency to intergroup agreement and a low tolerance for people or groups with different ideas or behavior. Russians resist change and are less inclined to risk in any form whatsoever (Hofstede Insights, 2019).
Long-term orientation
Strategic thinking determines the short-term or long-term orientation to the future, the focus on the solution of strategic, long-term goals, the desire to look into the future. Russia (81) is a very pragmatic culture in which people believe that truth depends on the situation, context and time.
Traditions easily change depending on conditions, the study of new directions is welcomed, with a reference to the future. Residents tend to save and invest (Hofstede Insights, 2019).
Indulgence
Indulgence is essentially a measure of happiness, a degree of satisfaction with the simple joys of life. Russia has a low rate (20) for this parameter. This is characteristic of a society that controls the satisfaction of needs and regulates it with the help of strict social norms. The Russian population believes that other factors influence their life and emotions (Hofstede Insights, 2019).
2.4. Technological Environment
At present, in Russia every year there is an improvement in the development of transport infrastructure, the development of new technologies, the development of the Internet, information, etc.
According to data provided by the World bank, in recent years, research and development expenses in the Russian Federation have generally stagnated at 1.1% of GDP. Despite this, Russia is among the top ten leading countries in the world in terms of domestic expenditure on research and development (R&D) in terms of purchasing power parity (The World Bank, 2019).
Also, in 2019, the Prime Minister of Russia Dmitry Medevedev signed a decree on the creation of the Vorobyovy Gory Innovative Science and Technology Center of the Moscow State University
25 to increase the investment attractiveness of research and development in such areas as medicine, pharmaceuticals, information technology, nanotechnology, robotics, space and others (Lomonosov Moscow State University, 2019).
Russia ranks 51 in the world in terms of the quality of infrastructure according to the Global Competitiveness Report 2018 prepared by the World Economic Forum. At a relatively high level (23rd place) in Russia there is only air transport. In other areas (quality of roads, port infrastructure, water infrastructure, electricity), improvements are needed (World Economic Forum, 2018).
The transport system of Russia is characterized by a developed transport network, one of the most extensive in the world and comprising 87 thousand km of railways, more than 745 thousand km of hard-surface roads, more than 600 thousand km of air lines, 70 thousand km of pipelines, over 140 thousand km of main gas pipelines, 115 thousand km of river navigable and sea routes. It employs over 3.2 million people, representing 4.6% of the working population (Invest in Russia, 2019).
Huge spaces and a harsh climate have predetermined the all-weather types of land transport.
Railway and pipeline are of paramount importance for Russia.
The overwhelming part of the passenger turnover falls on four types of transport: air (46%), bus (22%), rail (22%) and metro (8%). The trend of recent years is an increase in the share of air transport (an increase of almost 5 times compared to 2000) and a decrease in the share of rail transport (Federal State Statistics Service, 2018).
Rail transport in Russia is one of the largest railway networks in the world. The operational length of the network of public railways is 85.5 thousand km, 43.7 thousand km were electrified. The total length of the main railways is 124 thousand km; Russia ranks third in the world, yielding only to the United States and China (Central Intelligence Agency, 2019). In 2017, rail transport in Russia transported 27% of passengers and 45% of cargo (excluding pipeline transport — 87% of cargo). Passenger traffic in Russia accounts for about 5% of the total rail traffic. The largest industry company in Russia is Russian Railways. As of 2018, the company employs 737 thousand people, which is 1.2% of the total number of people employed in the Russian economy (Russian Railways, 2017).
Air transport is the most expensive, which limits its cargo application. It is of great importance for passenger traffic. In Russia, Moscow’s Sheremetyevo Airport, one of the largest airports in Europe, is the leader in terms of passenger traffic. The total passenger traffic of the airport in 2017 amounted to more than 40 million people (Sheremetyevo, 2019). Regular flights to Sheremetyevo are performed by 40 airlines. Flights from the airport are carried out in 210 directions (domestic and international) (Sheremetyevo, 2019). The variety of directions of the route network in conjunction with the technologies used forms the unique transit potential of the airport.
26 In Russia, unlike other countries, there are no specialized cargo airports. Cargo transportation is carried out through passenger airports, which have cargo terminals with the appropriate equipment for quick service of aircraft. The carriage of goods by air is characterized by a high cost, so air transport mainly carries low-volume cargoes that require urgent delivery, perishable, medical, postal, etc.
The current state of the transport system is characterized by a low technical level of the production base of most enterprises and the depreciation of the vast majority of vehicles, which leads to a decrease in the safety of their work.
Russia has developed numerous strategies and programs aimed at developing infrastructure. Over the past five years, 325 infrastructure projects have been announced that are currently at different stages of implementation. The implementation of most projects is planned until 2020, and only a few should be completed closer to 2030 (Invest in Russia, 2019).
The largest amount of investments is planned to be directed to the development of railway transport infrastructure. Their main part is intended for the implementation of projects envisaged by the plan for the development of high-speed railway traffic for the future until 2030. The second largest area of planned infrastructure investment is the construction of roads and bridges (Invest in Russia, 2019).
2.5. Legal Aspects
2.5.1. Forms of Business Entity
The following organizational forms of commercial enterprises can be created in Russia: economic partnerships, production cooperatives, state-run and municipal unitary enterprises (The Civil Code of the Russian Federation, 1994).
Business partnerships and companies:
• General partnership;
• Limited partnership;
• Limited liability company;
• Joint-stock company (open and closed).
General partnership
According to the agreement, which is concluded between participants, they are engaged in entrepreneurial activity and are liable for its obligations with property belonging to them, i.e. in relation to the participants of a general partnership, there is unlimited liability. A person may be a
27 member of only one general partnership. The participant of a general partnership, who is not the founder, shall be liable, along with the other participants, for the responsibility that arose prior to its entry into the partnership. A participant who retires from the partnership is still responsible for the obligation of the partnership which existed before his/her departure, including the two years after his/her departure. The profits and losses of a general partnership are distributed among its participants depending on the number of their shares in the capital. The minimum and maximum sizes of the share capital are not limited (The Civil Code of the Russian Federation, 1994).
Limited partnership
It is a partnership in which, along with participants engaged in entrepreneurial activities on behalf of the partnership and responsible for the condition of the partnership with their property, there are contributing investors who bear the risk of losses within the limits of their contributions and do not participate in the decision-making of the partnership activities. Investors do not have the right to participate in the management of business of the limited partnership, to act on its behalf otherwise than by proxy. They are not entitled to challenge the actions of the partners in the management of the affairs of the partnership (The Civil Code of the Russian Federation, 1994).
Limited liability company
This is a company established by one person or several people, the authorized capital of which is divided into shares of the sizes determined by constituent documents. The participants in a limited liability company bear the risk of losses associated with the activities of the company within the value of their shares. The authorized capital of the company is composed of the nominal value of the shares of its participants. The size of the authorized capital of the company must be not less than ten thousand rubles. (The Civil Code of the Russian Federation, 1994).
Joint-stock company
Joint-stock company is a company, which has its authorized capital divided into a certain number of shares. Members of the company are not liable for its obligations and bear the risk of losses associated with the activities of the company within the value of their shares. The current legislation provides for the division of joint stock companies into open and closed ones. The main difference between open and closed joint-stock companies is the possibility of open sale of shares.
A joint-stock company whose participants are free to sell their shares without the requirement of consent from other shareholders is recognized as an open joint-stock company. Such a company has the right to conduct an open subscription to the shares they issue and their free sale under the conditions established by law. A joint stock company whose shares are distributed only among its
28 founders or another predetermined circle of people is recognized as a closed joint stock company.
Such a company may not conduct a public subscription to the shares issued by it. The authorized capital of a joint stock company is made up of the nominal value of shares acquired by shareholders (The Civil Code of the Russian Federation, 1994).
The minimum size of the authorized capital of a closed joint-stock company must be at least 100 times the amount of the minimum wage, i.e. also 10 000 rubles. The minimum size of the authorized capital of an open joint-stock company must be at least a thousand times the minimum wage on the date of registration of the company 100 000 rubles (Oficial'nyj internet-portal pravovoj informacii, 1998).
Production cooperatives
It is a voluntary association of citizens in a form of a membership for joint production or other economic activity based on their personal labor or other participation and on the association by its participants of property shares. The members of a production cooperative bear subsidiary liability for its obligations. The profit of the cooperative is distributed among its members based on their labor participation. In the same way, the property remaining after the liquidation of the cooperative and the satisfaction of the claims of its creditors is distributed. In a production cooperative the authorized capital is not created, and the property in its ownership is divided into shares of its members (The Civil Code of the Russian Federation, 1994).
The minimum size of share fund of a production cooperative is not established by law. At least 10% of their share contributions are obligated to be paid by the members of the cooperative before the state registration of the cooperative, and the rest within one year from the date of registration (Oficial'nyj internet-portal pravovoj informacii, 1996).
State-run and municipal unitary enterprises
A unitary enterprise is a commercial organization has no right to have ownership of the property endowed to them by an owner. The property of a unitary enterprise is indivisible and cannot be distributed by contribution (shares), including among employees of the enterprise. In the form of unitary enterprises, only state and municipal enterprises can be created (The Civil Code of the Russian Federation, 1994).
The size of the authorized capital of a state enterprise must not be less than five thousand minimum wages (500 000 rubles) established by federal law on the date of state registration of the state enterprise. The size of the authorized capital of a municipal enterprise must be at least one thousand minimum wages (100 000) established by federal law on the date of the state registration of the municipal enterprise (The Civil Code of the Russian Federation, 2002).
29 2.5.2. Taxation
When opening and developing any business, an important issue is the choice of the tax system.
Paying taxes is a must, but they should not hinder the achievement of the main goal of any business
— making a profit.
To date, the legislation of the Russian Federation provides for 5 tax systems (The Russian Tax Code, 1998):
1. General taxation system;
2. Simplified tax system;
3. License-based taxation system;
4. Single tax on imputed income;
5. Unified agricultural tax.
General taxation system
The general taxation system in Russia is the most common, since it is used by most large and medium-sized enterprises.
The general taxation system is the most burdensome tax regime; therefore, small businesses or individual entrepreneurs should conduct business on the general taxation system only if the majority of counterparties are VAT payers or the firm’s activity is related to the import of goods.
If during the registration of a business entity a businessman has not filed documents on the choice of a specific taxation system, then it automatically switches to the general taxation system.
For most organizations and individual entrepreneurs, the general taxation system is less convenient compared to special tax regimes, since it provides for the payment of all major taxes, including.
Simplified tax system
The simplified taxation system introduced specifically for individual entrepreneurs. In order to work on the simplified tax system, it is necessary to meet certain criteria: income per year should not be more than 150 million rubles, and the number of employees in the organization should be less than 100 people. The peculiarity of the simplified taxation system is that instead of three taxes an individual entrepreneur needs to pay only one. Reporting is simpler than with the general tax regime, and it is submitted once a year at the end of the tax period (The Russian Tax Code, 1998).
The simplified tax system can be applied in one of two options to choose from (The Russian Tax Code, 1998):
• income tax — 6%;
• tax “income minus expenses” — 5–15% depending on the region.
30 License-based taxation system
The patent system of taxation can be applied only to a limited list of types of business activity, which is established by law.
The essence of this regime is that the individual entrepreneur buys a patent for a certain period (from one month to one year) and is exempt from paying income tax, value added tax and tax on property. The only condition is to pay the patent on time. The cost of the patent is calculated by the regional authorities on the basis of the potential profit that can be obtained when conducting a certain type of activity. Under this tax regime, there are restrictions: the number of employees — no more than 15 people (The Russian Tax Code., 1998).
Single tax on imputed income
When working under the single tax on imputed income regime, the individual entrepreneur pays a single fixed tax, which is set by the state for certain types of activities. In fact, in this mode, the tax does not depend on the size of income. Consequently, this mode is beneficial to use for those entrepreneurs who have a fairly large income in reality. The tax rate for single tax on imputed income is 15% (The Russian Tax Code, 1998).
One of the following conditions may prevent one from switching to this special regime (The Russian Tax Code, 1998):
• The taxpayer is classified as the largest;
• The organization or the owner of the company share in other organizations exceeds 25%;
• The average number of employees is 100 people and more;
• The activity falling under the single tax on imputed income is carried out in the framework of a simple partnership agreement or trust management of property;
• Taxpayer pays unified agricultural tax.
In addition, the tax code of the Russian Federation provides for restrictions on the types of activities in the application of the single tax on imputed income. For example, (The Russian Tax Code, 1998):
• The area of retail trading floors should not exceed 150 m2;
• The number of vehicles in the carriage of passengers and goods shall not exceed 20.
If during a year an LLC or sole proprietorship is working on an imputed income tax, but at some point, it violates one of the restrictions, then from this year it will switch to the general taxation system.
31 Tax exemption (The Russian Tax Code, 1998):
• For legal entities — corporate tax, corporate property tax, VAT;
• For individual entrepreneurs — tax on income of physical persons, tax on property of physical persons, VAT.
Unified agricultural tax
Individual entrepreneurs operating in the field of agriculture, that is, produce, process and sell agricultural products, can apply the regime of unified agricultural tax. Fishery organizations are also entitled to apply unified agricultural tax. (The Russian Tax Code, 1998)
The rate of unified agricultural tax is 6% of income minus expenses. The tax is paid twice a year, and reporting is carried out under a more simplified scheme and is submitted once a year at the end of the tax period. One of the conditions for the application of unified agricultural tax is that income from agricultural activities must be at least 70% of total income (The Russian Tax Code, 1998).
Tax exemption (The Russian Tax Code, 1998):
• Organizations — corporate income tax, tax on property of organizations;
• Individual entrepreneurs — tax on personal income tax on property of individuals, value added tax
Federal, regional and local taxes and fees are established in the Russian Federation.
Federal taxes and fees must be paid throughout the territory of the Russian Federation. Federal taxes include tax on income of physical persons, corporate tax, value added tax, excise duties, tax on the extraction of commercial minerals and water tax (The Russian Tax Code, 1998).
Regional taxes are taxes that are established by this Code and the laws of the subjects of the Russian Federation on taxes and are obligatory to be paid in the territories of the respective subjects of the Russian Federation. Regional taxes include corporate property tax, gambling business tax and transport tax (The Russian Tax Code, 1998).
Local taxes and fees are obligatory for payment in the territories of the respective municipalities.
Local taxes include land tax and tax on property of physical persons (The Russian Tax Code, 1998).
Tax on income of physical persons
Tax on income of physical persons — the main type of direct taxes. It is calculated as a percentage of total income of individuals minus documented expenses, in accordance with current legislation.
32 Payers of tax on income of physical persons are individuals, for tax purposes are divided into two groups (The Russian Tax Code, 1998):
• tax residents of the Russian Federation (actually staying on the territory of Russia for at least 183 calendar days for 12 consecutive months);
• not tax residents of the Russian Federation in the case of income in Russia.
The tax code of the Russian Federation on the tax on income of physical persons provides for five tax rates (The Russian Tax Code, 1998).
The tax rate in the amount of 9% of dividend receipt until 2015; receiving interest on mortgage- backed bonds issued before January 1, 2007, etc. If an individual is a tax resident of the Russian Federation, most of his income will be taxed at a tax rate of 13%. Such income, for example, includes wages, remuneration under civil contracts, income from the sale of property, as well as some other income. At a rate of 15%, the subject to tax are dividends received from Russian organizations by individuals who are not tax residents of the Russian Federation. All other incomes of non-resident individuals are taxed at the rate of 30%. The tax rate of 35% is maximum and applies to the cost of any winnings and prizes received in contests, games and other events, interest income on deposits in banks in terms of exceeding the established amount, etc. (The Russian Tax Code, 1998).
Corporate tax
Corporate tax is a direct tax, its value directly depends on the final financial results of the organization.
Tax payers are all Russian legal entities, foreign legal entities that operate in Russia, foreign organizations recognized as tax residents of the Russian Federation. The basic tax rate is 20% (3%
are transferred to the federal budget, and 17% to the regional one) (The Russian Tax Code, 1998).
Value-added tax
VAT is an indirect tax, the calculation of which is made by the seller in the sale of goods (works, services) to the buyer.
VAT payers are organizations and entrepreneurs. At a rate of 10% VAT, taxation is applied in cases of the sale of food products, goods for children, periodicals and books, medical goods. 20%
VAT rate applies in all other cases (The Russian Tax Code, 1998).
Excise duties
Excise is an indirect tax levied on legal entities and individual entrepreneurs. The list of excisable goods is quite narrow and contains the following groups: alcohol and alcohol-containing products,
