The University of Illinois College of Law

With an education system that has produced nearly 100% literacy, great emphasis on science and technology [4] seven consecutive years of steady economic growth and a consistent strengthening of the ruble, Russia appears to be an extremely attractive target for foreign investment. However, direct foreign investment is still very low in comparison with other transition economies in Europe and by international standards generally, [5]. With U.S. investment at a total of $1.64 billion, comprising just 3 percent of total foreign investment in Russia in 2006 [6], the question remains: Why are American investors so reluctant to invest their funds in Russia?"

For economic reforms to flourish and private investors and entrepreneurs to prosper, the legal system must effectively protect private property, defend economic rights against infringement, and establish a secure environment for investment and market relations. [7] In contemplating the accession of the Russian Federation (RF) to the World Trade Organization, a dramatic increase in foreign investment activity is anticipated. As a result, legislation concerning the regulation of foreign investment is becoming increasingly more important. Recently, there has been a surge in the passage of commercial laws as the Russian government seeks to rectify Russia's negative image in the eyes of investors.

It is generally recognized that the Russian legal system provides the main legal guarantees, investment protection, and conditions for commercial activities that comport with international standards. [8]The Russian government is currently working on a law that will provide for oversight of foreign investment in the country's strategic sectors, such as oil and gas. The codification of such policies, albeit restrictive, is seen by some U.S. officials as a positive step in improving the climate for foreign investment. One measure of Russia's transparency and openness to investment will be the Strategic Sectors Law. According to early drafts that have been made public, this law would regulate government reviews of investments into 39 sectors of the Russian economy. [9] Strong, fair and transparent governing institutions, such as regulatory agencies, keep the business sector in line and encourage investment, by ensuring that investors understand where they are putting their money. [10]

Several American corporate giants like Boeing and Procter & Gamble already maintain a notable presence in Russia. [11] Others, particularly those interested in the energy sector, are waiting for the Russian government to define the "rules of the road" for exploration and development off-shore and in the Arctic before undertaking the mammoth capital investments needed to get such projects off the ground.[12] The core legislation governing the national regime of foreign investments known as the Federal Law "On Foreign Investments in the Russian Federation " provides fundamental guarantees and serves to open attractive opportunities for foreign investors.[13] This Russian law provides equal rights for foreign investors in the domestic market, guarantees the protection of property rights and ensures the fair settlement of disputes. [14] Additionally, Russia is engaged in expansive administrative reform and has significantly liberalized legislation regarding currency regulation and control. [15] Recent changes in antimonopoly law have also made implementation of direct foreign investments in Russia significantly easier.

II. Intellectual Property

Russia's poor track record in improving intellectual property rights has historically hindered foreign investment. It was considered at one point to be a factor which could preclude U.S.approval to Russia's ascension into the World Trade Organization. [16] For years, WTO negotiations between the U.S. and Russia were slowed by Washington's concerns about Russia's weak stance on intellectual property. [17] In November 2006, the United States became the last major WTO member country to approve Russia's entrance into WTO by signing a bilateral agreement. [18]The agreement was tempered with a variety of specifications, and built a framework for Russia to crack down on piracy. [19] In addition, it set a timeline for enacting laws on the counterfeiting of pharmaceutical and computer goods in a bid to address the country's poor record on intellectual property rights.[20]

Since signing the agreement, Russia has made significant progress in addressing the widespread problem of intellectual property piracy and in fulfilling the requirements of the agreement. [21] When the timelines are completed, the agreement becomes subject to ratification by the U.S. Senate and must pass through one more hurdle before being finalized.[22]The US Chamber of Commerce, a private sector organization representing over three million business owners, has been advocating heavily for Russia's entrance into the WTO. [23] Russia has allocated 3.7 BLN rubles (approximately $144.7 million) to the goal of resolving intellectual property rights [24] and Russian authorities are currently trying to fight the problem by organizing raids, passing anti-piracy legislation and releasing anti-piracy ads. [25] Some improvements are already visible; the crackdowns have led to a reduced number on kiosks selling pirated CDs, DVDs and software in Moscow, the nation's capital. [26]

Bill Robinson, an American attorney and leading expert on Russian business, suggests that in addition to governmental action combating piracy, a more fundamental change essential to shielding intellectual property rights has also taken place. [27] Russian attitudes about intellectual property are changing.

There were two schools of thought about intellectual property when I began working in the Soviet Union. One thought was: we are a poor country and we can't afford Microsoft, so it's OK to steal it. The other school of thought was: we are as smart as anyone else in the world, and if we do not have a legal regime in place to protect our work and our efforts, then they will be worthless to us. That second school of thought is winning out. [28]

Roughly three-quarters of the Russian economy has been privatized, [31] but some investors cite the fear of nationalization (the transfer of privately owned assets into public ownership) as a reason for their reluctance to invest. In contrast, Bill Robinson, a respected lawyer and representative of businesses in Russia since 1990, thinks that nationalization is an insignificant risk and one which is easily insurable.[32]

Although there has been increasing state ownership in strategic sectors like aerospace, "national champions" of private industry such as energy and metals continue to grow alongside with these state giants. [33] Though the government is reasserting its position and ownership of some state resources, there is increasing privatization in the utilities sector. [34] Experts urge foreign investors not to view this trend of state capitalism as a threat, but as a way to cement the foundation of the country's economic system which will, in turn support the rest of the markets. [35]

Moreover, there is evidence that this trend of state capitalism seems to be working well for Russia. Many Russians who view the Soviet Era as the glory days of economic prosperity cite the return of a strong government as a source of pride, and assert that it has boosted consumer confidence. [36] Russians view the strategic sectors as one of their economy's greatest strengths. [37] They favor the new protections against foreign investment in these areas and stress that maintaining Russian control of these resources will have a positive impact. [38]

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