The opening up of Russia to trade and foreign investment at the end of the 1980s marked the start of a turbulent period for the Russian economy. Now, as the Russian stock markets enter their third year of strong growth, and western economies react to large-scale corporate failures and accounting scandals, investors are looking more towards emerging markets such as Russia. However different rules apply when approaching investment, and a number of pitfalls can present themselves to the uninformed investor.

What are the first steps in evaluating a strategic investment opportunity in Russia?

Several important variables should be considered in the course of evaluating a Russian investment opportunity. Firstly, any strategic investor needs to identify the core assets and ensure they are owned by the target. Secondly, it is essential to analyse the capital structure of the company, including its ownership and its history. In that regard, Russian companies can be viewed as falling into one of two general categories: privatised and newly formed. Privatised companies’ assets are more likely to be undervalued. Newly formed companies are likely to have fewer identifiable legal problems, but less likely to be a bargain.

Thirdly, it is important to understand to what extent, if any, the government is involved in the ownership structure or business of the company, either by direct ownership, or by control over large supply or customer contracts and key operating licenses.

Finally, the structure of the investment will depend on the motivation of the sellers and the buyers. Often, offshore holding structures become necessary to accommodate complex transactions because Russian law effectively prevents the use of constitutive documents of a Russian company as operative documents.

What regulatory approvals might be required?

In general, there are no limitations on foreign ownership of Russian companies, with the exception of certain specialised industries (for example, insurance) and specific companies (for example, Gazprom). Most investments will require the approval of the ministry of anti-monopoly. It is also important to remember that licenses held by the target almost certainly are not transferable and will have to be reissued, which could be costly and time-consuming.

Can a foreign investor exercise control over the company by means other than ownership?

Foreign investors in Russia often express the desire to acquire control over a potential target prior to or instead of acquiring a beneficial interest. When considering such arrangements it is important to keep in mind that voting proxies under Russian law are revocable at will. The only way to attempt to exert control over the company is by acquiring a minority stake and entering into a shareholders agreement governed by foreign (preferably New York or English) law with an international arbitration clause.

What should an investor focus on in the process of legal diligence?

In addition to all the standard due diligence items in any international acquisitions, foreign investors in Russia should focus on: (1) questions related to the formation of the charter capital of the company and its ownership structure; (2) ownership of the key assets; (3) contingent tax liabilities; (4) operating licenses; and (5) labour issues, particularly if the investor wants to cut jobs.

Can an investor count on contracts being enforceable in Russia?

Foreign investors entering into contracts with their Russian counterparts should aim to structure them so they are “self-enforceable”. This means a careful structuring of payments (for example, payment on delivery) and other mechanisms to assure the other side is properly incentivised to comply with the contractual terms for reasons other than the fear of litigation. However, although such careful structuring can be critical, it is also important to include dispute resolution mechanisms that will ensure maximum enforceability.

Anya Goldin is managing partner of the Moscow office of global law firm Latham & Watkins