The allure of Russia for Japanese investors deteriorated sharply in 2007, when the leading Japanese companies Mitsui and Mitsubishi were strong-armed by the then minister of natural resources into selling portions of their interests in the Sakhalin II oil and gas project.
However, the investment climate in Russia has become attractive to Japanese companies again as a result of international political trends and revisions to Russia's civil code and company laws. Changes over the last two years have brought the country's legal environment into line with the expectations of international businesses.
In addition, the development of the mineral-rich Far East region, which is close to Japan, is now a top priority for the Kremlin, following severe depopulation after the collapse of the Soviet Union and its system of regional subsidies in 1991. Russian President Vladimir Putin told parliament in 2010 that the country's survival depended on ensuring the economic development of its far eastern region.
A department for the development of the area was established in 2012, and several billion dollars were invested in the transportation infrastructure of Vladivostok, the regional capital, ahead of the Asia-Pacific Economic Cooperation summit on nearby Russky Island in September 2012. Significant sums have since been earmarked for the construction of a port and other infrastructure in the area.
Just as important is Russia's eastward political pivot following the imposition of Western sanctions in 2014, after the conflict in Ukraine. Russia is now looking to the Asia-Pacific region for funds, markets and new business partners as well as political allies.
At the same time, the rise of China has prompted Tokyo to try to resolve a dispute with Moscow dating from World War II -- the status of four islands north of the Japanese island of Hokkaido that are occupied by Russia but claimed by Tokyo. Japanese Prime Minister Shinzo Abe has held several meetings with Putin on the issue, most recently during an APEC summit in Lima, Peru, in mid-November. As part of its attempts to warm relationships with Moscow Japan has offered an eight-point program of economic aid, beginning with energy and port infrastructure in the Russian Far East. A bilateral group of experts is selecting projects.
This giant package could not have come at a better time for Japanese companies. A large number are now looking abroad in search of growth options as a result of the shrinking Japanese population and an increasing shortage of domestic labor.
Russia's civil code and company laws were adopted in the mid-1990s and incorporated the very shallow experience of Russian businesses emerging from the communist era. By the second decade of the century it had become apparent that these laws needed updating to bring them into line with the contemporary needs of the business community. This has now been done.
Recognition of shareholder agreements has been on the business community's wish list for years because foreign investors wanted to ensure that their rights could be protected in joint venture companies with Russian partners. Before the recent changes the details of how foreign and Russian parties planned to manage JVs could not be included in company by-laws. In the absence of shareholder agreements the management of JV companies was defined by a handful of provisions in Russian company law.
For years, Russian shareholders of JVs have been taking advantage of their superior skills in navigating those laws to abuse foreign partners, sometimes to the extent of kicking them out. This was particularly common in relation to Japanese partners. There are dozens of stories about how unscrupulous Russian JV partners took over companies and chased out their Japanese counterparts, leaving them with nothing. In fact, the Japanese business community has coined a particular term for that -- nottori.
However, the recent amendments to the Russian civil code have significantly strengthened the status of shareholder agreements. The expectation is that the courts will embrace this novelty, allowing shareholder agreements governed by Russian law to become a commonly used and dependable legal tool that will adequately protect the rights of minority shareholders in Russian companies.
An unprecedented step forward was the introduction into the civil code of the concept of representations and warranties in the context of a purchase of shares in a Russian company. It is commonly accepted that the central body of a business purchase is the set of disclosures and assurances that the seller makes to the buyer. To that end, lawyers spend enormous amounts of time and effort negotiating a fine risk allocation between the seller and the buyer of a company, as reflected in numerous pages of the share purchase agreement.
Previously, Russian law did not prohibit representations by sellers, but without express legislative recognition, parties to a business sale were reluctant to subject their transaction to Russian law. With the civil code now expressly providing for sellers' representations to buyers in merger and acquisition transactions expectations are high that more such deals will be concluded under Russian law.
A bold new system for the recording of pledges on chattels, as well as on rights and other movable assets, was also introduced recently. The civil code now requires a pledge holder to notify a Russian public notary of its security interest. The notary then enters the information into a database run by the Russian Notary Chamber, which is open to the public.
This change will significantly strengthen the protection of Japanese exporters of bulldozers, cranes and similar construction equipment, which tend to self-finance such exports by granting importers deferred payment terms. Japanese exporters' claims for such deferred payments may now be secured by pledges over the exported equipment that will be recorded in a public database and will be enforceable against third-party purchasers.
The recent amendments to the civil code also resolved the issue of setting binding pledges over bank accounts. Lawyers have for years been trying various techniques to pledge funds in accounts held by borrowers, but legal provisions did not allow reliable pledges of bank accounts.
A new section introduced to that end in the civil code introduces a legal mechanism allowing valid pledges of bank accounts which the pledger cannot dismantle later. The new ability to pledge the bank accounts of Russian importers of Japanese goods will boost protection for Japanese exporters, who can now establish escrow-type payment arrangements. This will help Japanese companies to capture proceeds reaped by Russian importers from the domestic resale of imported goods acquired under deferred payment arrangements.
Russia now boasts a set of corporate and security interest laws that are far more attractive and reassuring for international investors than the framework that preceded them. With the geopolitical and economic context particularly favorable to warmer Russia-Japan relations, the future looks bright for investment in Russia's Far East from the Land of the Rising Sun.
Andrey Goltsblat is managing partner at Goltsblat BLP, the Russian practice of the law firm Berwin Leighton Paisner. Sergey Milanov is head of the Asia practice, and a partner at Goltsblat BLP.