As Russia prepares for its accession to the World Trade Organisation, certain areas of potential impact on domestic industry need to be considered. Specifically, this pertains to the financial services sector and insurance in particular.
The Protocol of the Accession of the Russian Federation to the World Trade Organisation (WTO) was approved on16 December 2011. The Report of the Working Party on the Accession and the Protocol consist of about 2,000 pages on the commitments of the Russian Federation in respect of WTO membership, and there is no doubt that these documents will be the focus of very close attention and study. In the forthcoming 2012, this will certainly be one of the main topics of various comments, reviews, reports and publications; however, it is clear that the commitments to WTO membership will have a significant impact on the development of various industries in Russia, including the financial services sector.
Negotiations on financial services were particularly gruelling and protracted. Some WTO members wanted Russia to abolish all limitations on the banking and insurance sectors. As the result of a series of compromises, Russia has made a few important commitments in respect of insurance, and it is this sector that could be affected the most by WTO membership. The compromise was reached some time ago, and the details are not easy to recall off the top of our heads. Certainly, the full text of the Protocol will be subject to a careful review later, but we would like to outline its basic provisions on insurance now.
The Protocol is open for ratification by the Russian Federation for 220 days from the moment of its approval. The Protocol will enter into full force and Russia will become a member of the WTO on the thirtieth day after the treaty has been ratified. Let us have a look at what the Russian insurance market may face once the country becomes a member of the WTO.
The quota
The Protocol of the Accession deals with the cross-border supply of services as well as with the commercial presence of service suppliers in Russia. However, the Protocol does not contain special provisions regarding one of the most burning issues, namely, the issue of limitating foreign investment into the Russian insurance sector or the quota issue.
The Protocol simply refers to the rule that Russia may stop foreign investors from entering the insurance market should the aggregate amount of foreign investment into the sector exceed 50% of the total amount of the charter capital of Russian insurance companies.
As of 28 December 2011, Russian law provides for a 25% quota on foreign investment into the Russian insurance market. The Report of the Working Party refers to a 50% quota and outlines a formula for calculating it that does not correspond to the existing procedure. For example, according to the Report, foreign investment into the Russian insurance sector does not include foreign investment in Russian insurers or reinsurers made prior to 1 January 2007 and privatised after the date of accession of the Russian Federation. Moreover, certain Russian insurance companies with foreign investment made after 1 January 2007 and established for more than 12 years will not be regarded as companies with foreign investment. Finally, the Report provides that an increase in charter capital of a foreign-invested Russian insurance company that has been financed by its own profits earned in the Russian Federation or repatriated to the Russian Federation from abroad, as well as investments by the Russian subsidiary companies of foreign investors would constitute domestic investment for the purposes of calculating the quota.
As the Protocol does not provide for any special commitments on the quota, we can expect that the amount and the rules for calculating it will be introduced to the legislation prior to the ratification of the Protocol.
Cross-border supply of services
Under the Protocol, as of the formal accession date, there should be no limitations on cross-border supply of insurance of risks connected with international passenger transportation and liability arising therefrom, international transportation of goods, and international commercial air transportation and liability within the international green card system. Within four years of Russia's accession to the WTO, there should be no limitation on insuring risks associated with domestic commercial air and maritime transportation, including insurance of goods being transported, the vehicle transporting the goods and any liability arising therefrom, except insurance of the air carrier's liability and life and health insurance of the aircraft crew.
Commercial presence: branches
Russian commitments in relation to commercial presence are more complex. For the first nine years of Russia's accession to the WTO, commercial presence will still be possible only through a Russian legal entity. After nine years of Russia's accession to the WTO a foreign insurer will be allowed to operate through a branch in the field of life insurance and non-life insurance, subject to licensing, financial soundness and guarantee deposit requirements. The Protocol leaves it to the discretion of the Russian Government to establish these requirements for branches of foreign insurers.
In order to open a branch, a foreign insurer (reinsurer) must:
— have been authorised to operate in the same types of insurance or reinsurance in its country of origin for at least five years (for non-life insurance) and at least eight years (for life insurance);
— have at least five years' experience operating a branch in foreign markets;
— have total assets of more than USD 5 billion;
— have its legal address and actual address in the same country.
Russia is free to set up special capitalisation requirements for the branches of foreign insurers, which will be taken into account when calculating the quota. The creation of new branches of foreign insurers may be denied if the quota exceeds 50%.
Under the Protocol, branches of foreign investors will not be allowed to carry out insurance of state procurement and mandatory insurance other than the mandatory civil liability insurance of car owners.
Commercial presence: subsidiaries
The legal status of the subsidiaries of foreign insurers will also change. After five years of Russia's accession to the WTO, insurance companies in which foreign participation in the charter capital exceeds 51% will be allowed to sell life and CMTPL policies. At present, this is possible only for Russian subsidiary companies of foreign investors registered in the European Union.
At the date of Russia's accession to the WTO, a foreign investor that is the parent company of a Russian subsidiary insurer will have to have been authorised to supply the respective insurance or reinsurance services in the country of its registration for at least five years. At the moment, there is a requirement of 15 years' experience for investors from countries outside the European Union.
The Protocol contains a grandfather clause that allows insurers that are subsidiaries of foreign investors at the date of Russia's accession to the WTO and which have obtained their licences to provide life, state procurement, and mandatory insurance services prior to accession to engage in such activity in accordance with these licences.
Insurance intermediaries
The Protocol does not provide for major changes in the status of insurance brokers and insurance agents. In terms of commercial presence, it will still be required to operate through a Russian legal entity. Insurance intermediation related to the conclusion and distribution of insurance contracts on behalf of foreign insurance companies on the territory of the Russian Federation will not be allowed. The only exception is those insurance policies relating to the above-mentioned risks associated with international transportation.
If you have any questions on the matters referred to in this Alert, please do not hesitate to contact CMS, Russia expert Leonid Zubarev or your regular contact at CMS, Russia.
On-line version of this Alert can be viewed here.
|