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  1. Introduction
    1. Political and administrative structure
    2. Legal environment
  2. Common forms of business structures for foreign investors
    1. Main types of structure
    2. Registration, liquidation and reorganisation of business structures
    3. Shareholders’ and participants’ agreements
    4. Strategic industries
  3. Anti-monopoly issues
    1. General legal and regulatory framework
    2. Scope of application of the Competition Law
    3. Anti-competitive practices and restriction of competition
    4. Liability
  4. Tax system
    1. General approach
    2. Corporate taxation
    3. Incentives
    4. Special tax regimes
    5. Taxation of individuals
    6. Double taxation treaties
  5. Customs regulations
    1. General approach
    2. Trade between EEU and non-EEU countries
    3. Mutual trade between the EEU members
  6. Currency control
    1. Foreign currency transactions
    2. Consequences of breach/Penalties
  7. Lending in Russia
    1. Lending documents and governing law
    2. Jurisdiction
    3. International finance transactions and repatriation requirements
    4. Security interests
    5. Recognition of security trusts
    6. Syndicated loans
    7. Enforcement
    8. Suretyships and guarantees
    9. Bankruptcy considerations
    10. Other lending related issues
  8. Employment and migration
    1. Formalising the employment relationship
    2. Managing employment relationships
    3. Terminating an employment agreement
    4. Specifics of employing foreign nationals
  9. Personal data protection
    1. General approach
    2. Scope of the Data Protection Law
    3. Liability
    4. Right to be forgotten
  10. Intellectual property
    1. General approach
    2. Contractual aspects of intellectual property rights
    3. Rights over the results of intellectual activity
    4. Company names, trade names, trademarks and appellations of origin
    5. Intellectual property rights infringements
    6. IP Court
  11. Advertising issues
    1. General approach
    2. Scope of application of the Advertising Law
    3. Violations of the Advertising Law
    4. Liability
  12. Anti-corruption and compliance
    1. General approach
    2. Legal framework
    3. Compliance requirements for companies
    4. Concept of corruption in Russian law
    5. Possible targets of bribery
    6. Liability and penalties for corruption
    7. Example of sector-specific anti-corruption measures
  13. Real estate and construction
    1. Rights to real estate
    2. Real estate transactions
    3. Resolution of real estate disputes
    4. Planning and construction issues
  14. Corporate bankruptcy
    1. Insolvency criteria
    2. Stages of bankruptcy proceedings
  15. Import substitution and production localisation in Russia
    1. Measures affecting goods importation and current import substitution legislation
    2. Localisation incentives
    3. Sector-specific impact of import restrictions and localisation requirements
  16. Banking sector
    1. Legislative and regulatory framework
    2. Licensing and operations
    3. Deposit insurance
    4. The anti-money laundering law
    5. Bank secrecy
    6. FATCA and CRS
  17. Environment, energy efficiency and renewables
    1. Environment
    2. Energy efficiency
    3. Renewables
  18. Infrastructure and public private partnerships
    1. General approach
    2. Key PPP legislation
    3. Russian PPP environment
    4. Financing
    5. Legal issues
    6. Prospects for infrastructure projects
  19. Oil & gas
    1. Legislative framework
    2. Ownership and licensing
    3. Restrictions on foreign investors
    4. Licences
    5. PSAs

Import substitution and production localisation in Russia

Background

Around ten years ago, the Russian Government and legislators started to adopt measures aimed at increasing domestic production of goods and reducing the country’s dependency on foreign goods. The events, which took place in Ukraine in 2014, further reinforced these measures as it became more obvious that it is very dangerous for the country’s economy to be overly dependent on imported goods that (i) could be cut off at any time by sanctions; and (ii) are subject to currency exchange rates volatility.

Initially, the government’s policy was simply aimed at import substitution by removing foreign goods from the Russian market and imposing restrictions on imported goods so that domestic goods would take their place. However, it quickly became clear that it was necessary to simultaneously attract foreign direct investments and provide incentives for foreign companies to localise their production in Russia.

Currently, a weak Russian rouble, relatively cheap and qualified local labour force, a free access to the CIS markets¹, including the country’s deeper integration with Armenia, Belarus, Kazakhstan and Kyrgyzstan, which are members of the Eurasian Economic Union (the “EEU”), together with the incentives implemented by the Russian Government, have made the country an attractive place for production of goods.


[1] Russia is a party to the Commonwealth of Independent States Free Trade Area (CISFTA) between Russia, Ukraine, Belarus, Uzbekistan, Moldova, Armenia, Kyrgyzstan, Kazakhstan and Tajikistan. However, Russia has suspended this regime towards Ukraine since 2016. In addition, Russia has bilateral free trade treaties with other CIS countries like Azerbaijan. Back ↑

Key contacts

Contact
Heidemann Thomas
Dr. Thomas Heidemann
Partner
Rechtsanwalt

Sector-specific impact of import restrictions and localisation requirements

Whereas the general rules on import restrictions and localisation are the same, certain concepts, such as the criteria of a unique foreign product (meaning it has no equivalents in Russia), sufficient processing criteria and procurement restrictions may vary, depending on the industry sectors.

For instance, the sectors listed below have their own specific criteria.

Mechanical and electrical engineering and metal industries

For some types of industrial products, the production process must satisfy specific criteria established by Russian Government Decree No. 719 dated 17 July 2015 for a product made in the country to be classified as ‘domestic’. Such requirements depend on the types of products involved. The most frequently used criteria require:

  • certain industrial operations to be carried out in Russia;
  • a manufacturer to have sufficient rights to the relevant design and technical documentation;
  • the percentage of foreign-made components used for manufacturing the product to be gradually reduced from 50% to 10%.

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Food products and food processing

The imposition of import restrictions and sanctions on a wide range of foreign food products in a very short time adversely affected the local market as it was not ready for such negative developments. This led to a rise in prices and a reduction in the variety and quality of agricultural products and foodstuffs in the country.

However, with time, the ban of on foreign food items led to a significant increase in local food production and ongoing boom in the industry. Probably, this was one of the few industries in Russia that showed real and significant growth as a result of the government’s protective measures.

Preferential treatment

Russian Government Decree No. 832 dated 22 August 2016 (as further amended) stipulates a list of 27 types of food products that enjoy a preferential treatment in public tenders if they are manufactured locally. According to this Decree, public authorities, when procuring food products included in the list, are obliged to reject any bids from manufacturers whose products are not made in the EEU, if there are two or more bids for the supply of the same food products that originate from the EEU ( the “third odd one out” rule).

The list of foreign food products, which are restricted for public procurements, as approved by Decree No. 832, includes fish, shellfish, seafood, meat (beef, pork and poultry) fresh, chilled or frozen, dairy products (cheese, butter and milk), as well as sugar, salt, rice and wine. Also, the general price discount preferences apply for tender purposes.

Federal Law No. 264-FZ “On the Development of Agriculture” dated 29 December 2006 establishes a raft of incentives and support measures, such as subsidies, refinancing of loans and tax incentives, for local food producers.

Sanctioned goods

All the sanctioned goods (listed in Russian Government Decrees No. 778 and No. 1296) are blocked from entering the country by customs officials at the border (save for their transit transportation). Such goods are subject to immediate destruction.

Although Russia is a member of the EEU, it prohibits importing or reselling banned food products through Belarus and Kazakhstan (the two members of the EEU that did not support the ban), provided that the ultimate destination of such products is Russia.

There have been some discussions about the liability of local retailers, who sell banned products, and some draft bills were prepared, but no legislation has been adopted to date.

Banned goods which are processed in Kazakhstan or Belarus for subsequent sale in Russia are not prohibited from entering the country. However, the level of processing required in such case has to be significant enough to justify a change in the country of origin of such goods (as indicated by a special certificate of country of origin issued by the Belarusian or Kazakhstani authorities). This means that simple re-labelling or re-packaging of banned goods in Belarus or Kazakhstan does not resolve the issue. Besides, processing may not be suitable for many banned goods or could require some additional investments.

Special criteria for obtaining a certificate of country of origin

The countries of origin of agricultural products and foodstuffs are determined according to the general rules and criteria of sufficient processing as established by the Agreement on the Rules for Determining the Country of Origin of Goods in the Commonwealth of Independent States dated 20 November 2009.

Specifically, it is expressly stated that the following goods are considered as originating from an EEU member state:

  • vegetables that are produced or picked (harvested) in an EEU member state;
  • animals born or raised in an EEU member state and products made from these animals in such state;
  • products of hunting and fishing in an EEU member state; and
  • goods made from any of the above listed products.

There are, however, specific criteria for some types of goods (e.g. beef meat, meat products, dairy products, bread, chocolate, juice and wine). For such goods, the ad valorem rule (mainly 50%) can be applicable as a separate condition, or together with the requirement to fulfil certain other conditions and perform certain industrial and technological operations.

It is worth mentioning that the following operations (specific to food production) do not meet the requirement of sufficient processing:

  • milling and polishing cereals and rice;
  • colouring sugar;
  • peeling, seeding and cutting fruits, vegetables and nuts; and
  • slaughtering and meat cutting.

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Construction machinery

According to Russian Government Decree No. 656 dated 14 July 2014, certain types of foreign construction machines are not allowed to take part in public goods procurement tenders.

Russian Government Decree No. 2781-r dated 31 December 2015 applies to state-owned companies and listed companies. The Decree lists construction machines that cannot be bought by such companies without the consent of the Government Committee for Import Substitution.

This list includes, amongst others, bulldozers, tractors, excavators, graders, loaders and road rollers. The adoption of the list has led to an increase in tender prices (by up to 40%) and a reduction in the variety and quality of procured products.

Special criteria for obtaining a certificate of country of origin

There are specific criteria, established by Russian Government Decree No. 719 dated 17 July 2015, for some types of construction machines (e.g. bulldozers, tractors, excavators, graders, loaders and road rollers). These criteria vary, depending on the types of products. The most commonly used criteria require:

  • certain industrial operations (e.g. assembling, welding, painting) to be carried out in Russia;
  • a manufacturer to have sufficient rights to the relevant design and technical documentation;
  • at least one authorised service centre to be located in any EEU member state (i.e. Armenia, Belarus, Kazakhstan, Kyrgyzstan or Russia).

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Automotive industry

According to Russian Government Decree No. 656 dated 14 July 2014, foreign vehicles cannot take part in public goods procurement tenders, except when such vehicles are produced under a SPIC regime within a limited period (five years from the time of signing the special investment contract or three years from start of production) or under an industrial assembly regime. The importation and use of such vehicles are not restricted for other purposes. However, high customs tariffs (which, in fact, are prohibitive) may apply in such case.

Existing practice

The localisation system in the Russian automotive industry was primarily based on customs incentives. With its accession to the WTO, Russia lost the authority to control its customs duties and pledged to eliminate customs barriers by 1 July 2018. Notwithstanding the long transitional period set for the Russian automotive industry, the WTO rules took effect before the expiration of some of the existing investment agreements. Starting from 1 July 2018, the Russian Government implemented special state support measures to compensate the importers’ expenses related to increased customs rates.

Another acute problem in this space stems from the devaluation of the Russian rouble. The Russian state usually signs investment agreements with automobile producers, under which the latter commit to increase the added value to their vehicles in the country over a certain period. In most cases, the automakers are initially required to ensure 40% of local added value and subsequently increase it to 60%. Although the automakers have difficulty in finding qualified local suppliers (and this is public knowledge), they have somehow managed to attain these percentage benchmarks until the rouble’s drastic devaluation. Now it has become even more difficult to reach these benchmarks as the costs of imported materials have increased significantly due to the devaluation of the national currency.

Since almost all investment agreements previously signed in the automotive industry have already expired, most of the manufacturers have entered into SPICs.

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Information and computer technologies

Since 1 January 2016, foreign software products have been banned from public goods procurement tenders, except when:

  • the Unified Register of Russian Programmes for Computers and Databases (the “Register”) does not contain the software product of the required category; or
  • the software product in the Register does not meet the user’s requirements.

All software products, including operating systems, are affected. While, thanks to the above-listed exceptions, foreign software products are not completely banned for use by the public authorities in Russia, Russian developers are likely to squeeze out foreign software products from the local market in the long run by filling the Register with domestic software products.

At the same time, foreign software remains in high demand by public entities affected by these restrictions. To circumvent such restrictions, some local public authorities often set their goods procurement requirements in such a way that only their desired foreign software products can fully meet them. The authorities are trying to close this loophole by imposing the criterion of equivalence. Thus, with time, the localisation option looks more promising for foreign software developers who want to stay on or enter the Russian software market.

Special criteria for obtaining a certificate of country of origin

Under the current procedure for including software products in the Register, the owner of the software must be:

  • the Russian Federation;
  • a region of the Russian Federation;
  • a municipality of the Russian Federation;
  • a Russian non-commercial legal entity, whose management body is directly or indirectly appointed by the Russian Government, a Russian region or a Russian municipality and/or Russian citizens, whose decisions may not be determined by a foreign person or entity;
  • a Russian commercial legal entity, provided that 50% of its shares are directly or indirectly owned by the Russian Federation, a Russian region, a Russian municipality, a Russian non-commercial legal entity or Russian citizens; or
  • a Russian citizen.

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Medical products and pharmaceuticals

Russian Government Decree No. 102 dated 5 February 2015 stipulates a list of locally-made medical devices that enjoy preferential treatment in public goods procurement tenders. According to this Decree, public authorities, when procuring medical devices included in this list, are obliged to reject any bids from manufacturers of medical devices that do not originate from the EEU if there are two or more bids by manufacturers of the same medical devices from the EEU (the “third odd one out” rule).

Moreover, all medical devices manufactured in Russia are awarded a 15% pricing preference in public tenders. This means if the winning bidder (i.e. the bidder offering the lowest price) offers non-EEU-made medical devices, it must grant an additional 15% discount on the price of such goods.

Similar rules are set out by Russian Government Decree No. 1289 dated 30 November 2015. The Decree significantly limits the access of foreign pharmaceuticals which are included in the so-called ‘Essential Drugs List’ to public goods procurement tenders and provides for a 15% discount.

Existing practice

There have been a few court cases where distributors of foreign medical devices have tried to appeal the public authorities’ decisions to apply the “third odd one out” rule. However, the Russian courts have confirmed the legitimacy of the application of the rule to all the medical devices included in the list provided for by Russian Government Decree No. 102, as well as the local public authorities’ obligation not to consider medical devices, whose country of origin is not confirmed by an ST-1 Certificate or other means, as locally made products.

Special criteria for obtaining a certificate of country of origin

On 2 August 2016, the Russian Government adopted Decree No. 744 “On Amendment of Decree of the Russian Government No. 719” dated 17 July 2015, which provides for specific localisation criteria for different types of medical devices.

For most medical devices, a product may be deemed to have been made in the EEU, provided that: (i) the share of the foreign materials used in its production does not exceed 50% of its final cost; and (ii) a company which is a tax resident in the EEU holds the rights to the technical and engineering documentation of the device to an extent that is sufficient to produce it for a period of not less than five years.

Furthermore, the localisation criteria may include a requirement to operate a service centre in Russia which can handle warranty service, repair and technical maintenance of the medical equipment, as well as a requirement to have exclusive intellectual property rights to the software products that are required to operate the equipment, etc.

Regarding pharmaceuticals, under Russian Government Decree No. 744 dated 2 August 2016, any drug may be deemed to have been produced in the EEU if the following manufacturing stages are performed in the EEU: (i) production of the final dosage form; (ii) packaging; and (iii) quality control release. The list of particular technological operations, comprising the “production of final dosage forms” for different types of medicines (tablets, capsules, syrups, etc.) was set by Order No. 4368 of the Russian Ministry of Industry and Trade dated 31 December 2015. Such operations may include, depending on the dosage form, mixing the components, dry or wet granulation, capsulation, compression and other methods of production of pharmaceutical drugs.

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“Undoubtedly, localisation of foreign goods in Russia is the key to having an advantage over competitors who do not have local operations in the country, as well as enjoying the benefits of the CIS Free Trade Area.”


Key contacts

Heidemann Thomas
Dr. Thomas Heidemann
Partner
Rechtsanwalt