Following the policy decision to adopt import substitution measures last year, the Russian authorities are further developing their regulatory framework in this area. The trends we noted earlier (see here and here) are being gradually reflected in the legislation. Given the overall negative outlook for economic development in Russia, it can be assumed that these trends will only intensify in the future.
In such circumstances, investors working on business development in Russia should already prepare to consider new opportunities. To this end, we prepared a brief overview of the latest changes in legislation in the field of localisation of production in Russia.
How is the import substitution policy being translated in legal terms?
The import substitution policy was initially aimed at establishing bans and restrictions on access of goods of foreign origin to the public procurement system in Russia.
Later, the Russian Government commissioned the development of specific action plans for import substitution providing for a gradual reduction in the level of foreign goods being consumed in Russia by 2020 in more than 20 sectors of the economy (such as various branches of machine manufacturing (including farm and food processing machinery), light industry, oil refining and petrochemical industries, as well as medical and pharmaceutical industries).
Latest changes in the field of industrial policy
Certain draft decrees of the Russian Government that propose to extend the list of foreign-made products (in particular, light industry products and medical devices) which have restricted access to the public procurement system are currently being discussed. At the same time, measures to stimulate the localisation of foreign industrial production in Russia are actively being developed.
Special investment contracts
On 16 July 2015, Government Decree No. 708 “On special investment contracts for selected industries” was adopted under the general provisions of Federal Law No. 488-FZ of 31 December 2014 “On the industrial policy in the Russian Federation” (which came into force on 29 July 2015).
A special investment contract is a specific type of agreement entered into for a period of up to ten years whereby the state provides an investor with specific incentives to create new, or upgrade existing, production facilities; or to develop production facilities for products for which no substitutes are available in Russia. The investor is guaranteed a stable tax burden over the term of the special investment contract.
This Decree provides for a standard form of special investment contract to be used in certain sectors and industries (including machinery, metallurgy, light industry, chemicals, pharmaceuticals, health care and electronics).
Unlike the draft, the final version of the Decree stops short of setting out specific incentives that can be provided to an investor. This therefore allows incentives to be determined on a case by case basis for each investor, depending on the terms and conditions of the proposed investment.
The main advantages of entering into a special investment contract are that it not only gives the investor a “package” of incentives, but it also allows the investor to obtain the state’s prior approval to such controversial issues as the status of a producer and that of a sole supplier; and to set out special rules for determining the country of origin of goods.
In view of the fact that the State Duma is currently reviewing a bill under which state and municipal customers will have the right to enter into agreements with a special investment contract participant as the sole supplier (as an amendment to Federal Law No. 44-FZ dated 5 April 2013 “On contract system in sphere of purchases of goods, works and services for state and municipal needs”), securing a sole supplier status under a special investment contract may become one of the key elements of a localisation project.
At present, entering into a special investment contract does not guarantee any special tax and customs regime and therefore it makes sense to consider combining this type of agreement with other investment mechanisms (e.g. a regional investment agreement or an agreement on the implementation of activities in a special economic zone).
Products with no substitutes produced in the Russian Federation
On 17 July 2015, the Russian Government adopted Decree No. 719 “On the criteria for the classification of industrial products as industrial products with no substitutes produced in the Russian Federation”, which will come into force on 1 October 2015.
Under this Decree, the criteria to determine whether an industrial product falls within the definition of a product with no substitutes available in Russia, are:
- the industrial product in question is not produced in Russia; and
- its product parameters (relating in particular to its functional and quality characteristics) differ from those of products produced in Russia.
The Decree also establishes the criteria to determine whether a product originates in the Russian Federation (in relation to products of six sectors of the economy, including machine tools, automotive, electrical goods, farm and food processing machinery, as well as other branches of mechanical engineering). These criteria depend on the specific type of product and may include, among others, the requirement that: (i) certain technological operations on the products must be carried out in Russia; (ii) a manufacturer must have rights to the product’s design and technical documentation; and (iii) there must be a service centre in one of the Member States of the Eurasian Economic Union.
Changes to the regulation of public procurement
In the public procurement field, the following changes have recently been adopted:
- a ban on the conclusion of state and municipal contracts with companies registered in offshore jurisdictions (in force since 13 August 2015); and
- an obligation on customers and other legal entities implementing investment projects which receive support from the state to place their purchase orders under Federal Law No. 223-FZ dated 18 July 2011 “On purchases of goods, works and services by certain types of legal entities” (which will come into force on 10 January 2016).
The latest changes in legislation outlined above aim to provide more detailed legal regulation in the sphere of import substitution and localisation of production in Russia. Although the objectives and priorities set by the Russian authorities in this area are as a whole clear, we recommend exercising caution when implementing a production localisation project in Russia as there is currently no practice or precedent in terms of the application of the new provisions.
In this situation, it is advisable to continue to monitor legislative and regulatory developments in this area and be ready to adjust business plans to take into account any future changes in the law.