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Localised production and import substitution: new business opportunities under the sanctions

November 2015 - Tax & Private Client. Co-Publishing von Goltsblat BLP.

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Localised production and import substitution: new business opportunities under the sanctions

Vladimir Tchikine

Partner, Customs & International Trade Practice, Goltsblat BLP

Vladislav Safonov

Senior Associate, Customs & International Trade Practice, Goltsblat BLP  

The weakening of the Russian economy under the impact of the sanctions imposed by the West and against the backdrop of falling global energy prices is having an adverse effect on foreign trade, which has contracted significantly over the last year. In the current situation, the Russian authorities’ intent to support development of domestic manufacturing is both predictable and consistent.

An important step in this direction is Federal Law No.488-FZ dated December 31, 2014 "On Industrial Policy in Russia", which came into force on June 30, 2015.  

Localised production and import substitution: new business opportunities under the sanctions 

Vladimir Tchikine

Partner, Customs & International Trade Practice, Goltsblat BLP

Vladislav Safonov

Senior Associate, Customs & International Trade Practice, Goltsblat BLP  

The weakening of the Russian economy under the impact of the sanctions imposed by the West and against the backdrop of falling global energy prices is having an adverse effect on foreign trade, which has contracted significantly over the last year. In the current situation, the Russian authorities’ intent to support development of domestic manufacturing is both predictable and consistent.

An important step in this direction is Federal Law No.488-FZ dated December 31, 2014 "On Industrial Policy in Russia", which came into force on June 30, 2015.  

Who is subject to the law?

The Law applies in practically all areas of Russian industry. The law expressly affects the industries related to minerals extraction, manufacturing, power, gas and steam supply, air conditioning, water supply and removal, waste collection and disposal, as well as elimination of pollution.  

Support for domestic manufacturers—what options are available for business?

The Law stipulates a set of measures for promoting industry, including financial support: subsidies from budgets of different levels, special investment contracts, etc. In turn, these measures apply to legal entities and individual entrepreneurs doing business in industry in Russia, on the continental shelf and in the exclusive economic zone. 

A separate incentive consists in priority of domestically-made industrial products over foreign ones in procurements for state and municipal needs or by entities in which the State of Russia has interest.  

The incentive procedure will be determined by the Russian Government. It is important to note that the law does not apply directly, it requires implementing acts. Some of them have already been published, including a Russian Government resolution establishing the criteria for recognising products originating from Russia and those without domestic analogues (the Resolution). A legal framework for special investment contracts has been developed and is now almost completely in effect. It appears that the regulatory framework for full-scale application of the law will be shaped by the end of 2015. 

What is a domestic manufacturer?

Technically neither the law nor the Resolution use the term “domestic manufacturer”.   However, it is commonly understood that if a person manufactures goods in Russia and the Russian government agrees that the goods are domestic ones, that person is the domestic manufacturer that may be entitled to the incentives established by the law and its implementing provisions.      

Considering import substitution focus of the Law, the incentives will most likely be connected with production localisation in Russia. The assumption is based on the Resolution which establishes the criteria for recognising goods of Russian origin in Russia. The proposed criteria stipulate localisation of production to one degree or another.  Meanwhile, industrial products for which no special requirements are envisaged by the resolution will be deemed to be manufactured in Russia on the basis of the criteria determined by the Agreement between the CIS member-country governments dated November 20, 2009 “On rules of origin in the CIS”. 

In addition to the above said, products manufactured under special investment contracts will also be considered Russia-made. The procedure for entering into such contracts and the requirements on their contents have recently been approved by the Russian Government.

It should also be noted that the Resolution does not set out any procedure for confirming domestic manufacture of industrial products. This issue will be fixed by regulatory acts of the Russian Ministry for Industry and Trade. 

Practical advice—what should business focus on?

Since the regulatory framework for the law has not yet been fully prepared, we advise the business community to monitor publication of the relevant draft documents. Many are likely to be discussed publicly, including within the scope of the impact assessment procedure.  

In turn, once the conditions for “full-scale” application of the law on industrial policy are established, the most topical issues are likely to be those connected with recognition of products as manufactured in Russia, use of the incentives and, for foreign investors, compliance by the measures applied in Russia with the WTO requirements.