Localization in Russia – A carrot and a stick

800 products from 19 industry sectors should be locally produced in Russia by 2020. This is the ambitious plan of Russia regarding localization. On 07.06.2017 the portal of the Austrian economy abroad, ADVANTAGE AUSTRIA, organized together with SCHNEIDER GROUP, RSP International and the Government of the Moscow Region the business breakfast under the title “Localization in Russia – a carrot and a stick” with focus on Austrian enterprises. The event was hosted in the office of SCHNEIDER GROUP in the center of Moscow.

“A carrot and a stick” determines an approach that refers to rewards and punishment. In the event this idiom was used for the requirements and benefits for the localization process in Russia. After the introduction by Mr. Christopher Schagerl, Director at SCHNEIDER GROUP, the Austrian Commercial Counsellor in Moscow, Mr. Rudolf Lukavsky, gave an overview of the bilateral relations between Austria and Russia. After the all-time high in 2013 (EUR 3-48 bln.) exports from Austria to Russia slumped by 46%, followed by a turnaround in October 2016. Russia was Austria’s 16th most important trading partner in 2016. Machines and equipment (including electronics and car & train equipment) are still the most important export goods. On the import side stand mineral fuels and metals. The Austrian FDI in Russia in 2016 amounted to EUR 5.4 bln; the Russian FDI in Austria EUR 21.7 bln. As of today, more than 500 Austrian companies are active on the Russian market, while some of them have localized their production in Russia, mainly around Moscow and other big cities.

While Mr. Alex Stolarsky, Director for Legal, Compliance & Tax at SCHNEIDER GROUP, introduced to the 30 top-level visitors the requirements for localization and gave answer on the question of when a product really is “made in Russia”, Mr. Andre Scholz, Partner at RSP International presented the benefits from Localization. One of the main reasons to localize the production in Russia are the governmental plans for import substitution with the aim of increasing the domestic production. The plan to produce 800 products from 19 industry sectors by 2020 locally would mean an implementation of more than 2,000 localization projects. The “carrot and stick” method is also visible for example, in tenders when foreign products are excluded or their price automatically reduced by 15%. Further market access restrictions for foreign products are in place.

The definition of what is a domestic product “made in Russia” was discussed. The main rule is that at least one of the first four digits in the customs classification code will be changed and a percentage of the value of foreign materials used in the production of the final product at the final price is calculated. Special investment contracts bring incentives when localizing the production. These contracts give a range of opportunities, but also thresholds for their use. Incentives of reduced tax rates and guarantees may look very attractive but as a general approach it should also be considered that the investment needs to be profitable without subsidies and tax benefits.

Special economic zones also provide their residents with a number of benefits. Reduced rates or exceptions (e.g. profit tax, property tax, land tax, road tax) are possible – for a limited period of time. Duty free import to the SEZ is also possible. In the sphere of financing, Russia’s program includes loans with subsidized interest rates in the agro sector. In addition, commercial banks are nowadays eagerly looking for solvent clients to improve the quality of their portfolio. The key-rate of the Central Bank is also decreasing.

Mr. Timur Andreev, General Director of the Moscow Region Development Corporation gave an insight into the localization incentives of the Moscow region. With a population of more than 7 million people, of which 4.5 million are economically active  Moscow Region is rated first by the industrial development indicators. 3 Special Economic Zones are located in the area (Dubna, Istok, Stupino Quadrat). Industrial parks and Special Economic Zones host more than 400 residents with over 12 billion roubles in investments. From in total 64 industrial parks, 16 are currently under construction. The SEZ in the Moscow Region offer their investors the exception of profit tax for 8 years (then, 5% for 6 years and, after that, 13,5%), a 0% land tax rate for 5 years, 0% property tax rate for 10 years and 0% transport tax rate for 5 years. Furthermore, there is a possibility of partial reimbursement of expenses for the creation of utility infrastructure. Special focus is also on the support for agricultural businesses including greenhouses, cheese production, fish and mushroom farming.

In the afternoon, the participants could visit the DEGA Industrial Park in Noginsk in order to get a practical insight of how localization can be perforemed in reality. In the business park the representatives of the local government provided the participants with detailed information on the localization process.

Summarizing the full-day experience, visitors could get the theoretical and legal background of localization in the first half of the day, while the afternoon was organized as the practical session. For us at SCHNEIDER GROUP it was a pleasure to cooperate with ADVANTAGE AUSTRIA in the organization of the event.

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Contact our expert:
Alex Stolarsky
Partner, Rechtsanwalt, Legal & Compliance, Moscow
+7 / 495 / 956 55 57