How to Invest in Russia

HOW TO INVEST IN RUSSIA

ThE AEB guide to investing in Russia | Foreword How to Invest in Russia

MAXIM ORESHKIN Minister of Economic Development of the Russian Federation

Dear colleagues,

Creating favourable conditions for business is one of the key preconditions for higher investment activity. A set of measures to improve the statutory regulation of business activity has been implemented over the past several years and the infrastructure for investment project support is in the process of improving. This work has allowed Russia to climb to 35th place in the World Bank’s Doing Business rating, thus demonstrating stable improvement in its position in the rating.

The mechanism for managing the systemic changes in the business environment – Business Climate Transformation – is currently being formed, which is intended to lift the current regulatory restrictions on business activity, including the elimination of excessive, outdated and contradictory requirements contained in the regulations. The adopted measures will provide stable macroeconomic conditions and the foundation for economic growth.

Work on improving the investment climate in Russia is carried out in cooperation with the business community, including with the participation of the Association of European Businesses. This makes it possible to objectively and precisely calculate the advantages and costs, reduce the risks, and assess the impact on the business climate and investment attractiveness during the decision-making process.

We are open for cooperation and are ready to promote the successful implementation of business ideas of foreign investors in Russia.

1 How to Invest in Russia Foreword |

Johan Vanderplaetse Frank Schauff Stuart Lawson Chairman of the Board, Chief Executive Officer, Chairman, Finance & Investments Association of European Association of European Committee, Association of Businesses Businesses European Businesses

Dear readers,

Welcome to the 2018 edition of the AEB “How to invest in Russia” guide.

The past year has been dominated again by the geopolitical situation, with a continued deterioration in Russia’s relationship with the West creating an environment in which the economy has not been able to recover as quickly as it might. This is due primarily to a poor investment climate that has prevented needed improvements in productivity to offset the upcoming demographic challenge. In addition, the geopolitical tension has caused further pressure on the rouble that has prevented the Central Bank from making further interest rate cuts and stimulating corporate lending.

The administration’s conservative policies in relation to fiscal discipline, alongside the Central Bank’s commitment to inflation targeting, have been endorsed by leading economists, the IMF and rating agencies. With combined low public and private debt, adequate foreign exchange reserves and a positive balance of payments, Russia is approaching the coming period in a relatively strong position in the short term; issues that exist relate more to long-term development and future prospects.

That said, the highly-charged political environment has meant that ‘event’ risk has substantially increased, and there is now an inevitability to the potential for severe counter-actions from Russia in the event of further sanctions from the West. AEB reaffirms its position in favour of the de-escalation of conflict and

2 | Foreword How to Invest in Russia

remains opposed to economic sanctions or limitations on free trade or investment. It is incumbent on all parties to maintain dialogue within the business environment to seek a means to de-escalate the current tensions.

Apart from the direct impact of sanctions, which reduce GDP growth, increase the country risk premium, create pressure on long-term funding and fuel inflation, there are the indirect impacts of higher interest rates, capital and intellectual flight, and a loss of confidence of domestic investors and consumers. Given the political nature of the drivers, it is no longer possible to forecast how long these negative influences will last and how deeply they will impact the economy.

However, the Russian economy of 146 million people will continue to present tremendous opportunities for investors who are prepared to accept the risks involved in working here. The AEB survey of European investors acknowledges the increased risks of the operating environment, but also notes the consistently more positive perspective of those with existing investments.

This current edition of the “How to invest in Russia” guide will bring you updates on the investment climate and legal, financial and environmental aspects. In addition, it also provides insight into investments by regions and by industries, as well as into opportunities and challenges when localising in Russia.

We would like to thank all the authors who helped by making their valuable contributions to this guide and sharing their knowledge of the Russian market and their experience of running a business here. We are also most grateful to the Ministry of Economic Development of Russia and the Federal Antimonopoly Service, who have supported the guide over the years.

We hope this publication will serve its purpose, which is to bring more investment to Russia and promote a business environment which is beneficial to all interested parties.

3 How to Invest in Russia Table of contents |

CONTENTS

Part I. Russia is the right place for investing 5 Changes in the legislation and state policy of control over foreign investments 6 Business climate in Russia: AEB-GfK survey 2018 11 The Kaliningrad region: the legacy of the 2018 FIFA World Cup in Russia 14

Part II. Localisation and investments 17 Industrial Development Fund: projects support opportunities 18 Localisation and import substitution: what foreign producers need to know 24 A new era for localisation in Russia 29 How to reduce the cost of production localisation in Russia 34

Part III. Before you start 37 Sanctions risks affecting foreign investments in Russia 38 Protecting investments: accurate legal compliance with sanctions, anti-money laundering and anti-corruption 43 A positive trend in investment climate and Russian bureaucracy 47 Beneficial ownership concept: how it could affect your business in Russia 50 How can sustainability drive your business in Russia? 55

Part IV. Sharing experience 59 Investing in Russia and beyond: a case of Servier 60

Publication name/ Published by/Учредитель: Chief Editor/ Released date/ Publisher’s address/ Наименование издания: Limited Liability Company Главный редактор: Дата выхода в свет: Адрес издателя, редакции: How to invest in Russia/ AEB Business/ Y.S. Melnikova/Мельникова Ю.С. 1 November 2018/ 68/70 Butyrsky Val, bld. 1, Как инвестировать Общество с ограниченной Publication volume and number/ 1 ноября 2018 г. 127055 Moscow, Russia/ в Россию ответственностью Номер выпуска: 01, 2018 Circulation/Тираж: Россия, г. Москва, ул. «АЕБ Бизнес» 950 сopies/950 экз. Бутырский Вал, д. 68/70 стр. 1 Cost/Цена: Distributed free of charge/Бесплатно

The opinions and comments expressed here are those of the authors and do not necessarily reflect those of the AEB Business LLC (AEB)/Изложенные мнения/комментарии авторов могут не совпадать с мнениями/комментариями Общества с ограниченной ответственностью «АЕБ Бизнес» (АЕБ).

The information in this publication is not exhaustive and does not represent a professional consultation on related matters. While all reasonable care has been taken to prepare it, the AEB accepts no responsibility for any errors it may contain, whether caused by negligence or otherwise, or for any loss, however caused, sustained by any person that relies on it. [The information in this publication should not be used as a substitute for consultation with professional advisers.]/ Информация в данном издании не является исчерпывающей и не является профессиональной консультацией по соответствующим вопросам. Несмотря на то, что были предприняты все меры предосторожности при ее подготовке, АЕБ не несет ответственности за наличие возможных ошибок, допущен- ных по невнимательности или другим причинам, а также за любой вред, понесенный любым лицом, которое будет руководствоваться данной информа- цией. [Информация в данном издании не должна использоваться в качестве замены консультаций с профессиональными консультантами.]

4 Part I. Russia is the right place for investing

5 How to Invest in Russia Russia is the right place for investing |

Changes in the legislation and state policy of control over foreign investments

2018 is a rather symbolic year for national defense and state security anyone involved in control over foreign by decision of the chairperson of the investments in Russia, as it is the 10- Government Commission (see journal year anniversary of Federal Law No. 57 release No. 01, 2017 for details). of April 29, 2008 “On the Procedure for Making Foreign Investments in Busi- In 2018, to reduce uncertainty about ness Entities of Strategic Importance the procedure for applying this norm, for National Defense and State Securi- amendments were also made to Gov- ty” (“Law No. 57-FZ”), the Government ernment Resolution No. 510 of July Grigory Karakov Commission for Control over Foreign 6, 2008, which approved the Regula- Deputy Head of Department for Investments in the Russian Federation tions on the Government Commission Control over Foreign Investments, (“Government Commission”) and the for Control over Foreign Investments the Federal Antimonopoly Service Department for Control over Foreign in the Russian Federation (“Regula- of Russia Investments, or the core structural unit tions”). The Regulations specify the of the Federal Antimonopoly Service. procedure and period for processing In 2012, received a bachelor’s degree with information received about relevant honors at the Moscow State Institute of In- Over the past 10 years, legal regula- transactions and making decisions on ternational Relations (University), MFA Rus- tions have moved forward, with three their preliminary approval. sia, and in 2014 earned a master’s degree. successive packages of amendments From 2012 to 2015, worked as a State Duma to Law No. 57-FZ adopted in 2011, According to the Regulations, to deter- Deputy Assistant on a voluntary basis. 2014 and 2016 aimed to reduce the mine whether it is necessary to inform From January 2013 to March 2015, worked sphere covered by law and specify its the chairperson of the Commission as Deputy Director General at Decor Line, norms. Today, the 10-year anniversary about a transaction, the FAS, within LLC. is no exception. five business days after the competent Member of the Federal Antimonopoly Service authority becomes aware of the ex- from March 2015. Promoted from a Senior In particular, in 2016 Law No. 165-FZ pected transaction, shall send requests First-Class Specialist of the Pre- and Post- amended Federal Law No. 160-FZ of to the federal executive authority re- Merger notifications examination division at July 9, 1999 “On Foreign Investments sponsible for the regulation of the in- the Foreign Investment Control Department in the Russian Federation” (“Law No. dustry in which the company operates, to the Head of the Division. Since March 160-FZ”), making the transactions as well as to other authorities and 2018, serves as Deputy Head of FAS Depart- of foreign investors with respect to organisations concerned, in order to ment for Control over Foreign Investments. Russian business entities, including submit their proposals on whether the Member of the Expert Council at the State those of no strategic importance to na- chairperson of the Commission should Duma Energy Committee and member of tional defense or state security in the be informed of the transaction. the Expert Council for Foreign Investments meaning of Law No. 57-FZ, eligible for at the FAS Russia. submission to the Government Com- Based on the assessment of the pos- mission for consideration to ensure sible consequences of the transaction,

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is not expressly provided for by Law The Regulations specify the procedure No. 57-FZ, Law No. 160-FZ or Federal and period for processing information Law No. 135-FZ of July 26, 2006 “On the Protection of Competition”. A for- received about relevant transactions and eign investor planning a transaction should take into account that given the making decisions on their preliminary exclusivity of its application, the norm in question does not apply to transac- approval. tions. It should be noted that over the entire period of said norm’s existence, the authorities and organisations that expected transaction. If the chair- the chairperson of the Commission has received requests shall within 15 busi- person of the Commission decides been informed of two transactions, ness days send their proposals to the the transaction is subject to a pre- neither of which has so far been sub- FAS of Russia on whether the chairper- liminary approval, the FAS of Russia mitted to the Government Commission son of the Commission should or should shall within three business days infor consideration. not be informed of such transaction. form the foreign investor and Russian business entity thereof. However, the main achievement of the If it is proposed that the chairperson past year is the adoption of Federal of the Commission be informed of Thus the above norm does not in- Law No. 122-FZ of May 31, 2018 “On the transaction, the competent au- troduce any additional obligation Amending Individual Legislative Acts thority shall within five business days for foreign investors to apply to the of the Russian Federation to Specify provide the chairperson of the Com- competent authority regarding pre- the Term “Foreign Investor” (“Law No. mission with information about the liminary approval of transactions if it 122-FZ”).

7 How to Invest in Russia Russia is the right place for investing |

essential element of control over foreign investments, in June 2018 the norm concerning offshore companies changed, and Law No. 122-FZ made amendments to Law No. 57-FZ by introducing a new type of foreign investor instead of offshore companies: an investor that does not submit information to competent authorities about its beneficiaries, beneficial owners or controlling persons.

Thus, similar to foreign investors and international organisations, as well as their controlled organisations, including those founded in Russia, the above category of foreign investors is subject to a direct ban (without any alternatives) on transactions, other actions entailing control of strategic business entities, and/or transactions for the acquisition of property, whether for ownership, possession or use, categorised as fixed production- related assets, the cost of which is 25 or more percent of the balance-sheet value of their assets.

This approach helps improve control over foreign investments by impos- ing restrictions not based on territo- In July 2017, under the banner of de- the economy is indeed a disputable rial or national affiliation, but on the offshorization, Law No. 155-FZ prohib- decision. submission by foreign legal entities ited control of strategic companies and and foreign organisations (not legal their property for all investors owning The jurisdictions subject to the ban entities) of information to competent offshore companies. were chosen based on the “List of authorities about their beneficiaries, countries and territories offering ben- beneficial owners and controlling Law No. 155-FZ seriously restricted in- eficial tax treatment and/or requir- persons. vestments in the Russian economy not ing no disclosure or submission of only from the East and West, but do- information for financial operations In particular, the FAS of Russia regu- mestically as well. (offshore zones)” approved by the larly deals not with companies from Ministry of Finance of the Russian offshore zones that do not submit in- In the context of the economic sanc- Federation. formation about controlling persons, tions imposed on Russia and Rus- but rather with companies from coun- sians by a number of countries, the Considering that disclosure by for- tries or territories not included in the introduction of artificial barriers by eign investors of financial information above list (for example, the Republic the Russian government in respect about the persons who influence their of Cyprus) that refuse to provide the of its own citizens for investments in activities on a variety of grounds is an necessary information.

8 | Russia is the right place for investing How to Invest in Russia

Moreover, to apply the effective ex- authority responsible for control over advance in accordance with the Rules, emptions from Law No. 57-FZ (for ex- foreign investments in Russia (“Rules”) or by sending a request as per Part ample, to foreign investors controlled about the beneficiaries, beneficial own- 6, Article 8, of the Law. In all three by tax residents of Russia without ers and controlling persons of foreign instances, the Law’s requirement to other citizenship (Part 9, Article 2, legal entities and non-legal entity for- “provide information” will be fulfilled, Law No. 57-FZ), competent authori- eign organisations and their controlled and consequently such foreign in- ties must obtain information about organisations. vestor will not be subject to any the persons controlling the benefi- stricter regulations under the Law. ciary under the transactions to con- According to the draft document, in firm their application. regards to transactions or other ac- Information will be deemed provided tions subject to preliminary approval to the competent authority by the ap- The obvious disproportion between by the Government Commission, applicant as of the date of its submission the status of offshore companies plicants are to provide information to in the scope prescribed by the Rules, submitting information to compe- the competent authority as part of if it remains valid as of the transaction tent authorities and foreign countries their applications for the preliminary date. In other words, investors need and international organisations is approval of transactions, other actions not wait for any additional confirma- also worth mentioning: the first are private investors who are generally Investors need not wait for any additional lower in the ownership structure of the transaction beneficiary than end confirmations from the FAS of Russia, controlling persons, in other words a foreign individual or corporate enti- and foreign investors automatically ties (in particular, public companies with listed shares). The main differ- acquire “disclosed” status as soon as ence between offshore companies and foreign states is that an offshore they provide full information. company may in part be owned by a citizen and tax resident of Russia or petitions for approval of control in tions from the FAS of Russia, and for- who has no other citizenship. accordance with the rules approved by eign investors automatically acquire Resolution of the Russian government “disclosed” status as soon as they pro- In this context, the differentiated ap- No. 838 dated October 17, 2009 “On vide full information. proach introduced by Law No. 122-FZ the approval of Rules for the prelimi- eliminated the priority position of cer- nary approval of transactions and ap- However, to apply the exemptions and tain foreign investors over others for proval of control over foreign investors exclusions provided for by Federal Law, transactions with assets of strategical- or groups of persons foreign investors applicants must submit information no ly important companies and ensured belong to, and business entities of later than 30 days before the expected equal access for foreign investors to strategic importance for national de- transaction date. This means that until share in the privatization of public and fense and state security”, or under the foreign investors submit information municipal property, which as a whole procedure prescribed by these Rules. about their beneficiaries, beneficial will eliminate discriminatory conditions owners and controlling persons to the for foreign investments in Russia, con- Thus, it is expected that foreign in- FAS of Russia, the exemptions under tribute to further promotion of com- vestors intending to make a trans- Law No. 57-FZ, for example, under petition and improve the investment action with a strategic company and Part 9 of Article 2, Part 4 of Article 4, climate in Russia. prepared to disclose information to Clause 3 of Part 1 of Article 7, will not the regulator about its beneficial apply to them, and such investors shall Currently, the FAS of Russia has de- owners, beneficiaries and controlling be subject to the norms regulating the veloped its Rules for the provision of persons, may disclose such informa- activities of foreign investors that have information to the federal executive tion immediately in its petition or in not submitted information.

9 How to Invest in Russia Russia is the right place for investing |

preparation of responses to applications, as well as by the Public Recep- tion of the FAS of Russia and on its official website.

Based on the scope of this article, the Federal Antimonopoly Service has made significant improvements to the legislation concerning foreign investments. The amendments made are in line with the trend towards liberalizing Law No. 57-FZ and abandoning unreasonable restrictions and bans in the context of Moreover, if information in the scope Thus, due to the possible multiple in- unconditional observance of national prescribed by the Rules was submitted terpretations of Law No. 57-FZ, it is defense and state security require- to the FAS of Russia earlier as part of not always clear whether transactions ments. Moreover, legislative norms petitions or notifications submitted in ac- need to be approved or are subject to are further specified in the form of cordance with Law No. 57-FZ or Law No. other actions in certain circumstances, by-laws. 135-FZ and remains valid, such investors for example, is it possible to control a shall also be considered “disclosed”. foreign investor through a foreign nat- The experience of foreign countries ural person acting as its sole executive in regulating foreign investments is Furthermore, the “disclosed” status body. also analysed as a whole, and in con- remains in effect for investors without trolling foreign investments in sensi- any time limitations throughout the Before the above changes, the FAS tive economic sectors, in particular. entire period the submitted informa- of Russia did not have the legal au- The FAS of Russia weighs all the pros tion is valid. thority to examine the applications and cons of approaches used in the of natural or corporate persons as USA (in existing laws and expected Operations are simplified even further regards the application of Law No. amendments), Great Britain, France, for public companies of investment 57-FZ. Addressing this gap will fa- PRC and a number of other coun- funds, which can provide information cilitate the use of a more flexible ap- tries. Generally speaking, analysis in the form of a link to a website where proach by the FAS of Russia to the reveals that the Russian treatment is such information is disclosed in the interpretation of law provisions with far from the toughest, its procedures scope required by the Rules. regard to the formation of law en- are transparent and clear for foreign forcement practices (by analogy, with investors, and the legislation has no If the information disclosed is a com- the explanatory work carried out by hidden “snags”. mercial, official or other legally pro- this body within the scope of anti- tected secret, the applicant shall make monopoly legislation and expressed, Further development of Law No. 57- a list of confidential information, and in particular, in the standpoints of FZ will continue in a similar vein of the competent authority ensures the the Presidium of the FAS of Russia selective adjustments specifying the confidentiality of such information and reflecting the position of the FAS of “game rules” based on ten years of shall be held liable for its disclosure. Russia with respect to disputable law experience in the Government Com- enforcement issues). mission and the FAS of Russia as a Another new aspect introduced by Law competent authority for control of No. 122-FZ enshrined the right for the However, explanatory work is not ex- foreign investments in Russia, as well FAS of Russia to provide explanations clusive to the Presidium of the FAS of as the best global practices in the regarding its application of the Law in Russia, but can also be pursued by the context of the Russian legal frame- question. Federal Antimonopoly Service in the work.

10 | Russia is the right place for investing How to Invest in Russia

Business climate in Russia: AEB-GfK survey 2018

AEB published the results of the Annual Survey “Strategies and prospects for European companies in Russia”

key challenges and strategies faced and the results of the US election had by European companies doing busi- the most negative impact on the business in Russia. This year the survey ness of European companies in Russia. was conducted in March-April 2018 As compared to 2017, the share of re- in cooperation with the International spondents who negatively assess the Institute of Marketing and Social Re- impact of these factors on company search GfK Rus. operations and the Russian economy has increased: The uniqueness of this year’s survey Alexander Demidov is that the data collection stage co- ▪ 75% of companies said that sanc- Managing Director, GfK Rus incided with important events – the tions against Russia had a negative presidential election in Russia and impact on their performance in Rus- Dr. Alexander Demidov is a well-known the announcement of a new package sia (in 2017, 66%); Russian sociologist and a founder of pub- of US sanctions against Russia – and ▪ 47% noted that the election of Don- lic opinion studies and market research in captured the mood of European busi- ald Trump as president of the United the USSR and Russia. ness during this period.1 What has the States adversely affects the activities In 1991, Demidov established GfK Rus, greatest impact on business? of their company (in 2017, 8%); the Russian branch of GfK SE, and since ▪ 39% pointed to the negative impact then he has been the Managing Director The survey results demonstrate that of Russian sanctions on the EU and and CEO of the company. the majority of the European compa- US (in 2017, 39%). Since 2005 he has been the head of GfK nies in Russia were satisfied both with Rus department of the Sociology Faculty the results at year-end 2017 and at In the members’ opinion, the above at the Higher School of Economics. the beginning of Q1 2018. However, factors have the most negative impact Alexander is one of the Top 250 top man- weak growth in the Russian economy not only on their company, but also on agers in Russia according to the joint rat- added to the air of uncertainty. 29% of the economy of the Russian Federation ing by the Kommersant newspaper and companies noted that the overall state as a whole. the Association of Managers. of the economy in early 2018 was developing worse than they expected (in Regarding the influence of the Rus- 2017, this was 14%). sian presidential election results on he AEB published the re- the business of European countries, sults of the 11th AEB An- But one of the most destabilising fac- the majority (67%) of companies be- T nual Survey “Strategies and tors is the risk of sanctions, which lieve that the economic policy of the prospects for European companies in spoils the positive business climate for Russian Federation will not change Russia,” which characterises the state European companies in Russia as a after the 2018 election (the survey and attractiveness of the Russian in- whole. In the opinion of the study par- was conducted from March 26 to vestment climate and highlights the ticipants, the sanctions against Russia April 26, 2018).

1 The survey was conducted from March 26 to April 26, 2018.

11 AEB-GfK Index Dynamics

AEB-GfK Index Dynamics Positive expectations

Positive expectations How to Invest in Russia Russia is the right place for investing |

AEB-GfK barometer: business expectations in Russia

AEB-GfK barometer: business expectations in Russia AEB-GfK AEB-GfK Index barometer: Dynamics business expectations in Russia on increased profits, whereas in 2017 Positive expectations there was a slim majority of such com- 2011 2012 2013 2014 2015 2016 2017 2018 panies. 180AEB-GfK Index Dynamics Positive expectations 170 155 159 Why are there good prospects for the 160 2011 2012 2013 2014 2015 2016 2017 2018 180 Russian market? The main reasons for 150 144 170 141 138 entering the Russian market continue 140 155 159 160 to be the large size of the market, great 130 120 150 144 115 market potential, and positive mar- 120 141 138 140 106 ket dynamics: 93%, 90%, and 90%, 110 130 120 respectively, of the companies noted 100 115 120 these reasons as the most important. 106 110 100 The financial conditions of AEB member companies are still quite accept- Integrated index able: as a rule, less than 20% of payments are made late, and late payments usually do not exceed one Current business Integrated index • Current business situation (I=153) month. In addition, 21% of compa- state index • Current macroeconomic situation (I=83) 110 nies never had bad debts. Single • Business development index (I=93) indexes Current(2017 business– 110) • Current business situation (I=153) More than half of companies (62%) state index • Current macroeconomic situation (I=83) 110 went to court to recover debt, and the Single • Business development index (I=93) (2017 – 110) indexes • Business expectations (I=124) majority of the cases were successful. Business • Short-term expectations index (I=127) expectations index • Medium-term expectations index (I=165) What are the areas of 152 • Long-term expectations index (I=176) Single

indexes • Business expectations (I=124) (2017 – 157) • Expected revenues index (I=171) improvement of the Business • Short-term expectations index (I=127) • Expected profits index (I=151) business climate in expectations index • Medium-term expectations index (I=165) Russia? 152 • Long-term expectations index (I=176) Single indexes The business culture and business (2017 – 157) • Expected revenues index (I=171) The impact of the economic policy of• ExpectedRussia asprofits a whole index (I=151)increased from 11% environment of the country have a the Russian government on company in 2017 to 36% in 2018. However, modest rating among the European operations is estimated neutrally or most companies expect that invest- companies currently operating in the positively by 61% of respondents and ments in their types of business will market. Work with legislative, cus- negatively by 34% of respondents. remain unchanged. toms, tax, and other authorities is rated rather negatively. As a result of the growing discomfort Most companies expect the Russian from the possible risks of doing busi- economy to either stagnate or grow in Regulatory restrictions are a major ness in Russia due to external fac- the short-term (1-2 years). The good barrier to business (62% of compa- tors, in 2018 the Complex Index of news is that the long-term (6-10 years) nies mentioned regulatory restrictions the АЕB-GfK showed the sentiments and middle-term (3-5 years) economic as the main barrier to business). An- of European business decreased by 3 prospects remain high. other important problem is the lack of points compared to 2017, amounting qualified personnel (30% of compa- to 138 out of 200 possible points. This fact allows us to conclude that Eu- nies noted the lack of qualified per- ropean companies in Russia continue sonnel as a major barrier). 22% of In connection with negative external to believe in the Russian market. The companies named the lack of reliabil- factors, the share of respondents who survey showed that in 2018 almost ity of the supply chain as a key barrier expect a reduction in investments in two-thirds of companies were counting to business.

12 | Russia is the right place for investing How to Invest in Russia

Economic outlook for Russia in the coming 10 years, %

Short term (1-2 years) Medium term (3-5 years) Long term (6-10 years)

57 76 84 73 82 Growth

Stagnation 44 Decline 36 Don’t know 30

17 22 16 11

8 8 10 5 3 3 4 4 1 0 3 4

2018 2017 2018 2017 2018 2017

The main problems related to financGrowth- doStagnation not expectDecline improvementDon’t know in the tute of Marketing and Social Studies ing remain the high interest rates next two years), these areas can be GfK Rus at the AEB request. (29%) and lack of cash flow/available the main areas of improvement, which financing (29%). will make the Russian market more This year’s study was carried out attractive to new potential investors. for the eleventh time through on- Although most AEB members do not line surveys and personal interviews expect an improvement in the situa- About the survey with top managers of AEB member tion with regard to bureaucracy, tax- The “Strategies and Prospects of Eu- companies operating in Russia. The es/fees, and corruption (58%, 58%, ropean Companies in Russia” study is number of participants varies from and 57% of companies, respectively, carried out by the International Insti- 76 to 109.

Turnover Expectations for improvement in different operating units over the next 2 years, %

75 70 Significant improvement Infrastructure 12 71 13 4 55 Moderate improvement Bureaucracy 9 29 58 4 No improvement

Labour force capabilities 8 53 34 5 22 Don’t know 22 17 19 12 Rising labour costs 5 8 51 34 7 3 1 1

2017 2016 2015 Taxes and duties 5 33 58 4

Reliability of supply chain partners 5 66 24 5

Customs regulations 4 47 45 4

Corruption 4 33 57 7

Regulatory restrictions on activities 4 38 51 7

13 How to Invest in Russia Russia is the right place for investing |

The Kaliningrad region: the legacy of the 2018 FIFA World Cup in Russia

tions for the event and the formation Hosting games has become a power- of offers for the concept of the tourna- ful incentive to increase tourist flows, ment’s legacy. including from abroad.

The main issues discussed were fur- Renovated in anticipation of the Mun- ther use of sports facilities, infrastruc- dial, the Khrabrovo Airport can handle ture (sports arenas, airports, roads) 3.8 million passengers annually. Dur- and the development of cities. ing the 2018 FIFA World Cup, more than 70% of fans travelled to the Kalin- DENIS SALIY State support for development pro- ingrad region by plane (as a reminder, Head of the Representative Office of grammes of the championship facili- four matches were held in Kaliningrad: the Kaliningrad region Government ties is available for five years, with the Croatia-Nigeria, Serbia-Switzerland, under the Government of the expectation that by 2024 they become Spain-Morocco and England-Belgium). Russian Federation in Moscow self-sufficient and serve as centres of development for cities and public, Now we are seeing a large number of Born on 27 March 1983 in Krasnodar. business and cultural life. foreign tourists who immediately after Denis has three higher education de- the championship took the opportunity grees: legal, state and municipal man- All matches were held with full stands, to visit Kaliningrad again by FAN ID for agement, MBA. and the total ticket programme topped a longer time. In December 2016, he was nominated to 3.32 million people, or an average of the Council for the improvement of the in- 47,000 viewers at every match. More The tourist flow, which before the vestment climate in the Kaliningrad region. than 100 billion roubles were spent in event increased annually by 10%, shot In March 2018, he was appointed Head of the service sector by our guests. up by a factor of 18. During the World the Representative Office of the Kaliningrad Cup, the Kaliningrad region welcomed region Government under the Government As for the legacy of the 2018 FIFA foreign tourists from England, Spain, of the Russian Federation in Moscow. World Cup in the Kaliningrad region, Serbia, Croatia, Switzerland, Belgium, we note that beyond the sporting China and other countries. Hotels in event, the World Cup was marked by the region were fully booked at 97.6%. n 20 July 2018, Vladimir serious investments in the infrastruc- Putin, the President of the ture of the region, which have since When the World Cup was in full swing, O Russian Federation, held a created the necessary conditions for international automobile checkpoints at special meeting in Kaliningrad where business development. The tourna- the border with Poland and Lithuania the first results of the 2018 FIFA World ment also contributed to the economic were staffed to handle the maximum Cup were announced. The prepara- and social development of the region load, and worked in a specially de- tions for the FIFA World Cup in Rus- and helped increase the tourist flow. signed reverse mode, where the time sia lasted 8 years. The Governor of During the group matches, a total of to pass one car was no longer than five the Kaliningrad region Anton Alikhanov almost 260,000 fans visited the region, minutes. We plan to consolidate this chaired the working group on prepara- with over 105,000 foreign guests. successful practice of applying a re-

14 | Russia is the right place for investing How to Invest in Russia

versible traffic scheme at international car checkpoints during peak loads.

In short, all the joint efforts of the government, private businesses and volunteers were aimed at making tourists love the region and want to come back. The average consumption of one foreign tourist in Kaliningrad and the outskirts of the city during the World Cup was more than 30,000 roubles.

For FAN ID owners, the visa-free regime has been extended through 1 January 2019. Furthermore, in 2019, its own branch in the Khrabrovo in- 50 million roubles for projects in the a new regime will be rolled out to allow dustrial park and supply its products tourism and recreational sector, pro- foreign citizens visiting the Kaliningrad domestically and abroad, with to- cessing industry, agriculture and fish- region, to promptly receive electronic tal investments of around 10 million eries. For other types of economic ac- visas with a term of stay in the region roubles. One of the founders of the tivity, the investment threshold is set at up to eight days. Norwegian-Danish company RBPi is 150 million roubles. investing in the project for the pro- These conditions ease the burden on duction and sale of pig products for a Residents of the Kaliningrad SEZ also tourists, and will also help investors lo- total of 3 billion roubles. enjoy tax preferences for income tax calising business and production facili- and property tax: 0% during the first 6 ties in the Kaliningrad region. In general, foreign investment for us is years of project implementation, and a a kind of quality guarantee of the in- 10% income tax and 1.1% property tax The Kaliningrad region Free Economic vestment attractiveness of the region. from 7 to 12 years. The first 6-year peri- Zone has 185 residents and a total cost Yet the guiding principle formed by the od for income tax will start from the mo- of announced projects at more than 118 Head of the Government of the Kalin- ment of receipt of the first profits from billion roubles. Among them, in just Q1 ingrad region is as follows: we do not the project. Enterprises that received 2017, foreign investment tops 16,014.9 divide investors by nationality, and we SEZ resident status within 7 years will roubles. The unified state register of work with all investors according to the also be able to apply for reduced insur- legal entities with the participation of same rules. ance premium rates of 7.6%, provided foreign capital currently contains more the creation of new jobs. than 640 operating enterprises. The rules are as follows: to become residents of the special economic zone Other benefits and preferences are also Investors from more than 70 countries (SEZ), the company needs to indicate envisaged, such as reduced administra- implement their business projects in the their intention to invest at least 1 mil- tive terms of state expertise, guaran- region and this figure is growing steadily. lion roubles in the first 3 years. After tees of the invariability of the aggregate obtaining the status of a SEZ resident, tax burden, simplified procedure for ob- Since January 2018, there are already the company can enjoy all its benefits taining land for rent, and more. 7 major investment projects in varying and preferences. degrees of implementation. They in- Undoubtedly, one of the main advan- clude companies in IT, agriculture and For example, the minimum threshold of tages of the Kaliningrad region for metalworking. Baltinoks is a Lithua- 1 million roubles applies to IT compa- businesses is the combination of the nian company and one of the largest nies and scientific research activities. special economic zone and free cus- suppliers of stainless steel products to In the medical industry, the minimum toms zone, which applies to the re- the Russian market. It plans to open is 10 million roubles in 3 years, and gion as a whole. Currently, in terms of

15 How to Invest in Russia Russia is the right place for investing |

tax burden and costs, the Kaliningrad In March 2018, the Kaliningrad sta- Three training fields were also recon- region is objectively the most attrac- dium hosted its first event, with seat- structed in Kaliningrad, a new field was tive area to do business in, including ing for 35,000 spectators, making it constructed in Svetlogorsk, 10 new among foreign investors. the most compact stadium among hotels of various types were opened, the newly built facilities for the Mun- and 3 clinics and 17 transport facilities For investors in the Kaliningrad region dial. With the stadium’s completion, were reconstructed. In many ways, legislation has set a 0% customs duty the engineering preparation of the these advancements were all thanks to on the import of goods, raw materials Oktyabrsky Island was finished, the FIFA World Cup. and components. There is no import granting Kaliningrad development VAT, and a 180-day deferment period prospects of more than 130 hectares Of course, we expect this will also fa- applies to the export of import goods to in the city centre with roads and engi- cilitate a substantial increase in the the main territory of the Russian Federa- neering infrastructure. tourist flow, as well as the emergence tion. Moreover, there are no quotas for of new business investors. the import of goods, raw materials or To supply the football stadium with components into the Kaliningrad region. electricity, the first closed-type substa- If we talk about the most promising tion of 110 kilovolts was built in the sectors in the Kaliningrad region, at the Another unconditional advantage of the Kaliningrad region. moment we can highlight: automotive Kaliningrad region is its well-developed and mechanical engineering, shipbuild- logistics and transport infrastructure. In fact, this is quite timely, considering and ship repair, the agro-industrial The region is home to a single ice-free ing the fact that in autumn 2018 the complex and fish industry, food produc- port in the Baltic. Unique opportunities island will adopt a special administrative tion (in this field we can look to the suc- for the development of transit and ex- category featuring special tax regimes cessful experience of SEZ resident Hipp, port projects are also made possible by and no currency control. This special a German company which localised a the presence of two railway track types: jurisdiction has captured the interest factory for the production of baby food wide-track (EAEU countries) and narrow- of such financial companies as Rusal, in the Kaliningrad region, investing 15 gauge (European). The region is criss- Vnesheconombank, Gazprombank and million Euros), the pharmaceutical in- crossed by trans-European automobile others. dustry; IT and microelectronics, the de- transport corridors and there is also an velopment of which is ensured by the airport with the 5th freedom of air. As for the cultural heritage of the largest cluster in the electronic industry championship, Oktyabrsky Island near in Europe (Technopolis GS), media and The Kaliningrad region has real the Kaliningrad stadium will become film production (the system of returning promise to become the home base for the new home to a modern Cultural part of the costs for filming has been foreign producers looking to enter the Centre (more than 238,890 m2), in- rolled out in the region, and the devel- markets of the EAEU, and domestic cluding a branch of the Bolshoi The- opment of a movie cluster is planned); producers to enter the markets of the atre, a choreography school, a special tourism and medical tourism (we are EU and Southeast Asia. This is helped boarding school for children, a con- also working out all the options for part- immensely by its geographic position servatory, a museum complex with nering with European colleagues in the as the most westward region of Rus- support from the Tretyakov Gallery, near future open to cooperation), and sia because it is closest to the indus- Hermitage, Russian Museum, theatre our traditional amber jewelry production trialised countries of Europe, which and schools from adjacent territories. industry (currently primarily of interest are potential markets and sources of to our Chinese and Arab colleagues). investment. The Kaliningrad region Since the area is a legacy of the World with its low costs, tax benefits and af- Cup, all sites are equipped with the Thanks to preparations for the World fordable industrial park infrastructure, necessary infrastructure, which will fa- Cup, the Kaliningrad region has gained is an ideal platform for the production cilitate the quickest possible route for vast experience and a huge heritage of a competitive product and market the Kaliningrad region, as a special re- for further development, which the re- access to Russian and international gion of Russia, to become an outpost gion has all the conditions and oppor- markets. of the Russian culture. tunities to make a reality.

16 Part II. Localisation and investments

17 How to Invest in Russia Localisation and investments |

Industrial Development Fund: projects support opportunities

ing comprehensive integration of digital amendments to Fund standards have technologies and promoting an export- been recently prepared to envisage oriented economy. Implementation of additional preferences for export-ori- these focus areas requires favourable ented projects with more than 50% investment climate in the country and of product imports to external mar- a stable legal environment – the two kets (1% p.a.). components needed to attract financial, technological and human resources. As of October 2018, the Fund financed Sergey Vologodsky 291 projects in various manufacturing Deputy Director, Industrial Industrial Development Fund (the industries totalling 68,5 billion roubles. Development Fund Fund, IDF), in turn, takes part in the Medium-sized businesses are the main execution of these tasks by offering IDF clients, although the borrower’s Deputy Director of the Industrial Develop- a broad range of financial and non-fi- portfolio includes both large and small ment Fund since April 2015. nancial support measures to industrial businesses and even individual entre- Holds an expert diploma in state and mu- investors, which often include initiators preneurs. nicipal management from the Financial that implement their projects in close Academy under the Government of the cooperation with foreign partners. The IDF offers various financing pro- Russian Federation and graduated from the Fund concurrently adapts to modern gramme options to production busi- All-Russian Academy of Foreign Trade with strategic trends by implementing new, nesses tailored to a broad range of in- a Master’s degree in international economy. effective financing facilities, including vestor needs. These programmes may Professional career began in the procure- ones developed in accordance with the be divided into several categories: ment department of Procter and Gamble. above national priorities. From 2010 to 2014, worked in the Ministry ▪ Flagship programmes targeted at of Economic Development of the Russian IDF preferential loans most of the audience: “Develop- Federation. In 2014, received an appoint- IDF lending activities enjoy high de- ment Projects” – targeted at im- ment to the Ministry of Industry and Trade mand due to the high cost of bank port substitution and production of of the Russian Federation. lending in Russia. Despite the Central competitive products; “Lease” – Has been awarded a Letter of Acknowl- Bank (CB) key rate reducing by more allows investors to finance part of a edgment of the Ministry of Economic De- than half since late 2014 to 7.5%, the down payment for processing equip- velopment and of the Minister of Industry Fund’s proposal still remains attrac- ment purchase. and Trade. Is part of the federal executive tive to investors with its basic rate of ▪ Special-purpose programmes that staff pool. 5%. A rate of 1% offered for a few offer the most preferential terms IDF products is of particular inter- for top-priority projects for the est. For other programmes, the rate state in terms of industry-specific ecently, as part of May presi- may be reduced to 3% or even 1% and strategic priorities: “Machine dential decrees, the Russian p.a. subject to certain conditions, for Tool Industry” – targeted at R Government has faced ambi- example, the applicant’s bank guar- the manufacture of localised pro- tious goals, including making Russia one antee to secure a loan or purchas- duction goods, equipment and of world’s largest economies, accelerat- ing of Russian made manufacturing machinery; “Defence Conver- ing technological development, foster- equipment. It should be noted that sion” – fosters production of high-

18 | Localisation and investments How to Invest in Russia

tech civilian industry products by military-industrial complex (MIC) Medium-sized businesses are enterprises; “Components” – intended to create and cooperate lo- the main IDF clients, although the cal supply chains. ▪ “Drug Labelling” programme is borrower’s portfolio includes both a special-purpose financial product intended to solve a particular large and small businesses and task – allow pharmaceutical companies to install special-purpose equip- even individual entrepreneurs. ment for product codification for its further tracing in the system for Productivity” programme, which dustry development funds (RIDF) monitor drug flow from the manufac- will help enterprises raise funds to with support tools targeted at small turer to the end consumer within the implement advanced solutions to and medium businesses. Regional statutory timelines. foster increased labour productiv- funds are set up by local authorities. ▪ Programmes to implement May ity. Currently, there are more than 50 re- presidential decrees: as part of im- gional funds operating according to plementation of the “Digital Econ- RIDF regional network IDF standards. omy of the Russian Federation” The IDF operation model has proven top-priority national project, the successful, so the regional chain of in- By making an agreement with the Fund has recently launched the new dustry development funds is currently federal IDF, regional funds are able programme titled “Industry Digi- in active development. to jointly finance projects at a ra- talisation” that will help finance tio of 70% (federal funds) to 30% projects implemented to enhance The Fund conducts regular methodo- (regional funds). Requirements for the level of enterprise automation logical and analytical coordination shared loans are less strict in terms and digitalisation. IDF has also de- of Russian constituent entities when of the overall project budget and veloped the “Increase in Labour creating and developing regional in- amount of borrowed funds. Coop-

19 How to Invest in Russia Localisation and investments |

eration with IDF makes it possible submission. Prior to the interagency Fund: operator of the to finance many projects by attract- commission’s meeting, IDF provides mechanism for paying ing funds from the federal centre the Ministry of Industry and Trade of interest on loans even with restricted capital assets the Russian Federation with a conclu- The mechanism for paying interest of a regional fund. Presently, “De- sion based on document review results on loans is one of the most sought- velopment Projects” and “Com- and its position concerning SPIC fea- after instruments to support industri- ponents” programmes of the Fund sibility with regard to a project under al investors. It decreases the cost of offer joint financing. 22 projects have study. borrowed funds and increases profitability and payback of new produc- IDF provides comprehensive con- tion sites. sulting support at all SPIC stages After the mechanism’s launch, more than 100 projects have obtained and helps investors structure their support totalling RUB 9.7 billion. More than 150 projects are being projects and prepare documents for implemented and over 23,000 jobs will be created thanks to state sup- official submission. port. already been financed under the joint SPICs were mainly targeted at import In 2018, IDF has taken a very ac- federal-regional loans programmes. substitution and production localisa- tive part in restarting the support tion. After the instrument was launched mechanism for industrial enterprises RIDFs also develop lending pro- in 2015, 25 investment contracts in that implement new comprehensive grammes on their own terms, which various industries have been signed investment projects with increased may be of particular interest to small with an investment amount over RUB loan funds in 2017-2019. Submission businesses and representatives of in- 265 billion. The leading industries are of electronic applications for short- dustries outside of the jurisdiction of pharmaceuticals, machine tool manu- listing as comprehensive investment the Ministry of Industry and Trade of facturing and automobile manufactur- projects is envisaged. In addition, the Russian Federation, which are thus ing. International companies opt for amendments imply the possibility of beyond the scope of support of the SPICs as a way to fix the terms of their compensating for part of coupon yield federal Fund. business in Russia. 17 out of 25 con- payments under the bonds issued in tracts have been signed by companies 2017-2019 as part of implementation Fund: SPIC operator with participation of foreign capital, in- of comprehensive investment projects IDF also operates special investment cluding such prominent global market in top-priority focus areas of civilian contracts (SPIC) – another tool to at- players as Mercedes-Benz, Claas, As- industries. tract private funds (including foreign traZeneca, and DMG MORI AG. capital) to the real sector. As part of IDF consultation centre SPIC, parties assume mutual com- The mechanism and key criteria for in- IDF has a consultation centre (CC), a mitments: the investor – to set up or vestors are being currently upgraded. It “one-stop shop” for industrial enter- modernise production; the Russian is assumed that as part of the revised prises willing to gain insight into the Federation and constituent entities – to instrument format, the project support numerous peculiarities of state support guarantee a stable tax and regulatory decision will favour the investors that im- programmes. environment and provide support. plement modern production techniques, extend their production localisation level CC specialists provide manufactur- IDF provides comprehensive consult- and conduct R&D. Another essential ad- ers with detailed information about ing support at all SPIC stages and vantage of a project will be the export of IDF’s own concessional debt financ- helps investors structure their projects technology-savvy products and integra- ing programmes and help them as- and prepare documents for official tion with foreign supply chains. sess the borrower’s project eligibil-

20 Трансдукция — процесс переноса бактериальной ДНК из одной клетки в другую. Трансдукция используется в генетике бактерий для В GSK работают тысячи ученых. Мы постоянно картирования генома инвестируем в научные и технологические и конструирования разработки для того, чтобы разрабатывать штаммов. Родриго, и делать доступными врачам и пациентам научный сотрудник GSK, специализируется в этой инновационные лекарства и вакцины. области. GSK – один из лидеров отрасли Реклама по инвестициям в исследования в России. RU/OTH/0044/18 12.10.2018 How to Invest in Russia Localisation and investments |

The project support decision will and regional incentives available to industrial enterprises. Each en- favour the investors that implement terprise may choose the measures tailored to its needs in line with modern production techniques, preset criteria. In order to keep up with regulatory changes, inves- extend their production localisation tors may subscribe to information updates for “selected measures”. level and conduct R&D. Some support measures (for example, government resolutions No. 3 ity for a particular IDF programme. (SIIS) by order of the Ministry of and No. 1312) may not only be re- CC employees also hold consulta- Industry and Trade of the Russian viewed, but also applied for elections using Navigator of the State Federation. A set of services that tronically. Industrial Information System that considers the requirements of all includes all industrial state support user levels is being generated in Support Measures Navigator current- measures. the integrated information space. ly includes more than 900 measures, We will briefly introduce the most most of which are under the juris- State Industrial popular services. diction of constituent entities of the Information System Russian Federation. Detailed com- The Fund is developing the State Support Measures Navigator con- ments on each instrument may be Industrial Information System tains information about the federal obtained from the Fund’s CC.

22 | Localisation and investments How to Invest in Russia

If a project that needs additional fi- sian-German Chamber of Commerce, port to manufacturers looking for po- nancing does not meet the criteria of Korea Trade-Investment Promotion tential raw material and component available support instruments, the in- Agency, United States Chamber of suppliers and buyers in Russia. vestor may use the “Initiative Projects” Commerce, Franco-Russian Chamber service, which makes it possible to of Commerce and Industry, General Furthermore, the Fund plans to pro- publish project details to seek private Confederation of Italian Industry, vide active assistance to exporters. support from development institutions etc.), takes part in the country’s larg- The Ministry of Industry and Trade of or other investors. est investment and industrial activities the Russian Federation and IDF are and regularly delivers reports at inter- currently developing a new subsidiary Users may also use ongoing purchase national conferences. programme that will help local manu- monitoring services. An enterprise may facturers not only create competitive look for purchases at an aggregator IDF actively cooperates with such large products, but also secure their presence platform according to its economic ac- Russian public organisations as the Rus- on foreign markets. The Fund’s new tivity or output product, and also ana- sian Union of Industrialists and Entrepre- lines of activities directly correlate to lyse suppliers and customers. neurs, Business Russia, the Chamber of the definition of objectives by the Rus- Commerce and Industry of the Russian sian Government as part of the above The “Industry Atlas” service is an es- Federation, and OPORA RUSSIA. May decrees and support its willingness sential element of the SIIS integrated information space. It aggregates information on industrial products IDF maintains continuous interaction manufactured by enterprises, production sites, technology and pro- with all key Russian development duction capacities. institutions and foreign business “Industry Atlas” uses the data collect- associations, actively cooperates ed to present a comprehensive view of the state of Russian industry and with public organisations. elaborate well-founded strategies of local and industrial development, define focus areas for upgrading indus- Apart from state support measures to cooperate with businesses and pro- trial and regional support measures that may apply to investors, the Fund vide assistance in establishing effective with regard to actual industrial and also exchanges with its contractors cooperation with the state to handle regional clustering, and provide en- information about peculiarities of industry-specific and strategic tasks. terprises with an opportunity to pro- Russian law for production set-up mote their products on domestic and in areas with a special legal and tax In conclusion, it should be said that foreign markets. status. IDF also provides assistance despite the last few years, which have to promote cooperation between seen a challenging economic and polit- In addition, SIIS provides an e-trading business representatives and federal ical situation, the Russian Government platform that enterprises may use and regional executive bodies. All the has managed to elaborate and estab- to both post information about their above legal and practical aspects are lish a comprehensive working mecha- products and find suppliers. based on the Fund’s expertise and nism to support a favourable invest- are reflected in regular editions of ment climate in industries. It primarily Plans for the future the Foreign Investor Guide published concerns the instruments envisaged by As part of its activities, IDF maintains in cooperation with German law firm the law “On industrial policy” available continuous interaction with all key Beiten Burkhardt. to any corporate Russian tax resident Russian development institutions and willing to establish two-way dialogue foreign business associations (Asso- To develop this focus area, IDF also with the state to ensure the balance of ciation of European Businesses, Rus- intends to provide comprehensive sup- interests of both parties.

23 How to Invest in Russia Localisation and investments |

Localisation and import substitution: what foreign producers need to know

rate of the Russian rouble, owing to ever increasing oil prices and inflows of capital. It would just be easier, safer and cheaper to import than to produce in Russia. This underinvest- ment has led to an over-dependence on natural resources while the industrial base has suffered and become outdated. For many years, this was IRINA SAADUEVA ANDREAS BITZI considered a problem that has not VP Legal & Compliance, Managing Partner, been approached seriously (with cer- quality partners. quality partners. tain exceptions).

Irina is a lawyer in German law and joined Andreas is the managing director of the In the face of increasing tensions quality partners in 2017 as VP Legal & quality partners consulting company with between the West and Russia in Compliance for both Moscow and St. Pe- offices in Moscow and St. Petersburg. 2014 and subsequent sanctions tersburg offices. He graduated with a degree in business and counter-sanctions, the Russian She has a degree in law from Humboldt administration and economics from Berne government started a massive pro- University, Berlin, Germany, with a spe- University, Switzerland, specialising in fi- gramme to replace imports in pre- cialisation in contract law. nancial management, controlling and ac- defined industries with locally pro- After her studies, Irina has worked for counting. Andreas also passed level 2 of duced goods. Meanwhile, the focus many years in different international law the CFA exam. would turn from import substitution and consulting companies, consulting in- Andreas held positions as controller, project to export. A law on industrial policy ternational clients mainly in localisation manager and CFO at Swiss Krono Group was created, outlining certain prin- issues, contract law, migration law, labour plants in Russia and Ukraine. After that, he ciples to build up a competitive in- law and cross-border legal issues. worked as a business unit finance manager dustrial base. More laws have been at HP Switzerland. From 2008-2017, he man- introduced and many government aged an international consulting company decrees have been issued. in Russia, supporting foreign businesses in finance, legal, tax, HR, IT, and accounting. The idea would be to offer investment Since 2016, Andreas has been Chairman of incentives and give clear preferences, the AEB North-Western Regional Committee. or even exclusivity, to locally produced goods over foreign goods in state tenders and procurement of state-owned Introduction This was the case due to the lack of companies. The definition of goods Since the end of the Soviet Union, certainty about the outcome of in- made in Russia have since been deter- there has been a lack of investment vestments as well as a constant in- mined for many industries and goods, into industrial capacities in Russia. crease in the real effective exchange with ever-tightening requirements

24 | Localisation and investments How to Invest in Russia

each year, necessitating more and Putin publicly stated this summer that against the same illnesses (but not more local content, value added, man- the localisation requirements would be necessarily with the same effective- ufacturing processes, and the transfer only temporary measures. However, the ness). This is called the third odd one of know-how. general expectation is that the mea- out rule. The Russian government has sures and legislation are, most likely, a list of drugs considered “essential for Lately, there have been new initiatives, going to be in place for a long time. life”. Those drugs can be purchased such as state support for the export of only if they are manufactured in Rus- goods, with the Russian Export Centre Restrictions sia. Any foreign drugs foreseen for the to offer support in certifying products Exclusion same treatment/against the same ill- for foreign markets or in marketing the In some industries, such as pharmacy, nesses will be banned from procure- “Made in Russia” brand. Also, there medical technology or the automotive ment/tenders as soon as at least two have been signs that would indicate industry, there are certain goods which local producers are available. that closing off of the Russian markets can be purchased only if they are pro- would not last forever. The new Auto- duced in Russia (or the Eurasian Eco- As an example, drugs listed by the motive Strategy 2025 contains a plan to nomic Union). For other categories of Russian government as essential can strive for integration into international goods, there are opportunities to pur- be purchased only if they are manu- value chains, which, consequently, chase foreign goods as long as there factured in Russia as soon as there are would require an opening of the mar- are at least two drugs produced in at least two local producers available. ket. Also, the Russian President Vladimir Russia that are foreseen as treatment Any foreign drugs foreseen for the treatment of the same illnesses will be A law on industrial policy was cre- banned from procurement/tenders. Price discrimination ated, outlining certain principles to When no exclusion rules apply, price build up a competitive industrial discrimination rules usually apply instead. Goods made in Russia enjoy a base. Many government decrees 15% price advantage in tenders. That is, if a foreign good and a local good have also been issued. are offered, the Russian product is al-

25 How to Invest in Russia Localisation and investments |

ways regarded as if it was 15% cheaper not created for such use. Moreover, it and an inspection by a delegation of CIT than it actually is. If the Russian good is applied less often as the number of experts. In some cases, additional docu- wins, the bidder receives 100% of the goods without specific localisation cri- ments may be necessary. offered price. If a foreign-made good teria are decreasing. wins in a tender, there will be a 15% Expert delegations from the CIT may price deduction from the offered price. Example: passenger lifts visit yearly to extend the confirma- This rule means a price discrimination To be considered made in Russia, there tion documents. They may also visit of >32%, combining the two effects. should be a Russian/Eurasian legal en- upon complaints by competitors for tity and the right to use production se- non-compliance. In the past, expert Definition of place of origin crets/documentations for manufactur- commissions were often sent by local In a number of decrees and amending for 5 years. CITs with limited technical knowledge. ments to decrees, the Russian government has set rules on what constitutes a good made in Russia. Apart from To be considered made in Russia, some additional, industry-specific documents, the main guideline is Govern- there should be a Russian/Eurasian ment Resolution 719 (hereinafter, Res. 719), which was introduced in 2015. legal entity and the right to use pro- Several additions have been made since then. The decree gives detailed criteria duction secrets/documentations for for many goods and groups of goods. The main factors to be considered are: manufacturing for five years.

▪ tax residency in Russia or the Eura- In 2016, there was a maximum value In some cases, the experts would not sian Economic Union (EAEU); of imported parts in the overall mate- notice that some processes are not ▪ performance of defined production rial usage of 30% accepted, in 2017 it performed according to the law. How- steps in Russia or the EAEU (in cer- was 20%, and in 2018 only 10%. ever, there is a tendency to have more tain cases, only Russia!); expert commissions sent for inspection ▪ rights to relevant technical docu- Additionally, the following parts must by the federal CIT, with highly-skilled mentation and design; be manufactured in Russia or the Eur- experts that cannot easily be fooled. ▪ service centre in the EAEU; asian Economic Union: ▪ maximum value of imported parts Special investment used in production. ▪ cabin; contracts (SPIC) ▪ operating station; A special investment contract (SPIC) is For each good and group of goods listed ▪ doors; an investment agreement between an in Res. 719, some or all of these factors ▪ winch; investor and the Russian government. are applied. When it comes to produc- ▪ gearing/transmission; The investor is obliged to invest a cer- tion steps to be applied or the ad valo- ▪ counterweight. tain amount into new manufacturing rem criteria, the rules become stricter capacities or into upgrading the exist- every year or every other year. For in- Confirmation of the place ing capacity. In turn, the investor is of- stance, there may be a maximum value of origin fered investment benefits, such as tax of imported parts of 40% for 2018, Documents confirming compliance with benefits, subsidies, extension of the 30% for 2019, and 20% for 2020. localisation requirements are usually an time to reach localisation requirements inspection certificate and a so-called ST-1 set out by the respective laws, or relief For goods without specific criteria in certificate. These documents are issued from certain criteria. That is, the con- Res. 719 or industry-specific resolu- for a one-year period by the Chamber of tract can, practically speaking, offer a tions, a CIS agreement from 2008 Industry and Trade (CIT) upon providing grace period with immediate certifica- applies. However, this document was the necessary confirmation documents tion of local production.

26 | Localisation and investments How to Invest in Russia

27 Реклама How to Invest in Russia Localisation and investments |

controlled organisations and companies may have to make a decision to localise and keep the market or not to localise and lose the state part of the market. In industries affected by the restrictions and which sell a large part or in full to the state, it may even mean a retreat from the Russian market without localising. As a matter of course, the localisation measures are very restrictive and may not make sense in every industry. In some cases, the stipulated localisation steps may be unrealistic. In others, the market is simply too small to justify local production. A contract manufacturing agreement could be a way out, in which the transfer of know-how to a partner is a precondition.

Be aware that even when having a purely private client base you might still be affected by them indirectly in case your The minimum project investment shall nomic factors rather than pressure. As clients or their clients sell a large part or be 750 million roubles (this limit may for economic factors, one should be in full to the state. In such a situation, be raised to 1 billion roubles). The careful about the temptingly low rou- there can be considerable pressure on specific terms of the contract can be ble rates that have boosted investment their suppliers and sub-suppliers to also negotiated with the government based attractiveness. The positive effect may follow localisation rules, i.e. on you. on a business plan. Once there is a vanish quickly in case of a massive in- Otherwise, your clients or their clients decision made on the realisation of crease in oil prices. The rouble already could fail to comply with their localisa- a SPIC, there shall be regular perfor- seems to be considerably undervalued tion requirements for local content. mance reviews on the project’s status. at the current level of oil prices. This is As an investor, it is important to keep partly due to measures by the Ministry Finally, there are companies affect- investment promises. Otherwise there of Finance to keep the exchange rates ed by localisation restrictions that can be a request for amendment in the low. Another factor weighing on the bypass them by selling to distribu- SPIC or the contract can be terminated rouble are the latest sanctions by the tion partners that, in some way or by the government. US and the current generally negative another, manage to have the goods sentiment on emerging markets. This declared as made in Russia. How- Who should localise? assumes an end to the current sanc- ever, this is not a recommended For whom it makes sense to localise tions will massively boost the rouble. business model. Competitors care- very much depends on the industry. Things being as they are, the finan- fully watch the market, and it is a For companies only somehow or not cial models for economic soundness matter of time until such business affected by the localisation require- should still yield positive net cash flows practices are detected, denounced ments – directly or indirectly – there in case of 15%-25% strengthening of and stopped. may still be informal pressure to local- the rouble or, alternatively, with rea- ise, the aim to have a better image as sonably high discount rates built in. In the end, it is an individual decision for a Russian producer or cost advantages each company whether or not to have from local production. In this case, the Companies selling a considerable part local manufacturing, weighing the ad- decision will be based on purely eco- to the state or municipalities or to state- vantages and disadvantages carefully.

28 | Localisation and investments How to Invest in Russia

A new era for localisation in Russia

obligations Russia assumed toward What are the key changes to be faced? the WTO, the transition period for the Are main stakeholders ready for such application of the “industrial assem- changes? Where are the key chal- bly” regime expired on 1 July 2018. lenges in the relationship between the This essentially means that, start- state and investors? ing 1 July 2018, the rates of import customs duties on goods classified These are the questions of greatest by the HS codes “for the industrial interest to the market and the issues assembly of motor vehicles of head- for discussion in the current article. Tatiana Kofanova ings 8701-8705, their units and as- Director CIS, Automotive group semblies” must be brought into line Historical background Leader, Deloitte with the common rates of the Unified The Russian automotive industry has Customs Tariff of the Eurasian Eco- historically been backed by key inter- Tatiana is a Director in the Deloitte CIS Au- nomic Union (UCT of the EEU). national automotive groups. tomotive group. For more than 13 years, she has been responsible for advising At the same time, the majority of Since 2005, car manufacturers have companies in the automotive market. agreements between automotive invested more than 500 billion rou- Tatiana is a part of cross-functional auto- manufacturers (hereinafter, “the bles in the automotive area and cre- motive team leading projects for various OEMs”), the producers of compo- ated more than 25,000 new jobs. automotive clients. nents for the automotive industry More than 60% of OEMs achieved In particular, Tatiana led the provision of Transfer pricing services to several international and Russian automotive clients The Russian state contributed and participated in a project for the im- over 500 billion roubles to state plementation of DMS systems, change of business model and supply chain op- support programmes, making the timisation. Tatiana has also led a number of cost reduction projects for automotive automotive industry one of the key companies and dealers. Tatiana has a degree with honours from industries for support. Finance Academy. She is also a member of the British Association of Certified Ac- countants (ACCA). (hereinafter, “the OESs”) and the localisation of more than 50%, while Russian state establishing the status for some of OEMs and OESs localisa- of industrial assembly (hereinafter, tion was struggling to reach 30-40%. ore than 6 years ago, “the 166/566 Agreements”) end in starting 22 August 2012, 2020. The Russian state also contributed M Russia became a mem- more than 500 billion roubles to state ber of the World Trade Organisation Thus, a new era for localisation must support programmes, making the auto- (WTO) and, in accordance with the begin for Russia. motive industry one of the key indus-

29 How to Invest in Russia Localisation and investments |

tries for support. The key part relates to At the same time, local consumption bringing the import customs duty for so-called “compensation of scrap duty”. of new cars is lower than existing pro- goods imported under the HS codes duction capacities, which makes ex- “for industrial assembly” into line Scrap duty, introduced at the end port one of the key focus areas of the with Russia’s obligations to the WTO, of 2012, is paid by importers and Russian state. i.e. to increase import customs duty producers of vehicles in Russia. Si- rates both for OEMs and OESs that multaneously, the Russian state in- Thus, the new requirements could be benefited from decreased rates un- troduced subsidies for compensation summarised in the following key prin- der the 166/566 Agreements. of several types of production costs ciples: (salary, electricity, and others) that There are also plans to amend Regu- practically compensated the negative ▪ further localisation of components lation 719 “On confirmation of Rus- financial impact from the payment of to 60-70%; sia-made products” and, in particu- scrap duty by automotive companies ▪ localisation of R&D and innovative lar, to significantly increase the list of with localised production in Russia. technologies; technological operations to prove the Russia-made status of a Russian au- One could describe the Russian tomotive manufacturer. The Russian state is considering the in- state’s approach for transition to the troduction of subsidies to equalise the payment of increased customs duty new era of industrial assembly as a rates. All the above together is recognised as the so-called “new industrial classic “carrot-and-stick policy”. assembly” regime.

Correspondingly, the Russian state ▪ development of exports (estimated The subsidies to compensate scrap duty became a very important stakehold- at 9-11% in 2020 and to 13-15% in are to be extended; however, some er in the automotive industry. The 2025). OEMs may not have the opportunity to key OEMs localised in Russia based receive such compensation, as the cri- their business and financial models All of the above require significant ad- teria for applicants are to be expanded. on the understanding that special ditional investments from automotive conditions related to the compensa- companies in Russia. The Russian state is actively promot- tion of scrap duty and other incen- ing the mechanism of special invest- tives would remain for at least an- The producers of automotive com- ment contracts (SPICs) that provides other 7-10 years. ponents are also expecting similar a simplified way to receive the status changes in the current regime; how- of a Russian manufacturer, but re- However, the Russian state clearly ever, the outcome of such a change is quires the additional investment of at stated its agenda for the future in the not clear. least 750 million roubles. 2025 Strategy, saying that the new era for localisation should start with What are the key In summary, investors in the Russian expanded requirements for investors changes to be faced? automotive industry are now facing a to be treated as localised manufactur- One could describe the Russian state’s complicated choice to invest and stay ers in Russia. approach for transition to the new era on the “list of Russian manufacturers” of industrial assembly as a classic benefiting from state support pro- The 2025 Strategy complains that a “carrot-and-stick policy”. grammes or to stop receiving compen- significant part of added value is not sation of scrap duties, equating them localised in Russia. This is mainly In the near future, there are plans with pure importers. Such changes because R&D and the material part to amend the legislation regulating weigh heavily on companies that have of components are not localised. the “industrial assembly” regime, invested in Russia in the past.

30 | Localisation and investments How to Invest in Russia

Are the main International investors have already ing the criteria of the expanded list stakeholders ready for invested significant amounts (e.g. in of technological operations under the such changes? 2015, VW completed construction of amended Regulation 719 or by com- It is certainly the case that OEMs in an engine plant in which it invested mitment to conclude a SPIC. Russia are not immediately ready for over 250 million euros) that were not the changes in Regulation 719 and recovered by 2018 due to the slow re- In a situation with a complex politi- the expanded list of technological covery from the crisis. cal and economic environment, the operations. Moreover, the potential decision on further investment in volume of investments to meet the At the same time, the new localisa- the Russian automotive industry is a expanded criteria is much higher tion regime measures additional and tough sell. than expected for SPICs. significant investment either by meet- During 2017 and now, the Ministry of Industry and Trade clearly articu- International investors have invested lates that SPICs could be considered as practical extension of the 166/566 significant amounts that were not Agreements. In a press conference, Denis Manturov, Minister of Indus- recovered by 2018 due to the slow try and Trade, stated that no other recovery from the crisis. mechanism besides SPICs was being planned or considered.

31 How to Invest in Russia Localisation and investments |

Starting from the end of 2017, the Volumes of state support of automotive industry, RUB bln. majority of localised manufacturers of vehicles in Russia have SPICs un- 140 der consideration. One of the driv- 130 ers was an opportunity to negotiate State support each specific business case and to 120 111 receive the status of a Russian manufacturer in a simplified way. In ad- 100 dition, an international investor receives tax incentives like 0% profit 78 tax and property tax. 80

62 Provided that the majority of the ap- 60 55 54 plicants finish SPIC negotiation process, the automotive industry may 40 become a leader in the number of 35 30 SPICs signed. 17 17 20 What are the key challenges in the 0 relationship between the 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018F state and investors? Meanwhile, the commitment of the Russian state to continue the sup- In view of the fact that the subsidies One important challenge is to expand port of the automotive industry on are one of the key factors supporting localisation in Russia by establishing a the horizon of next 10 years, the the localisation business case versus localised chain of suppliers that meet duration of a standard SPIC in the the importer business model, the fur- the quality and other criteria of lo- automotive industry, is not guaran- ther decrease of state support may calised OEMs. teed. negatively affect the financial attractiveness of localisation in Russia. Historically, the Russian state paid The budget for subsidies to OEMs less attention to localised suppliers is approved annually and, based In the latter case, we may observe that that could pay decreased rates of im- on representations from the Min- the new era of localisation has resulted port customs duties on goods clas- istry of Industry and Trade, there for some investors in the termination sified “for industrial assembly” under are plans to decrease it. For exam- of production in Russia. the 566 Agreements but were not re- ple, the budget for 2018 is to be cipients of other types of state sup- decreased in comparison to 2017 State support is not the only expecta- port measures. from 62 billion roubles to 35 billion tion between the Russian state and the roubles. OEMs. In view of the new era of localisation, the requirements for further investment in localisation, R&D and export The requirements for investment in bring extreme challenges for localised manufacturers of components. localisation, R&D and export bring The market of OESs suffered huge losses during the crisis of 2015-2016 extreme challenges for localised that have not yet been recovered. In average estimates, the capacity of lo- manufacturers of components. calised production of automotive

32 | Localisation and investments How to Invest in Russia

components was only 40-50% loaded national investors that, apart from the Similar to R&D requirements, the during last five years. investment, may lead to the necessity development of exports will require of registering the developed innova- joint efforts from investors and the For example, one month ago Fujikura, tions in Russia. This brings additional Russian state. The latter has an- a supplier of cable for Volkswagen, de- legal and commercial risks for OEMs nounced the negotiation of free trade cided to discontinue its production in that should be mitigated by the con- agreements with Vietnam, Egypt and Chuvashia after three years of opera- sistent and continuous efforts of the Iran. However, the list should be ex- tions in Russia. Russian state. panded further.

The market requires the joint ef- The development of exports is also In summary, the new era of localisation forts of the Russian state, OEMs and a challenging task for international should soon start in Russia. Whether OESs to transition the producers of OEMs and OESs. The markets of the such change brings the profitability components to the new localisation Eurasian Economic Union are limited, and sustainable growth to investors in regime. while exports to other countries bring the automotive industry and the dra- additional costs for customs duties matic change in the industry expected The other requirement for new locali- and other entry costs. As a result, by the Russian state is still uncertain. sation is the development of R&D and the majority of export business cases In any case, the coming changes will innovative technologies in Russia. This are not competitive and have limited effect each and every company work- is a rather new requirement for inter- potential for growth. ing in the automotive market. Реклама

33 How to Invest in Russia Localisation and investments |

How to reduce the cost of production localisation in Russia

Five main barriers for foreign industrial investors and ways to overcome them. Timur Shagivaleev, CEO of Alabuga special economic zone, discusses the main risks for foreign industrial investors in Russia and offers ways to reduce them.

However, the production localisation Placing production at developed indus- cost in our country has inevitably in- trial sites with modern infrastructure creased. According to our experts’ as- and in special economic zones (SEZ) sessment, after the announcement of can develop an industry cluster around sanctions, the country’s risk premium the new enterprise. A large anchor increased to 10-15% compared to manufacturer attracts Russian suppli- 5% in the pre-crisis period. Investors ers of raw materials and components who are ready to invest in projects in for its production. In the mid-term, it Russia should have real solutions for makes it possible to reduce the level of Timur Shagivaleev overcoming all types of barriers to currency risk by purchasing raw mate- CEO, Alabuga special economic zone starting localisation that they may po- rials in roubles and increasing the level tentially encounter. of localisation. Timur Shagivaleev is the CEO of Alabuga special economic zone since 2011. He Currency risks Alabuga special economic zone has came to his current position after three The most obvious risk when increas- such an “anchor” investor represent- years as Chairman of the Board of Direc- ing the investment base in Russia is ed by the Ford Sollers automotive tors of SEZ Alabuga. the currency risk. Devaluation of the plant, which produces SUVs and light Previously he was a counselor of the Prime local currency (rouble) leads to an in- commercial vehicles. In launching lo- Minister of the Republic of Tatarstan on creased payback period for projects cal automobile manufacturing, the external economic activity, corporate sec- credited in dollars, and also automati- company has learned how to increase retary of the Tatarstan-Korean Petrochem- cally increases the cost of production its localisation volume and, as a re- ical Company, and head of the Regional using imported components and raw sult, stamping production from the Administration of the Federal Agency on materials. Turkish company Coskunoz emerged Management of Special Economic Zones in the special economic zone. Later, in the Republic of Tatarstan. But, at the same time, localisation of a service metal centre for the pro- production in Russia opens up oppor- duction of metal billets was built. By tunities for investors to access cheap saving on raw materials and reducing oday, despite sanctions and rouble loans that can reduce the level logistics costs, Ford Sollers reduced a difficult global economic of currency risk. There are various the cost of automotive components T situation, Russia remains support measures offered by the gov- and now delivers them not only to its an attractive and desirable platform ernment available for localised pro- Russian enterprises, but also to Ford for foreign investors. Our country is a duction in the country. For example, plants in Europe. large market, and the prices for raw there are concessional loans avail- materials and energy resources are able from the Industrial Development Following Ford Sollers, another Ford often lower than in other countries. Fund. partner and a special vehicles manu-

34 | Localisation and investments How to Invest in Russia

facturer, ST-Nizhegorodets, became Al- finished products not only inside the resources in roubles, and sells the abuga resident. A fairly small produc- country, but also abroad. finished products in another cur- tion was located on the ready-made rency. At the current rate, it is ex- leased areas of the Synergy industrial A striking example in Alabuga is the tremely profitable. park. Thus, the company reduced capi- Turkish Kastamonu plant, which pro- tal costs and significantly accelerated duces flooring and wood panels. The The Russian company Alabuga-Fiber, the implementation of its project. main components of the final cost of a manufacturer of carbon fiber, was wood panels are electricity, gas, and initially created with the expectation Market risk wood. The cost of gas in Turkey be- of export deliveries. The annual pro- Despite the fact that in recent years fore rouble devaluation was 3 times duction volume of such a modern and the economy and demand in Russia higher than in Russia, and now it is 5 globally in-demand product exceeds remains relatively stable, some fluc- times higher. The cost of wood was 1,500 tons, and the domestic Russian tuations in the future are inevitable. 2 times higher, and now it is 3 times market is not yet able to absorb this We remember how after devaluation more expensive than in Russia. With volume completely. of the rouble, the demand for some such data, localisation of production types of goods reduced by half. In such within the country was absolutely Lack of qualified situations, market fluctuations are less justified. The company launched personnel threatening to the stability of compa- the plant in 2014, later doubled pro- Companies that host their production nies that purchase raw materials and duction capacity, and today exports plants in Russia often face a short- components in the rouble zone and, two-thirds of its products. The com- age of qualified workers. The low-cost at the same time, are able to sell the pany purchases raw materials and labour force in Russia does not com-

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35 How to Invest in Russia Localisation and investments |

and then renting it to them. This greatly reduces the investor’s capital expenditures. For example, last year the SEZ Alabuga constructed a production building for the MMK-Cosku- noz plant. As a result, the capex of investors fell to less than half.

Of course, build-to-suit is focused on large and long-term projects, and the developer company evaluates the risks together with its partner. But this is an excellent option for modern industrial companies.

Monetary risks We know that large foreign investors are interested in dividing monetary risks with the government. Our country has developed an improved mechanism for a special investment contract. It guarantees unchanged tax pensate for the lack of skills. Today engineering skills, starting with the conditions for investors who have lo- companies are gradually solving the school bench. Our educational strategy calised production in the Russian Fed- personnel shortage problem, fighting is enormous, long, large-scale work. eration. Our analysts studied 10 large in highly competitive conditions for The goal is to provide our residents industrial projects with a total cost of the best specialists. Nevertheless, the with ready personnel for the next 20 almost 10 billion USD that could be issue of staff development requires years and create in Tatarstan a federal realised within the Republic of Ta- long-term work. It is necessary to centre of the highest competence for tarstan, but cannot due to monetary implement “long” strategies for ad- global production. risks. And we came to the conclusion vanced training and look for territories that at least 10% state participation and partners that are already doing High capital costs in the capital of new projects would this work and can provide new pro- Taking into account the increased significantly increase their attractive- duction with prepared, highly quali- country premium for risk, companies ness. At the same time, the return on fied personnel. are willing to minimise their capital the implementation of these projects costs by shifting them to operating will compensate government costs for The SEZ Alabuga understands its costs. A fully prepared infrastructure 5-10 years. residents’ need for highly qualified and partnership mechanisms for shar- personnel. Today, the factories need ing capital costs can reduce the inves- In summary, I want to say that for- specialists in electrical engineering, tor’s risk. This practice is beginning to eign investors in Russia can still suc- mechatronics, chemistry, and auto- be implemented in certain regions and cessfully implement large-scale in- mated production management sys- sites in Russia. dustrial projects, as there are many tems. These specialists are in demand different possibilities for this in our at any modern production facility both The SEZ Alabuga managing company country. It is worth trying to imple- in Russia and abroad. To meet the offers a “built-to-suit” mechanism for ment most of these opportunities in need of our residents for such employ- prospective and long-term projects, order to reduce time, money and, ees, in the next 5 years we will imple- where we are constructing a produc- ultimately, the risks of production lo- ment a programme to teach children tion building for the investor’s needs calisation.

36 Part III. Before you start

37 How to Invest in Russia Before you start |

Sanctions risks affecting foreign investments in Russia

as a drag on the Russian economy persons to block (freeze) the assets and foreign direct investment in Rus- of the SDNs. US sanctions even pro- sia, most foreign investors find that, hibit the receipt of any services from with attention to detail and adequate an SDN. risk management procedures in place, business can still get done. The infor- Sectoral sanctions: sectoral sanc- mation below provides an overview of tions target Russia’s state-owned fi- sanctions affecting foreign investment nancial institutions, oil companies and in Russia and includes steps to miti- certain defence firms, but they do not Ethan Heinz gate risks arising from sanctions. prohibit all transactions. Instead, they Counsel, Dentons generally prohibit the provision of new Sanctions framework financing to, or dealings in new debt Ethan has worked in Dentons’ Moscow of- In response to events in Crimea and securities issued by, such entities with fice for twelve years. eastern Ukraine in 2014, both the US a maturity greater than a specified term Although his principal focus is on M&A and EU imposed a range of broadly (presently 30 days under EU sanctions, and private equity transactions, he also similar sanctions targeting persons and and 14 to 60 days under US sanctions, devotes a significant portion of his prac- entities deemed to be involved in those depending on the sanctioned entity), tice to compliance matters, including in events, as well as those perceived to and in many cases dealings in new eq- particular the US Foreign Corrupt Prac- be close to the Kremlin or to have par- uity of such sanctioned entities. “New” tices Act and US, EU and other sanctions ticular importance to the Russian econ- in this context means financing made against Russia. omy or the Russian defence sector. or debt or equity issued (or materi- Prior to joining Dentons, Ethan was an Although other jurisdictions, including ally amended) after the effective date associate for four years in the New York Canada, Australia, Japan, Norway, and when such sanctions were introduced. office of a Magic Circle law firm, and also Ukraine, have also implemented sanc- Importantly, all other transactions with served for two years as a law clerk to the tions against Russia, for most foreign sectorally sanctioned entities are per- Hon. Richard W. Goldberg of the US Court investors EU and US sanctions are the mitted, unless restricted by other sanc- of International Trade. most relevant, and are thus the focus tions provisions. of this overview. Technology transfer restrictions: mong the most significant US and EU sanctions targeting Rus- these measures restrict exports to Rus- challenges facing foreign sia comprise four principal types of sia and Russian persons of military and A investors in Russia in recent measures: most dual-use technologies, as well years are those posed by the sanctions as the provision of goods, technology and restrictive measures implemented Blocking sanctions: blocking sanc- and services relating to projects for by the United States (US), the Europe- tions prohibit all transactions by US or the exploration or production of deep- an Union (EU) and other jurisdictions, EU persons (as described below) with water, Arctic, or shale oil (although US as well as the Russian response to designated persons (known under US sanctions concerning such “special” oil them. Although western sanctions and sanctions as “Specially Designated Na- projects are more comprehensive than Russian counter-sanctions have acted tionals” or “SDNs”), and require such their EU analogues).

38 | Before you start How to Invest in Russia

Crimea: both the US and the EU re- Most foreign investors find that, with strict investment in Crimea and transactions with Crimean entities. The US attention to detail and adequate risk embargo is almost total in scope, allowing only the sale into Crimea of a management procedures in place, small list of goods (such as most pharmaceuticals), technology and services. business can still get done. The EU’s embargo is somewhat less extensive; while investments in Crimea and the export of goods from Crimea including significant fines and sub- Sanctions targets are prohibited, the schedule of goods stantial terms of imprisonment (for EU restrictive measures in the form of that may not be sold into Crimea is example, up to five years in Ger- blocking sanctions apply not only to lengthy, but not comprehensive (per- many; six years in the Netherlands; designated persons, but also to entities mitting light passenger cars while pro- seven years in the UK; and twenty directly or indirectly majority-owned or hibiting personal computers and refrig- years in the US). otherwise controlled by a designated erators, for example). person. EU sectoral sanctions apply to In many cases, licences may be sought non-EU entities that are directly or in- Transactions that “knowingly and to engage in a transaction that would directly majority-owned by a sectorally intentionally… circumvent” (in the otherwise be prohibited by EU or US sanctioned entity, or that otherwise act parlance of EU sanctions) or “evade sanctions, although there is no guar- on behalf of or at the direction of such or avoid” (per US sanctions) applica- antee that a licence will be issued. The sectorally sanctioned entity. Under US ble restrictions are also prohibited. US and member states of the EU have sanctions, all entities at least 50% indi- A breach of either EU or US sanc- also issued various licences of general rectly or directly legally or beneficially tions may result in criminal liability, applicability. owned by one or more sanctioned per-

39 How to Invest in Russia Before you start |

sons are themselves also considered of such jurisdiction (as well as lawful However, this does not mean that the to be subject to equivalent sanctions. permanent residents of the US); indi- transaction will carry no sanctions-re- Other indicia of control are not taken viduals of whatever nationality physi- lated risk. In particular, under various into account, although US authorities cally present within such jurisdiction; provisions of the stringent sanctions law have cautioned that they may give rise and companies and other entities commonly known as CAATSA that the US to future sanctions designations. formed under the laws of such juris- adopted in August 2017, non-US persons diction. That being said, the prohibi- can be subject to “secondary sanctions” EU and US authorities have frequently tions on evading or avoiding, causing for engaging in certain transactions. coordinated Russian sanctions target- a violation of, or attempting to violate (Importantly, EU sanctions do not con- ing and there has traditionally been a US sanctions are directly applicable to tain any analogue to CAATSA’s threat of significant degree of overlap between non-US persons outside the US, al- secondary sanctions.) Of particular note, the sanctions lists of both jurisdictions. though US authorities may face prac- under section 228 of CAATSA, non-US However, in April 2018, the US depart- tical challenges in asserting personal persons may themselves be designated ed from this approach by designating jurisdiction over such individuals. as an SDN if they engage in or otherwise as SDNs various Russian industrial Nevertheless, US sanctions targeting facilitate a “significant” transaction with concerns, such as En+, Rusal, GAZ Russia do differ from certain other US a sanctioned person (whether an SDN or Group, and Renova, which had been sanctions programmes, such as those a sectorally sanctioned entity), unless a widely perceived as mainstream Rus- against Iran, that are binding on for- US person could also lawfully engage in sian businesses significantly integrated eign subsidiaries of US companies. the transaction without obtaining a spe- into the world economy, and not mere cific license. And under section 231 of extensions of the Kremlin. These des- In principle, provided that a given CAATSA, both US and non-US persons ignations have caused substantial mar- transaction in Russia can be carried that engage in a “significant” transac- ket disruptions, which were only partly out without any nexus to the EU/US – tion with a listed entity operating in the mitigated by general licenses allowing for example, if it does not require any Russian defence or intelligence sector – various periods of time to wind-down corporate approvals to be given by a some of which, like their western coun- terparts, have significant civil operations – may be subject to five or more Foreign investors should be enumerated measures largely designed to reduce or curtail their access to the sensitive to the use of financial US financial system, but which may in- covenants that require compliance clude an asset freeze. Official guidance on what may consti- with US, EU, and other sanctions. tute a “significant” transaction states that US officials will consider such pre-existing transactions. No less im- parent company from such jurisdic- factors as the size, frequency and na- portantly, they underscored the unpre- tion; if no personnel from such juris- ture of the transaction; management’s dictability of future US sanctions des- diction (including secondees or direc- awareness and the existence or ab- ignations. tors, for example) will be involved in sence of deceptive practices; whether the transaction; if goods, services, the transaction involves a blocked per- Risk of secondary and technology will not be obtained son; the impact of the transaction on sanctions from such jurisdiction for the transac- statutory objectives; and other factors Generally, EU and US sanctions tar- tion, and so forth – then in most cases deemed relevant by US authorities. In geting Russia as described above engaging in the transaction will not effect, although de minimis transac- are binding only on legal entities and directly breach EU/US sanctions laws tions are unlikely give rise to secondary individuals within the respective ju- that would otherwise prohibit such sanctions, the great discretion afford- risdictions of the EU member states transaction if it were entered into by a ed to the US executive branch means and the US, e.g. citizens or nationals EU/US person. there are no truly safe harbours.

40 | Before you start How to Invest in Russia

predictability since 2014. Although there have been occasional additions to the list of blocked persons (such as in connection with the diversion of Siemens turbines to Crimea), generally speaking the predominant approach within the EU is to maintain the sanctions status quo, neither lessening nor increasing existing restrictions. This is largely a function of the need for una- nimity in adopting sanctions. Individ- ual member states inclined to adopt a more robust sanctions policy towards Russia can, however, engage in more vigorous enforcement of existing sanctions, or make use of other measures (such as the increasing use of Unex- plained Wealth Orders in the UK).

The US took its first major step to de- link its Russian sanctions policy from the EU’s with the adoption of CAATSA in August 2017, and took a further step in this direction with the April 2018 SDN designations of major Russian industrial concerns. More recently, in Au- gust 2018, the US adopted new sanctions (more akin to a limited embargo) against Russia as a result of the use For over a year after CAATSA’s enact- plementation of secondary sanctions of chemical weapons in Salisbury, Eng- ment, the US government refrained cannot be ignored. land, and more severe sanctions (po- from applying secondary sanctions tentially including measures amount- under CAATSA (other than against Aside from the threat of US sectoral ing to a more widespread embargo) several Russian persons for cyber ac- sanctions, foreign investors should are likely to be implemented in late tivities). However, in September 2018, be sensitive to the widespread use November 2018, based on the require- the US imposed secondary sanctions of financial covenants (including in ments of applicable US law. under section 231 against a Chinese financing agreements with many EU, military department and its director, Asian, and other non-US banks) that Moreover, numerous bills have been which included not only a prohibition effectively require compliance with introduced in the US Congress in 2018 on foreign exchange and other trans- US, EU, and other sanctions. The risk that would impose harsh new sanc- actions within the US financial system, and adverse consequences of a breach tions on Russia, either immediately or but also designation as an SDN. Given of such covenants may be as great in the event of future interference in that these secondary sanctions were or greater than that of US secondary US federal elections. It may be that imposed in relation to a substantial sanctions. none of these bills ever becomes law, arms transaction, they may seem less but this manifestation of anti-Russian relevant for most foreign businesses Increasing US sanctions sentiment in the US Congress cannot in the Russian market. Nevertheless, and dissonance with the EU be ignored. Other US political factors the risk that the US may be transition- EU sanctions policy against Russia has are also potentially relevant to the evo- ing to a phase of more aggressive im- been characterised by stability and lution of US sanctions, including the

41 How to Invest in Russia Before you start |

▪ Where appropriate, exclude every The predominant approach within nexus between the transaction and the jurisdiction whose sanc- the EU is to maintain the sanctions tions laws would otherwise ap- status quo, neither lessening nor ply. Under US sanctions laws, this usually requires having a general increasing existing restrictions. recusal policy in place, since an ad hoc decision to transfer responsibility for a transaction to ongoing special prosecutor’s investiga- Recommendations for a non-US colleague may itself be tion into matters concerning the 2016 mitigating sanctions risk regarded as unlawful facilitation US presidential election. Against this sobering backdrop, what of the transaction. steps can foreign investors take to Russian counter-sanctions minimise their sanctions risk? Al- ▪ Where relevant, assess the risk of EU, US, and other foreign sanctions are though different investors and trans- secondary sanctions and take steps not the only sanctions-related sources actions have different risk profiles to mitigate it. This may include such of risk that foreign investors must con- and there is no one-size-fits-all solu- measures as engaging proactively sider. The initial Russian government tion, the following measures will of- with appropriate officials from one’s legislative response to western sanc- ten be helpful. own government (e.g. trade officials tions was largely confined to an import or commercial attachés), especially ban on a range of agricultural and food ▪ Routinely screen actual and poten- if from a jurisdiction friendly to the products, in particular fresh meat, fish, tial counterparties and transactions US; seeking preliminary guidance poultry & dairy, and produce. More re- for potential sanctions risks. This from US authorities; and/or main- cently the Russian President has been should not be a purely automated taining a low profile. (However, this granted very wide discretion to im- process; while official websites and should never cross the line into en- plement diverse retaliatory measures commercial compliance databases gaging in deceptive practices, which against foreign states, and their compa- are extremely helpful in such dili- will increase the risk of secondary nies, that implement sanctions against gence, there is no substitute for a sanctions.) Russia, although it is anticipated that clear-eyed assessment of the risks this will only be used in response to sig- by an experienced compliance of- ▪ Be prepared for the unexpected, nificant new sanctions, and not merely ficer. When in doubt, engage legal especially the risk of progressively maintenance of the status quo. counsel. worsening US sanctions. Where possible, incorporate sanctions-re- Of greatest concern to foreign inves- ▪ Understand that Russia is now related “escape clauses” in contracts, tors, earlier in 2018, the Russian Duma garded as a higher-risk jurisdic- while bearing in mind that these considered a bill that would impose tion, especially by persons with lit- will not always be enforceable un- administrative or criminal liability for tle direct experience here. Foreign der Russian law. To increase the complying with sanctions against Rus- banks, insurers, suppliers and other chances of enforceability in Russia sia. This engendered vigorous objec- commercial partners may require an (if relevant), it is recommended not tions from the Russian and interna- extra degree of assurance that, for to refer exclusively to western sanc- tional business community, and as of example, a given funds transfer, pro- tions against Russia but rather to all this writing further consideration of the ject or sales order is lawful. Proactive applicable restrictive measures and bill has been deferred, but is likely to management will minimize the risk sanctions, including those under resume at some point. of delays. Russian law.*

* The views expressed in the article do not constitute legal advice. Specific advice should always be sought before engaging in any transactions with potential implications under the sanctions laws of any jurisdiction.

42 | Before you start How to Invest in Russia

Protecting investments: accurate legal compliance with sanctions, anti-money laundering and anti-corruption

a large number of Russia-based companies have established their own internal Compliance Departments.

Companies should adopt and implement a corporate governance compliance programme (CGCP) that includes, among others, specific compliance with sanctions and anti-money laundering Pietro Fantappiè Anna Shashkova (AML) and corruption laws and regula- Senior Associate, LegaLife Diaz Reus Of Counsel, LegaLife Diaz Reus tions. With CGCP we define compliance obligations associated with certain crit- Pietro is an international lawyer with Anna has been practicing law for more ical aspects of corporate governance several years of experience who focuses than 19 years. in the current global geopolitical and his practice on the retail sector and ser- Her practice includes in-depth expertise business environment, namely with vice industries such as real estate and on money laundering and fraud, constitu- being a good corporate citizen in Rus- hospitality, cross-border transactions, tional law, as well as corporate, business, sia and in international business, es- blockchain and ICO, fraud, and com- and tax law. pecially in the financial community. It mercial law. She is also a law professor at Moscow is recommended that all major Russian He also assists high net worth clients State Institute of International Relations companies, as well as international with international planning. Pietro holds (MGIMO), has widely published books on entities operating in Russia, learn and a diploma in Business Administration money laundering, Russian business law, adopt a culture of compliance under from London’s Westminster College and and Russian corporate and business law, the heading of CGCP for the reasons a J.D. equivalent from the University of and authored over 150 publications in pe- explained below and continuously re- Florence, Italy. riodicals such as “Lawyer,” “President Con- view their compliance. trol,” “Rossiyskaya Ustitsya,” etc. She graduated with distinction from MGIMO Why complying? and obtained a Ph.D. in Law from MGIMO. Strict legal compliance with AML and corruption legislation is required. Not- What is compliance? the risks that organisations face and withstanding the absence of criminal li- Compliance means an act of obeying to resolve compliance difficulties when ability of corporations in Russia, penal- an order, rule, or request. In worldwide they occur. In the Russian Federation ties under the Code for Administrative practice, compliance departments are such a term does not have an official Violations of the Russian Federation created both to identify and minimise legislative interpretation though quite may be imposed, such as high mon-

43 How to Invest in Russia Before you start |

etary fines and disqualification of top ways political in nature, since they are legal perspective, it is very important employees. Directors, owners, and enacted by executive branches (gov- to identify some of the major players top executives of businesses may also ernments) of countries. and their powers to enact and imple- face criminal liability, which can include ment such measures – OFAC and the fines, disqualification of up to 5 years, In the present context of sanctions European Council. or imprisonment of up to 7 years. From against the Russian Federation and an outside point of view, any AML or other jurisdictions, there is a real el- OFAC, which acts under the US Depart- corruption non-compliance may also ement of risk when investing in busi- ment of Treasury (executive branch), is result in criminal liability that can be ness activities in Russia that do not the relevant office that publishes and even more severe than in Russia, as comply carefully with the international continually updates a list of Specially well as result in sanctions against a sanctions’ regime, namely engaging in Designated Nationals and Blocked Per- particular company or particular in- prohibited financial and transactional sons (“SDN List”), as well as a list of dividual by US and European Union operations, investments, trading, or Specially Designated Narcotics Traffick- authorities, which may result in huge other activities, especially with sanc- ers (“SDNT List”). Sanctioned person(s) financial losses. tioned persons and entities. and/or entities placed on the SDN or SDNT Lists, including those placed Compliance with Thus, sanctions do not only carry a on the SDN List pursuant to GLOMAG sanctions psychological impact when hindering (2016 Global Magnitsky Human Rights More so than ever before, companies potential investors from new activi- Accountability Act), may have their US- operating in Russia must develop and ties, but they cause very real risks and based property and interests in proper- implement Office of Foreign Assets negative consequences for those who ty “blocked”. Businesses and investors Control (OFAC) sanctions detection and engage in business with sanctioned must be aware that their failure to com- monitoring programmes. Sanctions entities without assessing and imple- ply with OFAC sanctions will lead to the are instruments intended to create a menting proper conduct. It is there- “blocking” of wire transfer payments, negative atmosphere as well as busi- fore necessary to carefully consider the loss of international banking privi- ness and personal consequences when precautionary measures in order to set leges, and potential civil and criminal it comes to investments and the way up appropriate sanctions compliance penalties. There are many other direct people do business in general. Specifi- activity and thus create ideal condi- consequences and collateral conse- cally, sanctions aim to freeze financial tions for risk-free transactions that quences, among others being stopped assets which belong to legal entities are reliable for investors. Such an ap- for secondary inspection and denied entry at immigration and customs en- Sanctions cause very real risks and try points into the US, and being placed on US airlines’ “no-fly” lists. Sanctions negative consequences for those who compliance can, however, be put in place by companies by studying their engage in business with sanctioned business relationships in order to identify potential risks of OFAC sanctions entities without assessing and and their consequences. An appropriate implementing proper conduct. OFAC compliance programme should be implemented to avoid these costly repercussions. It must be stressed that and individuals, often affecting at least proach is rather important nowadays even if an individual or entity is placed one of the most personal spheres of in the context of international business on OFAC’s SDN list, it is still possible to freedom – property. Sanctions may be investments, and business in the Rus- act legally and seek “de-listing”. De- considered as administrative measures sian jurisdiction is no exception. listing from the SDN or SDNT Lists, with no apparent remedy and are of- including those placed on the SDN List ten enacted based on political motives. In order to have a better understand- pursuant to GLOMAG, regularly occurs It can be argued that sanctions are al- ing of the issue of sanctions from a by filing a timely request for reconsid-

44 | Before you start How to Invest in Russia

eration. There are two ways to appeal imposed SDN sanctions on Agrosoyuz (1) written policies and procedure; OFAC’s denial of a reconsideration re- Commercial Bank over handling trans- (2) compliance; (3) training; and (4) quest: (1) submitting a new adminis- actions for North Korea in violation of audit. Such a comprehensive AML pro- trative reconsideration; (2) initiating a United Nations restrictions. gramme will help companies preserve lawsuit under the Administrative Proce- their important banking relationships dure Act (“APA”) against OFAC in the US In the EU, sanctions against other ju- and avoid law enforcement scrutiny District Court of Appeals for the District risdictions are usually enacted after a and investigation which, in case of of Columbia. vote by the European council, which non-compliance offenses, can result involves all the heads of states and in jail sentences, high monetary fines, OFAC administers a number of differ- governments of the 27 member states. and other penalties. ent sanctions programmes not related to a particular jurisdiction. Thus, it is Anti-money laundering The main relevant act of the Russian vital to stress that proper business compliance Federation to comply with in this field is conduct is not limited to behavior in All companies, especially financial insti- the Anti-Money Laundering Law (Fed- one jurisdiction, but applies to rela- tutions, should develop and implement eral Law No. 115-FZ on Countering tions with sanctioned entities and busi- “gold standard” AML in accordance Legalisation [Laundering] of Proceeds ness activities in any other jurisdiction, with the internal laws of the com- from Crime and Financing of Terror- as the recent case of Russia’s Agro- pany’s jurisdiction as well as relevant ism) dated August 7, 2001, which is soyuz Commercial Bank demonstrates. international treaties and agreements. regularly amended (last amendments On August 3, the Treasury Department Effective AML requires the following: came into force on July 23, 2018).

45 How to Invest in Russia Before you start |

There are also plenty of other regu- munity on suppressing all forms Federal Law No. 273-FZ on Counter- latory acts issued by AML regulators. of corruption. Global and Russian ing Corruption dated December 25, companies must develop a general 2008 is the main document to comply The general authority is the Federal awareness of the perils of paying with in this field in Russia. Many sub- Financial Monitoring Service (Rosfin- kickbacks or bribes, and must learn sidiary documents were later adopted monitoring). It requires individuals how to avoid dealings with corrupt which mainly place additional require- trading commodities or on finan- officials, including with corrupt - for ments on government employees. cial markets to provide information eign officials or Politically Exposed For example, in 2016 state officials upon request, gathers and analyses Persons (PEPs). were banned from owning securi- reports of suspicious transactions, ties or other financial assets located prosecutes violations of AML legisla- Companies must be aware of the or registered abroad through third tion, and transfers the collected data Foreign Corrupt Practices Act, a US parties. Russian law controls both in- to the appropriate law enforcement federal statute that prohibits US com- come and expenses of state employ- authorities for further investigation panies, or other companies under US ees. Since 2018 both state and mu- and action. Multiple orders of Rosfin- jurisdiction (any foreign company, nicipal officials may be dismissed on monitoring shall be complied with. including a Russian one, can under the grounds of loss of trust. Russian certain circumstances fall under US law criminalises active and passive Among other domestic AML regulators jurisdiction), from bribing public of- bribery, facilitation payments, gifts, are the Government of the Russian ficials to obtain a commercial advan- and other material benefits. Federation, the Bank of Russia, the tage. The US Department of Justice Ministry of Finance, the Assay Cham- has prioritised FCPA investigations The President of the Russian Fed- ber (under the supervision of the and prosecutions to attack this form eration adopted 6 National Plans on Ministry of Finance), the Federal Su- of business corruption. Global com- Countering Corruption, the most re- pervision Service for Communications, panies must be made aware of FCPA cent one on June 29, 2018 for 2018- Information Technologies and Mass requirements and must train their 2020. Other regulatory bodies in the Communications (Roskomnadzor), employees and senior management area are the Government of Russia and the Federal Tax Service, which is- accordingly. Companies also must be and the Ministry of Internal Affairs of sue various resolutions and orders to aware of the Magnitsky Act, which the Russian Federation. comply with. Each of these state bod- authorises and requires OFAC to list ies have their own specialisation, e.g. and sanction individuals or entities Introduction of compliance prac- the Bank of Russia is responsible for that are involved in corruption or hu- tice with corruption norms has credit organisations, insurance com- man rights violations. been a programme of the fourth panies, and professional participants step (started in 2010) of combat- in the securities market, while the As- The Russian Federation is catego- ing AML and corruption at the in- say Chamber is in charge of entities rised by the US State Department as ternational level and at the level of engaged in trade in precious metals, a jurisdiction of primary concern with particular countries. All companies gemstones, and jewelry. In the last 4 respect to money laundering and fi- must understand these significant years, the Bank of Russia has revoked nancial crimes such as corruption. Of- risks of being involved in corruption more than 350 bank licenses (96 in ficial corruption remains a problem at schemes and must implement the 2016, 51 in 2017, 28 during the first all levels of government and a major appropriate anti-corruption policies half of 2018) for non-compliance with source of laundered funds, especially and procedures. If companies fail AML requirements and other viola- in the judicial system and public pro- to address these issues, they may tions. Internationally there are many curement. The situation with state find themselves under criminal in- relevant bodies as well. corruption is considered one of Rus- vestigation for commercial bribery, sia’s vulnerabilities. Thus, measures sanctions violations, or money laun- Corruption compliance to counter corruption mostly concern dering, and they will suffer signifi- There is much more emphasis government employees, though B2B cant reputational harm and financial throughout the global business com- corruption is also punishable. losses.

46 | Before you start How to Invest in Russia

A positive trend in investment climate and Russian bureaucracy

pean companies in particular believe capital divided into shares. The partici- in the Russian market and economy. pants are not responsible for the com- What needs to be done to set up pany’s liabilities and the risk of losses business in Russia and what troubles is limited to their shares in the charter might you face? capital.

To be able to conduct business activi- An employment agreement is grounds ties in Russia, a foreign person must for commencement of an employment fulfill the following conditions: relationship stipulated by labour law. Paul Bruck In accordance with the Labour Code Management Partner, Most Service ▪ open a subdivision (representative of the Russian Federation, employ- office or a branch) or establish a ment relations between an employer Paul Bruck holds a diploma from the Uni- subsidiary; and employee should be formalized by versity of Natural Resources in Vienna and ▪ fulfill all migration formalities and executing an employment agreement a Master’s degree from the City University sign employment agreements with in writing within three business days of Seattle. employees; from the date of actual employment. He worked in Russia for the first time in ▪ pay wages to employees, including 1987 and has held various management relevant social insurance payments When hiring foreign employees, the positions in Austria and Russia since then. to the budget of the Russian Fed- Russian legal system offers two main For more than 10 years Bruck has run pro- eration. ways to obtain a work permit for a fessional service companies in Moscow. foreign employee: the standard proce- He is Management Partner in OOO Most A representative office allows a for- dure and that for highly qualified spe- Service, OOO Most Management, and OOO eign company to be present in the cialists (HQS). Balashova Bruck & Partners, a partnership Russian market, but not to carry out with Balashova Legal Consultants. commercial activity, i.e. it is forbidden When applying for a work permit ac- He is also involved in event and sport for a representative office to import, cording to the standard procedure, management and is the organiser of the purchase, and sell goods. Compared to one should bear in mind the so-called longest bicycle race in the world, the Red a representative office, a branch can quota principle, i.e. a work permit in Bull Trans-Siberian Extreme. perform commercial activity. A repre- Russia is given within the framework of sentative office or a branch acts in the quotas determined for each calendar name of its head office. year by the government of the Russian espite the global politi- Federation. The employer must notify cal turmoil especially ex- A subsidiary company can perform state authorities about its plans to em- D pressed in a trade war and commercial activity in Russia without ploy foreign employees for the next continuing sanctions against Russia, restrictions. The prevailing legal form calendar year. business, although somewhat hurt, is of an organisation for conducting com- continuing to invest or even extending mercial activity with foreign investors The main criterion for HQS status is investments in Russia. This might be is a limited liability company. A limited the annual salary, which must exceed due to pressure to localise production, liability company (Russian abbrevia- 2 million roubles (about EUR 25,500) but it still seems to show that Euro- tion “OOO”) is a company with charter gross per year or 167,000 roubles

47 How to Invest in Russia Before you start |

is an accommodation provided by a The prevailing legal form of an or- Russian citizen). Employers will now be allowed to act as a host party only ganisation for conducting commer- if they provide the foreign specialist with premises to live in (in force since cial activity with foreign investors in July 8, 2018).

Russia is a limited liability company. Russian legislation introduced several laws to help establish subsidiaries in (about EUR 2,100) gross per month. There are also certain prescriptions Russia. Criteria such as education, qualifica- regarding the migration registration tions, and work experience of the for- of foreigners coming to Russia, in- 1. Simplified state registration eign employee are evaluated by the cluding those coming for further work rules: employer. In addition, key features of in Russia. According to the newest the facilitated migration scheme for changes in migration regulations, mi- ▪ implementation of an electronic highly qualified specialists should be gration registration at the foreigner’s interaction system between regis- taken into account: no quotas for the place of stay must now be issued only tration (tax) bodies and so-called work permit; apostilled degree certifi- at the actual residential address of “multifunctional centres”, which also cates or medical tests are not neces- this person (the place regularly used accept documents for incorporation sary (and several other features). for sleep and rest which, as a rule, registration. This will help one navi-

48 | Before you start How to Invest in Russia

gate the registration procedure more preliminary checks of registration are not made. The banks’ reaction can easily (through a multifunctional documents before filing, examinations be different, e.g. all electronic bank- centre) without spending additional of future managing directors at the ing services can be blocked until the time (in force since April 29, 2018); premises of registration bodies (sev- changes are made. ▪ issuance of all registration docu- eral examinations within one proce- ments in electronic form (in force dure are possible), on-site inspections Servicing banks are also stead- since April 29, 2018, but not actually of the premises, and direct commu- ily toughening their requirements for applied yet by registration bodies, nication of registration bodies’ repre- document sets prepared by compa- e.g. in Moscow); sentatives with owners of the rented nies for opening bank accounts and ▪ possibility to submit additional (cor- premises. their further maintenance (e.g. due to rected) documents in case of registration denial without repeated payment of the respective state duty (in Setting up a business should be force starting October 1, 2018); ▪ possibility for interested persons to carefully planned and receiving subscribe to relevant registration professional advice from news regarding selected companies on the website of registration experienced consultants is advisable. authorities in order to manage possible future registrations of changes in these legal entities and to be Temporary suspension of registrations changes in the company). The paper- able to file objections to these reg- for an additional check of the data work necessary for opening accounts istrations. on the company to be included in the in one bank is nearly always over- Unified State Register of Legal Enti- whelming. 2. Cancellation of state duties for ties (EGRUL), which often happens registration of subsidiary com- due to registration of changes in the Registration (tax) authorities also panies when filing documents in company. cause difficulties in accrediting rep- electronic form (in force starting resentative offices and branches January 1, 2019) Checking the data already included of foreign companies. Though the in the EGRUL regarding addresses, state duty for accreditation is quite Despite legal actions to make it easier shareholders, or managing direc- high and amounts to RUB 120,000 for foreign companies to set up their tors of the companies, which can be (about EUR 1,500), state bodies business in Russia, some negative marked as “mass” ones (acting in the often deny accreditation based on facts are seen during the establish- respective capacity in more than five formal bureaucratic grounds with- ment of subsidiaries as well as rep- companies). Respective marks are out returning the previously paid resentative offices and branches in made in the register and can be cor- state duty. Russia. rected after corresponding changes in the company are made. If no chang- Overall the trend is positive and work- Unofficial toughening of requirements es are made within 6 months, the ing with governmental bodies became on shareholders, members of manag- company may be excluded from the more practical. Nevertheless, setting ing bodies (especially general man- EGRUL. up a business should be carefully agers), legal addresses and rented planned and receiving professional premises of the subsidiaries, and reg- Registration bodies often inform the advice from experienced consultants istration documents; additional checks servicing banks of the companies is advisable. There are a fairly high and (sometimes long-term) coordina- about the above-mentioned checks of number of well-established interna- tion procedures with registration au- suspicious data and can even recom- tional law firms, tax specialists, and thorities (officially declared reason: mend blocking the company’s bank consultants to support companies in fighting illegal business). Examples: accounts if the prescribed changes any language.

49 How to Invest in Russia Before you start |

Beneficial ownership concept: how it could affect your business in Russia

Confirmation is de facto one more step in further implementation of the beneficial ownership concept in Russia. Importantly, both documents should be submitted prior to the moment that payments are effected. The tax certificate should be provided at least annually, sealed with the apostille, trans- lated into Russian, and notarized. The Valeria Khmelevskaya Elizaveta Tolstorukova minimum requirement for confirmation Partner, Brand & Partner Lawyer, Brand & Partner is the income recipient issuing it with signatures of the authorized parties and Valeria Khmelevskaya is a partner and head Elizaveta Tolstorukova is a lawyer with its translation into Russian. There is no of tax practice with Brand & Partner law firm. Brand & Partner law firm. clear position regarding the regularity Valeria is a lawyer and a tax consultant with Elizaveta has recently completed an LL.M. of submission of confirmation. Based on over 18 years’ experience with her main programme at the Moscow State Univer- the conservative approach, it should be focus on cross-border transactions and re- sity for International Relations and has submitted before each payment. Con- lated structuring issues, VAT offsets and one year of experience with a BIG 4 firm. sidering the real practice in the MNEs recovery, double taxation and permanent Elizaveta mostly focuses on issues related groups, this should be done at least establishment issues, Russian CFC rules and to cross-border transactions, international quarterly. If a Russian company fails beneficial ownership concept, transfer pric- taxation, global tax information exchange, to obtain at least one of these docu- ing, etc. e-commerce and transfer pricing. ments prior to payment to the relevant foreign entity, then it must withhold the relevant withholding tax amount based early every Russian com- ent of such income. Russian companies on the Russian Tax Code. Later on, a pany belonging to a multi- may also pay out dividends subject to foreign company may still claim back N national group of companies participation exemptions provided in the relevant withholding tax.3 has inter-company or cross-border ar- the DTTs.1 In order to apply such DTT rangements which might be especially incentives, a foreign recipient should Confirmation of the actual attractive due to applicable double tax- provide a Russian company with the right to income ation treaty (DTT) incentives allowing certificates of tax residency and, start- There is no statutory form for confir- reduced withholding tax rates or taxa- ing from 2017, with confirmation of the mation. The Russian Tax Code4 sim- tion only in the country of the recipi- recipient’s actual right to such income.2 ply states the need for such confir-

1 Participation exemption makes it possible to apply a reduced withholding tax rate (usually 5%) in the country of payor of income if certain thresholds regarding the capital or investment share are met. 2 Paragraph 1 of Article 312 of the Tax Code of the Russian Federation 3 Paragraph 2 of Article 312 of the Tax Code of the Russian Federation 4 Paragraph 1 of Article 312 of the Tax Code of the Russian Federation 50 | Before you start How to Invest in Russia

mation and it is up to the taxpayer residence; and audited IFRS finan- have interpreted the beneficial owner to decide on the extent of the de- cial statements and any other docu- (BO) concept more broadly that the tails of information/documents to be ments evidencing the real power to one provided by the OECD. Notably, provided. It might be reasonable to dispose of the received income. The the letters of the Federal Tax Service prepare a less detailed paper, which, formal availability of both documents serve mainly as mandatory guidelines however, should contain all the nec- (the certificate and the confirma- for the local tax authorities in order essary data regarding the recipient tion) seems to not always be help- to ensure the uniform application of company (information on employees, ful, as the Russian company should tax legislation. They are generally assets, office, financial information, also be able to prove that the foreign not binding for the taxpayers. In re- etc.) in line with beneficial owner recipient is a beneficial owner. Fail- ality, they may affect the practice by criteria (see below) and be adjusted ure to provide the relevant proof can changing the interpretation and caus- to a specific transaction(s). Further, completely disallow DTT incentives, ing new controversies. more detailed information may be which will result in an additional tax prepared as a so-called “defense charge together with penalties and Beneficial owner criteria file” and may be provided later upon late payment interest. for tax purposes The Russian Federal Tax Service em- phasises a substance-over-form ap- In order to apply double taxation treaty proach to fighting tax avoidance. The incentives, a foreign recipient should criteria7 for proving that a foreign entity is a beneficial owner of income provide a Russian company with the derived in Russia include, but are not certificates of tax residency and with limited to: confirmation of the recipient’s actual ▪ independence of directors in decision-making; right to such income. ▪ power to dispose of the received income; ▪ real business activities; request of the tax authorities. Such Beneficial owner concept ▪ sufficient resources for such activi- approach would give a taxpayer cer- in Russia ties (office, employees, assets); tain leeway and may serve for a bet- The concept of beneficial ownership ▪ no back-to-back transactions (lack of ter and more flexible position in case of income was implemented in the obligation of the recipient to transfer of disputes with the tax authorities. Russian Tax Code in 2015.6 In gen- the income onwards); There is no statutory list of the de- eral, this concept means that the ▪ actual assumption of risks by the re- fense file’s documents that may sup- foreign recipient of income may be cipient regarding its assets. port confirmation. According to the denied DTT benefits if it has no in- Ministry of Finance5, the following dependent right of use and/or enjoy In the view of the Federal Tax Ser- documents may be required: agree- such income, or if this right is limited, vice, the tax authorities are allowed ments, arrangements, and contracts or if it bears insignificant risks and has to deny tax treaty benefits when a of any kind concluded with a third intermediary functions. There are also foreign entity has no active operating party that can provide confirmation provisions on beneficial ownership in business. They may not investigate of the active business of the foreign DTTs between Russia and other coun- who the real BO is, and so the mere company; tax returns and reporting, tries. Several guidance letters issued fact that the first recipient is not a other similar documents confirm- by the Russian Federal Tax Service BO is sufficient for applying domestic ing tax payments in the country of and the Russian Ministry of Finance withholding tax rates.

5 Letter of the Russian Ministry of Finance No. 03-08-05/76939 dated November 21, 2017 6 article 7 of the Tax Code of the Russian Federation 7 Letter of the Federal Tax Service No. СА-4-7/10261 dated May 17, 2017

51 How to Invest in Russia Before you start |

In the view of the Federal Tax one of the contracting countries under DTT. The presence of an active, oper- Service, the tax authorities are ating business run by the company, similar to the BO criteria envisaged allowed to deny tax treaty benefits by the Russian Federal Tax Service, is also among LOB conditions. The PPT when a foreign entity has no active should help to determine whether “one of the main purposes of an arrange- operating business. ment or transaction” is to obtain the benefits of the tax treaty, and, if so, The list of criteria has been expanded ply it to both related and non-related the tax authorities may deny treaty recently8: it is now important for the parties’ transactions. The Russian court benefits unless it is established that taxpayer (or tax agent) to prove the practice on BO matters usually upholds granting that benefit in that circum- non-tax purpose of a transaction, i.e. the tax authorities, whereby decisions stance would be in accordance with that the main aim of the transaction in favour of the taxpayers also exist, the object and purpose of the relevant is not to obtain tax benefits. Further- but are rather rare. DTT. The ratification of MLI might give more, in the view of the Federal Tax even more power to the tax authori- Service, a foreign recipient company OECD approach matters ties since the ratified MLI is a legal act may not be a BO, but rather an inter- Though not a member of the OECD, unlike guidance in the form of letters mediary (conduit) entity, and, thus, Russia upholds most of the OECD ini- issued by the tax authorities. A strong Nordic bank having no right to DTT benefits, if the tiatives. Generally, the tax authorities major part of the income of such com- and courts accept references to OECD Conclusions and practical Danske Bank is a Nordic universal bank with strong Nordic presence pany originates from Russian sources, Model Tax Convention Commentaries.9 considerations and bridges to the rest of the world. whereby such company has no or- Russia has also joined the Multilateral With the Federal Tax Service’s ap- dinary business other than receiving Convention to Implement Tax Treaty proach becoming more strict and ag- dividends and/or further redirecting of Related Measures to Prevent Base Ero- gressive, new challenges for MNEs will In Russia, Danske Bank provides services and solutions to subsidiaries of Contact information Nordic companies and selected multinationals with strong footprint in the income to persons who may not ob- sion and Profit Shifting10 (“MLI”). MLI is likely arise. In particular, local tax au- Danske Bank Russia Nordics. tain the relevant DTT benefits. Further aimed at implementing DTT measures thorities may more closely examine the indicators of the intermediary function to update international tax rules, and cross-border payments made by Rus- Moscow office Danske Bank is present in Russia since 2007 as a 100% Danske Bank A/S may be: the absence of typical busi- it should also reduce tax avoidance by sian subsidiaries to foreign affiliates, Botanicheskiy per., 5, 10th floor owned subsidiary and has strong local expertise. ness payments; insignificant operat- multinational enterprises (MNEs). MLI and also examine backwards regarding 129090 Moscow ing expenses; most of the costs are is currently in force, and Russia is very the periods that are still open for field Tel. +7 (495) 797–94–60 Danske Russia offers wide range of cash management, treasury and corporate administrative and relate to the formal close to ratifying it. MLI contains pro- tax audits (three years preceding the financing products. Located in Moscow and St Petersburg, the bank can meet St Petersburg Office customer banking needs across all of Russia. fulfillment of statutory requirements visions on limitation of benefits (LOB) year in which the audit is designated). Marata Street 69-71 A of the country where such company is and outlines the application of the 191119 St Petersburg residing; income from Russian sources principle purpose test (PPT). The LOB The main consequences of application Russia Our Essence is taxed at low rates or is tax exempt clause sets forth several conditions to of the BO concept can be the limita- Tel. +7 (812) 319–45–00 We help businesses achieve their goals. No matter what situation a in the recipient’s country. Notably, the be met by a company claiming DTT tion of benefits under DTTs as well business is in, we have usually seen something similar before. We use Russian tax authorities apply the BO benefits. If none are met, the compa- as reclassification of the transaction www.danskebank.ru our experience to provide value-creating advice and targeted solutions concept not only to dividends, interest, ny is not a “qualified person” and shall in question for tax purposes. For ex- SWIFT: DABARU2P to business customers. and royalties, but also extend it to any not be entitled to DTT benefits, even if ample, when loan interest is consid- Our customer promise other source income, and they also ap- that company qualifies as a resident of ered as a dividend under the relevant We help customers be financially confident and achieve their ambi- tions by making daily banking and important financial decisions easy. 8 Letter of the Federal Tax Service No. CA-4-9/8285 dated April 28, 2018 9 Commentaries on the Articles of the Model Tax Convention on Income and on Capital. The latest version of the Convention is available in the con- Our vision densed version from 2017: OECD (2017), Model Tax Convention on Income and on Capital: Condensed Version 2017, OECD Publishing, Paris, https:// Our vision is to be recognised as the most trusted financial partner. doi.org/10.1787/mtc_cond-2017-en. It is also questionable whether it is justified to refer to Commentaries in the later version of the Convention if the relevant DTT was signed before this later version. 10 http://www.oecd.org/tax/treaties/multilateral-convention-to-implement-tax-treaty-related-measures-to-prevent-beps.htm Реклама Акционерное общество «Данске банк» ОГРН 1022900002113 Лицензия No3307 выдана Банком 52 России 30.11.2015

A4_A strong Nordic bank.indd 1 29/08/2018 09.50 A strong Nordic bank Danske Bank is a Nordic universal bank with strong Nordic presence and bridges to the rest of the world.

In Russia, Danske Bank provides services and solutions to subsidiaries of Contact information Nordic companies and selected multinationals with strong footprint in the Danske Bank Russia Nordics.

Moscow office Danske Bank is present in Russia since 2007 as a 100% Danske Bank A/S Botanicheskiy per., 5, 10th floor owned subsidiary and has strong local expertise. 129090 Moscow Tel. +7 (495) 797–94–60 Danske Russia offers wide range of cash management, treasury and corporate financing products. Located in Moscow and St Petersburg, the bank can meet St Petersburg Office customer banking needs across all of Russia. Marata Street 69-71 A 191119 St Petersburg Russia Our Essence Tel. +7 (812) 319–45–00 We help businesses achieve their goals. No matter what situation a business is in, we have usually seen something similar before. We use www.danskebank.ru our experience to provide value-creating advice and targeted solutions SWIFT: DABARU2P to business customers.

Our customer promise We help customers be financially confident and achieve their ambi- tions by making daily banking and important financial decisions easy.

Our vision Our vision is to be recognised as the most trusted financial partner.

Реклама Акционерное общество «Данске банк» ОГРН 1022900002113 Лицензия No3307 выдана Банком

России 30.11.2015 Реклама

A4_A strong Nordic bank.indd 1 29/08/2018 09.50 How to Invest in Russia Before you start |

changes to the taxation and there is subsequent charging of additional taxes, or when an array of transactions is treated as a tax scheme and the provisions of national tax legislation are applied to the shifted profit.

Considering the changing environment in relation to the cross-border arrangements, MNEs may wish to define the BO position more clearly. As a first step, it would be wise to check whether the tax certificates and confirmations in relation to cross- border arrangements are available and whether they are duly prepared (apostille, translation requirements, etc.). The whole MNE group’s structure and cross-border arrangements, including those with non-related parties, should also be reviewed to indicate foreign recipients, including licensors, holding companies, companies performing purely treasury or administrative functions, where the tax position may be challenged based on the BO approach of the Russian Luxembourg entity was not a BO with the whole group. As a temporary solu- tax authorities. Considering this, the respect to this income and denied the tion in such cases may serve the intro- defense files containing documents application of the Russian-Luxem- duction of caveats and gross-up provi- supporting the BO position should bourg DTT. Instead of the domestic sions with respect to payments made be prepared, and in some cases re- withholding rate of 20%, the tax rate by the group’s Russian companies. thinking and reviewing the whole of 10% according to the Russian- This could also be a feasible solution contractual/holding structure may be Italian DTT was applied. At the same for transactions with non-related par- needed. Notably, entities may apply a time, it might not always be possible ties who might not be willing or ready “look-through” approach and disclose for the MNEs group to declare a “look- to provide information/documents for a higher tier or a parent company that through” approach or to rebuild the building up a defense file that is suf- may be found more compliant with existing structures in a short time, ficient for Russian tax purposes. To BO criteria. This was the case, for in- as this may cause consequences for summarise the above: it has become stance, for ZAO Bank Intesa11, where transfer pricing purposes of the whole crucial to follow up the approach of interest was paid to the Luxembourg group or trigger tax exposures or tax the tax authorities on a regular basis, entity on loans borrowed from this en- complications in other jurisdictions. and also further developments in the tity belonging to the Italian company. Any adjustments to the structures court practice regarding BO matters According to the Russian-Luxembourg would obviously require a lot of time and implementation of MLI, in order DTT, interest should be taxed in Lux- and significant effort for analysis from to hold a strong position in tax mat- embourg only. During the tax audit, the perspective of different jurisdic- ters and be able to provide adequate the tax authorities concluded that the tions and other aspects important for responses to support this position.

11 Decision of the Arbitration Court of the Moscow District No. А40-241361/2015 dated October 4, 2016

54 | Before you start How to Invest in Russia

How can sustainability drive your business in Russia?

many cases, this is the direct result of Russian operations executives’ skepticism about the sustainability initiatives of their headquarters. Sus- tainability is often considered not in- demand by the government and public in Russia. Green initiatives are not viewed as conducive to an increase of sales in the Russian market, and Anton Gubnitsyn Bashir Chalabi sustainability-related projects are of- Head of the Moscow Office, Senior Advisor, Promaco TR; ten abandoned. Promaco TR Chairman of the AEB Energy Efficiency Committee Yet companies with this attitude sim- Anton Gubnitsyn is the Head of the Mos- ply lose momentum on the Russian cow office of Promaco TR. Bashir Chalabi is the Senior Advisor for market. The situation, as we see it, He has over 15 years of experience in Public Policy at Promaco TR. is somewhat like in the 1990s, when public affairs and government relations. He focuses on environmental and energy some companies were saying “we do He advises major companies in the ex- efficiency state policy, and helps miti- not need an internet page, we are not tracting, chemical, machinery, consumer, gate business risks related to developing an internet company”. and e-commerce industries. regulations. Anton also serves as Chair of the Sharing Bashir is also Chairman of the Energy Ef- Why does sustainability Economy Cluster at the largest IT busi- ficiency Committee at AEB. Prior to join- matter in Russia? ness community, the Russian Association ing Promaco TR, he worked as the Head Until recently, the Russian govern- of Electronic Communications (RAEC). of Regulatory Affairs at an international ment paid little attention to sustain- Anton holds a Ph.D. in sociology from consulting firm, covering both Russia ability. Affordable costs for producing Saint Petersburg State University, and has and Kazakhstan. electricity, rich oil & gas deposits, and a Master’s degree in Public Administration Bashir holds a Ph.D. in law from the Rus- a well-developed forest industry all from Moscow State University. sian Academy of Sciences, a law degree prevented the country from adopting He completed his postdoctoral studies from the Higher School of Economics, and “the principle of preserving the envi- in communications at Laval University in a Bachelor’s degree in Philosophy from ronment for future generations” as a Canada. Moscow State University. national priority. However, over the last decade Russia has been under more pressure to adopt sustainable oday, everybody is talking Global Goals, and express support for practices. about green values and the principles of a circular economy. T sustainable development. However, the Russian operations of The trend of import substitution in Politicians, businessmen and leaders global companies are typically fo- the Russian market has shown that of non-governmental organisations cused on to a much lesser degree in Russian enterprises are inefficient emphasise their commitment to UN corporate sustainability reports. In and have very high energy costs.

55 How to Invest in Russia Before you start |

Russia remains the world’s fourth 2014, and substantially increasing the parts of the digitization of the Russian largest energy consumer according amounts of existing fees. The govern- economy. Currently, the development to Enerdata statistics (behind China, ment is planning to spend up to 1.5 of sharing economy services (collabo- USA and India), but has substantially trillion roubles for the Environment rative consumption) is likewise an ac- lower economic productivity than its National Project from now through tive trend in Russia. peers. This moved Russian authori- 2024, part of the funds of which will be ties to develop and adopt a new en- raised from businesses. How is the sustainability ergy efficiency plan in 2018. policy framework set? However, Russia has its specific na- There are several legislative sources The operations of outdated enter- tional characteristics when it comes to from which the framework of the prises, especially located in cities with implementing a sustainability agenda. meaning of “sustainability” can be un- historically high industrial development For instance, there is no universal derstood: and large populations (Chelyabinsk, sustainability agenda in Russia. This Omsk, etc.) also caused significant im- responsibility is fragmented and divid- ▪ the Presidential Executive Order pacts. To address this issue, in 2014 ed between various ministries. There on National Goals and Strategic the mandatory transition of enterprises is an agenda for energy efficiency Objectives of the Russian Federa- with high environmental impacts to the that has its own goals, key perfor- tion through 2024. This document best available technologies began, in- mance indicators and incentives, with is a programme of the President volving modern technologies approved the Ministry of Energy and the Minis- establishing the development of to limit pollutant discharges. try of Economic Development super- the environmental and digital vising this field in general. There is spheres as key state priorities to In 2018, public protests related to air also a distinctive waste management be elaborated in other legislative pollution from overloaded waste land- agenda as part of which the Ministry sources; fills demonstrate the new role of waste of Natural Resources and Environ- ▪ the Draft Plan of the National Environ- mental Project. This Draft Plan focuses There is no universal sustainability on waste management and decreas- agenda in Russia. This responsibility ing water and air pollution in Russia; ▪ the Comprehensive Energy Efficien- is fragmented and divided between cy Improvement Plan. This Plan sets various ministries. targets to increase energy efficiency per unit of GDP by 23% by 2030 compared to the base level of 2016; management in the government’s ment oversees environmental pro- agenda. Now pollution is not only an tection, the Ministry of Industry and ▪ the Digital Economy State Pro- environmental issue, but an important Trade oversees the development the gramme. This Programme describes factor of social stability impacting the recycling industry, and the Ministry the digital transformation of indus- reputation of governors and ministers. of Construction, Housing and Utilities trial processes and the built space is in charge of waste collection and to decrease the consumption of re- Finally, environmental protection has landfill management. Finally, there is sources. become an important smokescreen a digital agenda with both the Ministry for the government to use to receive of Digital Development, Communica- It may be assumed that the approach additional budget revenues. In recent tions and Mass Media and the Ministry to sustainable development in Russia years, the government has been in- of Economic Development as prime is concentrated around the concept troducing new fees for businesses re- stakeholders. Decreasing paper use of the three R’s: reduce, reuse and lated to the environment, such as the through e-document management recycle. Recycle relates to the de- recycling fee for consumer goods in and electronic public services are also velopment of waste management,

56 | Before you start How to Invest in Russia

reduce – to using less energy by in- to 3 billion roubles, based on various ernment is planning substantial spend- creasing energy efficiency, and resources), the government is already ing on waste management projects use – to the digital economy (more considering substantially increasing across Russia, including the construc- narrowly, the sharing economy). All of fees, as well as including them in the tion of waste recycling plants and the these can create both risks and op- tax code, which would make their non- rehabilitation of landfills. The potential portunities for businesses. payment a criminal offense. to participate in state programmes for waste management presents serious Recycling (waste Market access barriers. According to opportunities for business develop- management) several initiatives, certain types of ment. Waste management reform began in products considered non-sustainable Russia in 2014, but until recently en- should be banned in Russia. Exam- High-profile marketing. Today, Rus- joyed very limited success. The nation- ples include banning plastic bags as sian authorities are especially open al recycling rate remains at the pre-re- proposed by the Ministry of Natural to contractors providing support in form level of 7%, according to Federal Resources and Environment, and waste management-oriented pro- Statistics Service data. The 2018 Presi- market restrictions on disposable ta- jects. For instance, the Ministry of dential Executive Order sets the target bleware. The barriers, however, may Natural Resources and Environment to recycle all waste in Russia. also be created for services. The Rus- has already signed a memorandum of sian government is actively consider- understanding with some of the top Risks ing the creation of a national monop- international consumer goods and Increased financial burden. Since oly in the field of waste management, petrochemical companies, and the 2016, an environmental fee has been which would limit the opportunities Ministry of Industry and Trade has imposed on the producers and im- for other waste management opera- officially supported the used batter- porters of consumer goods and pack- tors in the market. ies collection project implemented by aging in Russia. While the current a top global batteries manufacturer. level of payment does not put seri- Opportunities Official support from the authorities ous pressure on the market (annual Business development for waste man- can be used as a high-profile market- budget revenues are estimated at 1.5 agement-oriented projects. The gov- ing tool.

57 How to Invest in Russia Before you start |

Reduce (increasing bonds. VEB, Russia’s development access in that timeframe. It will help energy efficiency) bank, is appointed as a key institution companies receive positive attention Energy efficiency was a part of Russia’s in the field. Other government banks, from government sector stakeholders, “innovations” agenda and one of the including Sberbank and VTB, already and also win loyalty among consumers key state priorities from 2008-2012. offer green finance services. starting to get more interested in the The new Comprehensive Energy Effi- sustainability efforts of corporations. ciency Improvement Plan was adopted Reuse In the meantime, companies operating by the government in 2018 and re- The digital economy is a potential area in Russia should avoid going to either ceived a new supervisor, namely the of development for Russia, given its of the two extremes. Economic Development Ministry. historical strengths in technology. Fur- thermore, the sharing economy is par- The first extreme is focusing on a Risks ticularly related to sustainability as a global corporate sustainability agenda Carbon tax. The Paris Agreement has system in which services that enable without paying attention to the region- still not been ratified by Russia. How- peer-to-peer exchange are given pri- al specifics of the Russian market. The ever, the most anticipated mechanism ority, and overall products are viewed stakeholders here are less sensitive for its implementation is the introduc- rather than services and not goods. to issues of global warming, but they tion of a carbon tax (rather than the This allows for a decrease in consump- care a great deal about reducing waste formation of a carbon trading system). tion levels, which directly benefits the generation. This would create a new non-tax pay- environment. The sharing economy is ment in Russia. being developed at both federal (State The second extreme is being pushed Programme for the Digital Economy) around by local stakeholders. For in- Administrative barriers. Russia has and regional levels (particularly in stance, regional authorities confuse been trying to create a national sys- large cities, such as Moscow and St. sustainability with charity. It may be tem of energy efficiency-related tech- Petersburg). difficult to explain to them that the nical regulations different from its environmental programme is of higher European analogue. One remarkable It may be asserted that this field has importance than the renovation of a lo- example is the Government Order on no risks, only opportunities. One of the cal school gym. Lighting Solutions and Electric Light- most exemplary is market access for bulbs, which introduced requirements short-term renting platforms for loca- It is always important to educate for energy efficient lighting solutions tions with a relatively low number of stakeholders about the efforts already different from those adopted in the traditional hotels. Another situation made by the company. Since 2016, a EU. This formed a barrier for global concerns the mobility on demand ser- draft law on non-financial reporting manufacturers working in the Russian vices in Moscow (MaaS). The Moscow has been discussed in Russia. While it market. Smart City programme also opens has not yet been approved, it is clear up many opportunities for innovative that the trend towards reporting is de- Opportunities businesses. veloping. Moreover, active reporting Tax benefits. Tax incentives for energy is strengthening businesses’ position efficient immovable assets are present What to do? in discussions about sustainability- in the Russian Tax Code. Companies Making the opportunities set by the related regulations by showing they constructing energy efficient buildings government’s sustainability agenda a are already making serious efforts in have the right to claim financial ben- reality would not have the immediate this field. efits under these tax incentives. effect of growing a company’s business in Russia. However, the sustain- Sustainability efforts do not bring im- Green finance. The Plan for Energy ability agenda is developing and will mediate results, but right now, when Efficiency Improvements is one the likely become a significant part of state the government’s efforts in the field first regulatory enactments in Russia policy over the next decade. Therefore, are only beginning to evolve, is the arguing for the development of green working with sustainability issues is an ideal time to secure a place for the fu- finance instruments, mainly green important measure to secure market ture development of your business.

58 Part IV. Sharing experience

59 How to Invest in Russia Sharing experience |

Investing in Russia and beyond: a case of Servier

ceutical industry, including market Advantages of production dependence on imported goods, reg- localisation in Russia ulatory barriers during registration, One of our main steps forward in quality control of drug circulation, etc. Russia came in 2007, when Servier “Pharma 2030” strategy is currently built its own plant “Servier RUS” in being drafted, and focuses on fur- Moscow and transferred innovative ther development of the technological technologies. competences for local pharmaceutical production, stimulation of R&D locali- Today, “Servier RUS” is a full-scale Jérôme Gavet sation and non-commodity export de- pharmaceutical plant producing 96% Managing Director, Servier Russia velopment. At Servier, we are commit- of its original medicines portfolio for and EAEU countries ted to developing our export potential the treatment of major NCDs, which and capabilities from Russia to the remain among the main causes of Jérôme Gavet joined Servier Group in Eurasian Economic Union (EAEU), and morbidity, mortality and disability. The 1999. planning further export activities to quality management system covers He was appointed as a General Director Central Asia and the European Union. all aspects of production and guar- of Servier Russia in 2007, and became antees full conformity with our cor- a Managing Director of Servier EAEU For us Russia has always been a strate- porate standards, international good platform in 2016. gic priority. Many pharmaceutical com- manufacturing practice (GMP) require- panies perceive the establishment of ments, and Russian legislative norms. the EAEU common market in 2015 as a The Industrial Complex Status we ob- Russian authorities: new opportunity for the regional devel- tained from the Moscow government a focus on the opment. As far as Servier is concerned, in 2016 provides us with additional op- pharmaceutical market in 2016 we established a single regional portunities to continue implementing Healthcare is one of the strategic pri- platform for EAEU and Central Asia that our long-term investment strategy in orities of the Russian government. In enlarged our footprint and operations Russia, and contributes to new tech- 2018, the Ministry of Health devel- in these countries. So, this year we en- nologies, new products as well as the oped a draft of the National Health- tered into a Cooperation Agreement modernisation of treatment facilities to care Project, which is designed to with Kazakhstan Government. We met conform to the most advanced envi- decrease mortality by improving the with the Prime Minister and the Minister ronmental standards. quality of care and its accessibility for of Health of the Republic of Kazakhstan the Russian patients, as well as by and discussed opportunities for contract Today, we are starting a new page in promoting a healthy lifestyle to reach manufacturing production development, our partnership with Russia by offer- the target of life expectancy up to 78 as well as collaboration on joint scientific ing our production capacities to the years by 2024. projects in various therapeutic areas. We third parties through contract pro- carry out a number of educational and duction. We intend to make “Servier The implementation of the “Pharma awareness campaigns in the field of pre- RUS” an attractive platform for lead- 2020” has been continuously carried vention and treatment of non-communi- ing companies to produce their own out for almost 10 years to address cable diseases (NCDs), including cardio- innovative medicines. This point is issues facing the Russian pharma- vascular diseases (CVDs) and diabetes. illustrated by the manufacturing pro-

60 | Sharing experience How to Invest in Russia

duction agreement we signed in 2018 illustrate this, two years ago oncology ed funds for a joint project with Rus- with GSK/ViiV Healthcare to localise accounted for 14% of R&D invest- fond to co-finance the treatment of the production of anti-HIV drugs. We ments, but has now grown to 37% seriously ill children. In 2018, in part- believe this collaboration will contrib- and is expected to reach 50% over the nership with the society for Parkin- ute to increasing access to innova- next two years. son’s disease patients, the “Parkin- tive medicines for patients in Russia suffering from this socially important disease. We are also open to further Many pharmaceutical companies perceive partnerships with local manufacturers to expand our product localisa- the establishment of the Eurasian Economic tion in Russia. Union common market in 2015 as a new As far as drug safety is concerned, opportunity for the regional development. in 2012, Servier launched its own continuous quality monitoring and control system for manufactured Servier has been operating in Russia son’s disease patients school” project products, SecuriStamp®, which guar- for more than 25 years. Exploring our was launched. This year we became antees the authenticity of our drugs. investment strategy, even in 1999, a partner of the Moscow government In 2016, “Servier RUS” also joined we established in Moscow our own programme of longevity organised the state pilot Track & Trace (T&T) International Centre of Therapeu- by the Troitsk city Administration. system project initiated and run by tic Research to organise our clinical In partnership with the International the Ministry of Industry and Trade, research and contribute to the de- Society of Hypertension, we carried the Ministry of Health, the Federal velopment of our international clini- out a large-scale public awareness Service for Surveillance in Healthcare cal trials in Russia and other EAEU campaign to encourage the popula- (Roszdravnadzor) and the Federal countries. tion to get their blood pressure check Tax Service. regularly. The Business Development strategy Investments through for EAEU countries reflects our glob- We have a staff of over 1,300 in our driving innovations al therapeutic approach mentioned Russian subsidiary, including “Servier Servier Group annually invests 25% above. Today, the Servier portfolio in RUS”. Despite this constantly grow- of its turnover in R&D and focuses Russia contains 17 drugs, and we plan ing number, we manage to maintain on five key therapeutic areas: CVDs, to double that figure in the following a friendly and encouraging atmos- neurodegenerative diseases, diabe- five years. We also continue our diver- phere, where employees can demon- tes mellitus, immune inflammatory sification efforts in the OTC segment, strate their individual skills and feel and oncology diseases. This invest- which is among its strategic lines due valued. This results in a very low staff ment and collaboration with the lead- to the specifics of the local pharma- turnover, particularly 6,59% at “Ser- ing scientific and research laborato- ceutical market. vier RUS” in 2017-2018. Focusing on ries and institutes around the world positive energy, strengthening our brought the company success in cre- An emphasis on team spirit, promoting cross-func- ating a significant bunch of medicine sustainable business tional collaboration and being selec- candidates with unique mechanisms development tive in our choices are all essential of action. Servier is committed to sustainable ingredients of our performance. We business development through its look forward to the future and intend By maintaining its strong position in own Corporate Social Responsibility to develop our innovative therapeutic cardiology and diabetes, Servier in- (CSR) activities, which contribute to solutions that contribute not only to tends to become a world reference resolving major economic, environ- increased life expectancy, but also to in oncology, which is also one of the mental, social and societal issues. improved quality of life of the Rus- company’s priority areas for R&D. To For example, in 2017, Servier allocat- sian patients.

61 How to Invest in Russia

For notes

62 AEB MEMBERSHIP APPLICATION FORM / ЗАЯВЛЕНИЕ HA ЧЛЕНСТВО АЕБ Please, email a scan of completed and signed application form to: [email protected], and send the original document by post / Пожалуйста, вышлите скан заполненного и подписанного заявления на адрес: [email protected], а оригинал направьте почтой. Calendar year / Календарный год: 2019 (Please check the appropriate box/boxes / Укажите соответствующий год/года)

Name of your AEB Contact / Ваше контактное лицо в АЕБ:

1. COMPANY / СВЕДЕНИЯ О КОМПАНИИ Company Name in full, according to company charter. (Individual applicants: please indicate the company for which you work / Название компании в соответствии с уставом. (Для индивидуальных членов – название компании, в которой работает заявитель):

Legal Address (and Postal Address, INN / KPP / ИНН/КПП: if different from Legal Address) / Юридический и фактический адрес, Phone Number / Номер телефона: Fax Number / Номер факса: если он отличается от юридического: Website Address / Страница в интернете:

2. CATEGORY/ КАТЕГОРИЯ: THE CATEGORY IS DETERMINED ACCORDING TO THE WORLD’S TURNOVER OF THE COMPANY Please attach the information letter on the activity of the company and its annual turnover with the signature of the head of the company on the official letterhead

Company’s world-wide turnover Please indicate your AEB Category / AEB Membership Fee / (euro per annum) / Мировой оборот Отметьте категорию Членский взнос в АЕБ компании (евро в год)

SPONSORSHIP / Спонсорство – 10,000 euro/евро

CATEGORY A / Категория А >500 million/миллионов 6,300 euro/евро

CATEGORY B / Категория Б 50–499 million/миллионов3,800 euro/евро

CATEGORY C / Категория С 1–49 million/миллионов 2,200 euro/евро

CATEGORY D / Категория Д <1 million/миллионов 800 euro/евро

INDIVIDUAL (EU/EFTA citizens only)/ Индивидуальное – 800 euro/евро (только для граждан Евросоюза/ЕАСТ)

Any non-EU / non-EFTA Legal Entities applying to become Associate Members must be endorsed by two Ordinary Members (AEB members that are Legal Entities registered in an EU / EFTA member state or Individual Members – EU/EFTA citizens) in writing/ Заявление любого юридического лица из страны, не входящей в Евросоюз/ЕАСТ, и желающего стать членом АЕБ, должно быть письменно подтверждено двумя членами АЕБ (юридическими лицами, зарегистрированными в Евросоюзе/ЕАСТ, или индивидуальными членами – гражданами Евросоюза/ЕАСТ)

Individual AEB Membership is restricted to EU / EFTA member state citizens, who are not employed by a company registered in an EU / EFTA member state / К рассмотрению принимаются заявления на индивидуальное членство от граждан Евросоюза/ЕАСТ, работающих в компаниях, страна происхождения которых не входит в Евросоюз/ЕАСТ

Please bear in mind that all applications are subject to the AEB Executive Board approval / Все заявления утверждаются Правлением АЕБ

3. CONTACT PERSON / INDIVIDUAL MEMBER / КОНТАКТНОЕ ЛИЦО / ИНДИВИДУАЛЬНЫЙЧЛЕН

Title, First Name, Surname / Ф.И.О:

Position in Company / Должность:

E-mail Address / Адрес эл. почты: 4. COUNTRY OF ORIGIN / СТРАНА ПРОИСХОЖДЕНИЯ

А. For a company / Компаниям: Please specify COMPANY’S country of origin / Указать страну происхождения компании1

or B. For an individual applicant / Индивидуальным заявителям: Please specify the country, of which you hold CITIZENSHIP / Указать гражданство

Please note that only EU / EFTA members can serve on the Executive Board and the Council of National Representatives/ Внимание! В Совет национальных представителей и Правление могут быть избраны члены, представляющие страны Евросоюза или ЕАСТ.

Please fill in either A or B below/ Заполните только графу А или В

5. COMPANY DETAILS / ИНФОРМАЦИЯ О КОМПАНИИ

Company present in Russia since: ______/ Компания присутствует на российском рынке с:______г.

Company activities/ Primary / Secondary / Деятельность компании Основная: Второстепенная:

Please do not include this in Company turnover (euro)/ In Russia / Worldwide / the AEB Member Database/ Не Оборот компании (в Евро) в России: в мире: включайте это в справочник АЕБ

Please do not include this in Number of employees/ In Russia / Worldwide / the AEB Member Database/ Не Количество сотрудников в России: в мире: включайте это в справочник АЕБ

Please briefly describe your company’s activities (for inclusion in the AEB Database and in the AEB Newsletter) / Краткое описание деятельности Вашей компании (для включения в базу данных АЕБ и публикаций АЕБ)

6. HOW DID YOU LEARN ABOUT THE AEB / КАК ВЫ УЗНАЛИ ОБ АЕБ?

Personal Contact / Личный контакт Internet / Интернет

Media / СМИ Event / Мероприятие

Advertising Source / Реклама Other / Другой

Signature of Authorised Representative of Applicant Signature of Authorised Representative of the AEB / Company / Подпись уполномоченного лица заявителя: Подпись Руководителя АЕБ:

______

______Date/Дата: Date/Дата:

1 Location of a parent company or of the main shareholder/ Местонахождение головной конторы или основного учредителя. AEB SPONSORS 2018

Allianz IC OJSC Mercedes-Benz Russia Atos Merck LLC Bank Credit Suisse (Moscow) Messe Frankfurt Rus BP MetLife BSH Russia METRO AG Cargill Enterprises Inc. Michelin CHEP Rus Novartis Group Clifford Chance OBI Russia Continental Tires RUS LLC Oriflame Crocus International Porsche Russland Deloitte Procter & Gamble DuPont Science & Technologies PwC Enel Russia OJSC Raiffeisenbank AO ENGIE ROCA Eni S.p.A Shell Exploration & Production Services (RF) B.V. Equinor Russia AS Signify EY SOGAZ Insurance Group FAURECIA Automotive Development LLC Total E&P Russie GE (General Electric International (Benelux) B.V.) Unipro PJSC HeidelbergCement VimpelCom PJSC (Beeline) ING Wholesale Banking in Russia Volkswagen Group Rus OOO John Deere Rus, LLC YIT KPMG YOKOHAMA RUSSIA LLC ManpowerGroup