How to Invest in Russia 2019

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,

The key priority for the Government of the Russian Federation is to ensure favourable conditions for doing business.

A comprehensive approach to the regulation of entrepreneurial activity ensured Russia’s rise from 120th place in 2012 to 31st in the World Bank’s Doing Business ranking.

In 2018, the Business Climate Transformation mechanism was launched to manage systemic changes in the business environment. The key objective of this mechanism is to ensure rapid responses to the business community’s requests for the elimination of existing regulatory restrictions. The action plan of the Business Climate Transformation is reviewed twice annually with the direct participation of the business community, including the Association of European Businesses.

Additionally, great attention is paid to strengthening the protection of legitimate business rights and mitigating the criminal law risks of doing business. The President of the Russian Federation has set the task of intensifying this line of activity.

Another promising area is the development of a ‘regulatory guillotine’ mechanism to reduce the number of requirements. It is designed to create an adequate modern regulatory system meeting the requirements of technological development and based on the identification and effective mitigation of the most significant social risks.

Thank you for your active participation in improving the Russian investment climate. We urge you to be even more active in developing and implementing systemic mechanisms to improve the business environment. We look forward to further fruitful cooperation.

1 How to Invest in Russia Foreword |

JOHAN VANDERPLAETSE FRANK SCHAUFF STUART LAWSON Chairman of the Board, Chief Executive Officer, AEB Board Member; Association of European Association of European Finance & Investments Businesses Businesses Committee Chairman

Dear readers,

Welcome to the 2019 edition of the AEB ‘How to invest in Russia’ guide.

The AEB presents the 11th annual edition of ‘How to invest in Russia’, bringing together practical advice from well-known professionals. The operating and investment environment remains essentially the same as in the previous year. Political tensions are still high, and sanctions and counter-sanctions put in place in 2014 are unlikely to be removed in the near term. While all financial stability indicators look strong, with high foreign exchange reserves, a fiscal surplus, and good terms of trade, the underlying performance of the economy remains weak. Productivity is low, and improvement would require investment, which has not been forthcoming. Foreign direct investment has fallen dramatically, reflecting the ongoing cross- border risk premium. The Russian macroeconomic picture is stable and the core strength has been established in a fiscal surplus, good balance of trade, and increasing foreign currency reserves. Through the use of the fiscal rule, the country has also been able to double its wealth fund and is expected to hit the target level of 12% of GDP by 2021 enabling the fund to contribute significantly to investment without lessening the backstop capability.

Recently there have been some early signs that there could be progress on the relationship with Ukraine. This might provide the first stage in de-escalating tensions with the latter, and, if so, to a gradual improvement in the political crisis.

The AEB reiterates its position in favour of the de-escalation of conflict, and remains opposed to economic sanctions or limitations on free trade or investment. It is incumbent on all parties within the business environment to maintain dialogue in an effort to de-escalate the current tensions.

2 | Foreword How to Invest in Russia

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 is the indirect impact of higher interest rates, capital and intellectual flight, and a loss of domestic investor and consumer confidence. 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.

Nevertheless, 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 the legal, financial, tax and intellectual property aspects. In addition, it also provides insight into investments by regions and by industries, as well as into the 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, 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, bringing more investment to Russia and promoting 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 New compliance challenges posed investing 5 by rollback on transparency of state Foreign investment control: the latest procurement and ownership rights 34 changes in legislation and state policy 6 What international e-commerce How the sentiment of European companies should know about Russian companies in Russia has changed 9 law in order to do business in Russia? 38 Protection of intellectual property in Russia: practical overview 42 Part II. Localisation and investments 11 State support for industrial projects: Effective licence agreements with Russian successful examples and new opportunities 12 clients, partners and subsidiaries 46 Reformatting of special investment contracts (or SPIC 2.0) 16 Part IV. Entrepreneurship in Russia: Draft Federal Law ‘On Protection and regional and industry specific Encouragement of Investments’: aspects 49 overview of key provisions 19 Lipetsk region: the energy of success 50 Utilisation of technology transfer in the Investment in life science business pharmaceutical industry 23 in Russia: common legal risks and mitigation options 54 Part III. Before you start 27 Renewable energy in the Russian energy Doing business in Russia: how to bridge sector: recent developments and key the gaps 28 perspectives 58 Tax incentives for investors in Russia: Catching big fish on the Russian fishery what’s next? 31 shipbuilding and fish processing markets 61

Publication name/ Published by/Учредитель: Publication volume and number/ Circulation/Тираж: Publisher’s address/ Наименование издания: Limited Liability Company Номер выпуска: 01, 2019 950 сopies/950 экз. Адрес издателя, редакции: How to invest in Russia/ AEB Business/ Released date/ Cost/Цена: Distributed free 68/70 Butyrsky Val, bld. 1, Как инвестировать Общество с ограниченной Дата выхода в свет: of charge/Бесплатно 127055 Moscow, Russia/ в Россию ответственностью 1 November 2019/ Россия, г. Москва, ул. «АЕБ Бизнес» 1 ноября 2019 г. Бутырский Вал, д. 68/70 стр. 1

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 |

Foreign investment control: the latest changes in legislation and state policy

tegically important for its defence and strategically important business enti- security. Investments in such indus- ties in a specific manner, became clear tries may be restricted on the legisla- and transparent and were lifted to the tive level. Normally, in any country, the level of federal legislation. list of these industries includes natural resource extraction and processing, de- Law No. 57-FZ contains a detailed defence, aviation, healthcare, transporta- scription of its purpose – to ensure the tion and telecommunications. defence and security of the country by establishing a special procedure for Igor Artemiev On April 29, 2008, Russia adopted Fed- foreign investment in industries that Head of the Federal Antimonopoly eral Law No. 57-FZ ‘‘On the Procedure are strategically important for ensuring Service (FAS Russia) for Foreign Investments in Business En- the defence and security of the country Since 10 March 2004, Mr. Artemiev has tities that Are of Strategic Importance through the implementation of statu- been Head of the Federal Antimonopoly in Ensuring the Defence and Security of tory restrictions for a range of entities Service of the Russian Federation. He is the the Country’ (hereinafter referred to as determined in Law No. 57-FZ. author of 43 articles and seven monographs Law No. 57-FZ). on state budget and economy. What is the structure of Law No. 57-FZ? Mr. Artemiev is Member of the Govern- The purpose of Law No. 57-FZ was ment Commission for Control over Foreign to consolidate separate regulations First, this Law contains requirements Investments in the Russian Federation; that one way or another limit the defining the rules for the execution of Member of the Government Commission participation of foreign businesses in transactions by foreign investors result- for Administrative Reform; Member of the Russian enterprises, unite such regu- ing in their establishing control over Government Commission for Development lations into one federal law, create a strategically important companies or of Competition and Small Business Support. single, transparent decision-making acquiring the property of such com- Mr. Artemiev was awarded with the Order procedure that is clear to everyone, panies. Second, the Law establishes a for Service to the Motherland of the 4th and transit from prohibitions to prelimi- complete prohibition on foreign govern- the 3rd grades. nary control and establish penalties for ments, companies controlled thereby violation of the law. Until 2008, such and a number of other categories of restrictions existed separately in laws entities establishing control over stra- tate investment policy is one touching upon different industries. In tegically important national entities. of the key tools used by the many cases, these restrictions, which Third, the Law contains a limited list S Government in order to en- had existed since the Soviet period, of strategic business activities. Fourth, sure its integrity, independence and were contained in various by-laws the Law establishes the procedure for competitiveness by developing and ap- and instructions; some of them even considering foreign investors’ petitions plying new technologies, increasing the belonged to certain security classifica- for preliminary approval of transactions quality of goods, works and services, tions. The adoption of Law No. 57-FZ subject to control under the Law, de- developing competition and improving changed the situation dramatically; the fines the powers of governmental bod- population welfare. restrictions, which are based on the re- ies in the process of controlling foreign quirements of the Constitution of the investments and establishes terms for However, each country independently Russian Federation and establish the decision-making. Finally, the Law con- determines the industries that are stra- procedure for foreign investments in tains measures aimed at preventing

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

violations of the procedure above and July 9, 1999 ‘On Foreign Investments It is noteworthy that the initial version eliminating their consequences. in the Russian Federation’, Federal Law of Law No. 57-FZ only included foreign No. 166-FZ dated December 20, 2014 governments, international organisa- Hence, Law No. 57-FZ contains quite ‘On Fisheries and the Conservation of tions and entities controlled thereby in specific and clear provisions, which Aquatic Biological Resources’, Law of a separate group of foreign investors, define the scope of its application. Pri- the Russian Federation dated February to which stricter statutory restrictions marily, it touches upon transactions 21, 1992 No. 2395-1 ‘On Subsoil Re- and unconditional prohibitions applied. and other actions performed by for- sources’, a number of resolutions of the eign investors both within the Russian Government of the Russian Federation By a resolution of the Government of Federation and abroad (this refers to and administrative procedures of gov- the Russian Federation, it was estab- the extraterritoriality of the law’s op- ernment bodies, as well as interdepart- lished that the Federal Antimonopoly eration), as a result of which they es- mental orders. Service (FAS Russia) was the federal tablish control over strategically impor- executive body authorised to perform tant companies. The Law also covers Taking into account law enforcement the functions of controlling foreign in- relations arising in connection with the practices, including world practices, Law vestments in strategic entities. The FAS acquisition of property of strategically No. 57-FZ is constantly being improved. Russia has extensive experience in the important companies worth more than field of economic concentration, since 25% of the book value of their fixed The first package of amendments to Law transactions falling within the scope production-related assets. No. 57-FZ was adopted in 2011, the sec- of Law No. 57-FZ are similar to those ond one – in 2014, the third one – in 2017, considered under Federal Law No. 135- It is important to note that, besides and the fourth one – in 2018. These FZ dated July 16, 2006 ‘On the Protec- the norms traditional for corporate law, amendment packages included such tion of Competition’. Consideration of which state that it is possible to con- material changes as the exclusion from economic concentration transactions trol business entities by owning stakes the scope of the Law of foreign investors pursuant to the requirements of Law (shares) in such companies, the Law controlled by the Russian Federation, of a No. 135-FZ, Law No. 57-FZ and Law defines other transactions and actions constituent entity of the Russian Federa- No. 160-FZ is carried out by a single requiring preliminary approval. These tion or a citizen of the Russian Federa- service, which enables prompt informa- include the possibility of blocking the tion who does not have other citizenship; tion exchange and decision-making. resolutions of strategic companies’ gov- the exclusion of cryptographic activities ernance bodies; rights, including the carried out by banks in the authorised It is important to note that decisions right to appoint the sole executive body capital, of which there is no share of the on the transactions considered under or elect a specific number of members Russian Federation from strategic ones; Law No. 57-FZ are made collectively, to collective bodies and the right to exclusion from the scope of the law of for which purpose the Government determine the resolutions of strategic international financial organisations, to Commission for Control over Foreign companies’ governance bodies; and which the Russian Federation is a party; Investments in the Russian Federation cases of establishing control by enter- clarification of strategic activities. has been established. It is headed by ing into shareholder agreements. the Chairman of the Government of An important innovation introduced into the Russian Federation; it consists of Essentially, the Law describes more Law No. 57-FZ is the assignment of a Deputy Chairmen of the Government complex control systems than share- special status to foreign investors that and heads of federal executive bodies holding, e.g. systems based on share- do not submit information to competent responsible both for the defence and holder agreements and various multi- authorities on their beneficiaries, benefi- security of the country and for the eco- tiered transactions. cial owners and controlling entities and nomic development of Russia, shaping equating their status and rights to those the country’s state policy and regulating Currently, there exists an entire system of foreign governments, international strategic industries. This makes it possi- of laws and regulations on this matter. organisations and entities controlled ble to consider each transaction submit- They include not only Law No. 57-FZ, thereby in terms of restricting foreign in- ted for consideration to the Government but also Federal Law No. 160-FZ dated vestments in strategic industries. Commission in a detailed and focused

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

manner at regular meetings and make of Qatar, the Swiss Confederation, the Government Commission for the Control well-reasoned and grounded decisions. Kingdom of Norway, etc. of Foreign Investments in the Russian Federation, in connection with which the A specialised structural unit – the De- It should be noted that currently, the FAS Russia filed a claim in court. partment for Control of Foreign Invest- FAS Russia is also developing judi- ments – has been created to support cial practice for the application of Law During the court proceedings, Jining the activities of the FAS Russia as the No. 57-FZ. Special attention is being paid made an attempt to evade liability by competent body for the fulfilment of the to cases where a foreign investor estab- trying to return a portion of the previ- objectives set for it. lishes control over strategic companies ously purchased shares in Amurmed LLC without obtaining preliminary approvals to the said citizen of the Russian Fed- Since the adoption of Law No. 57-FZ, from the Government Commission and eration. The court of the first instance 592 petitions have been submitted to without submitting a petition to the FAS partially refused to satisfy the claim of the FAS Russia, 263 have been consid- Russia. The non-observance of the law the FAS Russia since the defendant had ered by the Government Commission, entails legal consequences. For exam- eliminated the consequences of the 245 transactions have been approved ple, the FAS Russia has the right to sub- previously committed offence. (78 with the imposition of obligations; mit a claim to the court for disqualifica- with regard to 18, it was decided to deny tion from voting at the General Meeting However, the appeals court sustained preliminary approval due to threats to of Shareholders of a strategic company the claim of the FAS Russia in full and the defence and security of the country), on the basis of illegally acquired stakes. deemed the contract for the purchase 254 petitions did not require preliminary of the 100% stake in Amurmed LLC null approval, 57 were revoked by the appli- Within the framework of its judicial and void. This factor renders all other cants due to the abandonment of intent work, the FAS Russia challenges various transactions executed during the illegal to perform the planned transactions, and means of establishing control, including ownership by Jining of the Russian stra- 18 are currently under consideration. covert control, even up to challenging tegic company null and void. the awards of foreign courts within the Such figures demonstrate a favourable Russian jurisdiction; on the other hand, Hence, the FAS Russia prevented the attitude towards foreign investors. in the course of judicial proceedings, for- establishment of the practice of mala eign investors’ violations are eliminated, fide foreign investors evading the liabil- As of 2018, the total amount of trans- which enables the resolution of disputes ity established in Law No. 57-FZ for the actions granted preliminary approval by in a non-confrontational way, without af- execution of transactions in violation of the Commission was 631 billion roubles fecting the investment climate of Russia. the provisions of the said law. (≈9.5 billion US dollars), and the total volume of planned foreign investments A good example of the development of In conclusion, it should be noted that, under such transactions amounts to 426 the said judicial practice is a landmark in pursuing the goal of bringing the billion roubles (≈6.4 billion US dollars). case against Jining Limited Liability Com- foreign investment laws of the Russian pany, a business entity from Heihe, China. Federation into juridical security, the It should be noted that the economy FAS Russia continues to actively work of Russia is attractive for foreign inves- The FAS Russia established that Jining on the development of laws, including tors. The most attractive strategic fields had acquired a 100% stake in Amur- as a member of the established Ex- for foreign investors are the geological med LLC from a citizen of the Russian pert Council on Foreign Investments, study of subsurface resources and/or Federation; Amurmed is an entity that whose priority objectives are the re- the exploration and extraction of miner- is strategically important for the deduction of administrative barriers for als from deposits of federal importance, fence and security of Russia, using a foreign companies in the current eco- as well as airport services. mineral deposit of federal importance. nomic situation, as well as experience sharing and the implementation of the Investors come from the Republic of The transaction had been entered into best world practices in the field of for- Kazakhstan, the Republic of Cyprus, the in violation of Law No. 57-FZ without eign investments. Federal Republic of Germany, the State obtaining preliminary approval from the

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

How the sentiment of European companies in Russia has changed

And although we can say that during According to the AEB-GfK survey, the the past several years we have been principal reasons for the entry and witnessing a slow return to “business presence on the Russian market are the as usual”, there are still internal and large market volume, its great poten- external negative factors poisoning the tial and its positive development. These business climate in Russia. reasons were marked as the most important for their business by 92%, 92% The 12th “Strategies and prospects for and 91% of the companies, respec- European companies in Russia” survey tively. Alexander Demidov was conducted by the AEB in conjunc- Managing Director (CEO) of GfK Rus tion with GfK Rus, and provides an And this year, as it seems, the market (from 1991 to 2019) overview of the Russian investment has not disappointed the European climate attractiveness while highlight- companies working in Russia. A major Dr. Alexander M. Demidov is a well-known ing the key challenges and strategies of part of surveyed companies (66%) re- Russian sociologist, one of the founders of European companies doing business in ported that in 2018 their turnover had the public opinion studies and market re- Russia. This year the survey took place increased in comparison with the previ- search in USSR/Russia. in March-April of 2019 in the form of ous year. This indicator has shown posi- In 1991, he founded GfK Rus, the Russian online surveys and personal interviews tive dynamics for the last three years. branch of the global market research and with top managers of the AEB member Only 11% of the companies noted that data analytics company GfK SE. companies working in Russia. the turnover decreased compared to Alexander got education in law and sociol- the previous year. ogy; Doctor of Philosophy. As part of the study, we calculate so- He is the co-author of a number of mono- called AEB-GfK’s comprehensive index In general, the survey results show that graphs and numerous publications in Rus- (Business Barometer), which reflects the situation in Russia’s economy and in sian and international media. the general state of business and the their own business has not brought any Alexander is Head of GfK Rus Department mood of European companies operat- unpleasant surprises to the European of the Sociology Faculty at the Higher ing in Russia. According to this year re- companies. The macroeconomic stabil- School of Economics. sults, the index increased by 2 points ity in the country largely contributed compared to the previous year, reach- to this. A majority of the companies ing 140 out of 200 possible points. The (66%) noted that the general economic he annual “Strategies and AEB-GfK index growth was mainly due conditions in early 2019 (first 3 months) prospects of European com- to an improvement in the evaluations met their expectations. T panies in Russia” AEB survey of the macroeconomic situation in the has shown that despite the current geo- country, in the business development What is hindering political situation, Russia is succeed- outlook, and in short-term expectations business ing in preserving the confidence of the for the Russian economy. At the same time, as the AEB survey European business. The AEB-GfK Busi- participants note, the situation around ness Barometer measuring the senti- But the most important sign of the im- Russia remains rather difficult. The ment of the European businessmen proving situation is that business con- most negative factors for the current working in Russia remains in the zone tinues to grow and this supports the business market noted by the European of positive expectations, at the level of positive mood of the European business companies are volatility of the rouble 2018, 2017, and even pre-crisis 2013. working in Russia. (78%), US policy towards Russia (75%)

9 180 Positive expectations How to Invest170 in Russia 159 Russia is the right place for investing | 160 155 150 144 141 138 140 140 130 120 120 115 106 AEB-GfK110 barometer: business expectations in Russia (2011-2019) 100 180 180 2011 2012 2013 2014 2015 2016 Positive2017 expectations2018 2019 170 159 Positive expectations 170160 155 159 160 155 150 144 141 150 144 138 140 140 141 138 140 140 130 120 130120 115 120 120 115 106 110 200 106 110100 Positive 100 2011 2012expectations2013 2014 2015 2016 2017 2018 2019 2011 180 2012 2013 2014 2015 2016 2017 2018 2019

160 141 (2017) in the current year are as cautious as in At the same time, the share of pes- AEB-GfK index, 2019 140 140 (2019) the previous year. 17% of the companies simists – those who think that the 138 (2018) expect an increased investment volume situation with corruption, taxes and 200 200 120Positive in their sectors in the next 2-3 years. bureaucracy can only deteriorate – Positiveexpectations 28% expect investment volume growth among the respondents from Euro- 180 expectations 180 100 in Russia in general in the same period. pean businesses in Russia has sig- 160 nificantly decreased, on average by 80 160 141 (2017) Evaluation of the business almost 10 percent points compared to 141 (2017) 140 140 (2019) environment in Russia by the survey results in 2014-2016, when 140 60138140 (2018) (2019) European companies the fears were growing amid mutual 120 138 (2018)Negative 120 40 expectations As in the previous years, this year Euro- sanctions. 100 pean companies gave rather low scores 100 20 to the business culture and business In addition, more than half of the com- 80 environment in Russia. And more than panies (57%) reported that they went 0 80 a half of the surveyed European com- to court to recover debts and most cas- 60 panies say that they do not believe that es were successful. 29% of the compa- 60 Negative 40 Negativeexpectations the situation with bureaucracy, taxes/ nies reported that they never had any 40 expectations duties and corruption will improve. bad debts in Russia. 20 20 Expectations of European business in Russia regarding changes 0 in certain operational/problem areas in the next 2 years 0 (% of total respondents with negative expectations)

70 67 67 64 62 61 58 59 60 58 57 56 56 56 54 53 52 51 51 52 49 and economic sanctions against Russia 50 47 46 45 (71%). 44 43 48 44 70 67 67 43 64 70 40 42 38 36 67 67 62 The above-mentioned factors have a 61 58 5964 Bureaucracy 60 5862 57 56 31 56 Corruption negative impact not only on the busi- 30 61 58 56 30 5459 53 Regulatory restrictions 60 5258 57 52 ness but also on the entire Russian 51 56 25 56 51 25 56 54 49 Customs regulation economy, according to the participants50 47 53 4652 52 51 21 Taxes/Fees4551 of the survey. 44 20 43 18 4948 44 50 47 43 46 45 40 44 4342 48 3844 36 43 Therefore, the assessments of the pros- Bureaucracy 10 42 40 31 Corruption 38 pects for increasing investment in Russia 30 2011 36 2012 2013 2014 2015 2016 2017 2018 2019 30 RegulatoryBureaucracy restrictions 31 25 Corruption 2530 Customs regulation 30 Regulatory restrictions 21 Taxes/Fees 25 10 20 25 18 Customs regulation 21 Taxes/Fees 20 18 10 2011 2012 2013 2014 2015 2016 2017 2018 2019 10 2011 2012 2013 2014 2015 2016 2017 2018 2019 Part II. Localisation and investments

11 How to Invest in Russia Localisation and investments |

State support for industrial projects: successful examples and new opportunities

romoting the localisation of than 160 enterprises have already production in Russia, the launched new production facilities. The P implementation of an import implementation of all projects funded substitution policy, as well as the entry by the IDF will bring more than 160 bil- of industrial enterprises into foreign lion roubles in tax revenue to budgets markets are one of the main directions of various levels and will create more of state policy in the field of industry than 23,000 new high-performance today. At the same time, there are a jobs. To implement industrial projects, number of challenges and tasks for the IDF provides targeted loans at a Sergey Vologodsky Deputy Director, industrial investors that need to be rate of 1%, 3% and 5% per annum for Industrial Development Fund resolved. In the process of making in- up to 5-7 years in an amount of 5 mil- vestment decisions and implementing lion to 2 billion roubles, stimulating the Sergey Vologodsky has served as Deputy industrial projects, decisive factors are inflow of direct investment into the real Director of the Industrial Development conditions for doing business, includ- sector of the economy. The cost of IDF Fund since April 2015. ing stability of the economic activity loans is below market, but it is possi- Prior to taking up the position of Deputy Director, Sergey served at the Ministry of of enterprises and their taxation as ble to use them only in a targeted way. Industry and Trade of the Russian Federation, well as ability to attract debt capital Today, the IDF offers a wide range of the Ministry of Economic Development of the at low interest rates. So, the Industrial programmes to finance projects aimed Russian Federation, Procter and Gamble and Development Fund (IDF) occupies an at developing new high-tech products, Bank Societe Generale Vostok. important place in the system of state import substitution, export, leasing of Sergey holds a specialist diploma in Government management from the support for industry in the Russian production equipment, implementation Financial Academy under the Government Federation. For the implementation of of machine tool projects, digitalisation of the Russian Federation and has a industrial technology projects the Fund of existing industries, production of Master’s degree in International economy provides targeted loans, acts as the components, labelling of drugs and in- in the Russian Foreign Trade Academy. operator of the special investment con- creasing labour productivity. Sergey has got MBA with distinction from Kingston University (London). tract mechanism (SPIC), and carries Mr. Vologodsky is a member of the out international cooperation through One of the IDF’s priority programmes, Investment Policy Committee of the interaction with foreign business asso- ‘Components’, is aimed at developing a Russian Union of Industrialists and ciations and Trade Representations of network of local suppliers. This is a very Entrepreneurs, of Moscow Exchange Council ‘Growth Sector’, of the Board the Russian Federation abroad. important topic for Russian industry in of Directors of Association of industrial general and for foreign manufactur- parks and of several regional Industrial Since 2014, the IDF has become an ing companies in the Russian market Development Funds boards. effective tool for supporting industrial in particular. The Component Products Sergey was awarded by the Letter of projects and has funded more than programme is in high demand among Acknowledgment of the Ministry of Economic Development of the Russian 470 projects worth more than 100 bil- companies that produce a component Federation and the Ministry of Industry lion roubles in various industries and base and plan to integrate into the sup- and Trade of the Russian Federation. regions of Russia. By this work, more ply chain of localised in Russia compa-

12 | Localisation and investments How to Invest in Russia

nies and holdings. Its conditions may be attractive for companies: for the first 3 years, the interest rate is 1% per annum and 5% for the remaining term, while the loan amount is 50-500 million roubles. The programme provides de- ferred payment of principal of the loan for the first 3 years, which allows companies to enter serial production and generate project revenue. The share of project co-financing by the enterprise has been reduced to a minimum of 20% of its total cost. By the way, since the launch of the Components programme, the IDF has provided more than 11 billion roubles for the implementation of 39 projects. IDF funds under this programme have a wide range of opportunities for targeted use: money can be used to develop a new technology/ product, prepare for its production and launch on the market, acquire Russian/ foreign licences and patents, develop engineering, purchase Russian/imported industrial equipment, and even be part of general business expenses for the project.

Conditions for doing business, including Understanding the need for constant communication with business, the stability of the economic activity of IDF has a Consulting Centre, which acts as a ‘one-stop shop’ for indus- enterprises and their taxation are crucial trial investors and assists them in to implement industrial projects. understanding all the peculiarities of IDF financing programmes and state In addition, a new loan financing mitted to the programme by decision support measures. Consulting Centre programme, ‘Priority Projects’, was of the Ministry of Industry and Trade specialists provide detailed informa- launched this year. Under this proof Russia. Borrowed co-financing is tion on preferential loans of the IDF gramme, the Industrial Development provided for projects implemented in and help to assess the degree to Fund provides loans to create prod- the priority areas of Russian industry which the project meets the criteria ucts for the production of liquefied and aimed at import substitution, as of a specific IDF programme. In ad- natural gas (medium- and large-ca- well as at the localisation and creation dition, consultations are provided on pacity) and shelf projects. The IDF of mass production of highly competi- a wide range of federal measures of also finances the production of high- tive, high-tech, critical industrial prod- state support for industry included in power turbines, drilling rigs with a ucts competitive in foreign markets. It the Navigator of the State Industry lifting capacity of 320 tonnes, rotary- is important to note that, unlike the Information System. In order to as- controlled systems and equipment for other IDF programme, the maximum sess the scope of this work, it is im- hydraulic fracturing. Projects are ad- loan amount is 2 billion roubles. portant to note that on average more

13 How to Invest in Russia Localisation and investments |

than 15,000 calls are received by the of the SPIC must be the introduction exemption limit for the year 2025. Consulting Centre each year. or development and implementation Now it is possible to apply incentive of modern technology from the list measures throughout the entire peri- The SPIC 2.0 mechanism provides approved by the Government of the od of the SPIC, including industry sub- new opportunities to increase the in- Russian Federation for the manufac- sidies. However, SPIC 2.0 has another vestment attractiveness of Russia, to turing of products that are globally limitation – the preferential income strengthen the development, trans- competitive. The maximum period of tax rate is valid until the tax and non- fer and implementation of advanced, a SPIC is significantly increased – no tax expenses of the project’s budget modern technologies, and most im- more than 15 years for projects with exceed 50% of capital investment. It portant, to ensure stable business total investment up to 50 billion rou- makes possible to trace the compara- conditions for industrial investors in bles and no more than 20 years for bility of the investment planned under the Russian Federation. On 13 August projects with total investment of 50 the project and the volume of state 2019, a package of amendments to billion roubles. Prolonged SPIC terms support, as well as ensure budgetary Federal Law No. 488 ‘On Industrial provide investors with the opportu- effectiveness. In addition to this, non- Policy in the Russian Federation’ and nity to implement projects with a long application of changes in tax legisla- to the Tax and Budget Codes entered payback period and a long product tion that lead to a deterioration of the into force. A number of significant life cycle. It is important to note that taxpayer’s position remains, and it is changes will be implemented in the the minimum investment level is can- also possible to include in the SPIC as new SPIC 2.0 mechanism. For exam- celled (previously in SPIC 1.0 it was a promoting measure and a guarantee ple, the goal of a project implemented 750 million roubles). One of the main of stability of the business environ- by an investor within the framework changes is the cancelation of the tax ment for the investor. The new SPIC

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mechanism becomes much more at- German Chamber of Commerce, the Group on Strategic Cooperation in tractive for both Russian and foreign Korea Trade-Investment Promotion the Field of Economics and Finance investors, while 45 special investment Agency, the Franco-Russian Chamber included the problematic issue of im- contracts have already been signed. of Commerce and Industry, and the plementing the project of the German This indicates the demand for a SPIC Turkish Exporters Assembly. Working machine tool group Niles-Simmons- in various industries: machine tools, interaction continues with other as- Hegenscheidt, one of the 30 larg- automotive industry, pharmaceuti- sociations. As a result of this interac- est global machine tool builders, to cals, etc. It should be stressed that tion, we see, first of all, the creation localise the production of high-tech 27 of the 45 contracts are signed of added value for business: specific lathes for the Russian market. Since by companies with foreign capital, companies involved in financial sup- 2018, as part of the joint programme including such major players in the port for the implementation of pro- (Technical Cooperation) of the IDF world market as CLAAS, Mercedes- jects in Russia, the search for suppli- and the Korea Trade-Investment Pro- Benz, Volvo, Peugeot-Citroen, Vestas, ers of raw materials, components and motion Agency, an IDF borrower, Rus- AstraZeneka, and Sanofi. They have consumables with the status ‘Made in sian Mechanics, which manufactures received invariable tax conditions for Russia,’ the establishment of techno- next-generation snowmobiles for the the duration of the contract, the pos- logical cooperation between Russian Arctic and the Far North, and Korea sibility of an accelerated procedure and foreign industrial companies, R&D, a South Korean manufacturer for obtaining the status of products of industrial engines, have signed a manufactured in the Russian Federa- The SPIC 2.0 Memorandum of Cooperation for en- tion (Made in Russia), as well as the gine building. The issue of creating an possibility of applying preferential mechanism electronic platform for international rates on corporate income tax and cooperation in the industrial sector property tax. A number of companies provides new with a pilot project is being discussed. apply to the IDF in order to obtain opportunities to As a pilot project this may be a Rus- preferential financing in parallel with sian-Korean platform for technological signing of a SPIC. strengthen the and industrial cooperation with popular services for foreign and Russian The Fund, acting as the operator of the development, companies. In addition, active work SPIC mechanism, provides a compre- is currently underway on cooperation hensive study of investment projects transfer and with the Trade Representations of the with investors for compliance with the implementation Russian Federation. A number of con- terms of SPIC signing, performs an sultations are being held to support expert assessment of the set of docu- of advanced investment projects aimed at creat- ments (applications) for the conclu- ing localised production in Russia sion of the SPIC, prepares an expert technologies. from countries such as India, France, opinion on the project, and takes part Egypt, Germany, Turkey, etc. in coordinating SPIC parameters and and assistance in solving other cur- legal work. rent problems. For example, as part In summary, we can say that in spite of systematic interaction between the of a number of challenges, problems The IDF also promotes the SPIC IDF and the Russian-German Foreign and tasks, which industrialists are fac- mechanism among foreign inves- Trade Chamber, 100% of the project ing, there is a system of government tors, using a full range of opportuni- is funded by the German company support measures in Russia that can ties, including the Trade Representa- Schattdecor (Shattdecor AG Group) be used to maximise the effectiveness tions of the Russian Federation and for the production of decorative clad- of investment projects in all key in- foreign business associations. Since ding film on a paper base for furniture dustries. The Industrial Development 2018, cooperation agreements have and building materials. At the IDF’s Fund is interested in localising foreign been signed with the Association of initiative, the agenda of the meet- investors in Russia. And we are always European Businesses, the Russian- ing of the Russian-German Working ready for a constructive dialogue!

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Reformatting of special investment contracts (or SPIC 2.0)

they are known as SPIC 2.0 and their of cutting-edge technologies included objective is to reform and relaunch the in a special list to be approved by the arrangements for special investment Government of the Russian Federation. contracts. The exact definition of the term - ‘cut However, regulations enacted solely at ting-edge technologies’ is not yet quite the federal level are not sufficient for a clear, and the procedure to include full relaunch of this special investment such technologies in the above-men- contract tool. For a complete restart, tioned list has not been defined. Sergey Vershinin the Government of the Russian Fed- Associate Partner, Rödl & Partner eration must adopt a range of subor- Another important change is that SPIC dinate legislation – in particular, to es- 2.0 will be a four-party contract con- Sergey is the Head of Real Estate, Build- tablish a procedure for the conclusion cluded by the investor with the Russian ing and Environmental Law Department in of special investment contracts and ap- Federation, the concerned constituent Rödl & Partner office in Moscow. prove a list of cutting-edge technolo- territory of the Russian Federation and He has more than 15 years of experience gies for which investors may conclude the concerned municipality (represent- in advising foreign investors on real estate such contracts to develop (implement) ing the public sector) simultaneously. and building law in Russia as well as deep these technologies. Naturally, this is a step towards addi- knowledge of environmental law. tional stability in doing business. This His fields of specialisation encompass also The principal objective of this new for- stability will be promoted at all govern- commercial and contractual law as well as mat is to facilitate the entry into Rus- ment levels. special investment contracts. sia of cutting-edge technologies for mass production of competitive and It should also be highlighted that only unique industrial products; this entry one investor can represent the private will create new jobs and have a posi- sector as a party to SPIC 2.0. So far, ignificant changes to the tive impact on the income of Russia’s the current legal wording does not statutory rules for the con- constituent territories. envisage the possibility of co-invest- S clusion of special investment ing or contract participation by any contracts were enacted in the Russian This is a distinctive feature of this new other private sector entity. Perhaps Federation in 2014 by the Federal Law model. According to the previous re- the involvement of other parties will ‘On Industrial Policy in the Russian Fed- quirements, special investment con- be allowed by subordinate legisla- eration’ to incentivise localisation of pro- tracts could be concluded for any type tion (decrees of the Government of duction in Russia; these changes have of product. the Russian Federation) which is yet been applied in practice since 2015. to be adopted. SPIC 1.0 rules allowed In accordance with SPIC 2.0, a spe- participation in the contract by other Amendments to the Federal Law ‘On cial investment contract may only be parties attracted by the investor (such Industrial Policy in the Russian Federa- concluded for high-tech products, i.e. as engineering centres, distributors, tion’ were enacted on 13 August 2019; the development and implementation financial centres, etc.).

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Contract conclusion ▪ if only one bid has been submitted A prerequisite for the conclusion of procedure to the competitive tender and that a SPIC 2.0 contract will be granting According to the new rules, SPIC 2.0 bid satisfies the requirements estab- by the laws of the concerned Rus- will be awarded based on the outcome lished by law. sia’s constituent territory, as of the of an open or closed competitive selec- contract date, of industrial incentives tion process (tender). An open tender can be initiated by the applicable to the investor and the ex- public sector (the Russian Federation, istence of an approved procedure for The law allows two exceptions to this the Russian Federation together with their application. rule (i.e. conclusion of a contract with- one of Russia’s constituent areas and a out a tender): municipality) as well as by the investor. Prior to submission of its bid to the duly ▪ conclusion of a special investment authorised federal government body, contract on the terms and conditions Closed competitive tenders will be held the investor will have to coordinate the proposed by the investor and com- to award special investment contracts investment project with the relevant re- pliant with the Russian laws by a de- for the implementation of projects to gional and municipal governments. cision of the President of the Russian develop or to implement military, spe- Federation in order to implement a cial purpose or dual-use technologies The law sets the following criteria for strategically important project for for mass production of industrial prod- the selection of a winning bid in the the development of Russia’s econo- ucts on their basis to ensure national competitive tender held to award a my or to ensure national security; security. special investment contract: Реклама

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▪ the proposed term for the introduc- concluded for a maximum of 15 years sury only if the revenue from sales tion of the cutting-edge technology, for projects with investments of up to of goods under the SPIC made at which is the time period beginning 50 billion roubles (VAT exclusive), or least 90% of all contractual revenues with the special investment con- for a maximum of 20 years for projects other than gains from exchange rate tract conclusion and ending with with investments of over 50 billion rou- differences. the manufacture of the first batch bles (VAT exclusive). of industrial products based on this Starting from 1 January 2020, two op- technology; Tax incentives tions will be available to the SPIC 2.0 ▪ the proposed amount of the industri- SPIC 2.0 investors will continue to en- participants: al products to be manufactured dur- joy tax benefits. These benefits include ▪ to apply preferential tax rates sub- ing the special investment contract a zero income tax rate, preferential ject to the above-mentioned condi- lifetime; land tax, property tax and transport tions for the entity’s entire tax base ▪ the proposed level of technology to tax rates at the regional tax level, but (as per the previous rules); or localise industrial production using only a preferential income tax rate at ▪ to apply preferential tax rates only a technology included in the list of the federal tax level. to the entity’s tax base associated cutting-edge technologies approved with the implementation of the in- by the Government of the Russian The new rules have removed the re- vestment project under the SPIC. In Federation. striction on the application of tax ben- this case compliance with the 90% rule will not be required, but the en- In accordance with SPIC 2.0, a special tity will have to maintain separate investment contract may only be accounting records. concluded for high-tech products, i.e. The entity will have to approve the se- lected option in its accounting policies the development and implementation and may not change this decision for of cutting-edge technologies included the duration of the SPIC. in a special list to be approved by the The limitations on investor support: the investor will only enjoy prefer- Government of Russia. ential tax rates until the end of the reporting or tax period in which the Investment value in efits. The previous rules only allowed total support granted to the SPIC SPIC 2.0 exemptions until 2025. This time limi- participant from the treasuries at While the previous rules for special in- tation has been eliminated under the all government levels (including tax vestment contracts (SPIC 1.0), which new rules. For the new rules to actually revenues lost by these treasures) ex- were concluded for a term of up to 10 work, it will be necessary to make the ceeds 50% of the investor’s capital years taking into account the period relevant amendments to the subordi- investments in the investment pro- required for the project to reach its nate legislation. ject. full budgeted operating income level, included the minimum investment re- Preferential income tax Time limit of SPIC 2.0 quirement of 750 million roubles, the rates contracts new special investment contract ver- The terms and conditions for the According to the new rules, spe- sion (SPIC 2.0) does not set any in- application of preferential income cial investment contracts under the vestment threshold. tax rates have been adjusted. Previ- amended SPIC 2.0 version may only ously, it was possible to enjoy a zero be concluded until 31 December 2030. According to the new rules, the du- income tax rate payable to the fed- All contracts concluded in accordance ration of SPIC 2.0 will depend on the eral treasury and a reduced income with the previous rules (SPIC 1.0) will investment value. The contract will be tax rate payable to the regional trea- remain effective.

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Draft Federal Law ‘On Protection and Encouragement of Investments’: overview of key provisions

It has been prepared in order to implement the provisions of Order of Presi- dent Putin No. 204 dated 7 May 2018 ‘On National Goals and Strategic Tasks for the Development of the Russian Federation to 2024’. These provisions included securing growth rates above the global average and creating a highly productive export sector based on mod- Alisa Melkonian Diana Menchik ern technologies in the most important Partner, Head of Tax & Legal Senior Manager, Tax & Legal sectors of the economy, primarily in the Regional Development, KPMG in Department, KPMG in Russia processing industries and agriculture. Russia and CIS and CIS The Draft Law can be regarded as a Alisa is a Fellow Member of the Association Diana is a Fellow Member of the Association framework law on investment in Russia, of Chartered Certified Accountants (FCCA). of Chartered Certified Accountants (FCCA). as well as a law guaranteeing a stable in- She co-chairs the Tax Committee of the She also is a member of the Investment vestment climate, which aims to provide American Chamber of Commerce in St. Pe- Council of the Novgorod region. a transparent and predictable legislative tersburg, is a member of the Investment Diana advises on tax matters including due framework for large investment projects. Council of the Leningrad region and of St. diligence engagements, application of re- Petersburg. gional tax concessions, group tax restruc- In particular, it attempts to systematise Alisa advises on various types of state sup- turing, PPP (public-private partnership) and and replace the stability guarantees port in Russia: regional tax concessions, transfer pricing engagements. for investment projects existing under Special Economic Zones (SEZ) and Prior- current laws (e.g. Special Investment ity Social and Economic Development Ar- Contract, Public-Private Partnership, eas (PSEDA) regimes, Special Investment Special Economic Zone) with a unified Contracts (SPICs), Regional Investment he draft law ‘On Protection stability clause for projects for which Projects (RIPs). and Encouragement of In- an agreement is concluded. She also heads tax structuring, deoffshori- T vestments’ (hereinafter, Draft sation and transfer pricing engagements. Law) has now been developed and The Draft Law provides for the possibility published for public discussion. to enter into a special agreement on the

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protection and encouragement of invest- vate investments in the project’s bud- with a Russian legal entity that is ments (hereinafter, Agreement) between get, depending on the industry. more than 50% owned by a foreign the Government of the Russian Federa- legal entity; tion, Russian region(s) and investor(s). The standard duration of an Agree- ▪ the Russian Federation; ment is set as 6 years for investments ▪ the region of the Russian Federa- Agreement on the up to 30 billion roubles and 12 years tion where the investment project is protection and for investments over 30 billion roubles. planned for implementation (or sev- encouragement of Regardless of the amount of invest- eral regions if the investment project investments ment, if the investment period exceeds is implemented in these regions); 6 years, the duration of the Agreement ▪ co-investor: an individual or legal en- Qualifying industries is set as 18 years. tity (including a credit entity, a leas- Investment projects in the following company, a partnership, a fund, ing sectors qualify for an Agreement: The duration of the Agreement may a specialised foreign sovereign fund, agriculture, forestry, fishing and fish be extended for another 6 years if the a Russian or foreign investment fund, farming, mining (except for extraction investor undertakes to reinvest income a non-state pension fund, an invest- of crude oil and natural gas [not in- from the project into a new project in ment partnership, or a unit invest- cluding projects on liquefying natural Russia in an amount of at least 1 billion ment fund) engaged by the investor gas]), manufacturing (except for the roubles within this 6-year period. to co-finance the project; production of tobacco products, alcohol and liquid fuels, not including the production of liquid fuel from coal, and The Draft Law can be regarded as a law in installations for secondary process- guaranteeing a stable investment ing of oil raw materials according to the list approved by the Government of climate, which aims to provide a the Russian Federation), electrical, gas and steam power, air conditioning, heat transparent and predictable legislative supply, water supply, sanitation, waste framework for large investment projects. management, pollution management, construction, transportation and storage, information and communications sector, hospitality, tourism and health Parties to the Agreement: ▪ entity implementing the project: the care, including projects involving the ▪ investor: a Russian or a foreign investor or a legal entity controlled production of dual-use products. person/legal entity/unincorporated by the investor created under the organisation that provides financ- laws of the Russian Federation (in- There are certain financial require- ing for the investment project and cluding an organisation specially ments for qualifying projects: the pro- arranges project management or created by the investor to implement ject’s budget should total at least 10 implements the investment project. the project), producing (planning to billion roubles, while private invest- The Agreement cannot be concluded produce) the project’s products. ments should amount to at least 3 bil- with a legal entity residing in a low- lion roubles. tax jurisdiction and/or a jurisdiction An Agreement should contain the that limits information exchange with following essential provisions: The Russian government can decrease Russia, according to the list from the ▪ object(s) of investment activity; the investment threshold for the pro- Russian Ministry of Finance.1 Neither ▪ investor’s obligation to make its own ject’s total budget or the share of pri- can the Agreement be concluded investments in the project in the

1 Order No.108n of the Ministry of Finance of the Russian Federation dated 13 November 2007 ‘On the Adoption of the List of States and Territories Providing Preferred Tax Regimes and/or not Requiring Disclosure or Provision of Information on Financial Transactions (Offshore Zones)’

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duced after the Agreement was concluded, change tax rates, tax concessions, the calculation procedure, the procedure and time frames for the payment of corporate income tax, property tax, transport tax and land tax, introduce new taxes/obligatory duties instead of these taxes, change the time frames for payment and the procedure for VAT refund shall not apply to the entity implementing the project in relation to the execution of the Agreement.

The stability clauses do not apply to legislative amendments resulting from the implementation of international agreements concluded by the Russian Federa- tion and legislative acts of the Eurasian Economic Union (applied in Russia), as well as legislative amendments introduced to protect the foundations of the constitutional system, including the protection of citizens’ lives and health and amount and on the terms and condi- General stability clauses maintenance of state defence and safety. tions established by the Agreement; The Draft Law stipulates that the terms ▪ investor’s obligation to finance and and conditions of any statutory acts Tax Increment Financing (TIF) implement the project on time and which regulate business operations in The Agreement may stipulate a future on the terms and conditions estab- the sphere of the project’s activity (in- refund of taxes paid over the period of lished by the Agreement; cluding those related to licensing and the investment project and the respec- ▪ total budget of the project; certification, use of natural resources, tive customs duties in the form of subsi- ▪ obligations of the Russian Federation environmental protection, export or dies that will be used to build infrastruc- to compensate the investor for any customs operations, architectural de- ture (the procedure for granting these losses incurred as a result of failure to sign and construction), which were subsidies has not yet been stipulated). ensure the stability of the terms and introduced after the Agreement was conditions of project implementation concluded, and which introduce ad- The TIF mechanism was already men- ▪ procedure the investor should fol- ditional obligations, limitations or in- tioned in the Major Directions of Tax low to submit information on the terdictions as compared to the rights Policy for 2015 and for the 2016-2017 fulfillment of obligations under the and obligations of the investor/entity Planning Period. However, there have Agreement; implementing the project at the time not been any developments in this re- ▪ duration of the Agreement; the Agreement was concluded shall gard since then. ▪ responsibility of the parties for non- not apply to the investor or entity im- performance and/or improper per- plementing the project (as applicable) The stability clauses under the Agree- formance of their obligations under until the Agreement expires. ment apply to investment projects real- the Agreement; ised, among other things, in the follow- ▪ other material terms and conditions. Tax stability clauses ing forms/under the following regimes: The Draft Law stipulates that the terms Guarantees for investors envis- and conditions of any statutory acts Special Investment Project (SPIC), aged in the Agreement which regulate taxation, were intro- Public-Private Partnership (PPP), Con-

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cession Agreement, Priority Social and terms and conditions for investors, respect of new investment projects, Economic Development Areas (PSEDA), including the guarantees provided as i.e. before any investments are made; Free Economic Zone, Special Economic part of SPICs, PPPs, Concession Agree- 2) although the Draft Law expands Zone (SEZ), Free Port of Vladivostok, ments, etc. the tax stability clause to such direct and Regional Investment Project (RIP). taxes as corporate income tax, prop- However, it seems the process of erty tax, transport tax, and land tax, Procedure for concluding an considering the Draft Law is not go- mineral extraction tax and social se- Agreement ing smoothly (possibly because of the curity contributions are not currently The Investor should submit a special varying positions of different govern- covered by the Draft Law; 3) crude declaration on implementation of an mental departments) and a sufficient oil and natural gas extraction lie out- investment project – and likely a com- number of by-laws specifying the pro- side the scope of the Draft Law, even prehensive set of documents – to the cedures, criteria and requirements for though these are strategic industries. federal authorities. the parties to the Agreement will have Certain other industries (e.g. retail, to be developed. tobacco products and alcohol) are The template of the Agreement, the also not covered; 4) under the current procedure for its conclusion (and the rel- In particular, based on the mass me- wording of the tax stability clause, all evant set of documents), and the proce- dia, Vice-Premier Kozak has recently amendments to tax legislation – not dures for monitoring the implementation developed another draft law which only detrimental but also beneficial of Agreements have yet to be developed introduces differing conditions (for ones – would not apply to a private by the Russian government. example, the minimal investment party to the Agreement until the end threshold is RUB 15 billion, the state of the Agreement. Investment projects for which the support measures are to be provided relevant Agreements have been con- on a contest basis, etc.). As such, even if in theory the poten- cluded are included in the special reg- tial for this mechanism to support ister of Agreements. In addition, in its current version the and boost foreign investments can be Draft Law has a number of limitations viewed as promising, there is a certain Summary/conclusions that could possibly be addressed dur- level of skepticism as to whether prac- The Draft Law is aimed at unifying ing further consideration of it: 1) an tical implementation will fully address guarantees of stability of legislative Agreement can only be concluded in this strategic goal.

List of laws to be amended when the Draft Law is adopted and comes into effect (i.e. stability clauses will be added):

▪ Federal Law No. 39-FZ dated 25 February 1999 ‘On Investment Activities Carried Out in the Russian Federa- tion in the Form of Capital Investments’; ▪ Federal Law No. 160-FZ dated 9 July 1999 ‘On Foreign Investments in the Russian Federation’; ▪ Federal Law No. 116-FZ dated 22 July 2005 ‘On Special Economic Zones in the Russian Federation’; ▪ Federal Law No. 16-FZ dated 10 January 2006 ‘On the Special Economic Zone in the Kaliningrad Region and on Changes to Certain Legislative Acts of the Russian Federation’; ▪ Federal Law No. 377-FZ dated 29 November 2014 ‘On Development of the Republic of Crimea and the Federal City of Sevastopol’; ▪ Federal Law No. 488-FZ dated 31 December 2014 ‘On Industrial Policy in the Russian Federation’; ▪ Federal Law No. 224-FZ dated 13 July 2015 ‘On Public-Private Partnerships, Municipal Private Partnerships in the Russian Federation and on Changes to Certain Legislative Acts of the Russian Federation’; ▪ Federal Law No. 115-FZ dated 21 July 2005 ‘On Concession Agreements’; ▪ Federal Law No. 223-FZ dated 18 July 2011 ‘On Sourcing Goods, Work, Services by Certain Legal Entities’.

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Utilisation of technology transfer in the pharmaceutical industry

Matthias Wernicke Alexander Shaplygin Eldar Aleev General Director, Merck Biopharma Head of Communication, Merck Localization Projects Manager, Russia & CIS Russia & CIS Merck Russia

Mr. Wernicke holds Ph.D in Economics Mr. Shaplygin holds Ph.D in Social Phi- Mr. Aleev holds Master’s degree in Busi- from Oxford University, UK. losophy and MBA from Grenoble Graduate ness Marketing and MBA. Matthias has over 15 years of experience School of Business. Eldar has more than 12 years of working in the pharmaceutical and medical device Alexander has more than 12 years of ex- experience. industry. perience in communications, public affairs Before joining Merck Mr. Aleev worked for Before joining Merck Dr. Wernicke worked and corporate social responsibility. such companies as Sanofi and KPMG. for McKinsey & Co. Before joining Merck Mr. Shaplygin worked for such companies as Beeline and Sanofi.

ussia has faced many cru- changes. For example, 10 years ago a standard routine for most interna- cial changes in the phar- Russian drugs occupied only about tional companies active in Russia. R maceutical sphere the last 20% of market and the entire mar- few years. As the government is a ket volume was less than about 300 The complex nature of modern tech- significant actor in this industry, to billion roubles. Now drugs produced nological innovations and the speed understand the industry one needs to at Russian factories represent about of their development no longer allow grasp the key policy priorities, such 30% of the market, and the Russian research institutes and even large as the implementation of GMP stand- drug market is estimated at about research centres commissioned by ards, special investment contracts 1.2 trillion roubles. According to vari- industrial corporations to rely solely (SPICs), track-and-trace system for ous sources, over 150 billion roubles on their own R&D. That is why one drugs, and localisation of production. have been invested in technological of the most important aspects of One of the policy cornerstones is the equipment and other forms of sup- the innovation process is technology Pharma-2020 programme, which is port. More than 80 international transfer, i.e. the transfer of accumu- a pharmaceutical industry strategic companies have since localised their lated technological experience, sci- development plan that includes the production in different ways. Thus, entific and technical knowledge, and above-mentioned aspects. Phar- overall, understanding and manag- management technologies with the ma-2020 has brought about many ing technology transfer has become aim of advancing scientific and tech-

23 How to Invest in Russia Localisation and investments |

nological progress. The successful some sectors participate in state de- of picking a partner among the many transfer criterion is the correct appli- velopment assistance programmes. manufacturers of medicines regis- cation of the transferred technology They are better protected from cur- tered in Russia. Apart from clear in production and the release of in- rency fluctuations.2 geographical, social, economic, legal novative products of high quality that and other criteria, it is important that would be in high demand. One area Transfer process planning the Russian manufacturer is reliable where the technology transfer fits in Localisation can be achieved in differ- and complies with both local and in- the Russian market is the pharma- ent ways – by construction of a new ternational standards and rules. You ceutical industry. plant (green-field), modernisation need experience, knowledge and and/or re-equipment of an old one, or skills to implement a transfer. All this Business localisation accompanied by technology transfer to a ready-made has to be audited by a large team of technology transfer is a key area for production site. It is also important to experts, because a properly organised developing the pharmaceutical busi- choose whether the company invests transfer must guarantee that the lo- ness in Russia. The role of technol- on its own or jointly with a partner. calised product will be identical to the ogy transfer in the modern world is Each solution has both advantages and original one. In technology transfer, hard to overestimate. This way of lo- drawbacks. The construction of a new the company management skills play calisation facilitates a quick increase plant by a company on its own and the a crucial role. A well-organised pro- in the production capacity, enhances subsequent production transfer can cess is an indicator of a well-developed safety of supplies to patients, raises guarantee fulfilment of all the compa- quality management system at the the speed of launching a product on ny’s requirements, ensure full control, enterprise. It also leads to a reduc- the market, improves the competi- and create the basis for future develop- tion in material and time costs. tiveness of an enterprise, etc.1 ment. However, this is one of the most We should note that the transfer process has several features that, Apart from clear geographical, social, depending on the management’s ex- economic, legal and other criteria, perience, can carry both risks and opportunities for process optimisa- it is important that the Russian tion. When assessing the technical capabilities of the receiving side, it manufacturer is reliable and complies should be born in mind that it needs equipment similar to that available to with both local and international the transferring side, but not neces- standards and rules. sarily identical. Often the equipment may be similar, but differ in certain characteristics, e.g. the output vol- Localisation of production contributes expensive solutions. It is also one of the ume or speed. In this case, in addi- to further success. Enterprises that most drawn-out. In addition, hiring new tion to the technology transfer factor, have or are establishing manufacture staff, building a team, and utilising the the scaling factor will also be consid- in Russia are in a more advantageous capacity of such a plant will be a huge ered. Moreover, it may be necessary position than those focused exclu- challenge for the management. to both increase (with the expansion sively on exporting to Russia. They of production) and decrease (technol- can take part in government tenders If a company decides to work in a ogy transfer to a new market with a on par with local companies, and in partnership, it faces a difficult choice lower consumption of the drug) the

1 Problems and prospects of economics and management: proceedings of the V International Scientific Conference. St. Petersburg, 2016 https://moluch.ru/conf/econ/archive/219/11502/ 2 Fursova I. Business has taken root: localisation of production in Russia is becoming a trend. Rossiyskaya Gazeta, Special issue No. 110 (7573), 23.05.2018; https://rg.ru/2018/05/23/lokalizaciia-proizvodstva-v-rossii-stala-trendom-dlia-nemcev.html

24 | Localisation and investments How to Invest in Russia

volume. Here the so-called ‘dispos- ratories for subsequent comparison of manufacturer, or from one manufac- able technologies’ can be of great results), and an in-depth stability study turer to another. practical importance. The concept of programme, including monitoring of using disposable plastic tanks and fil- additional indicators. It is important to The main documents that fully describe tration systems can be implemented realise that the development of mod- the technology transfer process are in modern reactor equipment for pre- ern technology is impossible without the ISPE and WHO guidelines. Accord- paring solutions, storage and transfer the transfer of experience. ing to these documents, the transfer of substance concentrates, as well as process has the following main stages: in filling machines for finishing dosage Technological transfer is deemed to forms, if sterile liquid dosage forms be successful if a technical (engi- ▪ Signing a contract that includes a are involved. Disposable technologies neering) batch has been success- clause related to establishing a trans- ensure maximum versatility in tech- fully produced and tested. A routine fer team, delegation of responsibilities nology transfer and reduce the time production test (3 validation bathes) for the transfer, and a schedule. for installation and commissioning of shows that the entire transfer (not ▪ developing documentation. equipment to, for instance, 2-3 days only technological, but also analytical ▪ training of the receiving party’s em- for reactor equipment. methods, cleaning assemblies/equip- ployees (conducting training pro- ment/premises experience, and staff grammes and seminars). When planning the transfer process, qualifications) has been completed. ▪ transfer of analytical methods. the complexity of the drug dosage ▪ Technology transfer (exchange of form should also be considered. When Main technology transfer specialist delegations, re-equipment transferring complex products, the stages and upgrade of the recipient’s labo- company should arrange tests that will Thus, we can define the transfer as ratory, etc.) guarantee the identity of the product a logical, controlled and documented ▪ validation and verification. reproduced at the new site. For exam- procedure to transfer the pharma- ▪ Post-transfer control. ple, testing a bigger number of collect- ceutical drug control technology and ed samples (including at different labo- methods from the developer to the Each stage should be documented.

Below there is a table with an ap- 3 Rudko A. Technology transfer... Be ready! GMP news No. 3 (17), 19.11.2018 proximate list of documents devel- https://gmpnews.ru/2018/11/k-transferu-texnologij-bud-gotov/ oped in the course of the transfer:3

25 How to Invest in Russia Localisation and investments |

Stage/Task Source Documentation Transfer Documentation

Project launch Project plan and quality control Quality Agreement, Project Imple- plan, risk assessment protocol, risk mentation Plan, TOT Protocol mitigation plan, GAP analysis

Evaluation of instrumentation Plan and equipment of SU produc- Step-by-step comparison with RU tion facilities, list of all equipment production facilities, GAP analysis, and systems, qualification statuses Qualification protocol and report (DQ, IQ, OQ) and reports, manuals, SOPs, etc.

Safety evaluation Specific waste and its disposal

Staff training Standard operating procedures and Training protocol, evaluation of training programmes results

Transfer of analytical Specifications, including in-house Protocol and report on the transfer techniques control, methodology validation of methods reports

Supply of raw materials Specifications and Additional Information on APIs and Auxiliary Materials and Ingredients

Transfer process Information about reference par- Process validation protocol and ties, development report, stability report data, deviation reports, information on ASF, etc.

Cleaning Validation of cleaning, including in- Cleaning validation protocol and formation on solubility, therapeutic report doses, category (toxicology), SOP for cleaning, etc.

Technology transfer in the pharma- sion is still minimal within the indus- transfer will obviously be of a long- ceutical industry is very important try – the corporate income has not term nature. In order to maintain suc- both for foreign companies and for dropped yet, and workforce produc- cessful cooperation, it is important to the Russian manufacturers. For the tivity remains very high as compared consider such features as legal pro- former, it allows not only to main- to other industries. tection of transferred technologies, tain, but also to increase their mar- the quality of pharmaceutical prod- ket share in Russia. For the latter, it This cooperation trend between Rus- ucts or medical equipment produced provides opportunities for accelerated sian and foreign pharmaceutical com- with their use, their ultimate cost to growth right away, when the reces- panies accompanied by technology the consumers, etc.4

4 Problems and prospects of economics and management: proceedings of the V International Scientific Conference. St. Petersburg, 2016 https://moluch.ru/conf/econ/archive/219/11502/

26 Part III. Before you start

27 How to Invest in Russia Before you start |

Doing business in Russia: how to bridge the gaps

Structuring your new to inform the state bodies about the company: Trust and trust and pay taxes from its profit in ‘Matreshka’ Rule the Russian Federation.

In the Russian law there is still no ‘trust’ The 2nd structuring gap is the so-called concept. There is a ‘fiduciary manage- ‘Matreshka’ rule, which was cancelled ment’ notion, however, it does not in Germany and France for example, imply the transfer of ownership (prop- but still exists in Russia. According to erty) rights to management, as com- the Russian legislation,1 a legal entity Alina Kozmina pared to the English ‘trust’ concept. consisting of one person (individual or Senior Legal Expert of Corporate Therefore, the fiduciary management another legal entity) cannot be the sole Law practice, SCHNEIDER GROUP in does not serve the same purposes as participant of a Russian LLC (nor can Moscow the trust – here is the 1st gap which it be the sole shareholder of a JSC). you cannot actually bridge. Experts and businessmen have been Alina has been advising international in- discussing for a while already that this vestors on their activities in Russia for The issue of implementing the trust rule does not contribute to tracing of 7 years, has experience and expertise in notion in the same form it is under- the actual owners of businesses, i.e. to corporate and contract law, international stood under the common law has lifting of the corporate veil. However, investments & international projects sup- been raised in the discussions at the this provision still remains the same. port, public-private partnerships. level of the President and the Gov- Formally, a company that was regis- ernment of the Russian Federation. tered in violation of this rule may be However, at the moment the only liquidated on the basis of a court de- achievement of those discussions is cision confirming that the company’s the enactment of the tax regulations registration was invalid.2 The claim for hen a foreign investor on the controlled foreign companies liquidation may be filed with the court considers expanding (chapter 3.4 of the Tax Code of the by the tax authorities. However, practi- W business onto the Rus- Russian Federation) as of January 1, cally the risk of filing such a claim and sian market, such an endeavor can 2015. After this enactment the Rus- further liquidation of the company by be quite unpredictable, in particular sian tax legislation has become aware court is not very high, because tax au- when it comes to Russian jurisdic- of the term ‘trust’ and it has been de- thorities and courts take the position of tion compared to European. Let us fined as ‘a foreign structure without the Constitutional Court of the Russian take a look at the most common the creation of a legal entity’. However, Federation into account.3 According to practical ‘gaps’ the Russian legal it obviously refers to foreign trusts the the mentioned position, liquidation is system involves and how you may incorporation of which might result in an exceptional measure, which shall be ‘bridge’ them. extra responsibilities for tax residents proportionate not only to the violations

1 Paragraph 2 of Article 7 of the Federal Law as of 08.02.1998 No. 14-FZ ‘On Limited Liability Companies’ and Paragraph 2 of Article 10 of Federal Law as of 26.12.1995 No. 208-FZ ‘On Joint Stock Companies’ 2 Subparagraph 1, Paragraph 3 of Article 61 of the Civil Code of the Russian Federation 3 The Constitutional Court ruling No. 14-P dated 18.07.2003

28 | Before you start How to Invest in Russia

committed by the legal entity, but also company’s name, authorised capital from the beginning of its operation. to the consequences caused. and other mandatory issues, including This gap is usually bridged by appoint- general manager’s position and bank ment of a Russian citizen as a director Nevertheless, to be formally compli- accounts to be opened. The problem for the initial period of the company’s ant with the Russian legislation, you here is that in Russia there is no con- activity (2-3 months). After receipt of should consider the following solutions cept of an LLC being in the process of the work permit the foreign citizen to bridge this gap: 1) introducing one establishment (‘GmbH in Gründung’), may be appointed to the CEO’s posi- more participant (shareholder) at the which is why the preparatory steps for tion upon a resolution of the empow- level of the company to be established the future operation of the company ered corporate body. The 2nd possible or 2) at the level of the parent com- cannot be arranged by the company solution might be the appointment of a pany (or individual). Practically the itself in advance. management company (or a manager) 1st option is usually chosen because as an individual executing the powers it is less time and effort consuming as Thus, the Russian legislation obviously of a director for the same initial period compared to the 2nd one. does not forbid a foreigner to be ap- of the company’s activity with the fur- pointed as a director of the company. ther change to a foreign director. The Can your newly However, the gap here occurs because 2nd option might be more comfortable established company run of the rule that only the already estab- for an investor, because it does not its business right away? lished company may apply for a work involve the labour law issues with the Following all the legislation rules, permit for its director. Therefore, a for- relevant guarantees and possible com- you and your business partners have eigner cannot be appointed as a direc- pensations in case of dismissal of an probably already discussed the future tor in a newly established legal entity individual.

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As for the bank account, it also can- behalf of the company without a power of the future director to the online not be opened simultaneously with of attorney from the date indicated in banking system on the basis of a pow- the company registration as banks the resolution regarding the appoint- er of attorney issued by the company, require an application for opening ment. But on the other hand the new giving him/her the right to exercise an account to be submitted to the foreign director is not able to really act payments individually. After termina- bank for official consideration after on behalf of the company (i.e. perform tion of powers of the previous director company registration. It is also ob- duties as an employee) prior to receipt you may inform the bank about it and ligatory to submit copies of the docu- of a work permit. A kind of paradox oc- the future director will still be able to ments confirming the fact of registra- curs here: the director has powers to manage the bank account using the tion. How is this usually fixed? You act from the corporate law standpoint, power of attorney. After appointment should receive an application draft but the migration legislation forbids of this person as the new director and and the list of documents required to him/her to act. If this prohibition is receipt of the work permit you may open an account from the bank in ad- violated, the director and the company apply to the bank for changing his/ vance. You fill in all the bank’s forms may be held liable. The administrative her status from ‘Attorney’ to ‘Director’. and questionnaires, get all the nec- fines vary for companies from 250,000 This is how the gap between two di- essary information and receive the to 1,000,000 roubles and for individu- rectors can be bridged. required documents from the head- als from 2,000 to 7,000 roubles. The quarters of the future company. Then only way to avoid this for the director The second option is not preferable you confirm the filled-in blanks and is to refrain from signing any docu- from the compliance point of view, but documents set with the bank (i.e. the ments and from exercising any other if the first option was not arranged in bank should confirm that it addition- actions on behalf of the company to advance, the second one can turn out ally requires only the information and exclude the risks. to be the only possible temporary solu- documents which will be received tion in case you cannot let your bank as a result of the registration proce- The new director should obviously accounts be ‘frozen’. If you are quite dure). After receipt of the set of docu- be authorised to manage the funds satisfied with the previous director and ments from the registration authority on the company’s bank accounts. you terminated his/her powers not be- you finalise the set and submit it to However, the change of the individu- cause of any misconduct, practically the bank for official consideration. In als authorised to make payments on you may propose him/her to tempo- such cases opening of the account behalf of the company cannot be rarily manage the bank accounts until might take 2-10 days after the regis- carried out simultaneously with the the new director is authorised in the tration completion. change of the director as the bank bank. It should be noted that formally requires among others the copies of these will be considered unauthorised Changing the the documents confirming the new actions of the person, whose powers management: can it be director’s registration in the EGRUL. have already been terminated, and smooth? Therefore, only after receipt of such such actions can potentially be chal- When you intend to change the gen- confirmation documents the compa- lenged in court (e.g. by the company’s eral manager and appoint a foreigner ny is able to submit a statement on counterparties). Therefore, it is recom- in an operating company, it might still changing the authorised signatories mended to initiate the first option in be more difficult than you imagine. to the bank. However, if the bank is advance. not informed about the previous di- Thus, you have appointed the foreign rector’s authorities’ termination, he/ There are obviously other ‘gaps’ a for- citizen as the director of the company. she will be able to still manage the eign investor might be surprised by Only after that you can submit the bank accounts. in Russia, and as for now, not all of documents for receipt of a work permit them can be bridged. Nevertheless, and in parallel submit the package for Thus, there are two possible scenari- the legislation and court practice are registration of the new director in the os in this case. The first option: before constantly evolving, enabling Russia Companies Register (‘EGRUL’). Formal- termination of powers of the previous to climb up positions in various world ly the director is empowered to act on director you may add the ‘signature’ business rankings.

30 | Before you start How to Invest in Russia

Tax incentives for investors in Russia: what’s next?

tion in case of nationalisation of property, free transfer of income from Rus- sia, the most-favoured-nation regime,2 and the grandfather clause. Current Russian legislation provides for various tax incentives that also consider the above principles to certain extent.

Types of tax incentives Valeria Khmelevskaya Roman Manko for investors Partner and Head of Tax Practice, Lawyer, Tax Advisor, First of all, there are incentives as- Brand & Partner Brand & Partner sociated with certain activities, e.g. 150% R&D super deduction, reduced Valeria is Partner and Head of Tax Prac- Roman Manko has been advising foreign rates for social security contributions tice with Brand & Partner law firm. investors on issues of Russian and inter- for IT companies, etc. Secondly, Valeria is a lawyer and a tax consultant national tax law for more than five years. there are project-related tax incen- with over 19 years’ experience in Russian Roman mostly focuses on issues related to tives, e.g. Skolkovo (project partici- and international tax law issues with her tax risk analysis of cross-border transac- pants may obtain incentives with remain focus on cross-border transactions tions, tax incentives, transfer pricing rules spect to VAT, corporate income tax, and related structuring, VAT offsets and and double taxation. corporate property tax, and social recovery, double taxation and perma- security contributions). nent establishment issues, Russian CFC rules and beneficial ownership concept, There are other incentives as well. transfer pricing, etc. Both the federal and regional investment promotion laws provide for tax incentives and other measures to he investment framework to be among the Top 20 in the invest- support investors, which mostly al- in Russia has significantly ment ranking – should make Russia low application of reduced tax rates T сhanged and to some extent more attractive to investors. Also, tax for taxing profits (corporate income improved in recent years. Russia is cur- incentives provided locally in the Rus- tax), property (corporate property rently ranked 31st in the World Bank’s sian regions should serve this purpose. tax) or personal income (personal in- ‘Doing Business Report’,1 whereby at come tax). Also, some non-tax meas- the time of the ranking’s launch a few In general, Russian investment legisla- ures may be allowed (low-rated lease years ago, Russia occupied 124th place. tion provides for a number of protective payments for land in state ownership, Russia ranks 53rd in ‘Taxation’ and is rules for investors, including, but not subsidies from the federal or regional achieving higher positions each year. limited to guarantees against negative budget, financial support through The ultimate, officially declared goal – changes in the legislation, compensa- loans or grants from the Industrial Development Fund, etc.). To obtain the benefits, investors generally have 1 https://russian.doingbusiness.org/ru/data/exploreeconomies/russia to comply with certain requirements, 2 The same conditions for doing business compared to Russian companies. in particular, the project should qual-

31 How to Invest in Russia Before you start |

of goods and meet the following requirements: ▪ 100% localisation of production in the relevant constituent entity of the Russian Federation, partial localisation is also allowed with respect to some regions (e.g. Buryatia, Sakha, Tyva); ▪ At least 50 million roubles capital investment over a 3-year period or at least 500 million roubles over a 5-year period; ▪ the company does not apply special tax regimes, is not a resident of a special economic zone or located in the territory of priority social and economic development.

Eligible entities obtain a set of benefits that may vary in the regions: ▪ zero corporate income tax rate; ify as a priority project for Russian Investors enjoy the opportunity to ▪ application of a reducing coefficient authorities (this usually means new enter into SPICs with authorities at with respect to mineral extraction technologies, IT, import substitution, the federal, regional and local levels. tax (0, 0.2, 0.4, 0.6, 0.8 depending development of regional infrastruc- Initially, there was a high investment on the tax period and territory); ture, etc.). Also, a minimum invest- threshold for the federal level (750 ▪ application of increased depreciation ment threshold may be set forth as million roubles), which is currently rate (up to 2) to fixed assets. one of the criteria, or a requirement abolished. Also, the terms of incen- for the salaries of employees hired for tives were extended as a result of Investing in regions the project to be no lower than the amendments to the above law in Russian regions have fairly broad leg- average regional level. August 2019. They currently reach up islative powers and may independently to 15 years instead of 10 years for pro- establish both preferential conditions Special investment jects with total investments of up to for investors and the procedure and contracts (SPIC) 50 billion roubles and up to 20 years requirements for using such condi- Federal Law No. 488-FZ ‘On Indus- for projects with total investments ex- tions, unless there are limitations set trial Policy’ dated 31.12.2014 intro- ceeding 50 billion roubles. The incen- forth by the Tax Code or other federal duced the special investment contract tives provided under SPICs concluded laws. There are 85 regions in Russia (SPIC) as a government support guar- prior to the above amendments remain and each one has different regional antee for major companies invest- unchanged, so the same rules apply to regulations. So, the benefits offered by ing in technology, the list of which is them as before. the regions are quite diverse and may being approved by the state. SPICs include lower rates, as well as full or create special benefits and incentives Regional investments partial exemptions for corporate prop- for investors – whether Russian or for- project erty tax and land tax. They may also eign – to invest in Russia and localise Another opportunity to receive cer- guarantee unchanged tax rates for in- their production. In particular, there tain tax and other incentives is the vestors. may be tax holidays available with implementation of a regional invest- regard to corporate income tax and ment project. Such projects should In most regions, investors must un- corporate property tax. be aimed at industrial manufacturing dergo authorisation with respect to

32 | Before you start How to Invest in Russia

the project in order to obtain tax in- ▪ reduced corporate income tax rate ber of incentives and favourable re- centives. For this, submission/approval (established by the constituent en- gimes for which the project could of a business plan and signing of an tity of the Russian Federation); potentially qualify and clarifying the agreement with the region are gener- ▪ reduced tariffs of social security con- application procedures (if any). More- ally required. tributions; over, a project’s relevance should be ▪ simplified VAT recovery; checked from the perspective of sanc- Special economic zone ▪ land tax exemption (in several tions and the presence of further re- (SEZ) TASED). strictions (some strategic industries Special economic zones are territories have foreign investment restrictions). with a special legal status and pref- Notably, tax benefits are guaranteed It is also important to stay updated on erential economic and tax conditions for the entire duration of the residency. continuing and proposed legislative for resident companies. Each special To become a TASED resident, an appli- changes. Some insights on this could economic zone involves benefits in a cation and a corresponding package of be taken from a document regularly certain area of activity. In particular, documents must be submitted to the published by the Ministry of Finance there are: managing company of a certain TASED of Russia: the Main Directions of the ▪ logistics SEZ; and a special agreement on carrying Budget, Tax and Customs Tariff Poli- ▪ industrial SEZ; out activities must be signed. cies. For example, the Main Directions ▪ technological SEZ; of the Budget, Tax and Customs Tariff ▪ tourism SEZ. ‘Russian offshores’ Policies for 2019 and for the Planning These are special administrative ar- Period 2020 and 2021 describe one There are 27 SEZs in Russia (10 in- eas (SAR) newly introduced by Rus- of the major directions as creation of dustrial, 6 technological, 10 tourism, sian legislation for re-domiciliation of stable tax conditions for the oil and and 1 logistics).3 Residents of such foreign companies to Russia. At the gas sector by fixing the existing rules zones enjoy significant tax, customs moment, there are only two of them: for the next 6 years. Another goal is and economic benefits. They are en- on Russky Island in the Primorsky re- to achieve certainty in the legislative titled to pay corporate income tax gion and October Island in the Kalin- changes by foreseeing a statutory at a reduced rate varying from 0 to ingrad region. Eventual tax benefits rule that laws published after a cer- 15.5%, purchase land at a price not may include reduced tax rates on tain date which significantly worsen exceeding 50% of the cadastral val- dividends, proceeds from the sale of the taxpayers’ position or tax condi- ue, and be exempt from import and shares, etc. tions should come into force no ear- export customs duties and import lier than one year later. This should VAT on them. Residents may apply Free Port of Vladivostok end the existing practice of chaotic a 0% rate for transport, corporate (FPV) adoption of numerous tax laws that property and land taxes during the From a tax perspective, residents of amend the existing rules at the end first 10 years. In addition, there is a the FPV are generally entitled to a of the year. guarantee against adverse changes reduced corporate income tax rate in the legislation. and reduced tariffs of social security In general, it could be concluded contributions. They may also apply that despite complicated political Territory of advanced incentives in relation to VAT similar and economic circumstances, Russia social and economic to TASEDs. remains a fairly attractive place for development (TASED) foreign investments. This is also due There are currently more than 100 Considering the above, investors have to the wide range of support meas- TASEDs in Russia and their number a lot of opportunities for various pro- ures and tax incentives. An increase continues to increase. TASED residents jects in Russia and most of them al- in Russia’s investment attractiveness enjoy the following incentives and ben- low the tax burden to be reduced. It is also highly aspired to at the official efits: is important to start preparations for level, in particular, due to Russia’s a project in advance. This should in- expected entry into the Top 20 of the 3 Based on status on 04.09.2019. clude considering the eventual num- Doing Business rating.

33 How to Invest in Russia Before you start |

New compliance challenges posed by rollback on transparency of state procurement and ownership rights

In a 2018 report by Transparency In- ternational about the implementation of the Brisbane Commitments, it was noted that Russia had fulfilled 40-60% of its obligations. Most countries fell within this range. The organisation scored Russia high in the following areas: introducing the concept of beneficiaries, identifying and mitigating Alexei Panin Andrei Dudkin risks, domestic and international co- Founding Partner, Urus Advisory Analyst, Urus Advisory operation, beneficial ownership information and tax evasion, bearer share Alexei has over 10 years’ experience man- Andrei studied public relations in politics and nominees. Conversely, from 2015 aging end-to-end complex investigations and business at the Financial University to 2017, access to beneficial ownership and advisory projects on a range of sec- under the Government of the Russian Fed- information and beneficial ownership tors in Russia and across the FSU. He has eration. information of trusts regressed. worked on hundreds of detailed examina- His primary research areas include issues tions of corporate risks in the region on of political stability, legitimacy of institu- This article will now analyse the Rus- behalf of major multinationals and financial tions of public politics and international sian government’s recent manoeuvres institutions. relations. which, rather than promoting transpar- Alexei is a graduate from the Moscow Fi- ency, were in fact aimed at reducing nancial University under the Russian Gov- it, as well as the reasons behind these ernment and the UK University of Ports- policy changes. mouth. Alexei has lectured on corruption risks at the Higher School of Economics in In autumn 2015, the Russian Federal Moscow and participated in the Interna- Security Service (FSB) put forward a tional Anti-Corruption Academy in Vienna. bill proposing to classify information related to real estate ownership, air- craft and ships.2 By proposing to block he Western business com- solidated at an interstate level: at the public access to the Unified State Reg- munity’s commitment to G20 summit, for example, an agree- ister of Real Estate (USRRE), the bill T improving its transparency ment was reached about introducing was designed to protect the integrity has been one of the key trends in the concept of ‘beneficial owners’ and of property deals. Despite receiving recent times. Significant amounts of making information about them read- the support of the government com- corporate data relating to various as- ily available.1 mission, the proposed legalisation was pects of business – from production

statistics to ultimate beneficiaries – 1 https://transparency.org.ru/research/drugie-issledovaniya/rossiya-vmeste-so-vsey-g20-obeshcha- have become available in the public la-sdelat-biznes-prozrachnym-poluchaetsya-poka-ne-ochen.html domain. This trend is also being con- 2 https://www.rbc.ru/economics/06/10/2015/5612984c9a7947855de1caee

34 | Before you start How to Invest in Russia

frozen.3 Roman Rubanov, who cur- New compliance challenges posed rently runs the Anti-Corruption Foun- dation, which often uses information from the USRRE during its investiga- by rollback on transparency of state tions, has suggested that the appear- ance of the bill might be linked to the procurement and ownership rights revelation that the FSB’s former chief Nikolay Patrushev has 1.1 billion roubles worth of real estate assets.4

In summer 2016, the names of the children of Yury Chaika, the Prosecu- tor General of the Russian Federation, were changed to character sets on the Federal Service for State Registration, Cadastre and Cartography (Rosreestr), making it very difficult to determine the nature of their real estate assets.5 Prior to this in 2015, the aforementioned An- ti-Corruption Foundation published an investigation into the business activities published, accusing Prime Minister Dmit- At the end of 2017, the transparency of the Prosecutor General’s children in ry Medvedev of indirectly owning valu- surrounding state procurement was which it questioned their lawfulness. able real estate.9 Although the courts significantly reduced by order of the The Presidential Press Secretary stated ordered the Anti-Corruption Founda- government, all information related that the report was contrived and that it tion to remove the video from YouTube to purchases made by the Ministry of was not taken seriously in the Kremlin.6 (this request has not been obliged) on Defence, the FSB and the Foreign In- The actions of Rosreestr were later dis- account of the fact that it ‘discredited telligence Services became classified. puted in court, but it was ruled that they the honour and dignity’ of one of the These institutions gained the right to had not violated Russian law as ‘federal defendants (Alisher Usmanov)10 and identify their suppliers in secret, and laws do not give third parties the right due to its mixed reception by the expert all information about contracts became to access citizens’ personal data with- community,11 the publication resonated state secrets.13 Such a measure can out their consent’ (this is in reference to in society, leading to some protests on be explained by the difficulties caused Russian data protection laws).7 26 March and 12 June 2017.12 largely by anti-Russian sanctions. In

In summer 2017, the Federal Assembly 3 of the Russian Federation amended the https://og.ru/politics/2016/05/18/80919 4 law on ‘state security,’ removing the per- https://www.rbc.ru/economics/06/10/2015/5612984c9a7947855de1caee 5 https://meduza.io/shapito/2016/06/09/lsdu3-chayka-i-yfyau9-chayka sonal data of the president, prime minis- 6 https://www.rbc.ru/politics/07/12/2015/566564879a7947c4da36b745 ter, prosecutor general, the chairpersons 7 https://www.vedomosti.ru/realty/articles/2017/10/19/738417-razreshil-zasekretit-svedeniya- of the Investigative Committee, of both vladeltsah-nedvizhimosti houses of parliament and the Consti- 8 https://www.vedomosti.ru/politics/articles/2017/06/16/694626-zasekrechivat-imuschestve-chinovnikov tutional courts, and their families from 9 https://www.rbc.ru/society/02/03/2017/58b7f3959a79474158912948 public registers (for example, Rosreestr 10 https://tass.ru/proisshestviya/4297234 and the Unified State Register of Legal 11 https://tass.ru/proisshestviya/4297234 8 Entities [USRLE]). It is worth noting 12 https://www.rbc.ru/photoreport/26/03/2017/58d821a09a794774f91fddeb#ws, that in spring of the same year another https://www.rbc.ru/politics/13/06/2017/593e2f389a7947800c2f33db investigation by the (albeit heavily po- 13 https://www.forbes.ru/biznes/353621-gostayna-protiv-sankciy-silovikam-i-goskompaniyam-raz- liticised) Anti-Corruption Foundation was reshili-zasekretit-dannye-o

35 How to Invest in Russia Before you start |

autumn 2017, the FSB, the Foreign After the legislation was introduced, could be classified. In terms of the Intelligence Services, and the General some studies claimed that 35% of clause on sanctions, this refers specifi- Directorate of the General Staff of the public procurement in 2018 was classi- cally to those organisations affected by Armed Forces were added by the US fied. Several Russian experts consider the 2017 initiative Countering Ameri- State Department to the sanctions lists. this estimate to be inflated, although ca’s Adversaries Through Sanctions Act they recognise the effect that sanc- (CAATSA).19 The Russian government’s Along with these Russian law enforce- tions have had on this process. A de- reaction seems to be an obvious effort ment agencies, the largest manufac- crease in the percentage of classified to soften the impact of anti-Russian turers of state defence equipment public procurement might be possible sanctions on national enterprises. As is were put on the sanctions list: Kalash- if the law enforcement agencies were clear from the aforementioned exam- nikov, Rosoboronexport, Helicopters of to declassify some of their less sensi- ples, the main reasons put forward for Russia, etc.14 As long as the talk sur- tive purchases. For example, contracts justifying the new measures are anti- rounding the lifting of sanctions re- related to the healthcare system or Russian sanctions and investigations mains simply as talk, it is unsurprising housing and public utilities.18 by journalists. that this measure – initially introduced for six months – has already been extended three times (the current decree The risks associated with a reduction is valid until 1 January 2020). If the sanctions are not lifted, this trend is in Russian business transparency likely to continue. In November 2018, a further bill proposing the classifica- can be minimised through a systemic tion of all defence-related procurement came under government con- change. sideration. However, such large-scale measures were deemed excessive. All In spring 2019, the Russian govern- It is worth noting that the sanctions the same, information relating to some ment published a decree allowing legal have caused not only state companies areas of procurement – development, entities to classify information relating but also private companies to reduce modernisation, weapons servicing, and to co-owners, directors and enterprise their transparency. The statistics show space infrastructure manufacturing – licences in the USRLE in the following that en masse Russian companies are remained classified.15 Furthermore, circumstances: if they are registered turning away from the label ‘public the Federal National Guard (Rosgvar- in Crimea or Sevastopol, if they find joint stock company’. Out of nearly a dia) has suggested that from Decem- themselves under foreign sanctions or thousand companies comprising 80% ber 2019 it will classify its purchases.16 on the list of banks authorised for state of the total national income, more It is worth noting that in August 2018 defence contracts (the list includes than half do not publish public infor- another ‘viral’ investigation was pub- more than 20 large Russian banks, mation about their activities (in 2015, lished, alleging that Rosgvardia buys such as Sberbank, VTB, Alfa-Bank, the figure was less than 25%).20 their troops’ rations at inflated prices. etc.). It was also decreed that informa- Rosgvardia criticised the investigation tion about subsidiaries and state com- As a result, it is difficult to look at the as a falsification and a provocation.17 panies based in Crimea or Sevastopol Russian investment market with much optimism from a Western point of view.

14 https://www.rbc.ru/politics/27/10/2017/59f360619a79477350172a64 Instead of increasing transparency – 15 https://www.rbc.ru/politics/30/04/2019/5cc8486d9a7947212a6dc998 one of the keys to a thriving investment 16 https://www.rbc.ru/politics/26/04/2019/5cc3602a9a794703ce3f770d climate – Russia has taken measures 17 https://www.rbc.ru/politics/31/08/2018/5b890ee69a79472a00dec0f5 to reduce it. This has negatively af- 18 https://iz.ru/877209/dmitrii-grinkevich-aleksei-ramm/gossdelka-zakryta-35-biudzhetnykh- fected the country’s investment appeal, zakupok-okazalis-zasekrechennymi as well as undermined the confidence 19 https://www.rbc.ru/economics/11/04/2019/5cae1ee29a7947722c3e75bd of potential investors for whom there 20 https://www.kommersant.ru/doc/3527286 are already other worries, such as the

36 | Before you start How to Invest in Russia

arrest of the US businessman Michael Domestic policy is also not expected noted that the lower estimates – for Calvey – an issue that remains ongoing to change. Most likely, continued pres- example, 33% given by the IMF – ex- and which has divided opinion.21 sure on those conducting business in cludes companies which were former- Russia and on foreign business part- ly independent of the state yet may In our view, this negative trend may ners will lead to the additional closure be entirely dependent on state sub- continue. First, on account of the un- of certain segments of the Russian sidies or even have state entities on likelihood of relations between Russia market. As has been suggested, for their shareholders’ lists. Accordingly, and Western countries improving (al- example, Rosgvardia’s move to classify one can say that the state sector oc- though Western leaders are clearly di- its procurement contracts, in tow with cupies the lion’s share of the Russian vided on the issue of Russia, as opin- the Foreign Intelligence Service, the market. In addition to ‘setting the ions at the G7 in August showed). On FSB, and the Ministry of Defence, may rules of the game’, the state is itself the one hand, it is a given that coop- soon be implemented. a major, active player. In the current eration continues on some level. For climate, the state’s actions set a trend example, Mercedes-Benz is opening It is worth mentioning that the cit- which, in one way or another, affects a car factory in Russia, and the Nord ed cases are mostly related to state the whole system of economic rela- Stream 2 is nearing completion.22 On structures and less related to inves- tions in Russia. the other hand, there is no reason to tors working with private companies expect a breakthrough in relations. In that are not related to Crimea and The risks associated with a reduc- the last five years, pressure for sanc- Sevastopol. However, at the same tion in Russian business transparency tions on Russia have only increased. time, one should not forget that, ac- can be minimised through a systemic Additionally, it would be wrong to as- cording to various estimates, the pub- change. However, this requires either sume that Russia will change its posi- lic sector makes up 30-70% of the extraneous help like the unlikely eas- tion in the coming years. Russian economy. Some experts have ing of Western sanctions or changes in Russian domestic policy. Neither of

21 https://www.rbc.ru/finances/11/04/2019/5caf0b6f9a7947c6047d214e these possibilities are by any means 22 https://www.vedomosti.ru/auto/articles/2019/04/03/798178-mercedes-benz guaranteed.

37 How to Invest in Russia Before you start |

What international e-commerce companies should know about Russian law in order to do business in Russia?

nternational online retailers’ interest in the Russian market is I currently growing. Over the past three years, e-commerce revenue in Russia has increased by 2,579 million US dollars.1 Meanwhile, existing and potential market players often suffer from a lack of credible information about the legal requirements appli- Artyom Berlin Aleksei Gribanov cable to e-commerce in Russia. From Associate of Transactions & Senior Associate, Head of VAT to customs taxation to the col- Corporate Law practice, Borenius the Intellectual Property and lection, use and storage of personal Russia Information Technology practice, data, this article gives an overview of Borenius Russia what international e-commerce com- Artyom advises clients on issues related panies should know about Russian to the employment and tax law as well as Aleksei focuses on transactions and dis- laws. international private law. Artyom works on putes in intellectual property, the protec- projects on structuring and supporting pro- tion of personal data, the regulation of the Taxation cedures for optimising companies’ organi- Internet and new technologies (cryptocur- sational structures. rencies, big data, etc.) under both Russian VAT in cross-border e-commerce Artyom also represents Russian and for- and EU legislation. B2C cross-border online purchases via eign companies in Russian courts and in- Aleksei has significant experience of han- mail are not subject to VAT, though ternational commercial arbitration (the In- dling major court disputes involving leading the Russian business media periodi- ternational Commercial Arbitration Court at technological companies. Among his clients cally reports discussions at the gov- the Russian Federation Chamber of Com- are large gaming companies, financial and ernment level on imposing VAT on merce (ICAC), the International Court of technological companies, and renowned such purchases. However, there is no Arbitration at the International Chamber of software developers. strong sign that authorities will ap- Commerce (ICC Court)). Artyom’s experi- prove the introduction of such tax in ence includes contractor and distribution the near future. disputes, corporate conflicts, challenging unlawful actions of public authorities. 1 https://www.statista.com/outlook/243/149/ecommerce/russia

38 | Before you start How to Invest in Russia

If a Russian company makes purchases apply such a tax. Private parcels and comply, thus taking the risk that their on an international retail website, the small packages pass through customs websites may be blocked by Russian transaction is subject to VAT, which is control freely, unless a customs officer authorities, as was the case with due from the Russian buyer. The buyer has reasonable doubts as to their con- LinkedIn in 2016. must pay VAT at the standard 20% rate tent or value/weight regarding the cus- based on the customs value during the toms tax thresholds. Hence, only items Legislation on personal data col- customs procedure. A VAT deduction that are clearly undervalued or look like lection, use and treatment may be applied subsequently, depend- a commercial shipment have customs Russian personal data law provides ing on the use of the imported goods. duties de facto imposed on them. for various obligations of companies involved in the processing of personal data. From an international e-com- If a company retains a third party to merce perspective, the crucial ones are process personal data on its behalf, as follows: an agreement with that third party Written consent of the data subject In many cases, companies are required must set out the requirements for to obtain data subjects’ written consent to the processing of their personal personal data protection. data. For example, written consent may be required in order to transfer person- Customs tax threshold for tax- The situation differs for items delivered al data to those countries which Rus- free orders by private courier services (e.g. DHL). sian legislation believes do not provide Online cross-border B2C purchases are These are required to collect Russian a sufficient level of protection of data exempt from any customs taxes: purchasers’ taxpayer identification subjects’ rights, including the US and numbers and disclose them to the cus- China. The problem is that written con- ▪ if their cumulative amount per month toms office along with the shipping de- sent must include certain detailed infor- does not exceed 500 euros;2 tails. This mechanism helps customs to mation, such as the passport details of ▪ or if their cumulative weight per monitor the cumulative value of items the data subject. month does not exceed 31 kg. delivered through such channel. If a company retains a third party to Purchases above this threshold are Personal data legislation process personal data on its behalf subject to a 30% customs fee (ap- (e.g. a Russian data centre), an agree- plied to their fractional value above Personal data storage law ment with that third party must set out the threshold), with a minimum of 4 Since September 2015, when the the requirements for personal data pro- euros per 1 kg of weight exceeding personal data storage law came into tection and must contain other provi- the threshold. force, companies are obliged to ini- sions specified by law. tially store and update personal data Starting from 1 January 2020, the thresh- of Russian citizens with the use of Notification to the regulator old will be lowered to 200 euros – but databases located within Russia. The Companies must, before process- this will be per package, not per month. transfer of personal data outside of ing starts, notify Roskomnadzor (the The tax rate will also be lowered from Russia is permitted only after data lo- proper Russian regulator) of their 30% to 15%. calisation has been completed. While intention to process personal data. many businesses prefer to move user There are certain exceptions to this For postal shipments, there is no effi- data from foreign servers to Rus- requirement. For example, notifica- cient way to control the thresholds and sia, others have failed or refused to tion may be unnecessary in respect

2 Since January 1, 2019, the tax-free threshold has been lowered to 500 euros from the previous 1,000 euros.

39 How to Invest in Russia Before you start |

of personal data processed only to In April 2019, the head of Roskomnad- Furthermore, the illegal processing of perform an agreement with the data zor publicly encouraged his subordi- personal data may entail administrative subject. In practice, Roskomnadzor nate to oversee the compliance of for- fines and claims for the reimbursement often requests companies that have eign e-commerce companies with the of damages and moral harm caused to not filed notifications to provide- ex personal data storage law. Moreover, data subjects. The fines are relatively planations for their inaction. Roskomnadzor may initiate an investi- low (up to approximately 1,000 euros). gation of a company’s data processing However, the aggregate amount for Privacy policy activities based on a single user com- several violations may be significant. A company that collects personal data plaint or based on online monitoring through the Internet must publish performed by Roskomnadzor officials An initiative is currently being dis- its privacy policy online. Russian law on a regular basis. cussed to increase the amount of fines does not provide explicit requirements for failure to comply with the Russian for privacy policies. However, Roskom- Russian personal data law does not data localisation requirement up to ap- nadzor has issued non-binding recom- fully correspond to the GDPR. There- proximately 82,000 euros for the first mendations concerning their content. fore, compliance with Russian law may violation and 248,000 euros for a re- If a privacy policy complies with the require additional effort from a com- peated violation. The relevant bill has GDPR, it may still not comply with pany that has already ensured its com- been submitted to the State Duma. Russian law. pliance with the GDPR. Compensation for moral harm and Why foreign online retailers are Penalties for non-compliance damages is also low. In practice, it concerned The blocking of a website by Russian usually does not exceed approximately Russian personal data law applies to authorities is the greatest risk for e- 100 euros. all companies (even those that do not commerce companies if they violate have any physical presence in Russia) Russian data protection law. LinkedIn Product restrictions and targeting Russian users. For example, has been blocked in Russia since 2016. certification the use of the .ru domain name and the Currently, Roskomnadzor is trying to existence of a web page or an advertis- make Twitter and Facebook move their Prohibited goods ing campaign in Russian may suffice for databases with personal data of Rus- Alcohol, tobacco products, drugs, jew- these laws to apply to a foreign retailer. sian citizens to Russia. elry, pharmaceutical products, weapons,

40 | Before you start How to Invest in Russia

‘spy equipment’, and certain other goods and other specific information related of defective goods, to withdraw from specified by Russian law are prohibited to the product (places of production, the agreement if the goods are defec- from being sold online in Russia. The warranties, prices, payment terms, tive, etc. same rules apply both to online sales etc.). This information should be ex- within Russia and to cross-border orders. pressed clearly and plainly in the Rus- Other legal requirements sian language. Failure to provide the for international The online sale of prohibited goods may information may entail administrative e-commerce companies lead to an administrative fine of up to fines, increased liability for product de- approximately 560 euros, the seizure of fects and harm caused to customers, Liability of marketplaces the relevant goods, and the blocking of and the consumer’s withdrawal from E-commerce platforms must provide the retailer’s website in Russia. the agreement. In practice, it is diffi- customers with reliable information cult to enforce any relevant legal deci- about both the platforms themselves In 2020, Russia may legalise online sales sions against a company which has no and about their sellers. In some cases, of alcohol. presence in Russia. an e-commerce platform may be required to pay compensation for losses Goods subject to certification Product information for customs caused by inaccurate information about Foreign online retailers are not obliged to authorities goods. In addition, if goods are not de- certify goods if they are not imported for In terms of information placed on livered on time and the customer with- subsequent distribution in Russia. Other- the packaging of goods, there are no draws from the purchase agreement, wise, the goods must comply with tech- special customs requirements that such platforms must refund any pre- nical regulations concerning perfume and apply to the international delivery payment to the customer. cosmetic products, children’s products, of consumer goods by mail or via toys, clothes and shoes, furs, leather shipping service providers. However, Trademark protection products, sports equipment, locks, etc. such packages of goods must comply Online retailers must respect third par- with the mandatory requirements of ties’ rights to trademarks when they To obtain a certification, an international Russian law, including consumer pro- choose their domain names, slogans online retailer must submit an applica- tection law. and other designations. They may also tion to the accredited certification body, want to protect their designations as which then performs research and either Terms of purchase and the con- trademarks protected in Russia. decides to certify the product or deny sumer agreement certification. A foreign retailer may au- There are no specific requirements for Payment regulation compliance thorise its partner in Russia to apply for agreements between Russian custom- International online retailers should en- certification of a product on its behalf. ers and foreign sellers. sure that the payment solutions they use comply with Russian legislation Product labelling The parties are free to choose foreign (including the data localisation require- Some goods, such as perfumes, shoes, law as applicable to their agreement. ment). In some cases (e.g. online sales cameras and clothing, are subject to However, in this case, the consumer through distribution centres in Russia), mandatory identification labelling. This will enjoy the protection of his/her the law on cash registers may apply to rule applies to those international online rights under the mandatory provi- international online retailers. retailers that sell goods through Russian sions of Russian consumer protection distribution centres. law. For that reason, the purchase Advertising law compliance agreement must not violate the rel- Russian legislation employs a broad Product information evant provisions of Russian consumer definition of an advertisement, hence protection law, such as the provisions some content published on a website Product information on site cata- concerning the consumer’s right to may be considered to be advertising. logue withdraw from the agreement with- It is recommended to ensure that such E-commerce companies must provide in seven days from the delivery of content complies with Russian advertis- customers with product descriptions goods, to demand the replacement ing law.

41 How to Invest in Russia Before you start |

Protection of intellectual property in Russia: practical overview

cess companies tend to put a number Meanwhile, only national registra- of important legal issues on the back tion with Rospatent is permitted for burner, for instance, those related to inventions, utility models and indus- the protection of intellectual property trial prototypes. The registration of (IP). As a result, they only start pay- an invention with the Eurasian Pat- ing attention to this issue when they ent Organisation located in Moscow is have already been confronted by a another option. In doing so, the rights number of difficulties, from seizure of to an invention may also be protected their products by the customs authori- in Armenia, Azerbaijan, Belarus, Ka- Taras Derkatsch ties and actions related to suspected zakhstan, Kyrgyzstan, Tajikistan and Senior Associate, IP/IT Practice trademark infringement, to unfair com- Turkmenistan. Group, BEITEN BURKHARDT petition through the sale of counterfeit Moscow office products or registration of a domain As in the European Union, the state name in contravention of their rights. registration of copyrighted IP (in- His core activities include consulting on cluding software) is not obligatory the protection of rights to intellectual We highly recommend a different ap- in Russia. While such registration is property: inventor’s patents, utility mod- proach – to prioritise meticulous legal voluntary, it is highly recommended els and industrial prototypes, and also preparation before accessing a new for valuable IP assets, as this makes copyright, know-how, and first and fore- market, in particular issues related to it easier to prove who is the asset most trademark rights. Taras also advises IP protection. owner. on information technologies. He also advises clients on issues of contract law, in IP registration Trade names are protected in Russia particular international contract law and The first step when protecting IP on upon their registration in the respec- dispute resolution. a new market is to register IP in the tive register (e.g. in the commercial Mr. Derkatsch is listed in Best Lawyers in relevant country. Generally, the legal register in Germany or in the com- the fields Intellectual Property Law, Infor- protection of trademarks, inventions, pany register in Austria) based on the mation Technology Law and Media Law, utility models and industrial proto- Paris Convention for the Protection of and has been included in the Legal500 list types involves the registration of such Industrial Property. Protection begins of recommended lawyers. IP with the Federal Service for Intel- when a company launches any activ- lectual Property (Rospatent). ity in Russia, for example, imports its products or participates in exhibi- Introduction The legal protection of trademarks in tions, etc. Practice shows that when companies Russia can also be ensured through plan to enter a new market, they usu- the international registration of the IP rights transfer ally prioritise supplying products to trademark with the World Intellectual registration the new market as quickly as possible Property Organisation. This approach The general rule is that any legal through subsidiaries or distributors, can take more time than registration actions with IP rights (for example, and gaining market share. In the pro- directly with Rospatent. transfer, licensing, pledge, etc.) must

42 | Before you start How to Invest in Russia

be registered with Rospatent if regis- arbitration tribunal or a Russian state that the trademark owner will be able tration of the relevant IP rights them- court (in cases when enforcement is to sue the infringer, obtain control of selves is required. to be performed in Russia). the domain name and receive mon- etary compensation (with compensa- Since 2014 this registration is not ap- Trademark protection tion ranging from approximately 150 plicable to the respective agreements. Once the relevant IP has been regis- to 70,000 euros, depending on the It only applies to the transfer of IP tered, it requires further legal protec- actual infringement). rights (licensing, pledge, etc.). As a re- tion. In the case of trademarks – one sult, all the relevant agreements may IP item commonly used all over the The aforementioned approach is also be concluded in simple written form world – trademark infringement in applicable in situations when the in- according to the general rules of the Russia frequently occurs in two key fringer registers their own creative Civil Code of the Russian Federation. areas. and unique domain name but uses a In the absence of such registration, protected trademark on the website these agreements will have no legal Firstly, this concerns online sale of connected to this domain name. In force in respect of any third parties (in- products and services. Infringers of- this case, the trademark owner will cluding the state authorities), but will ten register domain names that are also have the right to sue the infringer. be deemed concluded and effective for confusingly similar to trademarks pro- It is highly likely that the trademark the parties to such agreements. tected in Russia, and then use these owner will also be able to compel the domain names to advertise and sell infringer during pre-trial negotiations The registration process can be com- products which are usually sold and or in court to delete all words and pleted in different ways: applicants advertised under the relevant trade- images which are confusingly similar can submit a brief notification signed mark by its owner, or simply offer to to the protected trademark, and pay by both parties, the entire agreement sell the domain name to the latter. In compensation. or a notarised extract from the agreement to Rospatent. It is irrelevant whether the agreement is subject to The legal protection of trademarks, Russian or foreign law – Rospatent inventions, utility models and industrial will still check whether the submitted documents comply with certain pro- prototypes involves the registration visions of Russian law and deny registration in the event of non-compli- of such IP with the Federal Service for ance. Foreign companies should bear Intellectual Property. in mind that these provisions will be applicable in every case, and seek advice from Russian lawyers or patent some instances, such infringers even In most cases of online infringe- attorneys as to whether the respec- pretend to be the official Russian dis- ment, it is not important whether tive foreign agreement complies with tributors of the trademark owner (e.g. the products advertised and sold via such provisions before signing the re- a foreign manufacturer), misleading the infringer’s website are original or spective agreement. consumers and adversely affecting counterfeit. On the other hand, this the trademark owner’s profits in the question becomes material in the sec- Finally, such agreements must be en- process. ond area of frequent trademark in- forceable in court. However, as there fringement – the import of products is no agreement between Russia So far, Russian jurisprudence and into the Russian Federation and their and Germany (and also a number of the practice of the antitrust authori- further sale. other EU countries and the USA) on ties have been developing in favour the recognition and enforcement of of trademark owners. If the domain If the products are counterfeit (in judgments by foreign state courts, name is confusingly similar to a pro- other words, they were manufac- we recommend selecting either an tected trademark, it is highly likely tured by another party and the rel-

43 How to Invest in Russia Before you start |

evant trademark was not applied by ter (registration is free). As a result, Finally, the Constitutional Court stated the trademark owner or was not ap- parallel importers are detained at the that identical sanctions could not be plied upon its request), then the case border by the customs authorities; applied to parallel importers and the is simple – the products should be the trademark owner is immediately importers of counterfeit products, as seized and destroyed by the customs notified and is able to take all the in the latter case the trademark own- authorities or the police acting ex of- necessary legal actions against the ers suffer reputational damage related ficio. The trademark owner will also infringer. to the non-compliance of the products have the right to sue the infringer, with the anticipated attributes and demand that the latter destroy the Until February 2018 such legal ac- consumer requirements. As a result, counterfeit products and pay com- tions usually included claims for the the Constitutional Court determined pensation. confiscation and destruction of the that compensation paid to the trade- respective goods and compensation mark owner in case of parallel imports The situation is more complicated, payment. However, in February 2018 must in general be lower than for im- however, for parallel imports. In this the Constitutional Court of the Rus- porting counterfeit products. case original products (i.e. products sian Federation ruled that a claim that were duly manufactured and the for the confiscation and destruction Copyright protection relevant trademark applied by the of goods may only be satisfied if the Copyright is used to protect a range trademark owner or upon its request) plaintiff has proven that the goods of different IP items: texts, music, pictures and photos, video, designs, Under Russian law the import of etc. Most of this IP may be successfully used in business and, conse- products marked with any trademark quently, may also become a target constitutes the use of the respective for infringers. trademark, which requires the consent At the beginning of this article we recommended that you register all of the trademark owner. valuable copyrighted IP. But it is also true that for some copyrighted IP registration is impractical (for vari- are imported into Russia by an import- imported by the parallel importer ous reasons). Nonetheless, there are er who did not receive the permission pose a threat to public health or pub- many ways to prove copyright to the of the trademark owner to do so. This lic interests (for example, public in- respective IP. For this purpose, each permission is mandatory, as under Rus- terests would be at risk if the parallel company should meticulously pre- sian law the import of products marked imports were to be purchased via the pare and keep all the documents that with any trademark constitutes the use special governmental procurement will assist in proving its rights. Such of the respective trademark, which re- system). documents may include, for instance, quires the consent of the trademark employment contracts with the indi- owner. Once it has been obtained, the The Constitutional Court also ruled viduals responsible for the creation exclusive right to the trademark is ex- that the rights of trademark own- of such IP (the job duties of such in- hausted, and the importer and its cus- ers may in general be restricted in dividuals listed in their employment tomers may freely sell the respective certain circumstances, e.g. if the contracts should include the creation products in Russia. trademark owner acts in bad faith or of the respective type of copyrighted abuses its rights. In such cases the IP, e.g. photos or software), special Generally, parallel imports are not claim filed by the trademark owner letters (or any other types of written prosecuted by the Russian state au- against a parallel importer may be documents) addressed to such indi- thorities. However, trademark owners dismissed in full, or the amount of viduals with requests that they cre- are entitled to enter their trademarks compensation might be reduced ate the respective copyrighted IP, the into a special Russian customs regis- substantially. certificates of acceptance of the work

44 | Before you start How to Invest in Russia

results, etc. If the creation of copy- and the infringer may be compelled granted to any user who downloaded righted IP is outsourced, then the rel- to delete all the unlawfully uploaded the software from an official online evant contract should contain special materials from the website and pay resource. provisions related to the IP rights and compensation to the owner of the the transfer of such IP rights to the copyrighted materials (with compen- Some rights, however, tend not to customer. sation ranging from approximately be granted to the user, e.g. the right 150 to 70,000 euros, depending on to transform or modify the soft- The most popular copyright infringe- the particular infringement). ware, use it on an unlimited num- ment area can be found online. For ber of computers, etc. For instance, instance, if an unfair competitor runs Another area of possible infringement modifications to video games that a website where it advertises and is one of the most popular copy- remove the copy protection proto- offers products similar to yours, it righted items – software. The physi- cols or anti-cheat systems constitute may be experienced enough not to cal media containing the software unlawful use of the software, i.e. in- use the protected trademarks on (for example, compact discs) may be fringement of the software owner’s its website or in the domain name. circulated freely (without the specific rights. Moreover, further distribution Nevertheless, the competitor may consent of the software owner) on the of such modified software, even if still use product pictures and text Russian market once they have been performed by third parties not in- descriptions that it has copied from lawfully introduced onto the market volved in the modification process, your website, or even the entire by the software owner or its official will also be treated as a copyright in- design of your website. The use of distributor – a licensee vested with fringement. The software owner will this copyrighted IP also constitutes the respective powers. The buyers of be entitled to file a claim demanding copyright infringement. After the in- an official compact disc with software that the infringers delete all modi- fringement has been documented by automatically receive the right to fied software copies, destroy the screenshots, the respective infringe- download the software to their com- physical media containing them and ment case may be taken to court, puters – the same rights are usually pay compensation.

45 How to Invest in Russia Before you start |

Effective licence agreements with Russian clients, partners and subsidiaries

local production and competitiveness of Russian products in foreign markets, with the ultimate goal of hav- ing significantly more added value in Russia. Within this context, localisation does not only refer to the transfer of technological operations and the use of domestic raw materials and components, but also the trans- IRINA SAADUEVA ANDREAS BITZI fer of the related technology itself. VP Legal & Compliance, member Managing Director, quality partners. In most cases, the industry-specific of the management team, quality requirements for localisation are as- partners. Andreas is owner and managing director sociated with a complete transfer of of quality partners., a consulting company production technologies to the local Irina has a degree in law from Humboldt founded in 2017, with offices in Moscow producer. As a rule, a licence agree- University, Berlin, specialising in contract and St. Petersburg. ment serves as confirmation of the law. He has a degree in business administration existence of such rights to use the After her studies Irina has worked almost and economics from the University of Bern, production technology. 10 years mainly in international legal Switzerland, specialising in financial man- consulting companies, consulting interna- agement. Andreas also passed level 2 of The basics tional clients in legal matters with a focus the CFA exam. A licence agreement is usually an on localisation issues, contract law, intel- Andreas held positions as controller, project agreement between two parties: a lectual property, labour & migration law as manager and CFO at Swiss Krono plants in rights holder (licensor) and a rights well as cross-border issues. Russia and Ukraine and worked as finance user (licensee). The agreement nor- Since 2017, Irina has been Coordinator of manager at Hewlett-Packard Switzerland. mally involves a payment from the Association of Italian Business GIM-Unim- From 2008 through 2017, he managed an licensee to the licensor. This is called presa in the north-western region. international consulting company in Russia, a licence fee, which can be fixed or She is also a regular speaker at confer- supporting foreign businesses in finance, variable, and a one-time payment or ences and seminars in Russia and abroad. legal, tax, HR, IT, accounting. regular payments. The most impor- Since 2016, Andreas has been Chairman of tant components of licence contracts the AEB North-Western Regional Committee. are trademarks, patents and know- how. While the former two are quite straightforward and understandable, Introduction a couple of years. The idea is to di- the latter is slightly ambiguous and The concept of import substitution – versify the economy and overcome sometimes difficult to understand the replacement of imported goods the massive dependence on foreign and define. It can relate to any kind by locally produced ones – is noth- technologies and industrial products. of secret and know-how that make ing new and has been in place and Therefore, the Russian government processes more effective (production subject to ongoing discussions for aims to create conditions to foster processes, sales processes, etc.).

46 | Before you start How to Invest in Russia

thereby protecting it from trademark abuse by third parties.

Know-how A production secret (know-how) as an exclusive right cannot be registered in Russia. Despite this, the subject of a licence agreement constituting a production secret (know-how) must be clearly defined so that it can be identified. The essence of production secrets (know-how) is their confidential nature, which must be respected by both parties to the agreement. To achieve the greatest levels of protection, it is recommended to include provisions on compensation of losses (which can indicate potential penalty charges) into licence agreements in case of disclosure of confidential information to third parties and/or its illegal use.

In some cases, the licence agreement name of the parties to the agreement Another factor that requires a clear can be a tool to protect exclusive (the licensor and the licensee) and description is how and in which ter- rights. In retail, the import of original the subject – the exclusive rights that ritory the exclusive right will be used. goods, adjustment of sales technol- are transferred for use, the methods ogy, and building of distribution net- and territory of use of the exclusive Terms and taxation works in Russia, as well as protection rights, the period for which the agree- The beginning and end of the term against parallel imports are directly ment is valid, the licence fee, and the of the licence agreement directly connected to use of the respective procedure for its payment. The most depend on whether the exclusive foreign brand, which is the trademark common subject of a licence agree- rights constituting the subject of belonging to the foreign owner. In this ment is the transfer of rights to use the agreement are subject to reg- case, the licence agreement will cover a trademark, patent, or production istration or not. In most cases, the the rights to use the trademark. secret (know-how). In light of recent licence agreement will not come into legislative changes, a specific geo- force until it is registered with the Thus, the demand for a licence agree- graphical location may also have to be state patent organisation, Rospat- ment as a tool for the protection of indicated. ent. This means that the rights to intellectual rights has increased signif- use the exclusive right are trans- icantly in recent years, which entails In most cases, the exclusive right ferred and the licence fee is paid the need for an expert approach to must be registered in the Russian only after registration of the licence the drafting of such agreements and Federation (as a trademark, patent agreement. The term for a licence a detailed study of each situation in- and others) in order for it to be the fo- agreement on exclusive rights that dividually. cus of a licence agreement. Thus, the are subject to registration must not right holder of a trademark registered exceed the term of the exclusive Like any other agreement, a licence in Russia (wither the licensor or licen- rights themselves. However, these agreement must outline the essential see) may apply for it to be included provisions are not applicable to pro- terms and conditions, including the in the customs IP registry (TROIS), duction secrets (know-how).

47 How to Invest in Russia Before you start |

Unfortunately, when it comes to taxa- To choose a foreign jurisdiction may, their rights associated with the geo- tion, things can start to get a bit at first glance, look appealing, but graphical origin of their products. complicated. There have been cases in practice it may lead to difficulties. where the tax authorities opposed Verdicts of foreign courts are often Legal protection will be provided to the licence fees paid to the licensor very difficult to implement in the designations of origin from a spe- prior to the registration of the licence Russian Federation. The situation cific geographical location and are agreement. In such cases, the tax may change in the future if the Rus- associated with a specific quality or authorities would claim that the costs sian Federation ratifies the Conven- reputation level. To qualify for such can only be shown as tax deductible tion on the recognition and enforce- protection, one of the main produc- after registration. At the same time, ment of foreign judgments in civil tion stages must be performed within there have been court cases where, or commercial matters, which was the respective geographical location. contrary to the example above, the adopted on 2 July at the 22nd diplo- This new IP rights element is being tax authorities oppose costs not matic session of the Hague Confer- introduced in addition to the existing shown as tax-deductible and paid to ence on Private International Law IP legislation on appellation of origin the licensor prior to registration of (Convention on the Recognition and of goods. New amendments will come the contract. In such cases, the tax Enforcement of Foreign Judgements into force on 26 July 2020. According authorities would challenge the li- in Civil or Commercial Matters). The to the authors of the amendments, cence costs after registration of the main objective of the Convention is this will help to popularise and pro- agreement, arguing that if there had to establish a predictable and ef- mote regional Russian brands whose been actual usage of the licences be- fective regime for cross-border en- unique selling points are due to their fore registration, but no licence fees forcement of judgments in civil and geographical location, and who have shown as tax-deductible costs and commercial matters. However, intel- a certain tradition or know-how that paid to the licensor, there shall not lectual property disputes are exclud- is passed down from generation to be licence fees acceptable as tax-deed from the scope of the Convention. generation. Examples for this are ductible costs after registration of the It should also be noted that Russia ‘Tula gingerbread’ or ‘Bashkir honey’. agreement. In short, the Russian Tax itself has not yet signed the Conven- Code does not specifically refer to the tion, but only signed the final act of Conclusions registration date. In practice, how- the diplomatic session which adopt- As this article demonstrates, licence ever, it is used as a reference point. ed the Convention. agreements are not only the basis for Fortunately for taxpayers, in both the transfer of licence fees, but also situations described above, there are In addition to state arbitration an important tool in the construction mainly positive outcomes from court courts, the parties have the right of commercial activities of a com- cases, provided there is proper docu- to choose the jurisdiction of the pany, compliance with legal require- mentation and reasonable proof. International Commercial Arbitra- ments, and protection of intellectual tion Court. In this case, the licence property rights. When developing a The safest way to avoid issues is to agreement must contain a corre- licence agreement, individual circum- have a licence agreement and reg- sponding clause. Since July 2019, stances should be considered. This ister it as soon as possible, prefer- the Vienna International Centre always requires expert evaluation to ably before there is actual usage of (VIAC) has the right to work in achieve optimal results and protec- the licences. In such a case, one can Russia as the second analogue of tion. The most important thing, con- entirely avoid the issue of whether to Stockholm arbitration. trary to what is often seen in practice, have licence fees invoiced and shown is to have a proper licence agreement as tax-deductible before or after reg- Indication of origin in place that covers all necessary as- istration. Recently, a bill was passed to intro- pects of the usage of rights. This duce geographical indications as a will help avoid potential issues with Law and jurisdiction new independent property right. This contractual partners, competitors or Special attention should be paid to new IP right is meant to allow foreign other market participants, as well as the choice of law and jurisdiction. and Russian manufacturers to protect with the tax authorities.

48 Part IV. Entrepreneurship in Russia: regional and industry specific aspects

49 How to Invest in Russia Entrepreneurship in Russia |

Lipetsk region: the energy of success

train from Moscow. The nearest sea turned it into a mighty Russian indus- ports of the Baltic and Black Seas as trial and agricultural stronghold. well as the European Union border are only 1,000 km away. Regional industry is represented by more than 2,200 enterprises. Indus- The Lipetsk region benefits from be- trial production accounts for 43% of ing at the intersection of major Rus- the gross regional product, with more sian transport routes. A major Russian than 30% of all employed working in federal highway (M4) passes through the industrial sector. Industry gener- Dmitriy Averov the region, connecting the northern ates more than 45% of the total re- Deputy Head of the Lipetsk region and southern parts of European Rus- gional taxes. The Lipetsk region pro- Administration in charge of economy sia. There are two large railway hubs duces 19% of Russia’s steel, 29% of and investments in the region. More than 8.6 million the washing machines, 26% of the tonnes of cargo are transported by refrigerators and freezers, 60% of the Since October 2018, Mr. Averov has been rail annually. This geographic position concrete mixers and 25% of the agri- Deputy Head of the Lipetsk region Admin- provides investors with real advan- cultural machinery. istration in charge of economy and invest- tages in terms of logistics, transporta- ments. tion and distribution. More than 100 global companies have In 2016-2018, he worked as Deputy Head established production facilities in of the Lipetsk City Hall responsible for Small but strong the Lipetsk region, including NLMK economy, roads and transportation. Prior The Lipetsk region is quite young. In Steel Corporation, Indesit Interna- to that, in 2015, Mr. Averov was elected 2019 it is celebrating its 65th anniver- tional, Yokohama, Bekaert, ABB, PPG Deputy of the Lipetsk City Council. sary. It is among the smallest regions Industries, OBO Bettermann, Viess- In 2011, he was appointed CEO of the in Russia, with an area of 24,000 sq mann, Hawle, Horsch, Ropa, Honey- Lipetsk branch of Rostelekom company. km and a population of 1.2 million well, Kemin, Syngenta, Angel Yeast, Since 2007 till 2011, he held executive po- residents. The region’s capital is the Schlumberger, Fondital, Fenzi, Alu sitions in governing bodies of the leading city of Lipetsk, which has a population Pro, Sest-Luve, Doka, Ottevanger, federal corporations in the field of telecom- of half a million people. During these Sucden (S&D), Groupe Soufflet, Lamb munications. 65 years, residents of the region have Weston, Cargill, and Mercor Proof. Mr. Averov has an МВА in management. He was born in 1974. The Lipetsk region benefits from being at the intersection of major Russian Right position If you look at a map of Russia, you transport routes. The geographic will see that the Lipetsk region is located in the heart of Central Rus- position provides investors with real sia, 450 km south of Moscow. It is a advantages in terms of logistics, 50-minute flight to the Lipetsk international airport or 5 hours by car or transportation and distribution.

50 | Entrepreneurship in Russia How to Invest in Russia

Dynamics of agricultural production, 2000-2017 Trade relations are maintained with 110 countries. The region’s main for- 2000 2017 eign trade partners are Turkey (22%), Mexico (20%), Belgium (18%), the Cereals (million tonnes) 0.9 3.1 USA (6%), Denmark (6%) Germany (5%) and Belarus (3%). Sugar beat (million tonnes) 0.9 5.3

Meat (all sorts, thousand tonnes) 86 342 Effective 3-level investment system Pork (thousand tonnes) 24 129 To attract investments, the administration of the Lipetsk region has creat- Poultry (thousand tonnes) 22 191 ed an effective 3-level system, which consists of the Lipetsk federal special The other highly developed sector is consume and exports its agricultural economic zone (Lipetsk SEZ), 10 re- agriculture and food processing. The products to 85 regions of Russia and gional economic zones, and 2 indus- predominant type of soil in the Lipetsk 40 countries around the world. trial parks. Investors are supported region is ‘chernozem’, or black earth, by the governor and the regional ad- which is rich in organic matter and Export-oriented ministration. The regional investment very fertile. Regional farmers cultivate The Lipetsk region is one of Russia’s policy offers transparent investment 11% of the total sugar beet crop in export leaders. The region actively conditions and aims to remove admin- Russia and rank 3rd in production of participates in the national project istrative barriers. vegetables in closed grounds. ‘International Cooperation and Ex- port’. Its exports increased by 27% in In 2019, the international Fitch Ratings Lipetsk food processing plants pro- 2018 to USD 5.5 billion. It ranks 3rd Agency confirmed the Lipetsk region’s duce 14% of Russia’s sugar, 74% of among the 18 Russian Federal Cen- rating as BB+ with a ‘stable’ forecast. the canned fruits and vegetables and tral District regions in terms of export According to the Expert RA agency, the juice for children (mainly from apples volume (after Moscow and Moscow Lipetsk region is 3rd among the least and other fruits grown in the region), Region) and places 14th among all 85 risky Russian regions for investors. 20% of the baking yeast and 8% of Russian regions. the mineral water. The region is self- In 2018, fDi Magazine, published by sufficient in the production of milk, Agricultural exports doubled, includ- the Financial Times, awarded the Li- pork and poultry, and eggs. It pro- ing cereals, sunflower oil, sugar, min- petsk special economic zone with duces several times more than it can eral water and beer. two nominations for Expansions and

Export dynamics, 2015-2018 Agricultural export dynamics, 2015-2018 (mln USD) (mln USD)

55305530 60006000 350 350 324 324 50005000 300 300 43384338 40004000 250 250 31723172 30363036 30003000 200 200 176 176 20002000 150 150 117 117 10001000 100 100 70 70 0 0 50 50 20152015 20162016 20172017 20182018 20152015 20162016 20172017 20182018

25002500

20162016 20002000 17521752 16381638

14621462 15001500 13521352

10001000 20122012 20132013 20152015 20162016 20172017 5530 6000 350 324 5000 300 4338 4000 250 3172 3036 3000 200 176 2000 150 117 1000 100 70 0 50 2015 2016 2017 2018 2015 2016 2017 2018 How to Invest in Russia Entrepreneurship in Russia |

Investments in the Lipetsk region’s economy, 2012-2017 exempts its tenants from paying cus- (mln EUR) toms duties and VAT when importing raw materials, components, equipment and construction materials to 2500 their sites. When exporting finished goods abroad (except EAEU coun- 2016 tries), its tenants also pay no VAT or 2000 1752 customs duties. 1638

1462 In addition to the free customs zone, 1500 1352 SEZ residents benefit from a 2% corporate income tax rate for 5 years, 0% corporate property tax rate for 1000 10 years, 0% vehicle tax rate for 10 2012 2013 2015 2016 2017 years, 0% land tax rate for 5 years, and 2% income tax for 7 years and Infrastructure Upgrades in its annual covers 2,302 hectares and is connect- 7% for the next 5 years. rating ‘Global Free Zones of the Year’. ed by railway with a regional railway Today it hosts 62 residents from 16 hub in Gryazi. It is also located near Production clusters are countries with investments of about major federal highways, including the being formed 3 billion euros. These projects have M4 and M6. The Lipetsk region has been develop- already created 15,000 jobs. Ten re- ing several large clusters of business gional economic zones host 40 ten- Due to the need to accommodate new associations: ants from various countries. investors, the Lipetsk SEZ greatly in- ▪ household appliances cluster creased its territory in 2016 thanks which currently includes about 20 At all of these investment sites, inves- to a new site near the city of Yelets, enterprises; tors are provided with a land lease on with possible placement of 50 more ▪ LipetskMash cluster for produc- favourable terms and its subsequent residents and additional 10,000 jobs. tion of machine-tool products; purchase at a low cost, and they also Creation of the necessary infrastruc- ▪ Valley of Machine-Building enjoy numerous tax benefits. The sites ture at the new site is in full swing, cluster for machine-building and are fully equipped with the necessary and 5 investors are already placing metalworking; infrastructure (gas, electricity, and their production facilities with a de- ▪ agro-industrial cluster for grow- water supply and disposal) and ready- clared investment volume of 200 mil- ing and processing agricultural made production and storage facilities. lion euros. products; The zero percent tax rate on property, ▪ pharmaceutical cluster in the transport and land for the first 5-10 The main advantage of the Lipetsk Terbuny regional special economic years saves SEZ participants a sig- SEZ is its free customs zone, which zone for production of medicines. nificant amount of money. The largest investment projects are carried out by leading European countries as well as The main advantage of the Lipetsk SEZ the USA, Japan and China. is its free customs zone, which exempts Lipetsk Special Economic its tenants from paying customs Zone The Lipetsk SEZ is the first special duties and VAT when importing raw economic zone in Russia; it was cre- materials, components, equipment and ated in 2006. Its first tenant started production in 2007. The Lipetsk SEZ construction materials to their sites.

52 | Entrepreneurship in Russia How to Invest in Russia

The key sector priorities of the Lipetsk region for foreign investment are mechanical and electrical engineering, metalworking, construction materials, agriculture and food processing, automotive and spare parts, agricultural machinery, pharmaceuticals and biotechnology, aviation, and tourism and recreation.

Other new clusters are currently be- the refrigerators and freezers in Rus- concrete reinforcement used in the ing formed, including clusters for the sia. Francesco Celentano, Production construction industry. Bert de Grave, production of spare parts and com- Director of Indesit International Li- President of Bekaert, argued: “the ponents for the automotive industry, petsk, stated: “the investment policy Lipetsk special economic zone is the for biotechnology, and for the food in the Lipetsk region is very interest- best site for foreign investment pro- industry. ing and is going in the right direc- jects in Russia.” tion. Our presence in the region has Investment priorities strengthened over the years. It proves Angel Yeast Rus is one of the largest The key sector priorities of the Lipetsk that our decision in 2000 to localise baking yeast plants in Russia. It was region for foreign investment are me- our production here in Lipetsk was the established in the Dankov regional chanical and electrical engineering, right one.” special economic zone in 2015. It is metalworking, construction materials, the Russian branch of the Chinese agriculture and food processing, au- Yokohama Rus was established in baking yeast producer Angel Yeast, tomotive and spare parts, agricultural the Lipetsk SEZ 10 years ago. It is the number three yeast producer machinery, pharmaceuticals and bio- the Russian branch of the Japanese in the world. Today 560 employees technology, aviation, and tourism and corporation Yokohama. 1.6 million of Angel Yeast Rus produce 30,000 recreation. high-quality automobile tyres are tonnes of dried baking yeast annually. produced annually by 750 employees 70% of its production is exported, thus The Lipetsk region is ready to provide of Yokohama Rus. 90% of the tyres making Angel Yeast Rus a leading ex- new enterprises with professionals of are sold on the Russian market, while porter in the region. Qin Jianhua, CEO varying levels of experience, as well the remaining 10% are exported. of Angel Yeast Rus, told: “since our as with young professionals trained Kawada Kazuo, CEO of Yokohama company produces baking yeast, the by local educational institutions. The Rus, noted: “our company has cho- most important reason to locate our region has 13 higher education insti- sen the Lipetsk region because of its production in the Lipetsk region was a tutions and 25 vocational training col- proximity to the main sales markets, stable supply of raw materials. Every leges that annually produce 10,000 well-developed infrastructure, large year our plant needs at least 100,000 young graduates in 230 specialties. labour market and favourable logis- tonnes of sugar beet, and the region’s tics. But the main reason is the maxi- agriculture is capable of providing this Successful investment mum attractiveness of the Lipetsk volume.” cases special economic zone.” Established in 2004, Indesit Inter- One look is worth a national Lipetsk was among the first Bekaert Lipetsk has operated in the thousand words foreign companies localised in the Li- Lipetsk SEZ since 2010. It is the Rus- If you are considering investment pro- petsk region. It is the Russian branch sian branch of the Belgian company jects, the administration of the Lipetsk of Indesit, a globally recognised man- Bekaert. 400 employees of Bekaert region cordially invites you to come ufacturer of household appliances. Lipetsk produce steel reinforcement and see all the advantages of the re- Today 6,500 employees of Indesit cord for automobile tyres, including gion’s investment system and assures International Lipetsk produce 29% Yokohama tyres. Another important you of all the support in their imple- of the washing machines and 26% of company product is steel fibres for mentation.

53 How to Invest in Russia Entrepreneurship in Russia |

Investment in life science business in Russia: common legal risks and mitigation options

tion between Russian parties. Choice of Russian law may even reduce the administrative, time and cost burden if disputes are dealt with through Rus- sian state or (preferably) arbitration courts. Nevertheless, the Russian case law has added some national features which may sometimes (though not always) complicate structuring and ne- Georgy Kovalenko Andrey Glebashev gotiating a deal. Partner, CIS Law Leader, EY Senior Associate, EY Where a transaction requires the use Georgy is the CIS Law Leader and Law Andrey is a Senior Associate at EY Law of mechanisms that are unfamiliar to Partner at EY Law Moscow. Moscow. Russian law or have not been tested Georgy specialises in corporate and M&A, Andrey specialises in corporate/M&A with a in court yet, one possible option is to structuring of domestic and international special focus on life sciences industry. take these issues out of Russian juris- investment projects. He also works with He has significant experience in M&A struc- diction. private clients assisting them in structuring turing and transaction support, complex le- their personal assets, dealing with family gal and regulatory due diligences, as well As an example, an M&A agreement and inheritance issues. as corporate restructurings. may be governed by English law, but Georgy helps clients to structure their ac- Andrey also advises clients on Russian it is important to bear in mind that quisition, disposal or joint-venture transac- pharmaceutical market access, interactions matters which constitute the subject tions both in Russia or in overseas juris- with healthcare professionals, conducting of corporate disputes must be settled diction, draft and successfully negotiate clinical trials, distribution of pharmaceu- in Russian state or Russian arbitra- transaction documents from non-binding ticals and medical devices, as well as on tion courts with a few exceptions.1 letter of intent to complex joint-venture other regulatory aspects in healthcare, The list of Russian arbitration courts documentation. pharmaceuticals and medical devices. and international arbitration courts is limited. It includes the International Commercial Arbitration Court. In 2019 rom an M&A lawyer’s perspec- Since 2015 major amendments to law foreign institutions such as the Hong tive, life science business is a have been introduced to bring English Kong International Arbitration Centre F combination of licences, prod- law-alike mechanisms into Russian law (HKIAC) and the Vienna International uct or services portfolio, people, real M&A deals. It sounds natural if Rus- Arbitral Centre (VIAC) were also ad- estate and IT assets. These matters sian law governs a transaction in re- mitted, but they have not yet depos- usually create the most common le- lation to Russian assets or a transac- ited their rules with the Russian au- gal risks which might be mitigated in transaction documentation. 1 Article 225.1 of the Arbitration Procedure Code of the Russian Federation

54 | Entrepreneurship in Russia How to Invest in Russia

thorities (as required by the law) and law was changed and all violations Risks associated with administrative are technically unable to administer of pharmaceutical licensing require- liability for the violation of licensing disputes.2 ments are now classed as major requirements are usually identified violations.5 In the medical sector, li- during the due diligence. Lawyers try In majority of cases, a specific licence censing violations are still divided to protect their clients by including or even a combination of licences is re- by severity, but only two are classed indemnities in the transaction docu- quired to carry on a life sciences busi- as minor violations: violation of the ments.8 Standard indemnities governed ness. Throughout its life, a company rules governing paid medical services by Russian law have already been test- must ensure due compliance with li- and failure to ensure regular profes- ed by Russian courts.9 However, the case law with respect to indemnities is An M&A agreement may be governed mainly developed around commercial by English law, but matters which disputes rather than corporate. constitute the subject of corporate Among the licensing requirements are the requirements which concern em- disputes must be settled in Russian ployees. It applies both to pharmaceutical and medical companies. In state or Russian arbitration courts. particular, the law requires the head of a medical organisation to have special- censing requirements – a set of speci- sional development training for medi- ised healthcare education, work expe- fications to premises, equipment and cal staff.6 Violations of any other re- rience and a valid specialist certificate. staff, as well as to its core pharmaceu- quirements are considered as major The Supreme Court recently empha- tical or medical business. violations. Ongoing compliance with sised that these requirements apply licensing requirements is therefore a to the head of a medical organisa- Prior to 2017, violations of licensing key consideration for every life sci- tion and not only to head doctors and requirements applicable to pharma- ence company. other employees responsible for medi- ceutical companies were divided into cal activities.10 Non-compliance with two groups: minor violations, which There is a perception that the suspen- this requirement is considered as a resulted in an administrative fine up sion of business as a sanction is not major violation. In an M&A transaction to a maximum of 40,000 roubles3 used by the authorities at all. In fact, this can be mitigated differently. For and major violations, which incurred this sanction applies, though not often. example, the buyer may require that a higher administrative fine, raised For example, we have seen the appli- a proper person is appointed prior to in 2016 to 200,000 roubles, or even cation of such sanction for significant completion of the deal as a condition suspension of business activities for violations of licensing requirements in precedent. Provisions of contract deal- up to 90 days.4 However, in 2017 the pharmacy business.7 ing with conditions precedent have al-

2 Part 4 of Article 225.1 of the Arbitration Procedure Code of the Russian Federation 3 Clause 3 of Article 14.1 of the Administrative Offences Code 4 Clause 4 of Article 14.1 of the Administrative Offences Code 5 Clause 6 of the Regulation on the Licensing of Pharmaceutical Activities (adopted by RF Government Decree No. 1081 of 22 December 2011) 6 Clause 6 of the Regulation on the Licensing of Medical Activities (adopted by RF Government Decree No. 291 of 16 April 2012) 7 Decision No. 09AP-27522/2018 of the Ninth Arbitration Appeal Court of 24 July 2018 on Case No. А40-69476/18, decision No. 09АP-33092/2017 of the Ninth Arbitration Appeal Court of 14.08.2017 on Case No. А40-86879/17 8 Article 406.1 of the Civil Code of the Russian Federation 9 Resolution No. 7 of the Plenum of the Supreme Court of the Russian Federation of 24 March 2016; Resolution No. F01-1070/2017 of the Arbitration Court of the Volgа-Vyatka District of 26 April 2017 on Case No. A43-16569/2016; Resolution No. F05-21314/2017 of the Arbitration Court of the Mos- cow District of 4 June 2019 on Case No. A41-9514/2017 10 Determination No. 308-KG18-13416 of the Supreme Court of the Russian Federation of 19 September 2019 on Case No. A53-37753/2017

55 How to Invest in Russia Entrepreneurship in Russia |

ready been successfully tested in court pharmaceuticals. Such a person would carry on this activity, it still remains to practice even if satisfaction of such not necessarily be the head of a phar- be a strategic enterprise and transac- conditions is dependent on a party’s maceutical organisation. This was the tions with its shares are still subject to will.11 line maintained by the courts until the governmental approval. Such approval Supreme Court expressed the posi- may be one of the conditions prece- In 2015, the Supreme Court consid- tion referred to the above. Even after dent to the transaction which are di- ered the corresponding requirements the Supreme Court issued its opinion, rectly permitted by Russian law. for the pharmaceutical sector and ar- courts have carried on following the rived at a similar position, namely contrary position.13 We have seen examples when phar- that the director of a pharmaceutical maceutical companies terminated such organisation must have a pharmaceu- A life science company frequently per- licence in order to lose its strategic tical education and relevant work ex- forms activities that involve the use of enterprise status and shortly after the perience.12 Unlike in the case of the infectious substances, in which case it transaction was closed, a company ap- medical sector, however, the law does must obtain a separate licence (with plied for the licence once again. Such not specifically impose such require- a few exceptions).14 In such case, the practice may lead to qualification of ments. A literal reading indicates that company in question is considered a the transaction with a foreign inves- the requirements apply to the head strategic enterprise in which foreign in- tor invalid.16 This risk exists for at least of an organisation whose activities vestment may require prior approval.15 3 years following the transaction and directly relate to wholesale, storage, Furthermore, where a company hold- may be a deal breaker for new inves- transportation and (or) retail sale of ing such a licence does not actually tors. M&A documents may contain a provision which imposes an obligation of seller (to the extent he continues to be a shareholder) to procure that the licence is not obtained shortly after the deal.

The list of the licences required to operate a life science company may include different types of other licences. In order to secure further operation of a large group of licensed companies, one of the effective way is to split licences between the companies. Thus, the suspension of one licence due to various reasons may not affect operations of the other companies.

11 Article 327.1 of the Civil Code of the Russian Federation; Resolution No. F07-3419/2017 of the Arbitration Court of the North-Western District of 12 May 2017 on Case No. A56-34384/2016; Determination No. VAS-981/14 of the Supreme Arbitration Court of the Russian Federation of 11 February 2014 on Case No. A76-15499/2012; Resolution No. F09-12197/13 of the Federal Arbitration Court of the Ural District of 28 November 2013 on Case No. A76-15499/2012 12 Resolution No. 302-AD15-9002 of the Supreme Court of the Russian Federation of 17 August 2015 13 Decision No. 09AP11300/2014-AC of the Ninth Arbitration Appeal Court of 28 April 2014 on Case No. A40-182839/13; Decision No. 09AP- 38316/2012-AC of the Ninth Arbitration Appeal Court of 21 January 2013 on Case No. A40-116432/12-152-717 14 Clause 19 of Article 12 of Federal Law No. 99-FZ of 4 May 2011 ‘On the Licensing of Certain Types of Activity’ 15 Clause 3 of Article 6 and Article 4 of Federal Law No. 57-FZ of 29 April 2008 ‘On the Procedure for Making Foreign Investments in Companies of Strategic Importance for National Defense and Security’ 16 Clause 1 of Article 10 and Article 168 of the Civil Code of the Russian Federation; Clause 8 of the Resolution of the Plenum of the Supreme Court of the Russian Federation No. 25 of 23 June 2015 ‘On Application by Courts of Certain Provisions of Section I of Part One of the Civil Code of the Russian Federation’

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Sometimes, a target company does not According to the law, any operation with carry on activities for which it has obtained a licence. In this case the licence a medicine in the Russian market is becomes dormant and the company usually takes insufficient care to ensure allowed if it is duly registered as must that all the licensing requirements are be confirmed by a registration certificate. met. Consequently, there is a risk of major violations of such requirements even though the company does not ac- lowed if it is duly registered17 as must of such medicine outweighs the effec- tually use the licence. A thorough due be confirmed by a registration certifi- tiveness of such product.19 If this hap- diligence study is required to identify cate.18 Currently, all registration certifi- pens, the operation of such medicine such violations. M&A documents may cates are issued for an indefinite term. is not allowed. This decision may ad- also address these risks using Russian However, in the case of a medicine that versely affect a transaction, especially law warranties. Another solution is to is registered in Russia for the first time, if the medicine in question is one of the provide in M&A documents that a tar- the registration certificate will be is- key products in a company’s portfolio. get company terminates those licences sued for 5 years with a requirement for This risk has to be properly addressed which it does not need prior to closing registration to be confirmed after this in transactional documents. of the deal. period. During that process, operations with such medicine are not restricted, Along with industry specific risks de- Where a transaction involves invest- but as a result of the confirmation pro- scribed above, we have seen that cor- ment in a pharmaceutical company, the cedure the registration authority may porate law risks and risks related to product portfolio plays a key role. Ac- refuse to issue a registration certificate real estate are most frequent among cording to the law, any operation with for an indefinite period if the risk of those issues which must be dealt in a medicine in the Russian market is al- harm to human health due to the use the transaction documents. To certain extent, failure to deal with them may 17 Clause 1 of Article 13 of Federal Law No. 61-FZ of 12 April 2010 ‘On the Circulation of Medicines’ affect operation of the life science li- 18 Clause 1 of Article 28 of Federal Law No. 61-FZ of 12 April 2010 ‘On the Circulation of Medicines’ cence and have greater effect as one 19 Clause 13 of Article 29 of Federal Law No. 61-FZ of 12 April 2010 ‘On the Circulation of Medicines’ may expect.

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Renewable energy in the Russian energy sector: recent developments and key perspectives

he implementation of a re- power system, but they are also parts newable energy policy in the of a broader socio-economic develop- T Russian energy sector has ment model to achieve higher living been debated over a relatively long standards in the country. time at various levels – economic, political, legal and environmental. Unfor- To motivate renewable energy mar- tunately, there have often been more ket players, the Russian government talks than real or concrete actions. In- adopted Decree 4491 in 2013. This de- deed, large hydropower plants still ac- cree established the so-called ‘capacity Dmitry Bogdanov count for a large share of the Russian supply scheme’, whose key idea is the Senior Associate, CMS Russia renewable energy sector. Other power determination of the remuneration (or sources, notably, wind and solar en- fee) payable to the power generation Dmitry is a Senior Associate in the real ergy, have traditionally been neglect- capacity provider. The calculation of the estate and construction team of CMS ed by market players and politicians. remuneration is based on the beneficial Russia. There are, of course, mainly economic fixed tariff that is established by the rel- His practice focuses on real estate, reasons for the insignificance of re- evant long-term energy capacity supply construction, contract and corporate law. newable energy in the Russian energy agreements signed with the renewable Dmitry acts on behalf of foreign sector since oil-, gas- and coal-based energy source operators. A potential companies and regularly advises them, power generation remains less expen- supplier is granted the right to enter particularly in the areas of EPC projects, sive for end consumers. into such agreements through a tender Greenfield and Brownfield development that is conducted by the administra- projects in various regions of Russia. He The situation started to change only tor of the trading system (ATS). Under is also involved in due diligence as well as with the adoption of the state policy such agreement, a supplier is obliged in drafting and negotiating agreements, on energy efficiency improvement in to create a renewable energy facility including land plot leases, sale and 2009. The policy specifically focused within a certain timeframe and supply purchase agreements and construction renewable energy, setting a goal of power into the Russian energy system. contracts. boosting its contribution to the Rus- Then the supplier is entitled to receive He has participated in large investment sian energy sector to at least 4.5% by remunerations for its capacity and the projects in the renewables sector (wind 2020. But in 2015, this deadline was power supplied based on prices which and solar energy), oil and gas and postponed to 2024. will be fixed for 15 years. automotive sectors. New energy solutions are now seen The application of the beneficial fixed as a way to modernise the Russian tariffs enables market players to re-

1 “Decree of the Russian Government No. 449 dated 28 May 2013 ‘On the mechanism for the promotion of renewable energy on the wholesale electricity and capacity market’”

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ceive a guaranteed return on their Therefore, the government has re- The year 2035 is considered in many investments into the construction and cently faced the challenge to deter- forecasts and assessments as the time operation of a power generating facil- mine how the renewable energy sec- when the cost of ‘green’ energy will ity. Such tariffs take into account the tor should develop after 2024. The fall to the average market price in the amount of capital expenditure, cur- discussions, both at the political and energy sector. Thereafter, no specific rency fluctuations and other factors, economic levels, are still ongoing and incentive measures will be required as and provide for a 12% profit margin. it is presently unclear how the sector the ‘green’ energy tariffs will become However, to apply these tariffs, the will grow further post-2024. competitive. power suppliers have to comply with the Russian localisation requirements. The draft of the new Russian Energy Large industrial consumers, however, Strategy until 2035 is now ready. Al- have objected to the extension of the The first tender under Decree 449 though this draft does not look so current policy beyond 2024. The main was announced in 2013 and since optimistic (as it focuses more on the reasons for their dissatisfaction stem then the ATS has annually announced problem of post-crisis economic devel- from the forecast prices of the power tenders for available power capacity. opment, which is definitely slower than capacity and the related costs of im- The results of these annual tenders the rate outlined in the Russian Energy plementing renewable energy projects, from 2013 to 2019 are summarised in Strategy until 2030), it sets out a goal which are still comparatively high. It the table below. to increase the share of renewable sounds reasonable since, for example, energy generation, excluding hydro- the capital expenditures (CAPEX) for

Target value Tendered value (in MW) (in MW)

Wind power sources 3,796.71 3,376.61

Solar power sources 1,910.204 1,858.298

Moderate-sized (with less than 25 MW of installed 802.16 168.068 capacity) hydropower sources

Waste-burning power sources 445 335

If all the power generating facili- power, in Russia by 9-14 times by the construction of generating facilities ties relating to the tendered capacity 2035, compared to today’s share. that are actually the decisive criterion value mentioned in this table are com- for the selection of renewable energy missioned on time, the stated target These figures may change at a later projects during tenders remain almost of increasing the share of renewable stage, but the implementation of new at the same level, irrespective of the energy in the overall power supply in renewable energy projects clearly year of the implementation of such Russia to 4.5% will be achieved by needs adequate incentives. projects. But, as the 2019 tender has 2024. However, as of today, the val- shown, there is still room for decreas- ue of the installed renewable power It is highly likely that the existing ca- ing the CAPEX as the winner of the capacity is estimated at just about pacity supply scheme, as the key in- tender was able to bid with an almost 1%, thus raising doubts over achiev- centive mechanism, will be prolonged, 40% discount. ing this target by the stipulated time- without significant changes, for the line. On the other hand, almost all the new period up to 2035. The key inves- We may, therefore, assume that the whole target capacity value has been tors in the Russian renewable energy final decision will be rather politically allocated. sector have supported such extension. motivated than economically grounded.

59 How to Invest in Russia

Another important selection criterion main economic policy drivers support- velopment of the concept of Russian for projects during tenders is the re- ing inbound investments and technol- green certificates, which may be used quirement to use a certain percent- ogy transfers needed to develop local to supplement the existing capac- age of Russian technology and locally innovative technologies in its economy, ity supply scheme. According to this produced components (‘local content including the renewable energy sector. concept, by selling these green cer- requirement’ or ‘localisation’). For ex- tificates, the consumers could reduce ample, for wind projects, the required It is anticipated that the government their total amount of payments for ca- degree of localisation is currently set at could extend the preferential regime pacity, while for the power suppliers, 65%, while the localisation benchmark to the segments that are currently out- the green certificates could act as a for solar projects stands at 70%. This side the scope of Decree 449, such as source of return on their investments. is a key condition to ensure the pro- energy supply in the ‘non-tariff zones’ ject’s bankability and, thus its sustain- and isolated territories. A decentralised Consequently, the Russian renewable ability, as a reduction factor is applied electricity generation system is of inter- energy market is now waiting for fu- to the tariffs for projects that are ex- est to Russia’s remote and distant re- ture changes in the legal regime. Such ecuted without the required degree of gions, as it is economically impractical changes will certainly give a new im- localisation. This reduction factor is set to extend high voltage electricity lines pulse to further development of this currently at 35% for solar power and to such regions. Since these territories industry. 45% for wind, small hydro and waste are not connected to the country’s ‘cen- treatment power sources. tralised’ energy system, investors would However, no dramatic changes should be expected. Most likely, the existing promotion mechanism (capacity sup- The key investors in the Russian ply scheme) will be prolonged until renewable energy sector (mainly, foreign 2035. players) have supported the idea of making We may assume that relevant developments will follow by the end of the existing local content requirements this year. They will enable all inter- more flexible and more gradual. ested companies to be prepared for the new tender, which is supposed to be announced in the first half of The key investors in the Russian re- keenly welcome alternative prefer- 2020. Some additional changes may newable energy sector (mainly, for- ences, such as subsidies, tax incentives, be adopted when the capacity vol- eign players) have supported the idea preferential loan interests, premium on umes initially targeted until 2024 are of making the existing local content tariffs, etc. commissioned and it becomes clearer requirements more flexible and more how the extra ‘green’ capacity affects gradual. They have generally agreed It could be envisaged that the imple- the wholesale energy market. to meet the required degrees of lo- mentation of waste-burning power calisation, but would like to mitigate projects will be further encouraged. It is, therefore, recommended that the risks associated with the failure to However, the relevant environmental companies planning to invest in the retain the achieved localisation degree risks should be carefully assessed. In Russian renewable energy sector keep during the whole operation process. this respect, we expect the Russian re- an eye on how the applicable legisla- newable energy policy will keep focus- tion develops further and, in parallel, We expect that some changes to the ing mainly on accelerating the deploy- assess the various options on how to regime of localisation will follow; how- ment of wind and solar photovoltaic effectively act in the industry, such as ever, such changes will not be dramat- plants in the country. creating consortiums with global or lo- ic, since these local content require- cal players or limiting their participa- ments, in response to the EU and US It is worth mentioning here that the tion to only financing renewable en- sanctions, have become one of Russia’s Market Council has initiated the de- ergy projects.

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Catching big fish on the Russian fishery shipbuilding and fish processing markets

harles F. Waterman, the fa- being the 4th largest in the world after mous author of many fish- China, the USA and Indonesia, is im- C ing and hunting books, said: pressive in size. Russia’s fishing indus- ‘Most of the world is covered by water. try accounts for 7 billion euros of its A fisherman’s job is simple: pick out GDP, and this figure is rising 5% each the best parts.’ year. Russia’s marine fishery sector accounts for about 4.5% of the world’s Recently, I had the pleasure to spend a marine fish production and its fishing day in Urk, a quintessential Dutch fish- fleet numbers over 2,000 vessels. Rus- Jeroen Ketting ing village with a fishery culture -dat sia has several huge fishing ports in Owner of Lighthouse Management, ing back to the tenth century. I had Kaliningrad, St. Petersburg, Murmansk, Lighthouse Technologies and meetings and discussions with inspir- Sakhalin, Nakhodka, Vladivostok, As- KETTING.COM. ing ‘Urker’ entrepreneurs representing trakhan and Novorossiysk. Russia ex- fishing companies, shipbuilders, ma- ports a lot of pollock, cod, salmon and Businessman and mentor, Jeroen Ketting, rine equipment producers, fish proces- herring. The main export destinations has been living and working in Russia sors and traders who are looking at the are China, South Korea, Japan and, since 1994 where he owns a 20-year- opportunities that the 7 billion euros surprisingly, the Netherlands. There old operational management company, a Russian fishery market provides. After are several huge Russian fishing com- 7-year-old industrial equipment distributer, my presentation on the opportunities panies, such as Norebo Group, Russian and a 5-year-old training business. Jeroen of the Russian fishery sector, many Sea Fishery Company, Sakhalin-based is a strategist and trusted ‘Russia’ advisor companies expressed their interest Gidrostroy, Okeanrybflot, Nakhod- for first line managers of international and intention to take their first steps ka Active Marine Fishery Base, FOR companies and an expert in EU-Russian towards building a business in Russia. Group of Companies, Preobrazhenie business relations. In this article I try to share their en- Base for Trawl Fleet (PBTF) and North- Using his 25-years business experience, thusiasm for the opportunities in the West Fishery Consortium (SZRK). The Jeroen developed his signature Value Russian market and the steps needed smaller companies operate around 20 Based Methods that inspire and motivate to capitalise on these opportunities. fishing vessels and the larger ones professionals through board and top- over 40 vessels. The annual revenue management sessions, seminars, corporate Russia has 40,000 km of shoreline, bor- of these companies ranges from 200 programmes and team building events. ders 12 different seas and has 102,000 million US dollars to 800 million US He is a member of the AEB Honorary km of inland waterways. You would ex- dollars. Council. pect that a country with such characteristics has an impressive fishery sec- Despite these impressive statistics, the tor and indeed, Russia’s fishery sector, Russian fishing fleet as well as the fish-

61 How to Invest in Russia Entrepreneurship in Russia |

ing port infrastructure is obsolete and the design and production capacities oped. 70% of Russian fish produc- needs to be upgraded. Most of Russia’s of Russia’s shipbuilding industry and tion and almost 90% of Russian fish 2,000 fishing vessels were built in the employing more than 95,000 work- exports still consist of raw and frozen 1980s, and many of them do not meet ers. The biggest shipyards are located fish. Fish processing equipment in Rus- today’s safety requirements. Accord- around St. Petersburg. sia is largely outdated and the need ing to the Russian Fisheries Agency for investments in new fish processing (RosRybolovstvo), Russia needs ap- Russia requires more than 400 new technology is estimated to be around proximately 400 fishing vessels: 220 fishing vessels, 40 of which should 3 billion euros. As a result of differ- fishing boats and 180 medium-range be built in the next five years. Many ent state support programmes for fish and large-range vessels. The total in- of these vessels will be built in these processors, processed fish exports are vestment required to build a new fish- Russian shipyards because of the Rus- steadily growing and with it the de- ing fleet is 738.9 billion roubles, out sian localisation policy. Through this mand for fish processing equipment. of which 128 billion roubles will be localisation policy the Russian govern- The more value that can be added to allocated from the federal budget. In ment is trying to stimulate the Russian fish products inside Russia, the bigger the next five years, Russia is planning shipbuilding industry by providing in- profits will be in Russia and the better to build 40 vessels and several large centives to Russian fishery companies it will be for the Russian fish industry. processing facilities. In reality, Russian to place orders with Russian yards. In- fisheries built only six vessels from centives take the form of allocation of There are opportunities in fish process- 2013 to 2016. Five out of these six fishing quotas depending on the- vol ing to sell on-board and on-land fish vessels were built in foreign shipyards. ume of domestic investment. processing technologies. Therefore, there are strong doubts as to whether Russian shipyards are Despite this localisation policy there is There are two types of fish processing capable of fulfilling such ambitious still a strong dependence on foreign equipment that are in demand: equip- plans and whether they are equipped know-how and technology. Fishing ment for processing on board the vessel to build high-tonnage fishing vessels. vessels have to be built in Russia, but and equipment for processing in typical In terms of the technological develop- parts and special equipment are usu- land-based facilities. There is demand ment of Russia’s fishery sector, there ally imported, and design and engi- for primary processing (cleaning, freez- are still big steps to be made, and neering is performed by international ing), which is usually done on board. Western companies can play an im- companies with good experience. On-board processing is different for dif- portant role in making Russia’s fishery ferent types of fish and seafood. The sector bigger and better. Hence, the Russian yards have a particular need most ‘popular’ fish in Russia – cod, pol- opportunities that the Russian fishery for on-board fish processing complex- lock and haddock – can already be pro- sector offers to European companies in es, main engines with a gearbox and cessed to fillet or minced on board. As shipbuilding, processing and trading. shaft, line shafts, screw propellers and most of the unprocessed fish is now ex- propulsion systems, deck equipment, ported, processing it on board will add Shipbuilding marine electrical equipment, general great value and increase profits. This is Russian shipbuilding yards that are marine set-up systems and electronic why on-board processing has become particularly active in building fishing devices. a strategic direction among the major vessels are the October Revolution fishery companies in the last few years. Shipyard, Vyborg Shipyard (USC), the The main foreign shipbuilding compa- Leningrad Shipyard ‘Pella’, the Sev- nies active in Russia hail from Norway On land, the processing industry needs ernaya Shipyard, the Nobel Broth- and Iceland. equipment for salting, drying, smok- ers Shipyard and the Yantar Shipyard ing, filleting and mincing fish. (USC). Some of the largest shipyards Fish processing are part of United Shipbuilding Com- The fish processing sector poses Some of the dominant fish processing pany (USC), the largest state-owned another big challenge for the Russian companies are Dobroflot, Russian Aq- consortium of shipyards. USC compris- fishery industry. Overall, the Russian uaculture, Meridian, Baltiyskiy Bereg, es 40 shipyards, accounting for 80% of fish processing sector is underdevel- and Kurilskiy Bereg.

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is harder to get access to decision makers in Russia than it usually is in Europe, you will open all the doors you need to open when you have a good product or solution that stands out in the market. Networking may demand more time than in Europe because ‘networking in the Russian context’ means building and main- taining relationships. ▪ to define your value proposition. We often observe European companies wasting time on offering solutions in Russia that are not in demand. Your value proposition is where your strengths overlap with your customer’s needs, but do not overlap with your competitor’s strengths. A large part of the fish processing in- Because of the Russian sanctions, most ▪ to learn about Russian business prac- dustry also produces semi-conserved fish exports from Europe to Russia are tices, rules, regulations and culture. and conserved products. Some of banned. Only hatchlings, canned and ▪ to prepare documentation in Russian. the leading producers of canned processed fish and seafood are al- ▪ to prepare certification. fish are RusFishWorld, Zarodinu, Yu- lowed for export to Russia. ▪ To start business development and zhmorriybflot, Roskon, 5Morey, and lead generation. Glavprodukt. The Russian fishery shipbuilding and ▪ To be ready to localise step by step. fish processing market is too big to The Russian localisation policy is ‘here In the Russian market for fish process- fail – and big enough to succeed! Get- to stay.’ Although it is obvious to Rus- ing equipment, you will find competi- ting a piece of that pie requires taking sian companies that the market will tors from Germany, Iceland, Sweden, the right steps. continue to need foreign equipment, Spain and Japan. technology and expertise, it is a real- Simply put, the right steps seem to be ity that any Western company wanting Fish trading as follows: to be active in Russia needs to show In fish trading, the opportunities for ▪ To take your top sellers and make some degree of localisation. This does Western companies in Russia mainly a competitive comparison based on not mean that you immediately need concern the sourcing of fish in Rus- functionality, quality and price. The to establish an office or production sia. Russia is a major exporter of pol- Russian market is becoming more site in Russia, but you need to have lock, cod, herring and different types and more price sensitive. Arguments a localisation strategy. Steps in such a of salmon. According to Russian sta- based on ‘lifecycle cost of ownership’ localisation strategy can be: a Russian tistics, around 30% of all Russian fish do not always convince Russian buy- language website, a Russian subcon- exports are exported to the Nether- ers, who have increasingly tighter tractor, a Russian distributor or rep- lands. I asked Dutch fish traders why capex budgets. resentative, your own legal entity, a they hold such a prominent position ▪ To start networking, networking, single-person office, a full local office, in importing fish from Russia. They networking. Don’t spend too much or a partnership. explained that fish stocks are de- time on studying the market from ▪ To be regularly present in Russia. creasing in traditional fishing areas behind your desk. Simply come to You cannot manage your Russian and that they see Russia as a stra- Russia to learn about the market business development at an arm’s tegic supplier to Western fish proces- and meet with potential clients, dis- length. In Russia you need to stay in sors and traders. tributors and colleagues. Although it the driver’s seat of your business!

63 How to Invest in Russia For notes

64 AEB MEMBERSHIP APPLICATION FORM / ЗАЯВЛЕНИЕ HA ЧЛЕНСТВО В 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: 2020

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

1. COMPANY / СВЕДЕНИЯ О КОМПАНИИ Company name in full, according to company charter in English & Russian. (Individual applicants: please indicate your business activities or the employer / Название компании в соответствии с уставом на русском и английском языках. (Для индивидуальных участников – описание предпринимательской деятельности или работодателя):

Legal address (and postal address, if different from INN/KPP / ИНН/КПП: legal address) / Юридический адрес (и фактический адрес, если он отличается от юридического): Phone Number / Номер: Fax number / Номер факса:

Website address / Страница в Интернете:

2. CATEGORY: THE CATEGORY IS DETERMINED ACCORDING TO THE GLOBAL TURNOVER OF THE COMPANY/ КАТЕГОРИЯ: КАТЕГОРИЯ ОПРЕДЕЛЯЕТСЯ ГЛОБАЛЬНЫМ ОБОРОТОМ КОМПАНИИ Please attach the signed letter on the company activities and its global annual turnover on the company letterhead / Просьба приложить официальное письмо на бланке организации с описанием деятельности компании и указанием ее глобального оборота, заверенное подписью.

Company’s global annual Please indicate the corresponding AEB Category/ AEB Membership Fee / turnover (EUR) / Отметьте, пожалуйста, соответствующую категорию: Членский взнос АЕБ Глобальный оборот компании (евро)

SPONSORSHIP / Спонсорство -- 12,000 EUR /евро

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

CATEGORY B / Категория Б 100-499 million/миллионов 4,000 EUR /евро

CATEGORY C / Категория С 1-99 million/миллионов 2,500 EUR /евро

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

CATEGORY I (EU/EFTA citizens only)/ -- 1,000 EUR /евро Индивидуальное (только для граждан Евросоюза/ ЕАСТ) CATEGORY R (rep. offices) / Категория Р (companies registered in Russia by a rep. office only may join for the first two years with an adequate upgrade to follow) / компании, зарегистрированные в России только в качестве -- 3,000 EUR / евро представительств, могут вступить на первые два года с последующим повышением категории до актуальной)

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 о вступлении в Ассоциацию любого юридического лица из страны, не входящей в Евросоюз/ЕАСТ, должно быть письменно под- тверждено двумя юридическими лицами из Евросоюза/ЕАСТ или индивидуальными участниками-гражданами в Евросоюзе/ЕАСТ. Individual AEB Membership is restricted to EU/EFTA member state citizens, who are individual entrepreneurs or who are employed by a company, which cannot join the AEB for the internal regulations / К рассмотрению принимаются заявления на индивидуальное членство от граждан Евросоюза/ЕАСТ, занимающихся индивидуальным пред- принимательством или работающих в неевропейских компаниях, внутренняя политика которых не предполагает членство в АЕБ. All applications are subject to the AEB Board approval / Все заявления утверждаются Правлением АЕБ. 3. CONTACT PERSON / КОНТАКТНОЕ ЛИЦО

Title, first name, surname / ФИО:

Position in company / Должность:

E-mail address / Адрес эл. почты:

4. COUNTRY OF ORIGIN / СТРАНА ПРОИСХОЖДЕНИЯ

А. For a company / Компаниям: Please specify the 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 fill in either A or B above / 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 / Основная: Secondary / Второстепенная: Деятельность компании

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

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

Media / СМИ Advertising Source / Реклама Other / Другой

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

Date / Дата: Date / Дата:

1 In accordance with the country of registration and citizenship of the major owner / В соответствии со страной регистрации и гражданством мажоритарного собственника. AEB SPONSORS 2019

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

THE AEB gUIdE TO INVESTINg IN RUSSIA