Issue 16 • February 2016 RUSSIA BRIEFING WWW.RUSSIA-BRIEFING.COM Understanding Localization in Russia Including P.04 Russia’s Special Economic Zones, Infrastructure and Advantages P.07 Special Economic Zone ‘Lipetsk’: Seeing is Believing P.09 The Special Economic Zone in St. Petersburg P.10 Analysis of Stupino Industrial Park P.11 Localization for SMEs: Project Types and Methods of Localization P.13 Legal Requirements for Localization P.15 Conducting a Due Diligence Investigation Prior to Purchasing a Production Facility P.17 Understanding Taxation in Localization P.19 The Substitution of Import and Localization In Cooperation with P.21 Administrative Issues to Consider during Localization P.23 Experiences with Localization 1 rb 2016 1 issue.indd 1 2/26/16 6:07 PM Introduction With the Ruble dropping to a record low at the start In this issue of Russia Briefing, we discuss the of 2016, Russia is currently in a deep economic crisis. advantages of localization in Russia for foreign Foreign investors have taken note of this, with the companies, and provide an analysis of Russia’s automotive industry a prime example of an industry industrial parks and Special Economic Zones (SEZs). that has seen decreased foreign interest. That said, over We also feature an article from the General Director of the past year we have also seen major new foreign ZENTIS Russia on their experience of producing jam, production sites in Russia, marmalade and other sweets such as the German harvester in the country. producer CLAAS in Krasnodar or the German-Japanese We at SCHNEIDER GROUP can producer of machine tools guide companies through the DMG Mori in Ulyanovsk. localization process with advice on tax, legal, accounting and We have also seen some IT/ERP matters. Additionally, existing Western production we can set companies up in Ulf Schneider sites in Russia beginning to the relevant industrial zone, Managing Partner develop export capabilities, help establish their plant, and SCHNEIDER GROUP allowing them to compete can offer interim-management with Chinese competitors in in the intended areas for African and Arabian markets. localization. These are just This is possible thanks to strict cost management and some examples of our services. the significant Ruble shortfall. Localization in Russia is a project for the long-term, and one that is worth I wish you good luck with your localization project in consideration. As Russia’s economic crisis unfolds, Russia. Take the crisis as a chance! investors should not be completely inactive – the time should be used to prepare for the country’s next consumer spending boom. Yours, Ulf Schnelder Managing Partner SCHNEIDER GROUP Reference Russia Briefing and related titles are produced by Asia Briefing Ltd., a wholly owned subsidiary of Dezan Shira Group. Content is provided by Disclaim Dezan Shira & Associates’ partner company SCHNEIDER GROUP. All materials and contents No liability may be accepted for any of the contents of this publication. Readers are strongly advised to seek professional © 2015 Asia Briefing Ltd. advice when actively looking to implement suggestions made within this publication. 2 rb 2016 1 issue.indd 2 2/26/16 6:07 PM Table of Contents Russia’s Special Economic Zones, P.04 Infrastructure and Advantages Special Economic Zone ‘Lipetsk’: Seeing P.07 is Believing P.09 The Special Economic Zone in St. Petersburg P.10 Analysis of Stupino Industrial Park Localization for SMEs: Project Types and P.11 Methods of Localization P.13 Legal Requirements for Localization Conducting a Due Diligence Investigation P.15 Prior to Purchasing a Production Facility P.17 Understanding Taxation in Localization This Issue’s Topic P.19 The Substitution of Import and Localization Understanding Administrative Issues to Consider during P.21 Localization Localization in Russia P.23 Experiences with Localization Online Resources from China Briefing About SCHNEIDER GROUP ERP Systems: SAP vs. 1C SCHNEIDER GROUP - 500 experts, six Currency Devaluation in Russia,? Kazakhstan, Ukraine and countries, your one-stop partner “ Belarus and its Effects on Business” We at SCHNEIDER GROUP provide our international clients with the back Structuring the General Director Position during Crisis Time office services they need to expand their business into or within Russia, Sanctions Affecting International Business Kazakhstan, Belarus, Ukraine, Poland and Germany. Our services include market entry support, accounting outsourcing, tax consulting, import, ERP systems (1C, Online Resources on Emerging Asia SAP and Microsoft Dynamics NAV) and support in legal matters with focus on Corporate Establishment Services migration, labor and corporate law. SCHNEIDER GROUP is your one stop Understanding Laos’ Special Economic Zones partner in Russian speaking countries and Poland. A Guide to China’s Free Trade Zones More information on www.schneider-group.com A Guide to India’s Special Economic Zones The Guide to Understanding Vietnam’s Industrial Zones Credits Publisher / Chris Devonshire-Ellis Editor / Edward Barbour-Lacey Design / Jessica Huang & Estela Mi 3 rb 2016 1 issue.indd 3 2/26/16 6:07 PM Russia’s Special Economic Zones, Infrastructure and Advantages By Vladimir Kazakov, Market Research Director, SCHNEIDER GROUP, and Tikhon Evdokimov, Managing Partner, Navigator Consult Case for localization The vast majority of businesses working with Russia are importers. They are represented either by distributors or representative offices. Recent Every economic crisis provides opportunities. The geopolitical and economic developments make this current crisis in Russia is a result of several factors, model unsustainable, principally because: such as the weak Ruble, low oil prices and, not least, Western sanctions on Russia. At the same • The foreign exchange market has recently been time, however, Russia is still an attractive market volatile with tens of millions of consumers. While no one • The population’s purchasing power to pay for can predict when the current economic situation goods and services in euros has diminished will improve or when consumers will be prepared • Brands have to fight for customer loyalty where to spend more, those who stayed in the market and many cheaper alternatives are available those who entered it during the crisis will certainly • Competition from Asian substitutes has increased. be in a better position in the future. They will see that their calculated risk will pay off. Western companies face hard choices: quit Russia, or stay in/enter the Russian market. Leaving aside What this crisis reveals is a need to rethink existing those who quit, let’s focus on those who stay/enter operating models of doing business in Russia, and and how they can plan their business strategy. They an opportunity to use the situation to a company’s believe that being in Russia is critical for their European own advantage. presence and are strongly considering localizing their manufacturing footprint. But is the moment right? Pros Cons • Lower entry costs resulting from the devaluation of the Ruble, • Extremely difficult to sell this step to the Board/ including decreasing wages, prices for real estate, equipment and owners advertising • Recession and decline in purchasing power and • Potential for export to third markets, e.g. inside the Eurasian domestic demand Economic Union • Sanctions: possible supply problems from • Import substitution at public tenders abroad • State preferences for start of localization • Price volatility due to currency exchange rate • During a recession, investors are incentivized to enter the market fluctuations • Opportunity to develop supplier base • Local suppliers need modernization • Significant local human capital resources • Low productivity • Lower operational costs • Unique opportunity to become first in your own niche 4 rb 2016 1 issue.indd 4 2/26/16 6:07 PM Issue 16 • February 2016 • Russia Briefing When planning localization of manufacturing, What Special Economic most businesses consider either a “brownfield” or “greenfield” option. Each approach has its own pros Zones Exist in Russia? and cons, but many will not be aware of a better In 2005, the Federal Law on Special Economic alternative: Special Economic Zones. Zones was adopted in Russia. It provided a legal framework for developing a network of Special This alternative route has the major benefits of Economic Zones (SEZ). An SEZ is an area in Russia a brownfield project (i.e., higher speed of entry with a special legal status and economic benefits and available infrastructure) as well as those of a designed to bring Russian and foreign companies greenfield project (i.e., flexibility of site selection, into priority sectors of the Russian economy. SEZs efficient site layout, investment incentives). are formed under a federal program overseen by In addition, Special Economic Zones offer the the Russian Ministry for Economic Development. following benefits to investors: The state management company AO Special • Significant fiscal gains (low or no taxes) Economic Zones (AO SEZ) manages the majority • Federal guarantees for fixed rules of the game of federal SEZs and is responsible for recruiting and until 2054 assisting resident companies. • Free customs zone (0 import duties & taxes) • Cheap land There are four categories of federal SEZs in Russia by • One window approach for dealing with formalities sector specialization: • No minimum investment threshold. Federal SEZ Preferences/taxes Tourist and Rest of Russia Industrial and High-tech and