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Import Substitution: its impact on foreign business Vladimir Konstantinov Partner, PwC Russia 30 October 2015

Import Substitution: its impact on foreign business

What is import substitution?

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Import Substitution: its impact on foreign business

Import Value of imports, USD First eight months of 2015, year-on-year

-40% Source: Federal Customs Service of Russia 30 October 2015 PwC PwC

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Import Substitution: its impact on foreign business

Devaluation of the Russian rouble Movement of the rouble’s rate

100% 35,7 ₽

-40% 150%

-90% 200%

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65,3 ₽

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Import Substitution: its impact on foreign business

Import Substitution

Import Substitution – an important part of state economic policy In the last 12 months, this policy I has been converted into: 30 October 2015 PwC

Legislation Regulations Practice 5

Import Substitution: its impact on foreign business

Recent examples of challenges for foreign business

New state procurement restrictions Law on foreign software substitution Ban on state procurement from offshores companies

New restrictions on state procurement of foreign-made medical products

Draft legislation on VAT on foreign movies

Card payments shall be processed by a national payment company

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Import Substitution: its impact on foreign business

Essence of the recent legislation

BARRIERS to foreign goods

STATE INCENTIVES for goods produced in Russia

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Import Substitution: its impact on foreign business

Barriers

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Import Substitution: its impact on foreign business

Barriers to foreign goods

State Procurement  State procurement is an important tool in the import substitution process;  State Procurement: RUB 5,5 trln per annum;  Russia is not a signee to the WTO Agreement on State Procurement. 30 October 2015 PwC

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Import Substitution: its impact on foreign business

Barriers to foreign goods Measures envisaged by state procurement legislation

BANS

Foreign goods are prohibited from state tenders

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RESTRICTIONS

ADMISSION REQUIREMENTS

Foreign goods are Price preference (15%allowed for state ”handicap”) is given to tenders, but preference goods made in Russia is given to goods produced in Russia

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Import Substitution: its impact on foreign business

Barriers to foreign goods Examples

Bans Decree № 656

Certain types of machinery

• Buses • • • •

Diesel trucks Tractors Bulldozers Auto-loaders Decree № 791

Certain goods of textile, clothing and footwear industry

• Clothes • Furs • Leather

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Import Substitution: its impact on foreign business

Barriers to foreign goods Examples

Restrictions Decree № 102

Certain types of medical products

• CT scanners • Laboratory refrigerators • X-Ray machines

Admission requirements Order № 155 of the Ministry of Economic Development

Various goods

• Food products • Furniture • Measuring and computing systems and machines 30 October 2015 PwC

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Import Substitution: its impact on foreign business

Barriers to foreign goods Crucial question: How to determine whether a good qualifies as “made in Russia”

New type of origin rules The Russian Government Decree № 719 of 17 July 2015

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Import Substitution: its impact on foreign business

Barriers to foreign goods Goods Manufactured in Russia – Criteria

Different criteria Goods listed in Decree № 719

All other goods

Separate criteria for each type of goods

Customs rules

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Import Substitution: its impact on foreign business

Barriers to foreign goods

Criteria Criteria under under Decree Decree №719 №719 Overall approach:

• Requirements on product content; and/or • Requirements for manufacturers (or processes) Requirements on product content

• Certain production and technical operations;

• Availability of rights on • Established percentage of Russian content;

• Established quantity of Russian components

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construction and technical documentation;

• Availability of service centers for warranty support

Requirements for manufacturers

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Import Substitution: its impact on foreign business

Barriers to foreign goods Significance of established criteria

“This is a long-awaited decree for both business and the public sector. It provides a clear understanding on how to organize its future activities and adjust production plans in order to maintain presence on the market.” Denis Manturov, the Minister of Industry and Trade

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Import Substitution: its impact on foreign business

Barriers to foreign goods Impact of restrictions on state procurement

Is it realistic to comply with all of the rules? What documents will confirm the new origin criteria’ observation? Ambiguity in the treatment and application of the criteria What are the sanctions if the criteria are not met? 30 October 2015 PwC

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Import Substitution: its impact on foreign business

State Incentives

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Import Substitution: its impact on foreign business

State incentives The Federal Law “On Industrial Policy”

came into force on

30 June 2015

 Formalises state policy on industrial production

 Provides legal grounds for state incentives available to local manufacturers

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Import Substitution: its impact on foreign business Import Substitution: Impact on Foreign Investors

State incentives Special investment contracts

Special investment contracts – a new incentive  Three contracting parties;  Profile of qualifying projects – RUB750 million;  Provided upon negotiations and approval;  Provides for various benefits

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Import Substitution: its impact on foreign business

State incentives Special investment contracts

Benefits for all projects: “Sole supplier” status for state tenders (i.e. state procurements without tenders); Reduced profit tax rates; Grandfathering tax clause (amendments to the Tax Code are planned); “Softer” localisation requirements.

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Benefits for certain projects: Reduction of the state registration period for drugs and medicines; Streamlined procedure for obtaining permits and licenses.

Customs duty exemption;

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Import Substitution: its impact on foreign business

State incentives Is there an ambition of full import substitution? Are these incentives available for foreign companies?

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Import Substitution: its impact on foreign business

What is the impact on particular types of business?  Foreign companies should understand whether the new regulations restricting access to state procurements may have an impact on their business;  Foreign companies should find out whether it is feasible and realistic to establish production in Russia so as to comply with the new rules.

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Import Substitution: its impact on foreign business

Contacts

Vladimir Konstantinov Partner Leader of the PwC Indirect Tax Practice [email protected] Tel.: + 7 (495) 967 6236

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