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HOW TO INVEST IN RUSSIA LOCALISATION AND INVESTMENTS |
Secial investment contracts
he num
er of challenges faced
foreign investors in Russia should
e
reduced through the conclusion of secial investment contracts that secure
a sta
le legal environment for the investor and can ensure his treatment as a
Russian roducer. he main idea of this aer is to rovide guidelines to foreign
investors on such secial investment contracts. Secificall the scoe of this
aer ill
e confined to an elanation of ho to al for a secial investment
contract and tis to assist investors in its negotiation and conclusion to the
enefit of the investor.
Why a special investment privileged. The issue is that many com-
contract? panies with production facilities in Rus-
A special investment contract is an in- sia are unable to receive a “Made in
vestment agreement between the Rus- Russia” certificate for their products,
1
sian government and the investor . especially if they only have knockdown
Under the contract the investor shall es- assembly facilities. An assembly plant
tablish or upgrade its production facilities in Russia is not sufficient to receive a
in Russia, and the Russian government “Made in Russia” certificate. Moreover,
shall grant the investor certain benefits. the requirements on local content and
BILGEIS MAMEDOVA These benefits may include tax incen- technology transfer must be met. How-
LL.M., Partner, tives or the securing of set tax and le- ever, the requirements established by
BEITEN BURKHARDT gal frameworks for the investors for the law cannot usually be met within the
entire duration of the special investment established timeframes. Therefore, in-
2
Dr. Bilgeis Mamedova is a Partner in the contract . However, from the investor’s vestors need a grace period. At present
Commercial Law Practice Group at BE- perspective, the most important benefit this grace period can only be provided
ITEN BURKHARDT’s Moscow office. Her arising from the special investment con- by a special investment contract. Thus,
core activities include consulting on the tract is the “Made in Russia” certificate a special investment contract empowers
market entry, set up of production facili- which is issued for the products manu- the investor to start production and to
ties and localisation issues. factured by the investor in Russia, pro- immediately receive a “Made in Rus-
Bilgeis also has extensive experience in vided that the products are covered by sia” certificate for the first three years,
the areas of international and Russian the special investment contract. even if the manufactured products do
contract law, securities and project financ- not meet the localisation requirements.
ing in Russia. The “Made in Russia” certificate is im- After the grace period, the required de-
She has authored numerous publications portant due to the Russian govern- gree of localisation must be achieved.
and regularly lectures at conferences in ment’s recent policy of import sub-
Russia and abroad. stitution, and enables the investor to Application for a special
Bilgeis graduated from Moscow State Law participate in state procurements as investment contract
Academy. She obtained an LL.M. degree well as in procurements performed by Once the investor has decided to ap-
at the University of Bremen and a Ph.D. state-owned companies in those cases ply for a special investment contract,
at the Moscow State Institute of Interna- when Russian-made products will be it will submit an application. The
tional Relations (MGIMO) of the Ministry
1
of Foreign Affairs of Russia. For the purposes of this paper, we consider in particular those special investment contracts that
are concluded on the federal and not regional level.
2
Special investment contracts will be concluded for a maximum period of ten years.
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| LOCALISATION AND INVESTMENTS HOW TO INVEST IN RUSSIA
consideration of the application and targets, tax withholdings, risks, etc., application, while maintaining the over-
conclusion of a special investment where both economic indicators and all amount of investments.
contract is within the competence of established legal requirements must
the Russian Ministry of Industry and be taken into account. Otherwise, the It is also important to note that the
Trade. business plan will not meet the require- investor will have to resolve a fair
ments and may be rejected. number of practical issues that usu-
A well-conceived application for a spe- ally arise in order to properly draft the
cial investment contract has particular When preparing the business plan, it is documents: in particular, how to ac-
relevance not only for the approval of also important to understand that the count for investments already made,
the investment project by the Russian investment under a special investment how to separate products manufac-
Ministry of Industry and Trade, but contract must amount to at least RUB tured under the special investment
also for the further negotiation of the 750 million. That being said, the in- contract from the investor’s current
special investment contract. vestor is basically allowed to indepen- business activity, how to report the
dently determine what the indicated profit for the period when the project
The application form and the docu- investments will be used for under the begins to generate operating profit,
ments to be attached thereto are stip- localisation project and by which dead- taking into account the established
3
ulated by law . One of the key docu- lines. In principle, the investments can degree of localisation of certain prod-
ments to which the investor should pay be performed throughout the entire ef- ucts, etc. The answers to these ques-
special attention is the business plan of fective term of the special investment tions will make it possible to duly draft
the project, including its financial mod- contract. True, the specific amount to the application. Therefore, once you
el. When drafting the business plan, be spent on each individual investment know what key questions need to be
it is recommended that the UNIDO or target must already be indicated when answered, you have to act and find a
EBRD international business planning submitting the application. In order to solution. This is not an easy task, par-
ticularly if you do not have extensive
experience. In any case, you will need
From the investor’s perspective, to resolve the key issues before you
begin negotiations with the Russian
the most important benefit arising Ministry of Industry and Trade. While
having a solution is essential, it is also
from the special investment contract important to maintain some flexibility
is the “ade in Russia” certificate at this stage. The negotiations with
the Russian Ministry of Industry and
which is issued for the products Trade may introduce new ideas that
need to be incorporated into the ap-
manufactured by the investor in plication. This is an important stage,
because it helps to ensure that the
Russia. documents are arranged in a logical
and legally compliant way. Please also
note that the special provisions of the
standards or the Vnesheconombank give the investor the required flexibil- special investment contract must al-
recommendations on drafting a busi- ity, considering the long-term nature ready be included in the application.
ness plan be used as guidelines. Re- of the project, it is possible to intro-
gardless, the business plan should con- duce a special provision in the applica- Once the application is prepared, it
tain special sections on localisation of tion granting the investor the right to is first sent by the investor with all
production (in particular, a localisation change the amount of investment and attached documents to the Industrial
schedule), local content, investment the investment targets indicated in the Development Fund. The Industrial
3
Resolution No. 708 of the Government of the Russian Federation dated 16 July 2015 “On Special Investment Contracts for Certain Industrial Sectors”.
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HOW TO INVEST IN RUSSIA LOCALISATION AND INVESTMENTS |
Drafting and negotiating
a special investment
contract
Since the Interdepartmental Commis-
sion also approves the essential terms
of the special investment contract,
the draft special investment contract
should be prepared prior to the final
approval of the investment project.
When drafting of the special invest-
ment contract, the following issues
must be considered directly.
Special investment contracts are gov-
erned by Russian law, with the State
Commercial Court of the City of Mos-
cow having jurisdiction. The template
of a special investment contract is es-
4
tablished by law . However, the provi-
sions of the contract can and will be
amended proceeding from the specif-
ics of the investment project.
The obligations of the investor under
Development Fund is an intermedi- tion of the documents in the Russian a special investment contract will be
ary between the investor and the Ministry of Industry and Trade general- covered, first of all, by the business
government, and gives preliminary ly takes several months (even up to six plan submitted in the application.
approval and provides its comments months) and requires regular working On the approval of the investment
on and recommendations for the meetings. Based on the results of the project, the business plan will be at-
application. A number of questions consideration of the application and tached to the contract as an integral
that arise during the preparation of the documents, the Russian Ministry part thereof. Despite the fact that the
the documents may also be promptly of Industry and Trade issues a prelimi- business plan is usually considered
discussed with the Industrial Devel- nary decision to approve or reject the merely a possibility, it turns into an
opment Fund, which can apply its investment project. obligation of the investor under the
experience in approving special in- special investment contract. From this
vestment contracts with other inves- The final approval of the investment standpoint, the best course of action
tors to help the investor to find solu- project and the special investment is to focus not only on scrutinising the
tions to certain issues. contract is in the competence of the drafting of the business plan, but also
so-called Interdepartmental Commis- on the negotiation of a “legal buffer”
After the preliminary approval of the sion. This commission includes the rep- for those cases when business expec-
investor’s application by the Industrial resentatives of nearly all key ministries tations are not met for reasons be-
Development Fund, the application and (the Ministry of Economic Develop- yond the investor’s control.
all attached documents are sent to the ment, Ministry of Finance, Ministry of
Russian Ministry of Industry and Trade. Energy, etc.), as well as representa- The template of the special investment
This is considered the official submis- tives of professional associations and contract shall be amended in line with
sion of the documents. The considera- public organisations. the regulation on local content and the
4
Resolution No. 708 of the Government of the Russian Federation dated 16 July 2015 “On Special Investment Contracts for Certain Industrial Sectors”.
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HOW TO INVEST IN RUSSIA LOCALISATION AND INVESTMENTS |
timeline for localisation. This is a gov- Trade might propose that a penalty be points from the beginning. There are
5
ernment regulation , but also involves introduced to the special investment always differing positions followed in
a fair amount of initiative on the part of contract for the breach of the localisa- the end by a compromise between the
the investor. The investor’s primary ob- tion clause, even if such a penalty is not parties. When negotiating a special
ligation is to comply with the mandato- explicitly stipulated by the law on spe- investment contract, the negotiating
ry regulations on the percentage of lo- cial investment contracts. In particular, process is made more difficult by the
cal content and the technical processes a penalty may be established for those fact that the investor is working with
to be performed in Russia. At the same cases when an investor fails to meet the the state, represented by the Rus-
time, however, the investor decides established percentage of local content. sian Ministry of Industry and Trade. A
on the product portfolio and is not Should this be the case, the penalty will number of Ministry departments are
ultimately prevented from modifying, be calculated proceeding from the in- involved in the approval process: the
updating and replacing the products vestor’s turnover from the sale of prod- sectoral department (for example, for
under a long-term investment project ucts manufactured under the special in- the automotive industry, the machine
based on research and development or vestment contract that do not meet the tool industry, etc.), the legal depart-
due to market conditions. However, it is local content requirement. It is particu- ment, the strategic development de-
important to identify such issues at the larly critical for investors to ensure that partment, etc. Each department con-
siders the draft special investment
contract from the standpoint of its
he template of a special own competence. Furthermore, the
essential terms of a special investment
investment contract is established contract must also be approved by an
Interdepartmental Commission made
by law. owever, the provisions up of the representatives of various
ministries and sectoral organisations
of the contract can and will be that have their own positions and
competence on key issues. As a result,
amended proceeding from the the approval process is conducted in
specifics of the investment project. several rounds, and requires, at the
very least, intensive legal work, nego-
tiation and coordination skills.
very beginning and stipulate special the penalty clause is negotiated in good In summary, a special investment con-
provisions in this regard in the special faith, in order to make it feasible for the tract will establish stable frameworks
investment contract. investor. Generally speaking, the liabil- for the investor in the Russian market,
ity and termination clauses lead to the and shield him for a long period from
To ensure that the investor duly per- most discussion. An in-depth substan- the unpredictable measures taken by
forms its obligations under the special tiation of the investor’s position from the government. It can apply to the
investment contract, the Russian Minis- the legal and economic standpoint is re- entire range of the investor’s activities,
try of Industry and Trade puts the in- quired in order to reach a compromise. and serve as a foundation for success-
vestor under surveillance. This is usually ful cooperation between the business
performed on an annual basis, with the The drafting and approval of a special and the state. At the same time, the
investor submitting annual reports and investment contract takes time. On investor must first manage to conclude
supporting documents to the Russian the one hand, a special investment the special investment contract on con-
Ministry of Industry and Trade. There- contract, like any other agreement, ditions that enable him to implement
fore, investors must also be aware that must be negotiated. In B2B practice, the project in an economically reason-
the Russian Ministry of Industry and the parties probably never agree on all ably and legally precise way.
5
Resolution No. 719 of the Government of the Russian Federation dated 17 July 2015 “On the Criteria for Classifying Industrial Products as Industrial
Products that do not have Russian-Made Equivalents”.
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