Russian Market Russia: Between Protectionism and Structural Transformation

Author / Editor: Kai Ulrich / Lisa Hohmann

The continuously low oil price, the low exchange rate of the ruble and the reciprocative sanctions policy brought about by the Ukrainian crisis have forced the Russian government to re-structure their economy. In the following, we will discuss how the German companies might profit from this.

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Russia is an important furture market.
Russia is an important furture market.
(Photo: PP Mezhdunarodnaya/Siemens)

The EU and Russia imposed economic sanctions on each other in mid-2014; the VDMA expected that the EU would extend the duration of these sanctions by at least six additional months in the middle of December 2015 (the decision regarding the deadline was not yet fixed). Russia responded by enabling a separate production of high-tech goods to go forward. German mechanical engineering companies should not be worried about import bans levied by the Russian government. This has pragmatic reasons, since Russian mechanical engineering companies often lack the know-how to replace its imports.

At the beginning of October 2015, agricultural machinery manufacturer Claas set an additional plant into operation in the southern Russian city of Krasnodar. As a result, production volume increased to 2,500 harvesters and tractors per year. The investment made amounted to 120 million euro. Russia is an important future market, since currently only 72 million ha are being used as agricultural land. All in all, 122 million ha are suitable for agriculture in Russia. The demand for efficient agricultural technology is expected to remain high in Russia. Moreover, Claas has signed an MoU, which will significantly simplify the sale of agricultural machinery produced there. In a few months, an investment agreement should be concluded, giving Claas the status of a "Russian manufacturer". This will help Claas to obtain the same financing conditions as Russian manufacturers.

New law for industrial policy includes subsidies of different types

Russia has recently issued a new law for industrial policy. On the one hand, this includes support measures such as subsidies of different types for industrial projects in Russia. On the other hand, the procurement policies of the public domain and state-owned or state-controlled companies should – based on this law – be controlled in such a manner that, in going forward, goods of Russian origin and the Eurasian Economic Union are preferentially purchased.

These purchase limitations are to be defined in a branch-specific manner by the government decrees. The production location is crucial. The home country of the investor does not play a role there. This means that even German mechanical engineers are "Russian manufacturers" if they produce their goods in Russia.

The VDMA reported further that the Russian government had created a completely new promotional instrument, a special investment contract concluded on 16th July 2015 for investment projects with the focus on production. This contract is to be concluded between the country and the investor. The maximum term is ten years. The country will be liable to ensure specific subsidies and to exclude an additional burden for the specific investment projects in case of future changes in law, in particular in the area of taxation. The investor will be liable to comply with the business plan submitted at the time of contract conclusion, including the investment amount, the number of workplaces to be created, implementation planning, the product range for the next year until contract conclusion, and expected tax payments. If the investor does not meet his obligations, e.g. if production stops after seven years, then the country may reclaim all granted subsidies and tax benefits.

A special investment contract and the requirement for "made in Russia": The investor must submit certain documents for the conclusion of such a contract. These documents will be checked by a special committee. The maximum term, within which all procedures should be completed, is 130 working days. A minimum investment amount of 750 million ruble (approximately 10 million euro) is required for the conclusion of such a contract. The investor obtains subsidies and political support through the special investment contract. However, he also needs to fulfil extensive and long-term obligations. The VDMA also reported that an ordinance came into force on 1st October 2015, with which the government defined the hurdles for "Made in Russia". This document stipulated production steps that must be executed in Russia for a number of products. The companies manufacturing in Russia must have the rights regarding the technical and design documentation, which ensure the further development of production for five to ten years.

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