Export markets Russia: Between Protectionism and Structural Transformation

Editor: Kai Ulrich

The continuously low oil price, the low exchange rate of Ruble and the reciprocative sanctions policy in the course of Ukrainian crisis force the Russian government to re-structure their economy. We shall show, as to how the German companies can profit from this.

Russia promised good business for German mechanical engineers for a long term; however, currently the sanctions prevent sales.
Russia promised good business for German mechanical engineers for a long term; however, currently the sanctions prevent sales.
(Photo: PP Mezhdunarodnaya/Siemens)

EU and Russia imposed economic sanctions in mid 2014 on the other side; VDMA expected that EU shall extend the term by at least six additional months in the mid of December 2015 (the decision regarding the deadline was not yet fixed). In addition, Russia responded to enable a separate production for high technology goods going forward. German mechanical engineering companies should not be apprehensive of import ban by the Russian government. This has pragmatic reasons, since the Russian mechanical engineering companies often lack the Know-how to replace the imports.

Agricultural machinery manufacturer Claas expanded in Krasnodar

At the beginning of October 2015, the agricultural machinery manufacturer Claas had set an additional plant into operation in South Russian Krasnodar. Thus, the production volume increased to 2500 harvesters and tractors per year. The investment amounted to 120 million Euro. Russia is an important market for the future, since currently just 72 million ha is used as agricultural land.

In all, 122 million ha area is suitable in Russia for agriculture. The demand for efficient agricultural technology shall remain high in Russia. Moreover, Claas has signed an MoU, which shall significantly simplify the sale of the agricultural machinery produced there. In a few months, an investment agreement should be concluded, which gives Claas the status of a "Russian manufacturer". Thus, Claas obtains the same financing conditions as the native manufacturer.

Russia issued new law for industrial policy

On 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 controlled companies should be controlled in such a manner based on this law that going forward, preferabley the goods of Russian origin and Eurasian Economic Union are purchased. These purchase limitations are to be defined in a branch-specfic manner by the government decrees. The production location is crucial. The home country of the investor does not play any role there. This means even German mechanical engineers are "Russian manufacturers", if they produce their goods in Russia.

New promoting instrument for investment projects in Russia created

VDMA reported further that the Russian government had created a completely new promoting instrument, the special investment contract, on 16th July 2015 for the investment projects with the focus production. This shall be concluded between the country and the investor. The maximum term is ten years.

The country shall be liable to ensure specific subsidies and to exclude an additional load for the specific investment projects in case of future changes in law, in particular in the area taxes. The investor shall be liable to comply with the business plan submitted at the time of contract conclusion: The amount of investment, number of workplaces to be created, implementation planning, product range for the next year till the end of the contract term, expected tax payments. If the investor does not meet his obligations, since e.g. the production stops after seven years, then the country may reclaim all granted subsidies and tax benefits.

The special investment contract and the requirement for "made in Russia"

The investor must submit certain documents for the conclusion of such contract. These shall be then checked by a 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 contract. The investor obtains subsidies and political support by the special investment contract.

However, he also needs to fulfill extensive and long-term obligations. In addition, VDMA reported that an ordinance came into force on 1st October 2015, with which the government has defined the hurdles for "Made in Russia". For several products, steps in the production are mentioned, which must be executed in Russia. 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.