Import substitution in Russia - Automotive Industry

Regulations

Localisation rules

The localisation rules applicable to the automotive industry were enacted in 2005 (with subsequent changes in 2010) and go beyond the scope of the import substitution efforts under the Industrial Policy Law (488-FZ).

This policy has been successfully implemented over the years and has incentivised many of the world carmakers to localise their production in Russia. In addition, the policy made it possible to attract a substantial number of car component producers with their own production facilities in Russia, thus creating a base for the development of a car component market that hardly existed in the country before.

According to the initial rules, car components imported into Russia for industrial assembly purposes were either exempted from customs duties or enjoyed a reduced customs duty rate. The exemption was granted for seven years (for brownfield production projects) or for eight years (for greenfield production projects). Producers were required to achieve the annual production volume of 25,000 cars in 2.5 years, and a 30% localisation level in 4.5 years.

In 2010, the localisation rules were amended. It was provided that a producer could take additional obligations to increase the annual production volumes to 300,000 cars in a four-year period (350,000 in a three-year period for brownfield production facilities), with the localisation level to reach 60% in five years. The creation of added value in the country required to include certain technological processes. The purpose was to bring SKD assembly in Russia to a higher level of vertical integration.

Import substitution rules

Although the state policy in the automotive sector mainly concentrates on localisation by granting reduced (or zero) customs duty rate to car producers and car component suppliers, recent import substitution legislation provides for certain import substitution rules aimed at reducing the level of foreign-made vehicles and car components used in Russia.

In particular, according to Resolution No. 656, vehicles cannot be admitted to public procurement if they do not originate from Russia. Importation and use of such vehicles for any other purposes are not restricted. However, increased customs tariffs (in fact, prohibitive) may apply in such case.

The Russian Government has also adopted the relevant action plans for import substitution which provide for a gradual reduction in the level of foreign-made car components used in Russia and their replacement by domestic ones by up to 50-100% by 2020.

References (sources)

- Resolution of the Government of the Russian Federation No. 166 dated 29 March 2005;

- Resolution of the Government of the Russian Federation No. 566 dated 16 September 2006;

- Resolution of the Government of the Russian Federation No. 656 dated 14 July 2014;

- Resolution of the Government of the Russian Federation No. 719 dated 17 July 2015;

- Joint Order of the Ministry for Economic Development of the Russian Federation No. 73, the Ministry of Energy of the Russian Federation No. 81 and the Ministry of Finance of the Russian Federation No. 58n dated 15 April 2005;

- Order of the Ministry for Industry and Trade of the Russian Federation No. 648 dated 31 March 2015.

Affected entities

Localisation rules apply to car producers and car component suppliers who entered into the relevant investment agreements on industrial assembly.

44-FZ and related regulations affect state and municipal authorities.

Affected products

Industrial assembly rules apply to tractors, buses, cars, trucks and special vehicles (cranes, concrete mixers, etc.).

Existing practice

Localisation regulations have always been regarded as an opportunity for car producers and car component suppliers. Market players have always been free to choose whether to enjoy the proposed exemptions or not. However, the relevant agreements and the industrial assembly regime have largely been used as mechanisms to achieve significant economic benefits.

Investment agreements on industrial assembly were only available for a limited period of time. At present, it is no longer possible to enter into new agreements.

Even though investment agreements have been implemented without problems and producers have now achieved the required level of localisation and observed other localisation criteria, some issues have arisen as a result of circumstances beyond the concluded agreements.

The localisation system in the automotive industry is based, as described above, on customs incentives. Those producers who opt for the industrial assembly regime enjoy reduced or zero customs rates; others have to pay sometimes prohibitively high import duties. With its accession to the WTO, Russia lost the ability to control customs duties and undertook to eliminate customs barriers. Notwithstanding long transitional periods set for the automotive industry, the WTO rules will take effect before the expiry of some investment agreements. Now that Russia must ensure low customs rates for all importers, it is no longer able to meet its contractual obligations to reserve offers of reduced customs rates to the parties of investment agreements.

Another, much more acute problem has arisen in connection with the Russian rouble’s decline. The Russian state concluded investment agreements with producers under which the latter committed to increase the added value in the country over a certain period of time. In most cases, producers are required to ensure 40% of local added value and subsequently increase it to 60%. Even though producers have found it difficult to find local suppliers (which is public knowledge), producers managed to reach these percentages until the rouble’s decline. Now that the cost of imported materials has increased due to the national currency’s drop in value, it is no longer possible for producers to meet the required local percentages. A solution to this problem has yet to be found. Various options have been discussed. One is to use the rouble exchange rate fixed at the execution date of an investment agreement. The Ministry for Economic Development of the Russian Federation has proposed a different approach, which is to move the deadlines for increasing the localisation level, both in terms of percentage and technical requirements. Currently, there is no formal solution; the problem remains unresolved. An instruction of the Russian President to elaborate a development strategy for the Russian automotive industry by 1 March 2016 has failed to be implemented by the required deadline.

Access to public tenders

To participate in public tenders, producers have to meet the conditions of the relevant agreements on industrial assembly and perform the minimum number of certain industrial operations (e.g. assembling, welding, painting). This has to be confirmed by the relevant certificate of examination to be issued by the Chamber of Commerce and Industry of the Russian Federation. Such certificate can be also supplemented by a confirmation issued by the Ministry for Industry and Trade of the Russian Federation under Resolution No. 719.

Recommendations

Localisation in the automotive industry is a Russian success story. The industry has attracted a great number of foreign producers to the country, leaving all other sectors far behind. However, new economic circumstances have thrown the localisation system out of balance, and a solution is still being searched for. The automotive industry is being supported through subsidies; the main problems of the incentive-based system remain unresolved. In the meantime, the situation needs to be monitored in order to see how things develop.

This article is a part of a series based on the publication "Import Substitution in Russia" which we compiled for the Swiss embassy in Moscow. To learn more, register for the webinar on 14. September with Dr. Thomas Heidemann.

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23 Jun 2016 Import substitution in Russia - Food and food processing