Import substitution in Russia - Food and food processing

Regulations

Unlike industrial production, the agricultural and foodstuff industries are not affected in the same manner by the new import substitution policy, which is based on the Industrial Policy Law (488-FZ) and procurement restrictions imposed by the Procurement Law (44-FZ) and the Law on Procurement by State-owned Companies (223-FZ).

However, a large number of domestic agricultural products listed in Order No. 155 are subject to general preferential treatment (i.e. a 15% pricing preference over foreign-made goods) for public procurement purposes.

In response to economic sanctions and political tension, mainly from the US and EU countries, Russia has imposed an embargo (by the relevant Decrees of the Russian President and Resolutions of the Russian Government) and closed almost the entire market of food products imported from these and other countries (including Canada, Australia, Norway, Ukraine, Albania, Montenegro, Iceland, Liechtenstein and Turkey).

At the same time, the Federal Law “On the Development of Agriculture” No. 264-FZ establishes such main incentives and support measures for local food producers as subsidies, refinancing of loans and tax incentives.

Moreover, the Russian Government has adopted the relevant action plans for import substitution which provide for a gradual reduction in the level of foreign-made goods being consumed in Russia and their replacement by domestic ones by up to 80-100% by 2020.

References (sources)

Access to public procurement

- Procurement Law (44-FZ);

- Order of the Ministry for Economic Development of the Russian Federation No. 155 dated 25 March 2014;

Import bans

- Decree of the President of the Russian Federation No. 560 dated 6 August 2014;

- Decree of the President of the Russian Federation No. 391 dated 29 July 2015;

- Decree of the President of the Russian Federation No. 583 dated 28 November 2015;

- Resolution of the Government of the Russian Federation No. 778 dated 7 August 2014;

- Resolution of the Government of the Russian Federation No. 1296 dated 30 November 2015;

Food production support

- Federal Law “On the Development of Agriculture” No. 264-FZ dated 29 December 2006;

- Resolution of the Government of the Russian Federation No. 717 dated 14 July 2012.

Affected entities

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

Import bans affect food importers and local retailers.

Food producers (including foreign-owned ones) can apply for state support measures.

Affected products

Order No. 155 contains a list of domestic agricultural products which are subject to general preferential treatment (i.e. a 15% pricing preference over foreign-made goods) for public procurement purposes. Such list includes, in particular, some types of fruits and vegetables, fish (live, fresh, chilled, frozen or canned), caviar, salt, frozen beef and pork, canned meat, jams, sunflower oil, wheat flour, pasta, bread, chocolate and pastry, etc.

According to Resolution No. 778, the banned goods include certain agricultural products, raw materials and foodstuffs originating from the US, EU countries, Canada, Australia, Norway, Ukraine, Albania, Montenegro, Iceland and Liechtenstein, namely:

• meat (including beef, pork and poultry) and meat products (including sausages) fresh, chilled or frozen;
• fish, shellfish and seafood;
• milk and dairy products (including cheese and curds);
• vegetables, edible roots and tuber crops;
• fruits and nuts.

Under Resolution No. 1296, it is also prohibited to import the following goods from Turkey:

• frozen poultry;
• carnation;
• certain vegetables and fruits;
• chewing gum;
• salt.

Existing practice

In the food and food production sector, the new regulations have different levels of implications in practice.

The impact on public procurement and procurement of state-owned companies is not that significant in this sector, although the pricing regulations lead to a clear advantage for local production.

The import ban has adversely affected the local market: the market was not ready for such a rapid implementation of bans and restrictions. It resulted in a rise in prices and a reduction in variety and quality of agricultural products and foodstuffs on the market.

Some importers are still trying to overcome the bans by “fake” customs operations (such as “transit” of the banned products via Russia, or simple re-labelling or re-packaging of banned products in Belarus). However, the Russian customs authorities are now experienced in uncovering such offences.

The potential liability of local retailers who sell banned products is another negative circumstance to take into account. Although the above bans and restrictions only relate to importation, in practice, the supervision authorities are trying to take administrative action against retailers as well. Existing court practice on this matter is scarce and inconsistent. The enactment of a law on the administrative liability of retailers, which has already materialised in a bill, is under discussion.

Apart from the above explicit bans, restrictions on the importation of certain food products which fail to meet Russian standards or safety requirements may be imposed by two Russian state bodies, the Federal Service for Surveillance on Consumer Rights Protection and Human Wellbeing (RospotrebnadzorRosselkhoznadzor) and the Federal Service for Veterinary and Phytosanitary Surveillance (). Although formally aimed at protecting consumers, in practice, this mechanism is often used by the Russian authorities for political reasons. For example, such restrictions are implemented from time to time in relation to food products originating from Ukraine, Moldova, Poland, Turkey and some other countries.

Subsidies can be granted in practice, but are not sufficient to ensure a quick rise of local production.

Relevance for imports to Russia

All banned goods (as listed in Resolutions No. 778 and No. 1296) will be blocked at the border and will not be allowed to enter the Russian customs territory. Such goods are subject to immediate destruction.

Although Russia is a member of the EEU, it is also prohibited to import the banned products via Belarus and Kazakhstan (the other two members of the EEU who did not support the ban) provided that the ultimate destination of such products is Russia.

A way out may be processing banned goods on the territory of Kazakhstan or Belarus for subsequent sale in Russia. However, the level of processing required in such case would need to be significant enough so as to justify a change in the country of origin of those goods (as certified by a special certificate of origin issued by Belarusian or Kazakh authorities). This means that simple re-labelling or re-packaging in Belarus or Kazakhstan would not resolve the issue. The processing may be also inappropriate for many types of banned goods or require additional investments.

Criteria for obtaining a certificate of origin

The country of origin for agricultural products and foodstuffs is determined in accordance with the general rules and criteria of sufficient processing as established by the CIS Agreement “On the Rules for Determining the Country of Origin of Goods in the CIS” dated 20 November 2009 and applicable in the EEU.

In particular, it is expressly stated that the following goods are considered as originating from an EEU member state:

• vegetables produced or picked in such state;
• animals born or grown in such state, and products produced from these animals in such state;
• products of hunting and fishing in such state;
• goods produced from the above products in such state.

For some types of goods (e.g. beef meat, meat products, dairy products, bread, chocolate, juice and wine) there are, however, specific criteria. For such goods, the ad valorem rule (mainly 50%) can be applicable as a separate condition or together with the requirement to fulfil certain other conditions and perform certain industrial and technological operations.

It is worth mentioning that the following operations (specific to food production) do not meet the requirement of sufficient processing:

• milling and polishing cereals and rice;
• colouring sugar;
• peeling, seeding and cutting fruits, vegetables and nuts;
• slaughtering and meat cutting.

Recommendations

All the above bans and restrictions as well as relevant support measures give an impulse to develop localised agricultural production. However, most of them are politically motivated by sanctions imposed against Russia, and, therefore, may be rapidly revoked once the situation normalises or, to the contrary, reinforced in the worst case scenario.

If products fall under the import ban, the Russian market is closed to such products. Circumventing custom controls is not really an option and, if undertaken, may result in a complete loss of the product. A legal way of importing would be to process a banned good in a jurisdiction not falling under the import ban and import the final product as a product from such country.

If localisation is an option, the affected entities should thoroughly analyse the market’s importance. The crucial points when deciding whether to localise production in Russia are the importance of the market as well as the efforts required to produce local goods that are sufficiently processed to obtain a certificate of Russian origin. In addition, the political character of the import ban should be taken into account as the ban can be lifted for political reasons at any time.

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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